Episode 41: Yellowstone is Global Macro Trading – Drew Knowles

Drew Knowles

In this episode I talk with Drew Knowles, managing member of XIT Ranch.

XIT is long-term oriented family investment vehicle including real assets such as ranchlands, horses and cattle operations, venture capital, private equity, and hedge funds.

We talk about:

  • Never Ask a Cattleman Size of Herd,
  • Hay shortages,
  • Levels of ranching certifications,
  • Carbon Sequestration,
  • Global Macro-End of the World Vol Trade and more! 

I hope you enjoyed this conversation with Drew as much as I did!

 

 

 

Listening options:

 

 

Have comments about the show, or ideas for things you’d like Taylor and Jason to discuss in future episodes? We’d love to hear from you at info@mutinyfund.com.

 

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Transcript Episode 41:

 

Taylor Pearson:

Hello and welcome. This is the Mutiny Investing podcast. This podcast features long form conversations on topics, relative to investing, markets, risk, volatility, and complex systems.

Disclaimer:

This podcast is provided for informational purposes only and should not be relied upon as legal, business, investment, or tax advice. All opinions expressed by podcast participants are solely their own opinions and do not necessarily reflect the opinions of Mutiny Funds, their affiliates, or companies featured.

Disclaimer:

Due to industry regulations, participants on this podcast are instructed to not make specific trade recommendations, not reference best or potential profits. Listeners are reminded that managed futures, commodity trading, forex trading, and other alternative investments are complex and carry a risk of substantial losses. As such, they’re not suitable for all investors and you should not rely on any of the information as a substitute for the exercise of your own skill and judgment in making a decision on the appropriateness of such investments. Visit mutinyfund.com/disclaimer for more information.

Jason Buck:

A couple of weeks ago you told me an anecdote and I love a good anecdote that comes out of left field that I would never have thought about before. You told me that hay prices… hay is about to be a problem. We’re talking about the bullwhip effects of supply chains and everything, but then you started telling me as a rancher, dealing with hay now because of the drought in California, hay may become a future problem that I should be keeping my eye on. Tell me what’s going on with the hay market nationally.

Drew Knowles:

That’s a great thing to start off with. All of our animals eat hay so we buy a lot of it. Our two ranches are located in Colorado and Texas. We have two different hay markets between the two locations. As with any futures market or any agricultural market, you’ll have a national aggregated number and then you’ll have more localized and regional markets.

Drew Knowles:

As it pertains to various droughts going on at different points in time across the country, California is a year ahead of where Texas is right now in terms of going through a drought. What do I mean by that? The effects of what are happening in Texas right now are what was seen last year in California. Because California is ahead of the curve compared to where we are east of there, it means that producers are going to follow the money.

Drew Knowles:

Right now, if there’s no hay in California and the demand is there, limited supply, then prices are going to go up. Classic demand curve. So producers in Utah that might be able to go either direction, all of a sudden they’re looking towards California because if they can get $500 a ton or something like that, then they’re going to go get that there.

Drew Knowles:

A couple years ago when I could get it for less than $200 a ton or something like that, now I’m looking at over $200 a ton. Prices are going to be moving up. In some areas, they might already even be $300 a ton. What we are seeing right now through our rodeo stock contractor friends is they’re getting some of the word on the street because they travel around to Arizona and Utah, to all of these different rodeos, bringing stock in for the rodeo, could be a Bronco or could be a Corriente cow or what have you, that’s coming in for the weekend of the PRCA Rodeo. They’re hearing from their hay broker friends that the Utah or even Arizona, hay is heading west to California because prices are so high.

Drew Knowles:

Hay that maybe we would’ve gotten here in Colorado is going out there. So where are we going to get it? Well, Texas is in a massive drought down there right now. People are destocking their cattle like crazy even horses, because all of a sudden there’s no grass for them to eat. That means that there’s no hay that’s being planted or wheat and so on and so forth.

Drew Knowles:

The knock on effects really are prevalent. I think that we are going to see higher commodity prices, higher input prices, as we march through this thing. It’s going to take some time for it to all happen, of course, because the ag industry is a slow moving industry. Ultimately I think we are already feeling the pinch here. We just had two truckloads hay get delivered and it was expensive, but ultimately we need really high quality alfalfa for our broodmares that might have a foal on their side and maybe are pregnant again right now. For those horses, we have to have really good feed.

