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A 45-month Rate of Return Case History / Rancher verses Investor
by Rich Forrest, Mountain Velvet, Ltd.
Secretary/Treasurer, Colorado Elk & Game Breeders Association COPYRIGHT 1998
e’ve all heard the headlines on elk economics. GOOD MONEY. EXCELLENT MONEY ... a better return than beef, etc., etc. Some declarations are believable, some I believe, not so trustworthy. We’ve all heard 25% ... 35% or more on your money .... $750 to $1000 per year on breeding cows, etc. ... really big bucks if you raise elk. Sounds good, perhaps too good. Maybe its true, maybe not. We really do need to know.
On the other hand, we’ve also noticed several ranchers sell off herds, completely quitting the business. They cite various complaints ranging from government interference, disease worries, to just plain non-profitability. What’s going on here? Why the enthusiasm, yet regular liquidation’s?
Way back when, on my initial look at elk, the indications were sufficiently impressive to explore them further. In 1992, enough encouragement was found on elk to actually try out the business. Now, almost 5 years later, there are no regrets for that decision. My enthusiasm continues and have since helped others learn about elk.
But a nagging thought has always kept gnawing away at my business sense. A thought that probably plagues all ranchers and farmers, even elk ranchers.... Am I really making money, or just trading dollars? What do these animals really return, dollar for dollar? Are they really profitable?.... How profitable? Well, let’s find out.
Since my business spirit requires that all records be kept .... I’ve kept records. Lots of records, way more than the average Joe. Enough informational junk was already stuffed in my computer to answer these nagging types of questions. It just took time.
With 45 months of records on one particular four (4) animal elk purchase, some real elk profitability can be established. These results are encouraging and will be related in two forms: 1) from a rancher’s point of view without a cost of land and improvements, and 2) an investor’s point of view where a fee is paid to the rancher for labor and use of facilities
But first, a bit of background. I am not a rancher nor farmer, but an entrepreneur, or as a hard-of-hearing friend says, “I’m in the manure?.” My business is creating new businesses. Creating new projects literally looking for gold, but many times finding manure instead. An entrepreneur seeks out opportunity and follows it to a potential source of revenue and hopefully profits. That was the motivator.
Early on, long time Colorado West Slope elk rancher, Roger Prock and later, Jerry Perkins helped define the business, educating and enhancing my fledgling knowledge of this relatively new ag enterprise. A venture in agriculture was a first for me. Visits to several elk ranches were invaluable.
All this new found knowledge eventually gave rise to a bit of confidence and resulted in a decision to buy elk. Almost universal rancher enthusiasm and seemingly their great successes gave me the wherewithal to take a test drive.
My initial investigative research was satisfying in several ways. Elk not only seem to make money several ways, but they make it without having to go to slaughter. Hmmm... I liked that ... so do others, in this animal rights conscience world of the 90’s. Further, several natural antler products seem to work miracles on a myriad of afflictions found round the world. A whole flock of baby boomers needs these products.
Suprisingly, elk actually seem to make you feel good from the inside out. Nothing is finer for the soul than hand feeding a magnificent bull elk in velvet, albeit cautiously, or bottle feeding a new born calf. These are incredible animals. Even “talking elk” with other ranchers, or just interested bystanders was almost as gratifying as watching the critters themselves.
However, a problem arose, if one is not a rancher or farmer, then one must raise elk vicariously ... from a distance. Fortunately, early in my elk exploration, I was introduced to then new elk ranchers, Craig and Noreen McConnell, of Stoneham, Colorado. They had similarly launched themselves into a new business that was a bit closer to home. The McConnell’s were converting from cattle to elk and just then finding the satisfaction that seems to permeate the industry.
We were a good match, and since we had similar elk goals, off we went into an elk venture. Craig and Noreen with a bed and breakfast - elk boarding ranch, the Elk Echo, and myself with the beginnings of the Mountain Velvet (“MV”) herd. My early purchases included four, guaranteed pregnant, 2-year old cows originally derived from the Alvin Johnson herd, herein designated as cows #F1, #F2, #F3, and #F4. All were larger than averagefor Colorado, weighing perhaps 580 to 620 pounds. Genetically, they were not very exciting, possessing nice lines but only average velvet genes. This is the story of those four cows and their offspring.
The first year for these cows was a learning year for all of us. All four cows had been bred to Elk Echo’s herd sires, three to “Remington”. All cows were under a 60% MV-40% Elk Echo profit sharing plan until end of the 3rd year. Come June of the first year, two heifers #F1a and #F4a plus a bull (#M2a) were born for a 75% live calf rate. One cow, #F3 failed to calf, leading to invocation of the guaranteed bred clause, which yielded the monetary value of one bull calf. Not bad for year 1, the original four cows, 2 new heifers and a nice bull calf plus some cash. The bull (#M2a) was later sold off.
Year two had all four cows again bred to Echo’s sires. Calving yielded 3 bulls #M2b, #M3b, and #M4b and a heifer #F1b, a 100% live calf crop, 75% bulls!
