There is a certain amount of risk and uncertainty associatedwith almost every decision you make. You must be opti-mistic about your decisions, or else you would not imple-ment them. However, realistic optimism is based on a care-ful study of all the evidence. Successful managers look forevidence that a plan might not work, as well as evidencethat it will. They do not rely on general rules of thumb, andthey do not make the same decisions year after year forfear of trying new approaches. Your chance of successdepends on selecting the right things to do and then doingthem right. To select the right things to do you must thor-oughly evaluate the possible outcomes of each decision.

What Are Your Odds?

Are you a gambler who relies on luck, or do you plan andcalculate the odds associated with all decisions and alterna-tives? Are you reckless or cautious? Why do some peopleseem to beat the odds by sustaining their rangelandresources and succeeding financially even under adverseconditions, while others are always out of forage, out offeed, out of water and out of money?

Top operators recognize that successful business manage-ment is, to a large extent, successful risk management.Even if you can’t control a particular business risk, you canmanage your business to compensate for it. In some casesyou can even capitalize on the risks you face.

Understanding Risk, Probabilities and Uncertainty

To understand the concepts of risk, probability and uncer-tainty, let’s consider drought. Drought is common on Texasrangelands. Its frequency and duration increase as youmove from the eastern to the western part of the state. Theodds are that there will be drought 1 to 3 years out of 10(east to west, respectively). But what do these odds mean?Will there be a 1-year drought, a 3-year drought, or two 3-year droughts within the next 10 years? And when willthey occur?

Odds are probabilities based on the study of many individ-ual occurrences. You can use probabilities to summarizeknown outcomes of an action implemented many times,

but that won’t tell you what will happen if you implementthat action. An 80 percent chance of success is the same as a20 percent chance of failure. The manager’s responsibilityis to decide whether or not that 80 percent chance of suc-cess is good enough.

Consider a decision about brush control. If you are toldthat a certain practice will help you achieve 80 percent con-trol of brush, that may sound very good. But you mustlook beneath the claim and calculate the odds. Some ques-tions you’ll want to ask include: Have 100 percent of theoperations that used this practice achieved 80 percent orbetter control of brush? Is 80 percent the average of resultsachieved by all operations? The risk involved depends onthe answers to such questions. If the answer to the first

Will You Succeed as a Rangeland Manager?Larry D. White and Wayne T. Hamilton

Professor and Extension Range Specialist, The Texas A&M University System; and Director, Center for Grazinglands and Ranch Management

Rangeland Risk Management for Texans

Used by permission of the artist.

Stewardship is taking care of all yourresources and evaluating your risks!

“Sir, you’re only outta patience, I’m outta grass, outtafeed, outta water, and outta money.”

E-11410-00

question is yes, then there is little risk in using thispractice.

However, if the 80 percent is an average result, youneed to see the risk assessment index (frequency) ofdifferent results to be able to determine your risk.Using a risk assessment index is one way to beat theodds in making management decisions.

Using a Risk Assessment Index

Table 1 shows the risk assessment index for our brushcontrol example. It is important to understand what thenumbers mean. An average is different from a median,which is different from mode, which is different fromfrequency. The range of values observed in the variousbrush control efforts determines the amount of differ-ence that could occur. The average control was 89 per-cent, but for some operations the result was as high as100 percent and for some it was as low as 61 percent.The median was 93 percent control (half had less andhalf had more). The mode, or most frequent result, was95 percent. The relative frequency of results (percentchance of greater control) is a better tool for evaluatingyour risk than the other calculations.

With the risk assessment index you can determine thepotential effect of not achieving the brush control you need.For example, if you have to achieve about 90 percent con-trol or greater to maintain your planned stocking rate, thenyou have only a 60 percent chance of being successful. Onthe other hand, if 60 percent brush control is adequate foryour situation, this practice will be successful and carries“no risk,” unless your situation differs from those studied.

Understanding Cumulative Risk

Management involves taking a series of actions designed toachieve the results you want. Each individual action carriesits own risk. Cumulative risk is the combination of proba-bilities for a number of decisions/actions. Let’s use a sim-plified livestock grazing example to illustrate.

A)Five hundred animal units are needed to pay businessoverhead and family expenses.

B) Median rainfall is necessary to produce adequate foragefor the enterprise without over grazing.