Drew Knowles:

We have a choice. We can either pay up for it or we could destock a horse. But if we have a really high caliber performance horse out in the pasture that has a foal on her side, that foals future value is well worth some additional input costs. And ultimately that does meander its way into something like the horse market.

Jason Buck:

This is going to be my favorite kind of podcast because I get to ask a series of dumb questions. It’s only going to be dumb questions from here on out. Part of it was, I was thinking about when you’re saying that, so would we not really see the full effects… You’re saying during the summertime, I assume they’re out grazing, but if you had drought in Texas or Colorado, there’s not going to be high quality grass. So you’re trying to increase the quality of grass.

Jason Buck:

But I would think that you’re not going to really see the hay prices move through the system more towards until the winter. Is it more of the seasonality? You’re seeing it now, but you’re going to say we’re going to start seeing news headlines like this winter with hay prices?

Jason Buck:

Part of it, you were just saying with high performance horses, does the silage content matter? Like you were saying with the alfalfa content and everything, so it’s very specific states or regions that you want to be getting hay from? I know that’s like a two-parter and totally divergent two parts, but I’m just curious of your thoughts.

Drew Knowles:

We’re already buying hay for the winter. We already had some previously bought it’s in a hay shed. We just had the two truckloads that just arrived. Those are for this winter as well. In southern Colorado where we are, we do get over a hundred inches of snow every winter. When there’s a foot of snow on the ground, there’s nothing for them to eat and what would be left at that point would not be very high quality. It’s more filler. It’s not really the same nutritional value that you would have during this time of year when we’re very green and lush and whatnot. If we’re talking about protein contents, alfalfa might have say up to 20% protein in it, hay might be say 8% or 9%. Different types of hay have different protein contents. When you have a high octane performance horse, they are burning a lot of calories. They’re working very hard. They need very high quality feed.

Drew Knowles:

Cows also need high quality feed, but they eat all day every day. There are different seasons to their life as well. If you’re talking about a grass-fed and grass-finished cow that you want to have on good finishing ground, like we have here in Colorado, that high protein hay is going to go a long way. If you have to grass finish a cow in the middle of the winter, you better have some really good hay in the barn so you can make sure that that protein on somebody’s plate is going to be what they expect.

Drew Knowles:

The other question you asked about the location of hay and where it comes from. I know a ranch down in Texas that trucks hay all the way in from Wyoming, because they think that hay is that good. Now you would think in a world of $6 diesel that maybe this year they don’t do that. I don’t know. I haven’t talked to him about that yet, but people will truck hay in that they think can make a difference in their animal’s lives. Kentucky is famous for bringing in hay from out here in Gunnison County. It’s not irregular for people to truck hay all over the place, especially if they think it’ll give their animal an edge.

Drew Knowles:

At the same time, if you run out of feed and your back is against a wall and you got to go to your local feed shop and pay through the nose for a couple of bales until you can get something delivered, people will do that. It’ll probably be lower quality and cost a lot more, but their animal will stay fed. Maybe not as nutritionally dense as the producer may like, but you don’t always have a choice in ranching.

Jason Buck:

You brought up another topic. There’s so many, actually, you brought up, I can’t wait to ask you about. One was, as you know, I live in a pseudo farming community here with growing grapes, but what’s great is where I go get my coffee every morning is basically attached to a gas station that’s primarily a diesel station where all the farmers are filling up in the morning. I was looking at the diesel pump yesterday, and the price was $856 for the guy that filled up 125 gallons or whatever. You’re talking about whether it’s hay input costs or diesel input costs, but the other thing I didn’t have time to look up. I’m curious if you know the difference. I did notice on the pump though, the other day, you have off-road diesel and on-road diesel. Do you know what the differences are? I don’t mean to put you on the spot with that one.

Drew Knowles:

Yeah. Green diesel would be your on-road diesel. That is what truckers have to use on the highway. There are various laws that exist. You have to have that high quality diesel on the highway for emissions reasons and whatnot. Red diesel would be your off-road diesel. That would be what the tractor is running on out in the field. It costs less, it doesn’t burn as clean. So there are two types of diesel.

