Best of Straight Talk: 3 strategies for increasing profit on the farm

This Best of Straight Talk episode is from November 2021, when Emmery and her brother, Ezra, interviewed Dallas Mount, owner of Ranch Management Consultants, the company behind Ranching for Profit seminars.

The episode focuses on what people who take the Ranching for Profit seminars learn, including why profit is more important than productivity.

At the heart of the seminars are three strategies that farmers and ranchers need to consider to be successful. Learn more about them in this episode.

To learn more about Ranching for Profit, visit About Us - Ranching For Profit.

Ranching for Profit can also be found on Facebook at Ranching4Profit

To get in touch with Emmery, please email emmery@ndfb.org

Chapters

• 0:08 Introduction by Ezra and Emmery and three strategies for success in farming and ranching
• 0:42 Meet the RMC owner Dallas Mount
• 1:39 Ranching for Profit school, a business management 7-day workshop that helps people run a farm or ranch like a business.
• 5:13 Looking at the business economically by building a business together in class
• 8:08 Improving the gross margin per unit and what that means
• 11:09 The most frequently overlooked issue on farms and ranches is the impact of overheads
• 17:15 What are some practical takeaways that farmers and ranchers can start looking at now?
• 19:55 Getting away from the productivity model and focusing on profit
• 21:35 The victim mentally in agriculture and how to retrain your attitude into a ownership mindset

Transcript

[Straight Talk theme]

[00:08] Ezra Grotberg: Welcome to Straight Talk. I'm Ezra, along with my co-host, Emmery. Today, we interview Dallas Mount, owner of Ranch Management Consultants, and we discuss three ways to increase profit on your ranch or farming operation.

[00:22] Emmery Mehlhoff: We look at decreasing overhead, increasing gross margin, and increasing turnover. So stay tuned. 

My name is Emmery Mehlhoff and I'm your host for Straight Talk with NDFB. And today we are chatting with Dallas Mount. Hi, Dallas.

[00:39] Dallas Mount: Hey, Emmery. Hey Ezra. Good to be on. Thanks you guys for the invitation.

[00:42] Emmery: Can you just tell us a little bit about yourself, Dallas, and where you're from and who you are?

[00:48] Dallas: Sure, yeah. I live in Wheatland, Wyoming. Wheatland is about an hour north of Cheyenne, here in southeastern Wyoming. We're kind of where the mountains and the plains come together. My family and I have lived here for about 20 years. We got two kids. 

I've been the owner of RMC for about three years now. I'm the third owner of the company. Stan Parsons was our founder and then Dave Pratt ran the company for about 20 years. So I'm fortunate to stand on the shoulders of the giants that have come before me and carry on ranching for profit. 

Before this, I spent about 20 years with the University of Wyoming Extension, working with them and doing programs and workshops for ranchers all across Wyoming and beyond. And then my family and I have a grazing operation here in Wheatland where we run on a combination of owned and leased land.

[01:38] Emmery: Awesome. Can you tell us a little bit about the Ranch Management Consultants?

[01:43] Dallas: So RMC is what we call it and we do a couple things. The main thing we do is we do the Ranching for Profit school. Ranching for Profit is a seven-day business management school for people involved in agriculture. So we do about 10 of these classes a year all across the country. And for seven days we have them there. And through very interactive, engaging discussions, we explore all things business management around the farm or ranch. 

And it's founded on the idea that knowing how to run a business is a separate skill set from knowing how to raise crops or knowing how to raise livestock. Right. And most of us that grew up in ag are really good at raising livestock and at raising crops. But unfortunately, many of us haven't ever been taught how to run a business that does those things. So, so that's where we step in. And we're often called like an MBA program for people in ag. We dive into the economics, the financial, the human resource side of it, the mission and vision pieces of it that are, that are so critical. So, so that's one our main thing that we do is the ranching for profit school. 

Another thing that we do is a program called Executive Link. We call it EL. So in EL, we take graduates of the ranching for profit school and we put them on boards of directors for each other and they meet that board. So it's a board of six businesses. Usually it's about 10 to 12 people. And that board meets three times a year. And we provide the structure, the facilitation for that meeting and all those things that go on with that. So that board meets three times a year and they look inside each other's businesses and they hold each other accountable to doing things that, you know, if somebody's not holding you accountable, you often neglect to get done the really high-value things in your business.