Unfortunately, July of year two was almost catastrophic, one bull calf died early (#M4b), and lightening stuck near #F1, my biggest and best cow. She lingered for a couple of days and died after a diligent try by Craig and the vet. Her calf (#F1b) fortunately survived, but was weaned quite early. Year 2 ended with 3 cows, 2 yearling heifers, a heifer calf, two early bull calves and a late bull who was growing like a weed (#M2b) ... I kept him, but sold the two early bull calves, #M3b and #M4b. A worrisome, but good year.
Year three had the 3 original cows and 2 yearlings bred to Echo sires which yielded 3 heifers #F4c, #F3c, #F1aa and one bull, #M4aa, (75% heifers) although cow #F2 failed to calf for an 80% live calf ratio. Two heifers #F3c and #F1aa, together with the one bull #M4aa were later sold. Late in year 3, the original remaining cows #F2, #F3 and #F4 were all sold, and the cash taken out of the venture to be invested in other elk. I retained the offspring: cows #F1a, #F1b and #F4b along with bull #M2b. #F1a was later sold off and unfortunately, cow #F4b died of mysterious causes shortly into the breeding season. She was seemingly chased to death, perhaps a heart failure. A so-so overall season.
Year four had only one offspring cow #F1b which was bred to a Clearstone bull. She yielded heifer #F1ba while offspring bull #M2b showed 9.5 lbs of velvet as a 2-year old and might have some herd sire potential. Later in the year, #F1b and #F4c were exposed to Clearstone bulls. Pregnancy had not yet been established. The valuations of the remaining unsold animals was based upon the then current animal prices.
On Tables 1 & 2, the actual financial information for all 45 months has been tabulated for all the original animals and their offspring. Table 1 shows the effects of a rancher’s position in elk, whereby the rancher pays only the costs directly related to the animal such as testing and vet costs, including feed costs which approximate $1.00 per day per adult animal, lesser for calf and yearlings. The rancher’s position makes no charge for the cost of labor, improvements or other non-direct costs of the animals. All income and expenses are tabulated quarterly. Chart 1 portrays this information graphically.
Table 2 gives an investor’s perspective, also tabulated quarterly. Here the animal care (the rancher’s labor and facilities) adds a minimum of $1.00 a day to the animal’s daily cost over an above the feed and vet costs, sometimes more when the sharecropping method is used. Chart 2 portrays this information graphically.
The Ranch Perspective. Despite several adverse events, the four cows originally purchased produced a respectable profit when accrued to a ranch account. All cows were purchased for an initial cost of $6,200 each, guaranteed bred and were cared for in an ordinary fashion within a paddocked 800-acre enclosure on the Northeastern Colorado prairie. This area requires supplemental feeding all year round.
Cashflow-wise this elk venture would be quite profitable for the rancher in the long run. Maximum cash exposure of $25,084 occured early in year 1. Emphasizing herd growth, only $1,353 of cash was removed from the venture during the first year. During year 2 only an additional $586 was taken out of the venture. Year 3 saw a major change in the emphasis toward a different genetic line of animals. Significantly, some $18,161, fully 73% of the original investment money, was removed from the venture in year 3. Lastly in year 4, an additional $9217, or another 37% of the original investment was withdrawn from use. Over the full 45-month period some $29,319 of cash (or 118% of the original investment) was removed from the venture to be used for other elk investments and general operating funds. The remaining animals: cow #F1b, bull #M2b, jinnock #F4c and heifer #F1ba were valued collectively at $18,600 or about 75% of the original investment. Chart 3 “Rancher’s Year End Asset Value” portrays the financial position of the venture at the end of each fiscal year.
The internal rate of return (“IRR”) per animal in the original investment (IRR is like the interest rate you are making on your money) ranges from 16.2% to 34% with an average of 24.3% annually. Proof positive that the animals are making money! Total cashflow or expected cashflow from each animal ranged from a low of $9,085 for cow #F3 to a high of $18,092 for cow # F1, a range of $9,000, or a 100% spread. Total cashflow generated equaled $47,948 from a $24,800 investment, a 93.3% increase over 45 months. Each individual animal generated a positive cashflow measuring from a low of $2,885 for cow #F3 to $11,892 from cow #F, also a $9,000 range, but a wide 312% spread for a total positive cashflow of $23,148. In any one year the cashflow could have been negative for a period of time.
Cow #F1 out performed all the other cows despite its early, accidental demise. It and its offspring yielded a very respectable 34% IRR. Although not her responsibility, her line produced only heifers, both from her and her offspring. The worst performer, cow #F2, yielded 16.2%. It did have a slightly more positive cashflow than #F3 which gave an 18.7% yield rate. Timing of income and expenses is important in IRR calculations. #F2’s poor performance is dictated by missing one calving period and having two bull calves. While #F3 had the guaranteed bred clause invoked, lost one bull calf and finally had a so-so heifer calf, also a not so stellar performance. #F4 line produced two heifers and two bulls, but unfortunately the early heifer died as an adult, lessening the return rate. Overall, this was not the best set of results one could hope for.
