Turning Grass into Money

Turning Grass into Money

In November 2020, Dr Mark Ferguson interviewed Nigel Kerin on the Head Shepherd podcast and we have turned it into an article for you. Mark and Nigel discuss Nigels unique but profitable way of farming that utilises good growth seasons and protects feed banks in the dry.

Mark: Today I was really keen to hear about the journey of Kerin Agriculture and some of the mindset changes that have occurred over time. Obviously you grew up on the family farm, but have built a business that's very different to the family farm. How did all that get underway and where did that start?

Nigel: I left school at 14 and went jackarooing. Where it really started humming is when we did our succession in 2007. The first thing we did was employ a business coach. The reason we employed one was because we were okay at agriculture, but we weren't that great at business. We knew business skills were what we had to sharpen up on, not agriculture.

One of the big learnings was that what actually got business going was bringing an outsider into the business to hold your hand through a change. I know that exists very much in the cropping business. Agronomists hold your hand through change, but in the livestock industry, especially the sheep industry, there's absolutely bugger all outside influences that you can bring into your business to make a difference.

The guy who we employed was an absolute, fantastic game changer. In the way we thought, the way we addressed and conducted business and also very much how we managed climate.

I've heard you talk about your understanding of what's in front of you in terms of grass and your grass budgets. How does that system work?

One of the one-liners that our coach uses over and over and over again, nearly every meeting is, "Nigel you'll make really good money in the good years, and then you'll tear it up in the bad." Drought was our enemy. Over time we developed a process where we started using trade animals to adjust stock to carry capacity.

"We were 100% breeding back then. We started using trade animals to adjust stocking rate and carrying capacity but the problem with that was we were doing everything the way everyone else used to do it.

Most cockies consider wealth by the amount of animals they're holding and that's not how trading works. For us, a trade comes in and it's got to be in and out in four months.

The reason it's four months, is that’s all we can see ahead of us as far as grass- four months. We won't buy trade sheep or cattle, unless we've got the grass to finish that trade, before we actually buy it.

How unique is that four months to your neck of the woods? Is it universal?

Very universal. It doesn't seem to matter where you go across Australia or go to a strange place. How long can you see in front of you? I say four months.

It's very different when you go into the pastoral zones, they can actually see further out because they're in a much bigger area and they can do a pasture or herbage assessment of what's there. They can get out to six and seven months at a time but in the higher rainfall areas, four months is about as good as you can get it.

A lot of livestock farmers are very proud of their breeding herd or flock and it ends up being a hell of a lot of emotion tied up in those animals. You've obviously broken out of that mould.

I remember that when the old man was boss. The biggest issues we ever had were in droughts. The sacred bloody cows and the issues that maintaining and keeping those sacred cows used to create...

Well, when I got my own business, the most stress that ever came into our business was in the dryer years, so something had to change.

We used our grazing charts and grass budgets to determine what we’d got on offer. It allows us to monitor exactly what we are doing with how much grass we've got and how many months ahead.

We like to have four months ahead of us all the time for the core breeding herd and we maintain that by adjusting it with trade animals.

I've seen a fair bit on social media this year of some fancy-looking canola. That's obviously been a bit of an interesting feed for this particular year.

Yes, we put in 710 hectares. It wasn't this year that got us really interested, it was how it performed in 2019 in the worst drought ever.

It was just amazing the way this stuff would go chasing moisture. We wondered, how can we get the highest cash flow after going for basically two-and-a-half years of being in drought? What will be the highest return on a millimeter of rain that we can get, with the least amount of risk?

Some people will say, well, hell, canola's pretty bloody risky. Well, not when you've done it before and you know what your costs are and you know what the return is. We thought, "Well, if this stuff can grow so well in a drought, my God, it would have to perform well in a good season."

We went for canola and started planning in February, finished in March. It just went kaboom because the season went kaboom with it.

We then looked about what stock would have the highest return from grazing on that canola and at the time it was lambs. We looked at what the lamb industry was doing and we worked out that this stuff had run about 35 DSE a hectare. That's what it did standing on its head.

We went in then and we brought lambs. The thing was with the lambs, we didn't buy any lambs until we got the contracts. Now those contracts at the time were $9 a kilo. Did I have to think about taking $9 a kilo as a forward price? No, because it was in the 100th percentile band. It doesn't get any better. We went and brought all the lambs.

On that trade, the whole lot were in and out of there in 14 weeks. In that period, we netted, after the cost of carry at $16 a head on each lamb, $75 a head. I've never seen weight put on, no matter whether it was Merino's or crossbreds, as quickly as what that stuff did. We had basically zero losses, there were zero animal health issues. It was an absolute piece of cake.