[03:27] Ezra: So ranching for profit is for farmers and ranchers, not just ranchers?

[03:34] Dallas: Correct. Yeah. You know, I'd say 80% of the people that are in the classes, ranching is their primary enterprises, you know, around livestock enterprises. But that's not all of it. You know, we have some people that just farm that come to us. But you know, the examples that we use in class are around livestock. But the principles apply across any business. So when we start diving into the economic principles, the human resource principles, you know, the ecology principles, all these things apply no matter what the enterprises are.

[04:09] Emmery: Yeah. I mean, so often we end up ranching or farming for...

[04:14] Ezra: Occupation...

[04:15] Emmery: Yeah, occupation, because we love it for the lifestyle. But most of the time it's to make bank payments. And not a lot of the time maybe is focused on or actually winds up being a profit. Can you just dive into the principal side you mentioned that you look at and consider when you're looking at people's operations, can you dive into that?

[04:39] Dallas: Sure, yeah. So I mentioned the giants that have come before me. So these guys are the ones to credit with having developed these principles. And it really is an amazing school because it's founded on principles. Right. We don't, we, you don't come to the school and we tell you, well, you better run this kind of cow or you better calve here, you better feed this or you better grow these crops. Right. Those aren't the things that we say. We, we say, here's a way to explore those decisions for you. Right. And we, and we use the principles as the guideposts as, you know, chalking the field to do that exploration. 

So maybe let's start with the economic ones. So when we look at the business economically and we do this in class by going into business together, right? Starting from scratch and building this business from the ground up. And what we realize as we do this is there are costs that occur, no matter the scale of our business. And when we go into this from scratch, the first thing we do is get some land to operate on, and we can rent it or we can buy it. And there's different ways to look at those two. 

And then we need people to do the work. And whether that's us that do it as the owners or whether we hire that, it's really...it's a cost, it's a labor cost, right? And what we tell folks is when we look at it economically, we can't work for free. We have to include that labor cost in there. And unfortunately, so many people in our industry just donate their labor to this thing, right? And so we're going to book it on the economic budget as what would it cost to replace yourself in the work that's going on, on the farmer ranch? 

And so as we explore these, we see that these costs are operate as kind of a flat line across the chart whether we farm 500 acres or whether we farm 5,000 acres. And so we call those costs overhead costs. And the economists are going to call them fixed, but we're going to call them overheads. Because in farming and ranching, most of our costs are overheads, right? And if we call them fixed, just that word implies that they can't be changed. And they can be changed. They absolutely need to be able to be changed, and we have a lot of leverage to change them. 

So we've got the overhead costs. And then as we build this model out, then we have our direct cost or our variable costs, and then we have our gross product, the value of production. So when we look at that chart and we build this together in class, and we walk through it step by step. When you look at that chart, you realize there's only three things that any business can do to increase profit. And those things are to reduce overheads, right? To find ways to do more with that existing or even to cut some costs in there. My friend of mine, Burke Tigert, he says that you got to wage war on those costs on those overheads because they tend to creep. And when they creep up, they're very sticky, right? It's hard to bring them down. So we need to bring those overheads down. So there's one of the principles, right, is to look at reducing overheads. 

And then we've got some benchmarks, some ratios that we walk through about, you know, what reasonable overhead should be in the area of land and labor. And by the way, one of the labor costs is machine cost, right? So when you start looking at, well, should I use this machine and what's the repairs, depreciation, all the costs of owning it, what that machine does is it does labor, right? So when I say labor cost, that includes the cost of machines as well. So that's the first one, reduce overheads. 

The second one is to improve the gross margin per unit. And a gross margin analysis just says when I look at the total value I've produced and the direct costs it takes me to do that, what's left over? What's left over to service overheads and for profit? And unfortunately in ag, we've been so focused on production, bushels per acre, pounds weaned, all these things is that our production numbers go up, but unfortunately our margins often don't improve. And who cares what your production numbers are, right? You might be weaning 800 pound calves and you might be losing your shirt doing it. Conversely, you might be weaning 800 pound calves and making a kill and doing it. But the only thing that matters is the margin. So we really need to stop talking about production and start talking about margin. That's where the focus needs to be. 