Drew Knowles:

Somebody asked me recently, an astute market participant asked me, “Why is gasoline this price and why is diesel that price?” We started talking about it a little bit. I said, “You know what? If I really knew the real answer, I’d probably just get upset as to why I’m paying so much more for diesel as I am regular gasoline, unleaded.” There’s some things where ignorance is bliss. That one might be one of them. I’m sure one of your listeners can tell us exactly what’s going on there. I would welcome it, although I should probably not do it on screen. So you don’t see my head explode.

Jason Buck:

Exactly. Then we have to start getting into crack spreads and the lack of CapEx and refining manufacturing facilities within the US. Then we start getting into that. A lot of people don’t realize everybody’s looking at crude oil prices, but the crack spreads have exploded between crude to refined products from anywhere from $15 to $20 a barrel up towards $70-$80.

Jason Buck:

That’s why the prices that the pump we’ve seen in the last year are pretty dramatically different from crude oil because you just had this perfect storm, I think on the CapEx side of refining. Especially the lack of refining capacity we have in this country. What are you seeing then from the diesel perspective? Are you still concerned or do you think we’re past the hump in diesel? I know this is all speculative from your perspective. Do you expect prices to go back up? Do you help mitigate those prices by doing grass-fed, grass-finished cattle and trying to avoid using diesel as much as possible?

Drew Knowles:

Yeah. In our business, we’re in the grass-fed, grass-finished business, so I’m not buying grains like corn, for example, to finish these cows. When we get to that point with some of them. If you think about a feed yard that has a reliance on silage or corn or what have you, what a lot of people don’t necessarily understand is that the grain producers use a lot of propane to dry their product before it ends up leaving. One of the reasons for the propane is because most of these people are at middle of nowhere and they don’t have the electricity. I guess it’s probably more efficient to use the propane for the dryers.

Drew Knowles:

I forget who it was, it might have been been Duneberg, yeah, it was Duneberg, put out a note a month or two ago about the national propane shortage. We messaged about it very briefly and basically the takeaway was store as much as you can. So to your question about fuel prices and everything else, we’ve got storage tanks for diesel. Every time we need to fill one of those tanks, we’re making a call on the directionality of one of these inputs. Let’s say it’s a 2,000 gallon tank or something like that. That can be a pretty expensive moment. It makes sense to study these markets to try to make a call on if I think there’s a near term transition in the price action, that’s about to happen maybe I want to wait, or maybe I want to jump in right now.

Drew Knowles:

As for the price specifically in diesel, obviously the price per barrel of oil has come down more significantly than the price at the pump as you articulated a minute ago. We’ve just gotten used to operating in a world with higher input costs and we are charging more on the back end. One of our restaurant partners that we sell a lot of ground beef to, for example, they’ve got six restaurants and I called them up and I said, “Hey, I need to raise your price to X.” They didn’t even blink an eye. It was not a problem, not an issue. They knew what was going on. They’d see it across the board, they’re increasing their prices in lockstep with their producers. The pass through of some of these costs are definitely showing up to the consumer, I would say. It’ll be interesting this earnings season to see what’s going on with a number of the big companies out there that are in this space like General Mills.

Drew Knowles:

I would say that for somebody that’s gotten used to elevated prices, I almost think about it a little bit differently as opposed to it might go up and come back down. It’s almost like we took a stair step up and we’re operating on this level now. It’s a little bit easier to operate the business and just saying, these are my input costs. If I have a hope and a dream that they’re going to go back down, so my margins expand, if that doesn’t happen, then maybe I go out of business. I better get used to operating in a higher elevated market. I’d say that to have pricing power, and we do have some pricing power as a producer, if we can use that pricing power while these things are happening to us, then we can maintain our profitability and we can continue doing what we do. But if we don’t have that pricing power, then we can get into trouble pretty quickly.