When all those lambs started going back out the gate, had we not taken that forward price, we would've burnt money up.

A key principle for you is if it's not already sold, then you don't buy it?

I love record store markets and restocking markets. When black steers are making $5 I get excited. When you're buying a restock of lambs for $200 at 43 kilos, that's when you know you're going to make a heap of coin.

The reverse opposite to what most people think.

Because what do the meat processes do when everyone's got grass fever? They want to secure supply and they do that in a way called forward contracts. When the restock market is at record levels, 90% of the time the forward pricing will be at record levels.

I don't look at what I pay for a black steer or what I pay for a restock of lamb, I convert everything back to DSE return for the weeks that I hold it.

That's where it gets really interesting because it removes all the emotion out of record prices. In our lamb fattening business, we traditionally and quite easily, put a kilo of dressed weight on per week for each lamb.

If we've forward sold at $8, it’s $8 a week we're making on that lamb. So our cost to carry traditionally, on lambs, is about $16. That's interest freight, in-out, induction costs, blah, blah, blah, interest, whatever you can think of.We only have to hold those lambs for two weeks to cover our cost to carry, so if they're here for 12 weeks, the next 10 weeks are all net profit.

That's a really, really good business when you know your cost to carry is covered in two weeks of grazing in the next 10 weeks, it's all cash. It's the same with cattle buying black steers.

We don't bring animals on to park them here and put bugger all weight on, just because they are cheap. I’d rather have nothing running on my farm. There is nothing good about cheap, because usually when an animal's cheap, it means you've got no grass anyway, so what are you going to do? Just go and park it there, and incur a cost of carry with bugger or weight gain?

I'd rather leave the money in the bank and leave the grass in the grass bank and do nothing than buy something just because it was cheap- that's really dumb business.

The thing with these lambs or any trade lambs we buy, we know we're going to bring them here and they're going to be here for a maximum of 16 weeks, but they're usually out the gate and gone in 12 or 13 and they're going to do a kilo of dressed weight a week.

It's the same with the cattle when we are dealing with black steers. We want to be doing a couple of kilos a week. With cattle, when you've got $100 cost to carry, if you are looking at $4 a kilo and you're doing two kilos a day, it takes 12 and a half days of grazing to cover your cost to carry. Then after that, it's all profit, so 12 and a half days, I've got to pay the bank back, and then after that, bingo the rest is mine.

When you annualise the return of the lambs they annualise out. Admittedly, you can't do this all year, but I have to annualise it out to know well, is this a good trade? Those lambs came back at an annualised return of $230 a DSE. The cattle this year, which were forward sold at $7 a kilo of dress weight, come back at $177 per DSE annualised.

How much of your bandwidth is taken up looking for those trades or have you got people in your business that are always looking?

It's pretty simple now, it's just like a button you push. You do a feed assessment, you update your grazing charts, you look at the trend line on your grazing charts, you look at what grass you need on hand for the core breeding herd, whether that be sheep or cattle. Then you go, "Well, I need to put on another 4,000 DSEs. So I’m going to buy lambs”.

I rate lambs at 1.3 DSE per lamb, and I'll rate cattle at at 1 DSE for 50 kilos. I use 50 kilo a DSE because I can work it out in my head rather than 45. That tells us how many DSEs/animals we've got to go out and buy and I just give that order to our agent and he goes and buys it.

I used to do all that myself, but I choose not to touch that anymore because I will never have the networks that a great agent has.

There's a lot of difference between a great agent and an ordinary agent. If you've got an ordinary agent, you're going to find it hard to make money.

If you've got a great one you'll find stuff will fall into your lap, and that's very much when you take that focus off cost. Though while your focus is on cost, you'll never see cash.

And that's been a big realisation now in our business. If you focus on turnover you get turnover, you focus on cost, you'll get a low-cost business. It's bloody hard to have both

Just to flesh that out a bit more, and there's a lot of, I guess, advisors running around that spend a lot of time with their clients trying to take the last percent of cost out of the business. That's certainly not the way you've found a successful way to make money out of grass?

I don't make a living out of agriculture, out of anything, but grass. I don't make a living out of having the lowest-cost business. In the sheep and cattle game, it costs you pretty much $300,000 of direct cost to create a million of sales.

Let's say on the 1st of July the beginning of the new financial year I get out of bed and I say, “I'm going to wipe 10% off all our direct costs for the next financial year.”

I'll wipe 10% off $300,000 of direct cost, that adds up to $30,000. Now, what does $30,000 buy you? Absolutely bugger all. It doesn't change your world.