So we look for ways to improve the gross margin per unit. And the gross margin per unit, that number right there gives you the economic efficiency of that production unit of that enterprise. And you know, if you're in a farming business, you're going to look at gross margin per acre and compare your different crops you could grow. If you're in the livestock business, you're going to look at gross margin per standard animal unit, which is the investment of grazed forage into that. And that's going to give you a really good useful tool to compare those enterprises to, you know, strive for efficiency and effectiveness in those enterprises. 
And then the last thing that we do is we look for, for ways to increase turnover. So turnover, think of that as the throughput of the business. If you're running a livestock business, that's how many head, right? How many head are we running? And then what's the turnover on those? Is this a 12-month business or is this something we're turning over every three months? We look at those three ways to improve profit. Those are the three principles. Reduce overheads, improve the gross margin per unit and increase turnover. 

Now the beauty of that, of the simplicity of that is every business struggles with one of those more than they struggle with others, right? So if you're looking for the weak link. One of those three is going to be the weak link in your business. And the strategies to address those are very different. Right? The way you go after increasing turnover is totally different from the way you go after reducing overheads, which is different from the way you go after improving gross margin. So when you put it into the economic model and when you identify that, then it gives management laser focus for here's what we need to do to improve this business to get it really cranking for us. 

You know, so often what happens in farming and ranching is we get to the end of the year and we look at the Schedule F we look at the operating loan and we go, well, this year wasn't very good. And then we start just shotgunning these strategies to improve it, right? Well, maybe if we use this, or maybe if we took this away or maybe if we tried to do this instead, instead of saying, well, what is the problem? Is it overheads? Is it gross margin? Is it turnover? And then once we've identified the problem, then we go after strategy development.

[11:09] Ezra: So when somebody goes to your school, I'm assuming you guys will do a financial analysis of their business or something like that. Is that the process of when you're working with that individual, you'll go through that financial analysis and identify their weakness and help them and say, okay, I my overhead's killing me or I don't have enough turnover or whatever. But basically, I mean, would you say, is there one you always start with, I mean, I bet you overheads killing most people. Limiting is probably the right word to use.

[11:41] Dallas: But yeah, you're right, Ezra, that overheads are commonly what we find the issues are. And to back up and answer your question, so when you're in the school during the formal class time hours, we work through examples together. So we're all working with this example ranch that we have in class and we're doing this stuff together at your tables with the instructors bouncing around, helping people make sure they get it. 

After the formal class time hours, in the evening time, if people want to come in and crank through their own numbers, then we provide support there in the classroom to help people do that. So whether it's myself, whether it's another instructor, whether it's alumni of the program, people come in there and kind of sit with you and help you get unstuck as you're doing your own numbers. And the idea is that when you leave the school, you're going to have, if you come in there those evening hours and work, you're going to have your numbers pretty well done by the time you walk out and then be starting on the strategy development side of, "Is it overheads, for me? If it is overheads, what kind of leverage do I have to address those? What am I willing to address?" 
That's a separate piece that sometimes people say, no, I don't, you know, I don't want to reduce the number of employees on the place. Right. Or I don't want to change the type of machinery that we're using or things. And so, okay, well, then we're stuck here. This is what we're saying we're going to do. So now we need to find the ways to crank the turnover in the margin side to service those overheads. And sometimes that strategy works and sometimes you get to looking at it and you're just like, well, there's no way. I just can't crank the turnover and the margins enough. So then I have to come back and readdress those overheads.

[13:20] Ezra: Let's say, for example, you have a family member that's involved in the farm or ranch and they're done with high school or whatever, they've done their college or they've gone and done their thing, they're coming back, they're starting from square one. And really they're kind of relying on mom and dads giving them an opportunity to get started. Applying these three principles. What advice do you give to that young farmer, rancher that's, that's coming to either get involved in an operation or work alongside mom and dad to get their operations started. Where's the first place you look in applying these principles?

