Latest / CattleUSA Daily / 182: Before You Sign That Custom Grazing Contract Listen to This

Transcript

182: Before You Sign That Custom Grazing Contract Listen to This · CattleUSA Daily

• 0:03
  Welcome to. The Cattle USA Daily Podcast.
• 0:06
  Your go to source for the latest.
• 0:07
  Livestock markets, industry insights, and the update shaping
• 0:11
  agriculture today. I'm your host, Lauren Moylan, a
• 0:14
  passionate advocate for agriculture here.
• 0:16
  To keep you informed. And connected.
• 0:18
  Now let's dive into today's episode.
• 0:27
  Custom grazing sounds simple. You supply grass and management,
• 0:30
  someone else supplies cattle and a check shows up in the mail.
• 0:34
  But does it actually pay or just drain time, labor and pasture?
• 0:39
  Today we're walking through both sides.
• 0:42
  What makes custom grazing profitable and what makes it a
• 0:45
  headache? I'll give you the framework to
• 0:47
  pencil it out for your ranch, not for your neighbors down the
• 0:50
  road. So a quick definition so that we
• 0:53
  are all on the same page. Custom grazing is getting paid
• 0:57
  to graze someone else's cattle on your forage under a contract.
• 1:01
  Payment can be per head, per day, per pound of gain, or a
• 1:05
  hybrid with added add-ons for mineral rotations and handling.
• 1:10
  University and extension professionals use those exact
• 1:13
  structures in their budgets and guides that I used to give this
• 1:18
  outline for you guys today. So first, let's dive into the
• 1:22
  upside. Number one, you've got flow
• 1:25
  without cattle ownership risk. You're not tying up capital in
• 1:29
  animals. You are monetizing forage and
• 1:31
  management and tight or high interest years.
• 1:35
  That matters. And you know what?
• 1:37
  This is a great alternative income path when owning stalkers
• 1:41
  or backgrounding looks thin #2 you've got your known revenue
• 1:46
  per day when you are paid per head per day.
• 1:50
  A posted rate per head per day gives predictable cash flow.
• 1:54
  If you hit stocking and season targets, then you've got you get
• 1:57
  paid for. Management contracts can and
• 2:01
  should bake in your labor rotations, moves, water checks
• 2:05
  and record keeping that you are doing.
• 2:07
  And finally #4 if you were good at grazing timing, watering,
• 2:12
  stock flow, all of those things that come with custom grazing,
• 2:15
  you can turn pasture into a service business, not just a
• 2:19
  commodity lease. Now let's break down the
• 2:21
  downside. You've got forage and weather
• 2:23
  risks. Drought can blow up your whole
• 2:25
  system. If you've guaranteed headcounts
• 2:28
  or minimum days without a forage out clause, you'll be buying hay
• 2:33
  for someone else's cattle. This is the biggest hole in weak
• 2:37
  contracts. University lease contract
• 2:39
  resources stress aligning stocking and escape clauses to
• 2:44
  actual forage conditions. Then you've got underpricing,
• 2:47
  labor and wear and tear. Most first time grazers don't
• 2:51
  charge enough for time, fuel, fence repairs, and water
• 2:54
  systems. Make sure you are valuing labor
• 2:56
  explicitly and tracking it so that the rate reflects reality.
• 3:00
  And #3 you've got rate structure that pushes risk onto you
• 3:04
  without an upside. Pay by the pound of gain can
• 3:08
  sound like premium, but experts warn it often shifts risk to the
• 3:13
  grazer with little reward and less forage.
• 3:15
  Quality and animal class are firmly defined.
• 3:19
  And finally, you've got hidden cost inside services included
• 3:23
  things like mineral fly control, processing poles, trucking
• 3:26
  coordination. All of these seemingly little
• 3:29
  things add up quickly. Older rate sheets show big
• 3:33
  spreads based on who supplies feed, supplement and vet work.
• 3:38
  If you are including them, price them accordingly.
• 3:41
  Now let's talk pay structure. Number one, you've got per head
• 3:45
  per day. This is is the easiest to cash
• 3:47
  flow and budget. You carry forage and weather
• 3:50
  risk and the owner keeps animal performance risk.
• 3:53
  This is a situation where you can use seasonal minimums and
• 3:56
  drought out clauses to protect yourself #2 you've got per pound
• 4:02
  of gain. Sounds attractive, but only if
• 4:05
  you control cattle claws, starting weights, health