The Investor’s Perspective. From a passive investor’s standpoint, these elk were not a rip snorting success. Several untimely deaths, one from purely accidental occurrences, resulted in a less than spectacular financial performance. One must however review the results critically. The cause of lesser performance is important.
For the Investor, the venture’s cashflow is profitable, but lesser so. While emphasizing herd growth during year 1, some additional $1692 had to be invested for care and feed. During year 2 some additional $853 went into the venture. Maximum cash exposure of $27,710 occured mid-year of year 2. Year 3 again has a major change in the emphasis toward a different genetic line of animals. Significantly, some $13,385, almost 54% of the original investment money was removed from the venture in year 3. Lastly in year 4, an additional $8,270, or another 33% of the original investment was withdrawn from use. Over the full 45-month period some $19,110 of cash (or 77% of the original investment) was removed from the venture and used for other elk investments. The remaining animals: cow #F1b, bull #M2b, jinnock #F4c and heifer #F1ba were valued collectively at $18,600 or about 75% of the original investment. Chart 4 “Investor’s Year End Asset Value” portrays the financial position of the venture at the end of each fiscal year.
For the Investor, the internal rate of return per original animals ranges from a paltry 6.8% to a respectable 21.6% with an average of 13.0% annually for the full 45 month period. Some, in fact many, mutual funds and stocks may have done better during this same 45-month period. Total cashflow or expected cashflow from each animal ranged from a low of $7,539 for cow #F3 to a high of $14,402 for cow # F1, a +$6,800 range (a 91% spread). Total cashflow generated equaled $37,739 from a $24,800 investment, a 52.2% increase over 45 months. Each individual animal generated a positive cashflow measuring from a low of $1,339 for cow #F3 to $8,202 from cow #F1, also a +$6,800 range (and a whopping 512% spread), for a total positive cashflow of $12,939. Again, in any one year the cashflow could have been negative for a period of time.
Lesser cashflows can be explained by the same reasons as the rancher’s perspective, however the deduction of animal care costs and the use of a 40%-60% calf crop split between the rancher and investor materially decreased the return. This was partly due to a random higher percentage of heifer calves born and weaned under the sharecropping plan.
Note further that the positive cash flow difference between the ranch and investor scenario is $10,209. This represents the fee paid by the investor to the rancher over this 45-month period. Taking this back to the original 4 cows, this represents an average cost of about $57 per mother animal per month. One must however also account for the offspring before they are sold. Counting offspring, some 205 animal months were generated under the investor ownership. $10,209 divided by 205 yields an average monthly cost per animal of $49.50. This represents the value received by the rancher for his labor and facilities for each month the animals were resident on the ranch.
Conclusions. The animals used in this study were average animals of uninteresting genetics. They probably did not appreciate as much in value as would have well cared for, “select” animals. Buying the best always yields a better product and hence rate of return. The animal husbandry techniques used during this period were not yet advanced nor even very well developed, all parties were still “learning” elk for the first few years. More recently, animal management practices and imported genetics have been steadily improving the herd. Animal value, velvet weights, calving rates, etc. are increasing with time.
Conclusively, one can determine from the compiled data, that elk owned by a rancher are profitable, even when the animal genetics are not the best in the world. A steady yield of over 20% compounded annually should make any rancher happy. This assumes of course that the ranch and facilities are already established. For a new ranch, an amortization factor may need to be added, much like the investors ranch fee. Of course, the rancher must also make a significant contribution of time to the equation. The good news is the ranch and facilities will eventually pay for themselves and be owned fully by the rancher. Not so for an investor.
From an investors stand point, and looking from a purely monetary perspective, the results are not so favorable. The need to reimburse the rancher for his time and facilities takes its toll. Eventually the rancher will end up owning the ranch while the investor has naught. However most investors do not wish to invest their time and will voluntarily pay for these services, albeit at a decrease to the rate of return. Basically, part of the return has been sacrificed for convenience, in this case 11.3% annually or 46% of the total available yield. Secondly, the animals studied were not the best of their class and were perhaps subject to additional problems not encountered with “select” animals. A new, absentee owner is always at greater risk. Lastly, the learning curve also took its toll on the investor and lesser so on the rancher. Perhaps upwards of an additional 6% to 8% return could have been gleaned under either scenario if the learning curve had already been established.
Buying the best, implementing good animal management routines, and keeping that learning curve pointed up steeply is the best way to insure a good rate of return. Good advice for the investor, as well as, the rancher. As we all have discovered, with time and effort comes expertise. Expertise decreases waste and increases profitability. There is no doubt that the present and future elk endeavors are currently more profitable than the initial group analyzed herein. At the present, strong positive elk economics is almost assured and growing. This routine of continuing, evolving expertise together with the future elk market will determine the profits for those years to come.