C) Minimum weaning weights must be 500 pounds (theminimum for the ranch over the last 10 years).

D)At least 85 percent calf crop must be weaned (the mini-mum for the ranch over the last 10 years).

E) A market price of $0.85 per pound is needed (the medianfor the last 10 years).

F) Annual direct costs per animal unit can not exceed $25(the maximum for the ranch over the last 10 years).

To calculate the cumulative risk for this example, multiplythe probabilities for each item: B (0.50) x C (1.00) x D (1.00)x E (0.50) x F (1.00) = 0.25

Thus, there would be only a 25 percent chance of success(or a 75 percent chance of failure) with this scenario. It isvery easy to overestimate your chance of success unless youlook carefully at cumulative risk and probability.

Rather than starting with the number of animals you wantto have, start with the amount of forage you can realisticallyexpect to produce (allowing for possible drought). Usuallythe size of the herd should be no more than 50 to 70 percentof “normal” carrying capacity (requiring adjustment oneout of ten years). This allows you to accumulate a foragereserve to help when a drought occurs. With part of yourforage “set aside,” the forage supply risk changes and thecumulative risk for this scenario becomes: B (0.90) x C (1.00)x D (1.00) x E (0.50) x F (1.00) = 0.45, or a 45 percent chanceof success.

Your financial survival depends on your stocking rate(which reflects your resource stewardship) and, of course,animal performance and your financial responsibility. Manyranchers increase stocking rate to achieve higher income,but as stocking rate increases so does risk. Increasing thestocking rate creates wider fluctuations in weight gain andreproductive performance. It also degrades the rangeland,lowers future carrying capacity, causes more weed andbrush problems, decreases the amount of rainfall enteringthe soil, and increases erosion. Thus, risk of failure increasessignificantly. Calculate the cumulative risks for yourself anddetermine how much risk you can afford.

Trialno.

Percentmortality

Sortedranking

% control

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

avg.

77

61

84

84

93

76

95

95

95

95

89

95

100

95

93

88.7

61

76

77

84

84

89

93

93

95

95

95

95

95

99

100

Risk Assessment Index

Based on this data set:100% of the time you willachieve greater than 61% control.

93% of the time you will achievegreater than 76% control.

67% of the time you will achievegreater than 84% control.

60% of the time you will achievegreater than 89% control.

The average control is 89% forall situations studied. Your situation may differ.

Table 1. Mortality of mesquite two years following application of Reclaim (1/2%) and

Remedy (1/2%) herbicides as individual plant leaf sprays.*

*Data set from Brush Busters reports, Texas Agricultral Extension Service

100

93

87

67

67

60

47

47

13

13

13

13

13

7

0

Remarks% chance of

greater control

Beating the Odds

To beat the odds, calculate cumulative risk using the worstoutcome seen for each part of the scenario over the last 10years. This will constitute your survival level. Then adjustyour goals and management to achieve at least this level ofperformance every year. This should allow you to keep theranch and reduce debt. Profits in better years should be usedto service debt and make effective investments withoutincreasing overhead (pay cash when possible). Off-ranchinvestments may be more profitable and less risky thanranch investments.

It is also necessary to monitor your resources constantly andlook for warning signs that your projected outcomes are notoccurring. Then you can look for alternatives and adjustyour management strategy before small problems becomebig ones. Compare all the alternatives before making impor-tant decisions. Everyone’s ranch, goals, management skills,financial resources and risk-taking comfort zone are differ-ent. To beat the odds, make sure you can survive and havethe income you need even if you can not achieve the incomeyou want. Remember that you will not achieve the incomeyou want every year. Sometimes the key is to reduce losses.

Selecting the Right Things to Do

It is more important to set appropriate goals and achievethem than to select particular technology or tools. Ratherthan focusing on what to do, the good manager first identi-fies the responses he needs (forage production, weaningweight, etc.) to achieve his goals, and then selects the mostappropriate way to achieve those responses. If the responsesyou need to reach your goals are not achievable or have toomuch risk, then your goals are unrealistic.

Identify each step in the process of reaching your goals, thenidentify the cumulative risk. In the Total Ranch Managementapproach, you identify the annual overhead expense neces-sary to keep the ranch or property and the minimum familylifestyle expense. The total of these two is the minimumgross margin (GM) you need from all sources of income–ranch enterprises, off-ranch investments, and off-ranchemployment or other income.