Jason Buck:

Yeah. I think about when we were talking about grass-fed, for example, maybe half decade ago I went around to all my farms in Northern California where I source all of my produce, my dairy, my meat from, and just to make sure they were doing everything they said they were doing. The people don’t realize the amount of time that takes. Part of it was because grass-fed became a moniker. But then what I had to find out is they were grass-fed, but they weren’t grass-finished. So now we have to think about two terms. Correct me if I’m wrong, my understanding was they’re raised out in grass-fed environments, but then in the last 60 to 90 days, they’re moved into pens closer to the abattoir to be harvested and then they’re fed on corn to fatten them up and increase the weight as they go into finishing. I’m curious, when you say grass-fed and grass-finished, are you taking them off the roaming range when you go to grass-finished? What time are they then spending? Is it then on hay and silage or what’s the transition from grass-fed to grass-finished?

Drew Knowles:

That’s a great question. I’d say that for a consumer, the way that I like to think about it, you want to focus on pasture-raised, grass-fed, and grass-finished. Pasture raised means that the animal has been living out on the grass in the pasture its whole life. Grass-fed means that’s what its been eating. That’s what’s been going on. Grass-finished means that its not receiving something other than grass prior to harvest.

Drew Knowles:

If an animal gets into some type of confined location and gets put on corn for the final 30 days, the flavor profile will be very different then it will a grass-fed and grass-finished cow. A lot of consumers like the sweetness that a corn or silage finish might bring to the table. Some people prefer that to grass-fed and grass-finished beef. At least from a flavor perspective, that’s just somebody’s preference.

Drew Knowles:

For us, how we like to operate is they’re out on pasture their whole lives. Typically the cattle that’s in our beef program, those would be cull cows from our cow-calf program. If a mother cow has a calf and does not breed back, then she would be a cull cow. That mother cow is going to turn into grass-fed, grass-finished beef. So the final bit of her life to make sure that the flavor profile is strong and that the quality of the meat and everything else is there, we want to make sure that they’re finished on high quality forage. And so we’re going to stick them on some of the best finishing ground that we have, but we will also give them free choice to have other types of hay available depending on what time of year it is. For us, we will not put them in a confined location to finish them. Different operators do things differently for different reasons. Depending on what the consumer wants, an operator may make one choice versus another.

Jason Buck:

Do you have anything locally or do you supplement with anything random as a small percentage of their diet, like lupins trying to have a different flavor profile at the very end? Is there anything unique there or am I just hoping that there’s some secret sauce?

Drew Knowles:

No, no. We talk about this stuff all the time. All of these craft brewers in Colorado have all of the spent barley and everything else. One of our restaurant partners up north who’s a Land to Market restaurant. Land to Market is the Savory Institute’s program for producers and buyers that are looking for regenerative goods. Whether it’s Ugg boots or Timberland looking for regenerative leather, or it’s a restaurant like Currito, that wants regenerative beef and everything in between.

Drew Knowles:

That restaurant group, they’re very interested because they know a lot of the craft brewery guys. They have to pay for somebody to take this away. They would give it to you for free if you would come pick it up. Let’s try to figure out how to do this. With diesel being expensive and with how quickly those spent grains will spoil, we’re trying to work through some of those roadblocks to figure out how to make it work. But I think it’s pretty intriguing to use other products to alter the flavor profile in the final 30 or 60 days.

Drew Knowles:

We do also have oat hay for a diverse diet. We have a very biologically diverse piece of ground here as well as in Texas. So when it snows in Texas, for example, the sagebrush is also there as an option to forage. And somebody would say, “I can’t believe they would eat sagebrush.” When there’s nothing else around and that’s on the ground, that’s going to happen.

Drew Knowles:

You know the smell of sage. Sagebrush is a little bit different that’s inherently going to have an impact on that animal. I don’t know how long that’ll stick around in terms of a flavor profile and how much it takes exactly. Those are some of the things that we’re trying to work through right now with some of our restaurant partners. We think that we do have the ability to stay within our ethos as land managers and to create something that might be a better steak on the plate for the consumer.

Jason Buck:

Yeah. I’m sure you’ve probably seen this too. In Spain, we have a guy that grows some of the most ethically raised foie gras in the world. Where he’s-

Drew Knowles:

[inaudible 00:22:05].

Jason Buck:

… actually not even gorging them.

Drew Knowles:

Yes.

Jason Buck:

He’s created the Disneyland of foraging for his geese. One of them was the yellow lupin plants that created the yellowish hue or tint to the livers that people came to expect from foie gras. He figured it out from having them forage lupins when they’re out in the pastures.