[13:58] Dallas: Yeah, that's, that's a great question. Because that, that is what we so often deal with, right? People coming back to an existing operation and then starting to spread their wings within that operation. So, so ideally, the young person would be coming to the school with representatives of the previous generation as well. And that's the best dynamic, is that when everybody's there together and we're going through these things together. And so like, if this family were in the classroom in the evening time, you know, we'd be laying out, okay, what are the enterprises? What are the margins each of these enterprises have? What's the overhead structure of the business? How are we doing at servicing those overheads? What about our profit target? What is that? What do we want profits to be? And then what are we going to use those profits for? Right? And having these conversations together. 

And what often happens is when we get to doing this, we see that well, our overheads are, let's just pick a number: half a million dollars. And our margins from our business service, $425,000 of those. So we're about $75,000 short of covering our overheads. So what are we going to do? And so hopefully the family's sitting there together asking these questions, going through it, and then people start suggesting ideas. "Okay, well, what if we found a way to lower our overheads? What might that look like? Or maybe we need to add an enterprise to it." Right. "I've come back to the farmer or ranch, and this is what I'm passionate about. This is what I'd like to explore. What kind of leeway is the business going to give me to build this new enterprise?" 

And then we'd ask the person bringing that back, "Okay, if this worked well, what kind of margins might it create? Is it going to create $10,000 of margin, which of which case it's just a distraction, or is it actually going to have the possibility of servicing a large number of those overheads?" And so we start exploring those together, and it becomes a process of, instead of, well, what are mom and dad doing that's wrong? Or what are. What are they doing that should be changed? Or what's Junior, you know, going to... what's the greatest idea that they're going to have? We just say, well, here's the facts now, now let's walk through this and explore these ideas. Right. Some of. Some of the ideas are going to be completely off the wall, and, and that's great. And then others are going to have some real merit. And then we need to start exploring them more deeply. Right. What are, what are the upsides? What are the downsides? What kind of resources are going to pull away from other things so that. I don't know if that's a specific enough answer you were looking for. But, but that's the way we often do it, is with people there together and working through those thought exercises about what the business could be.

[16:37] Ezra: Yeah, no, that makes sense. I'm curious how many times you actually get everybody together at the school.

[16:44] Dallas: Oh, probably less than we'd like. The most effective ones is when the, the representatives of the business, the ownership group, comes together because we have you captured, right. And you're, you're there and you can have those conversations. Everybody's going through the same experience together. You're away from the distractions at home. You know, it's. It's a great time to have those.

[17:05] Ezra: Yeah, absolutely. And anytime you want to get something done it seems like if everybody's on the same page, it actually happens.

[17:11] Dallas: Yeah, exactly.

[17:14] Emmery: Dallas, one of the things that the beauties of these profit principles is how you can really apply them to an operation and giving people tools to really dig in and see where, where they could use some improvement. But what would be like the, the primary weak spot, you see, or maybe if you were just to give our listeners a really practical takeaway here at what they could do today to start looking at implementing these profit principles, what's something that they could look at on their operations today?

[17:47] Dallas: Sure. Yeah. So I'm going to expand on one that I, that I just touched on. But for me, it's. It's one of my favorite things to talk about because I think it's really lost in a lot of agriculture, and that is the idea of gross margin per unit. Instead of thinking about how can you be more productive, I want everybody to change their thinking to how can we be more profitable? It's ingrained in agriculture from the day we start 4-H or FFA and we're beat with this stick all the time, is that you have to be productive. 

When you go outside in the morning, you got to get something done. You got to, let's, let's feed them, let's grow them, let's raise them, let's do this. And unfortunately, when we look at the numbers, when we sit back and look at what our businesses are doing, productivity does not result in profitability. In fact, when I was with the University of Wyoming, I ran a benchmark data set for ranchers across this region. And Harlan Hughes was part of it at the time. And we put everybody into this system and we looked at all their production numbers and then we had all their financial data to correlate against it and productivity -- and our data set was based heavily on cow calf producers -- and productivity pounds weaned per female exposed had zero correlation with profitability. ZERO. Some people would think, well, maybe it'll be low. It had zero. In fact, if you looked at it just numerically, it was inversely correlated. Some of the least productive ranches were among the most profitable. 

And I would argue that there's similar things in farming where you're just told to be more productive, be more productive. And yet the things that we do to be productive move us backwards sometimes. In what I think should be the goal of profitability. It doesn't matter how hard you work, it's the results that you produce that matters. In my opinion, one of the results of a business is profitability. So let's focus on that instead of productivity. 