• 4:08
  protocols, and have supplementation rights.
• 4:11
  Otherwise you're betting your paycheck on genetics and
• 4:15
  weather. Many grazers regret PPG's
• 4:18
  without a solid floor rate. And finally, you've got a hybrid
• 4:21
  option. You can do a base PhD plus small
• 4:26
  gain bonuses. That is actually often the
• 4:29
  fairest split of incentives, but only if a contract is laid out.
• 4:34
  Well, let's talk those contracts and the things that you actually
• 4:38
  need in there so that you are staying in business and this
• 4:40
  doesn't just turn into a favor that you're doing for another
• 4:42
  producer. Things that you have to have in
• 4:45
  this contract. Number one, you've got stocking
• 4:47
  and dates with flexibility tied to measured forage conditions #2
• 4:51
  who pays for what? Mineral meds, poles, vets,
• 4:54
  processing, trucking, salt, fly control, all of it #3 you've got
• 4:59
  shrink, death, loss and liability set thresholds and who
• 5:02
  bears them #4 you've got monitoring and moves.
• 5:06
  Who decides rotations and when #5 you've got payment.
• 5:10
  Timing monthly is common, but what are you doing?
• 5:13
  And make sure you get a deposit. Number six, you've got drought
• 5:17
  and forage out claws, a clear off ramp if grass disappears.
• 5:21
  Use every single one of these and talk with an attorney to get
• 5:25
  a solid contract in place that protects both parties.
• 5:29
  Now how do we pencil it out? Here is some quick math so you
• 5:33
  can get a sanity check and a rate for yourself.
• 5:36
  Step 1. You need to be analyzing your
• 5:38
  cost of grass, fence depreciation, water systems,
• 5:41
  taxes, leases, pasture maintenance and your labor at a
• 5:45
  real hourly value #2 translate to a daily cost per animal unit.
• 5:52
  Use a realistic stocking rate and grazing season link.
• 5:55
  This is an area where you can heavily lean on extension
• 5:58
  budgets or local custom rate surveys to help you #3 add
• 6:04
  margin. You're running a service
• 6:06
  business, not a charity. Step 4 Have a reality check
• 6:10
  against local custom rates. Historic surveys show Cal, calf
• 6:14
  and soccer PhD ranges. Some regions publish annual
• 6:18
  custom rate reports. Do not undercut the market.
• 6:21
  You can't make up for it on volume and #5 do a stress test.
• 6:26
  What if drought cuts your days by 30%?
• 6:28
  What if labor ends up running 25% higher?
• 6:31
  Do you still clear a margin? If not, adjust rate or the
• 6:35
  contract. Now, when does this actually
• 6:38
  make sense? Does custom grazing make sense
• 6:41
  for you? It fits your operation.
• 6:43
  When you've got excess grass or want to rest your own cow
• 6:47
  capital, you're good at grazing and logistics and can command a
• 6:52
  premium, have clean contracts that price services, protect
• 6:56
  drought risk, and pay on time. And local custom rates are
• 7:01
  strong enough to cover your true cost plus profit at the end of
• 7:06
  the day. Now let's talk the other side of
• 7:09
  this. When is it a resource drain?
• 7:11
  This option drains you when you've underpriced labor and
• 7:15
  wear and tear to accept PPG with no control over cattle class or
• 7:20
  supplementation. There's no forage outclaws, and
• 7:24
  you end up buying hay for custom cattle and you treat it like a
• 7:28
  lease instead of a managed service business.
• 7:32
  Different animals, different risk, different paperwork.
• 7:35
  So here's your filter for this week guys.
• 7:37
  Number one, you need to do your all in daily cost.
• 7:40
  Is that greater than your expected custom rate with
• 7:44
  margin? Does my contract cap my exposure
• 7:49
  on drought, death, loss, scope creep?
• 7:52
  Contracts are important. Look at them, review them with
• 7:55
  an attorney #3 am I pricing my management of the cattle, not
• 8:01
  just the grass #4 is this rate structure aligned with what I
• 8:05
  can control? Forage moves, mineral, all of
• 8:09
  those things, not just genetics and luck.
• 8:12
  If you can check these boxes, custom grazing can pay.
• 8:16
  If not, it's probably going to drain resources.
• 8:19
  That's the truth of it. This is the Cattle USA daily
• 8:22
  podcast. I'm your host, Lauren Moylan.
• 8:24
  Thank you all so much for tuning in to another episode.
• 8:27
  We will see you all next time.