Jason Buck:

Another two part question for you. You brought it up with the grass-finished taste difference between corn-finished and your wife’s is a chef. What do you usually tell people that usually have hesitation about the different flavor profiles of actually grass-finished? I’m just curious of what you guys tell them. And part of that is can you tell the difference between male and female cattle when you’re actually tasting your end steak or ribeye, et cetera?

Drew Knowles:

In terms of the description of grass-fed versus conventional beef, one of the things that I really focus on is maybe less so on flavor profile and it comes down to cooking technique. Abby will be one of the first people to tell you, you have to babysit grass-finished beef when you’re cooking it. You can’t put it on the grill and walk away and forget about it. Conventional beef is very forgiving. In fact, the executive chef at the restaurant group down in New Mexico. He and I were talking about this the other day because they always have turnover in line cooks. Here’s how you cook this burger to the best of your ability, make sure you have your timer on and follow these techniques. I generally think that you can have a phenomenal grass-fed, grass-finished flavor profile that people won’t know that’s what they’re eating if it’s cooked right.

Drew Knowles:

If it’s overcooked and it’s dry and whatever else. Say there’s a difference in the fat content or the marbling or what have you, then cooking technique is really where you need to go. I generally talk more in cooking technique than I do flavor profiles. I’ve had people in the past say things like, “Well, it tastes gamey.”

Drew Knowles:

And I said, “Well, what do you mean by that?”

Drew Knowles:

And they’re like, “Oh, it’s maybe a little bit tougher,” or something like that. Again, I think that oftentimes comes down to cooking technique than it does actually what’s there. You can overcook a conventional beef, conventional steak just as well as doing it on a grass-finished one.

Drew Knowles:

What kind of marinade do you have? Are you doing a reverse sear? What are you doing to actually make that be what it should? Generally speaking, we default to what is the simplest thing. If I’ve got two kids and they’re really hungry, I need things to happen fast. And so just like anybody else, I’ll get something off of the grill and onto their plate really fast and whatever else. I’m going to err on the side of under cooking, especially with grass-fed and grass-finished beef, as opposed to anything else.

Drew Knowles:

I think the other thing, too, just in talking about changes in the ways that animals are being raised over the years. Go back to World War II, lamb, mutton things like that was something that a lot of people had, didn’t really have a good taste to it. A generation almost turned off to lamb. Fast forward to today, there are a number of incredibly good lamb producers like Capra and you know Aaron Cook. People that are doing phenomenal things-

Jason Buck:

Shout out to Aaron Cook.

Drew Knowles:

Shout out to Aaron Cook. What Capra’s doing, they’re doing regenerative ag as well. They have phenomenal tasting lamb. A whole bunch of people who are boomers’ children, whether they’re millennials or whatever they are, they’re all of a sudden waking up to this whole new flavor profile out there is something that they actually really enjoy. To have a difference in the point of view about raising the animals, I think it’s creating opportunity for people to find new flavors that they really like.

Jason Buck:

Yeah, me, I’m not as open. When people say gaminess, you mean it tastes like a real animal? Maybe that’s not what you’re accustomed to. Stripping out the nuance from the cooking side, obviously every piece of meat is different in nuance, but in general, I always think about with grass-finished, you either wanted to go real low and slow, or you want to cook a lot faster than you would corn-finished beef. Those are quick rules of thumb, would you agree to that?

Drew Knowles:

I’d totally agree with that. Yeah. And if you don’t have really good sous vide and you want to have a really good steak, get a sous vide and learn how to use that. Then learn how to finish it on the grill to get that sear. It will be amazing.

Jason Buck:

That’s an excellent piece of advice. If anybody wants to step their game up, sous vide is actually… What’s great about sous vide, everybody starts to getting intimidated because of maybe the French phrasing, but it actually is almost idiot proof. It’s the best way of cooking things and you don’t actually need a lot of technique because you just put the sous vide on. Set it and forget it and then just finish it when you’re done. It’s great.