By the time we buy one of these brand new side-by-side bikes, deck out with a bull bar and two way radio, spray tanks and roofs and what not on it, they're about $30,000.

But what if I get out of bed on the first of July and my focus for this financial year is going to be putting another 10% of turnover into this business?

For every million dollars I turn over and I create another 10% on top of that, I make $100,000, and what does $100,000 buy you? $100,000 can buy you an absolute cracking labor unit

When you actually look at your business and ask, “How can I create an extra 10% of turnover?” it gets really bloody exciting.

Most people are that busy being busy, they haven't got time to make money.

If your focus is on turnover it allows you to create more cash and it allows you to employ more people. That actually gives the CEO of the business time to get up in a helicopter and look down on that grass business to think, “How do I convert grass, which is actually water, into the highest price value thing I've got?”

That's the big difference. If you're busy being busy, you're not focused on all those things.

Here's where it gets really tricky. You do not have to have a very good skill base to cut 10% off direct costs. It's just a matter of ringing people up and screwing them. And my thing is, who wants to do business with you when you're being screwed all the time?

In our case, it comes in the simplest form of grass management and looking at how we keep that grass in a production mode before it goes into reproduction mode. That’s where it turns to cellulose and then we need bypass protein to turn that into a usable product.

That's where the thing of matching stocking rate and the carry capacity works. It's in the eight months of the year where we're lucky enough to get big rainfall events is where we're making our money.

What I've been seeing in the last 10 years, and you'll hear this “In the central-western New South Wales has just had a one-in-50-year event as far as rainfall” in the news. Well, how do you know you're in a one-in-50-year rainfall event until it's finished? Then all the 100% breeders look back and say shit, it was a good year? Well, it was a great year but was it a great year for turning it into cash?

In the last 10 years, we've had three, “so-called one-in-50-year” rainfall events. I've got a feeling the one we're in now, which might go from this March till March 2021, may end up another “one-in-50-year event”.

What I'm saying is, if you can change your management systems and the way you manage your grass, which is your business, where you capture those so-called one-in-50-year events, which in our area, Central West, New South Wales is now turned into three-years-out-of-10 year events.

We're making more money in one year than what we will in three of average rainfall.

It all happens and gets created by grass fever. Grass fever pushes the store market through the roof. When that happens, it also pushes the forward price through the roof. You're actually protecting your investment that you're buying back in, by forward prices.

Climate change, there's something going on, it's happening, but don't throw the towel in. We just need to change the way we look at our animal business and stop trying to force profit into a business in a year where rainfall is tight.

That's where you have got to have grazing charts and grass budgets to work out “How big a budget of grass do I actually have in this business at the moment? How do I dish that out to the core breeding herd?”

We use grazing charts to map stocking rate and carrying capacity. Because if you sell early you sell little, if you sell late you'll sell lots, but the problem with selling late is you will have already affected the landscape function, and how that landscape bounces back when it does break and that's the big killer.

I think that's a key one. That's an absolute key function of handling climate, isn't it? Getting animals off paddocks when there's nothing there.

Yes, I just lay down in front of the climate. I know it's going to win, it's going to beat me. For the core breeding herd, we go back into containment, but we go back there with the least amount of animals that I actually need. I don't get emotionally involved and hold on to animals and go, oh yes, it always rains.

I'll never forget being in Hamilton in Victoria. There was a group of cockies there and it was the beginning of a really dry period for Hamilton. They said, "Yes, we always had rain for such and such a date in Hamilton."

Well, guess what, 12 months later, they were still standing there going, "It used to always rain on such and such a date at Hamilton." Because they were so locked into this set pattern, they were like deer in headlights, they just didn't react. It really knocked that landscape around as far as the loss of perenniality.

We always learn a lot more in hardship than we do when things are amazing. The last two and a half years prior to this one, it was a very tough time to be farming in most of Australia. What were your key learnings out of this current or most recent drought?

I think the biggest lesson showed in the people. The ones that kept making decisions, reassessing every month. Reassessing and acting, reassessing and acting.

The ones that didn't, and just kept ordering trucks after trucks of feed. They weren't in a good spot. When they finished, it affected how they reacted when it broke. They're still very, very gun shy.

It affected them whilst they were in drought, their way of thinking and the culture that's in that business but it's also affected when they've come out as well, because it hurt that much whilst they were in it.

What keeps rattling through their mind is "Oh shit. What happens if I restock and it stops raining?" That's why it's got to be a four-month trade thing. They got to be in, locked-in, purchased, then out the gate and there is no risking that. The main thing with trading is it's not markets usually that move against you. It's running out of grass.

If you'd like to find out more about Nigel Kerin and his business, follow the link below.