That one change right there in mindset might challenge some of your listeners in their thinking, but to me, it's a paradigm shift and we throw that word out. You hear that word thrown around a lot. Is a paradigm shift, a change of thinking, a change of the way we see the world? But to me, that one's huge in agriculture. We've got to stop just chasing this treadmill of becoming more productive and switch it to, okay, what resources am I going to deploy and what's going to be the return for that with productivity.

[20:16] Emmery: It seems like on farms, farmers are paid on productivity through crop insurance. And so, you know, everybody's trying to chase that high yield so that they can get their productivity up so that they can play the crop insurance game and get paid on that. I'm just curious to see if you have any insights on that or thoughts about that at all.

[20:36] Dallas: Yes, we do have some principles that we apply to all the farm programs. And I would group some crop insurance into those farm programs and, and say that when, when you design your business, let's, let's design a business that meets our values and our mission and our vision and our core beliefs and moves us towards that. Right? And let's, let's be firm about that. Now, if farm programs come along that support the direction we're headed and are part of supporting what we're here for and why we do this, then, then by all means, let's, let's use them. But what I see it too often throws these businesses off into the deep end and takes them on a tangential track is when they start structuring the business for the farm program. Right? Rather than saying, okay, this is what the business is fundamentally structured for, is to do this, to serve these values of ownerships, to create these outcomes.

[21:34] Emmery: I think one of the issues you see on operations is that business owners, farmers, ranchers, we make excuses for why things go wrong. You know, it could be, hey, the wrong buyers were at the, at the sale barn today, and I didn't get what my calves deserve.

[21:50] Dallas: Okay, I'm with you.

[21:51] Emmery: Or I got butchered when I brought my grain into the elevator. You know, all of, I got discounted and it's always somebody else's fault that we're not making money. What would you say? What would you say to that?

[22:03] Dallas: Yeah, perfect. So we like to think about this in terms of a ladder. And we draw this ladder out in school and we ask, where on this ladder is your thinking? You know, where, where does your, where's your mindset? 

And at the bottom of the ladder is, is the victim mentality. And, and around the victim mentality where, you know, we look for blame and we, it's all about discouragement and it's, you know, all about, oh, the things that are happening to me. And, you know, I'm, I'm entitled to just, you know, wake up every day and do the same thing I've always done for 50 years and make a profit. Right? That, that's the victim mentality. And, and, and the unfortunate thing is this is so prevalent in agriculture. And, and if you go to a lot of the, you know, center of the industry stuff, you hear this, right? And, and there's even messaging around telling people in agriculture that, you know, you're the greatest people in the world and you're entitled to all this stuff and the world's out to get you. Right? And it just drives me nuts because it's, it's, it's all around this victim thinking. 

And as we climb up this ladder and as, as we get to the top of the ladder, there's a popular book out there called Extreme Ownership, and I think that Extreme Ownership really encapsulates the top of the ladder very well. Right? And so we call the top of the ladder the ownership mindset. Right at the bottom is the victim, and at the top is ownership. 

And at ownership, it's all about, okay, how am I going to structure my business for success? What are the key indicators you're going to be watching? What are the key decisions you're going to tie to those indicators? What kind of enterprises are you going to have on this business? How flexible are those enterprises? Those are all things 100% within your control. It's all about this ownership mindset. And, and the most beautiful thing about this is it's 100% within your control about where on that ladder you fall. 

Are you going to be down there at the victim, you know, just going to the coffee shop and kicking the dirt every day because, you know, all this stuff is happening to you and you can't do anything about it? Or are you going to pull yourself up and position yourself at the top of the ladder and say, okay, I get out of bed today, I get to make all these decisions. It's a beautiful world because everything that's happening is within my control, and it's how I structure my business to respond to these things that are outside of my control. Right? So what enterprises are we going to run? How are we going to respond to this you know what's going to be our overhead structure. These are all decisions that you have 100% authority to make.

[24:26] Emmery: Well, thank you so much, Dallas, for joining Ezra and I here on the farm today on this chilly morning and really appreciate you and your insights. Thank you you so much.

[24:36] Dallas: Oh, you're sure welcome. It's been a great conversation. I enjoyed talking to you. Thanks. Thanks for the opportunity.

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