Jason Buck:

But one of the things you pointed out that I was remiss that I missed earlier is it’s really fascinating to me when I looked at the studies of grass-finished versus grain-finished. It’s like you were saying, not only are you changing the fat content, but you’re changing the fat profile. It’s really affecting your omega-3 to omega-6 ratios. What’s amazing to me is looking at those studies is how a certain amount of days can dramatically affect that omega-6 to omega-3 ratio. Once again, it’s about what are you putting into your body and what are the cooking techniques and flavor profiles that provides? But more importantly, what’s the omega-3 to omega-6 ratio that you’re putting in your body? Just a few days on corn can dramatically affect that more than you’d ever realize.

Drew Knowles:

It sure can. Yeah. That’s a great point as well. I think that a lot of people make the choice based on taste. Some are making it based on their health and what their dietary needs are. There are a lot of different ways that people find their way to different types of beef. I think that however somebody gets there, it’s okay. In my opinion, it’s just the place where you want to be. These animals are genetically engineered to live off of grass. Yes, you can alter flavor profiles and finish faster and all of these other things doing it other way. But I believe that these animals were designed to live on grass They’re ruminants with a four chambers stomach and it’s just what it is. Philosophically that’s where we lie and what we really believe in.

Drew Knowles:

If I go to a restaurant and I order a burger, I can generally tell pretty quickly that it’s a conventional beef versus a grass-fed one just because I eat it all the time. I think you asked another question a little while ago about, can you tell the difference between a male and a female? So a steer and a heifer. Gosh, maybe Abby could. She’s cultivated such a more discerning palette than myself. So maybe she could do that. But I will say that we’ve tried to discern whether or not there’s a difference in taste of a beef that went through an abattoir versus a beef that was a field harvest on the ranch. It’s almost unfair because I know what’s what, but I’d say, if I had my druthers, the field harvest would be the way to go. Per USDA law, we can’t sell a field harvested beef to a restaurant partner, but that’s a whole nother podcast.

Jason Buck:

Yeah, we’re going to get deep on that one. Yeah. I tried to look at studies too, worried about adrenaline and cortisol and other things, whether it’s going through an abattoir or it’s field harvested. From my study, I’m curious if you have any pushback on this, it seems to dissipate so quickly that it doesn’t matter in the finished product on the meat side. But then what you’re talking about that people don’t realize is if you’re going to sell meat publicly, you have to go with either a USDA approved abattoir or harvesting facility. There’s only five of them, regionally in the country. Actually a lot of them shut down during COVID, which is even a bigger problem. You actually cannot necessarily harvest the cattle in a more humane way that you’d want to because of the regulations on the USDA side.

Drew Knowles:

That’s correct. That’s definitely something that I’d say politicians are waking up to and something that is getting more attention. For the big packing houses, it’s a factory. They have what they do and there’s a bunch of people and they know one cut and then they move on and that’s what it is. Whereas a small processor that might only do 10 a day or something like that, there’s just a couple of people that are out there cutting, breaking down the entire animal. To have that person, I think that person has a lot of knowledge when it comes to butchery. It’s a lost art form with the production line mentality that we have here in speed and efficiency.

Drew Knowles:

At the same time, it can be hard to work with the smaller processors because you might have a restaurant partner that needs a very specific cut done a very certain way, and they may not have that knowledge. Actually, one of our restaurant partners is educating themselves from the butchery side of things so that they know the language to be able to bridge that gap in between restaurant language and abattoir language so that they can actually get what they want. Where a certain cut is not over trimmed or whatever the case may be. I think there is an opportunity to work locally with the smaller processors.

Drew Knowles:

Ultimately, for the scale that a restaurant needs and the on demand needs of a restaurant, it can be pretty hard for them to work with a producer like us. If they can call their food purveyor up at midnight and the next day they got 25 tomahawk ribeyes that show up, that’s as convenient as it gets for them. Whereas I’m saying to them, “Hey, a year from now, or six months from now or whatever it is, let’s do some menu planning and let’s figure this out so that you can have exactly what you want. And it can be the best plate of food that your customer has that differentiates you from your competitor.”

Drew Knowles:

If there’s a couple dozen steakhouses all in the same city, say Denver for example, or Amarillo or something, what makes you different compared to everybody else? That’s where a lot of people are trying to get an edge by working directly with somebody like us. But then all of a sudden we’re playing a bunch of different roles which have all been displaced by food purveyors and other things. So logistically it could be pretty complex.