For example, if the overhead expense is $40,000 (taxes, landpayments and other long-term debts) and the minimumneeded for a modest family lifestyle is $35,000, then the min-imum GM from all income sources is $75,000. If the ranch isto supply all the GM income and it comprises 10,000 acres,then you need a minimum income of $7.50 per acre. A sur-vival GM budget should identify the lowest animal produc-tion and highest direct costs over the last 10 years to deter-mine the survival stocking rate for the ranch. In this case acattle operation would have to produce a minimum GM of

$262.50 per animal unit, if stocked at 35 acres per a.u. Is thisrealistic? Will your range resource be sustained? What aboutdrought years and poor markets?

The Total Ranch Management livestock management deci-sion aid (available from the Texas Agricultural ExtensionService) allows you to quickly determine the number of ani-mal units, production per unit, value per unit, and directcost per unit needed to achieve your goal with a balancedherd composition and your culling practices. See Extensionpublication B-5036, “Stocking Rate Decisions,” for a discus-sion of the procedure for balancing stocking rate with finan-cial needs. From the needed stocking rate you can calculatethe needed forage supply, then determine if it is realistic foryour ranch and expected rainfall. With this information youcan determine likely budgets for each enterprise and find thecombination that best achieves your goals.

Brush control practices, fences, water facilities, etc. arepotential investments that require a large capital outlay andhave risk. There are always alternative investments with dif-ferent risks and potential returns. Because the costs andreturns associated with range improvement practices occurat different times in the planning period, you must analyzetheir “present value” (and/or “internal rate of return”) inorder to compare them with alternative investments andother opportunities. The Texas Agricultural ExperimentStation has developed software called ECON that helpsmanagers assess the present values of different investmentopportunities. The software allows you to use “what if” sce-narios to determine relative risk. ECON simply accounts forthe added costs and revenues associated with rangeimprovement practices occurring in each year of the plan-ning period, discounts them with the appropriate discountfactor, sums the discounted costs and returns, and subtractsthe summed discounted costs from the discounted revenues.The difference is the “net present value” (NPV) of the rangeimprovement investment. If the NPV is zero or positive, theinvestment should be economically feasible. For more infor-mation contact the Center for Grazinglands and RanchManagement at Texas A&M University.

Dealing with risk and uncertainty requires perception,assessment, and careful management (planning, implemen-tation, control, and adjustment). If you do not perceive risk,assess it, and manage for it, your enterprises and resourcesmay not survive.

Other publications in this series:

L-5368, Making Better Decisions

L-5371, Common Grazing Management Mistakes

L-5375, Common Brush and Weed Management Mistakes

L-5377, Forage Quality and Quantity

L-5374, Rangeland Health and Sustainability

L-5370, Drought

L-5369, Toxic Plants

L-5376, Seeding Rangeland

L-5372, Types of Risk

For further information:

Halpern, D. F. 1989. Thought and Knowledge. Hillsdale, New Jersey;

Lawrence Erlbraum Associates Publishers.

B-1630, Causes of Farm and Ranch Failures. Texas Agricultural Extension

Service.

McCollum, T. 1993. Managing stocking rates to achieve livestock production

goals in North Texas and Oklahoma. In Proceedings of Managing Livestock

Stocking Rates on Rangeland Symposium, Texas Agricultural Extension

Service.

Troxel, T. R. and L. D. White. 1989. Texas TRM – Total Ranch Management:

An Integrated Educational Program for Texas Ranchers. In Proceedings of

the National Integrated Resource Management Leadership Conference.

November 1988, Denver, Colorado. USDA-ES and National Cattlemen’s

Association.

White. L. D. 1994. Total Ranch Management – Strategic Management of

Range Ecosystems. In Proceedings of the 8th Australian Rangeland

Conference. June 1994, Katherine NT, Australia.

B-5036, Stocking Rate Decisions, Texas Agricultural Extension Service.

L-5141, Do You Have Enough Forage? Texas Agricultural Extension Service.

For additional range management information see: http://texnat.tamu.edu

For additional risk management information see: http://trmep.tamu.edu

Support for this publication series was provided

by the Texas Agricultural Extension Service risk

management initiative.

RiskManagement Education

™