Jason Buck:

Yeah. I think part of it is you’re trying to educate the restaurateur, but also at the same time, you almost have to educate the end customer. Thankfully the nose-to-tail movement has caught on so people are starting to understand that better. Like you’re saying, if you sell tomahawks and those are the sexy steaks, well that’s only a small part of the cow. Luckily we know how to harvest all the other pieces and parts and every little piece of the animal, but it’s getting people to think outside of maybe just a tomahawk or a t-bone or ribeye and try to really create better flavor profiles and education from other parts of the animal that can be just as good depending on what dish you’re trying to create.

Jason Buck:

To put a finer point on it, I’m curious if you think, we’re talking about field harvesting versus an abattoir processor, do you think we’re anthropomorphizing, having the lineup of animals in a chute, and we’re worried about what that does to their chemical balance before they get harvested? Is there any data behind that or do you think that’s just our general feeling?

Drew Knowles:

I’ve read various opinions over the years about the spikes in cortisol and adrenaline that a cow may receive in a stressful situation. Does that actually affect flavor profile or not? I don’t know if there’s enough data on that and I don’t know if there’s a preeminent authority on flavor profile that is published on that front. I’d be really interested to read it or to even contribute to the study in some way. But ultimately I think the idea of a happy cow that’s out in the field where the lights just turn out is very different than loading the animal onto the trailer, driving it a hundred miles or something like that, some people have to drive them a hundred miles, and then it going into a strange place. And then what happens happens. Two very different experiences.

Drew Knowles:

Like you said, maybe we’re an anthropomorphizing things, but ultimately there’s a lot that we can do as consumers. If I’m the consumer, there’s a lot I can do to ensure that cow lived a happy life and I can feel good about that. One of the things that I generally say about this business to people that aren’t involved in this business is our cows only have one bad day. They’ve got one bad day and that’s it. Every other day they’re taken care of. They’re fed, they have water, they have sunshine, they can go eat whatever they want. You know, if it’s early season and cheatgrass is coming up, they can eat on that. If it’s late season and the sedge isn’t bitter anymore, and the pH has changed in that grass, they can go eat that. All of a sudden the leaves on the Gambal oak are no longer toxic. They can eat that safely at this time of year and all those types of things.

Drew Knowles:

At the same time, if it snows real heavy in the spring, the only thing that’s green are those oaks, they’re going to go towards them and they can get poisoned and die. There’s tough stuff all around with the free forage movement in raising animals. But at the end of the day, I think we all would like to have a… It’s like that Portlandia episode, if you remember it, where they’re ordering chicken at the restaurant. It’s like, “Can we meet the chicken? I want to meet the chicken.” It’s kind of like that. It’s somewhat tongue and cheek, but I think that the point is salient that we all, especially these days, it seems like people want to have a connection to the food that’s on their plate and they want to understand where it came from, how it was raised, and those sorts of things.

Jason Buck:

Yeah, Gen-Z and Millennials want a story from even a clothing brand they buy. Everybody, thankfully, is trying to learn more about the supply chain of everything they consume. You brought it up, so I don’t mind alienating everybody in a way. Like you said, ruminant animals with four chamber stomachs and their ability to process grass is… In that sense, at a 30,000 foot level, we’re all living off of solar energy. To me, a ruminant animal with a four chamber stomach actually is a great vegetarian because they can process that vegetarian into protein that then I can eat. So it’s just a step removed in between that they’re much better at processing that solar energy through vegetarianism. By us eating them, we’re getting that vegetarianism and that solar energy.

Jason Buck:

Similarly with fish too. With the smaller fish eating plankton and algae. Larger fish. And then we consume the larger fish. It’s that cascade through the system. Maybe people don’t want to necessarily deal with that. One of the other questions I had for heifers versus steers, do you see any marbling difference with heifers?

Drew Knowles:

Steers grow bigger faster. Let’s just say that I’ve got a group like I do right now that are designated as beef cows. I’ve got a group that are steers and a group that are heifers. The first set that’s going to go to harvest are going to be the steers. Then the slower growing, smaller heifers are going to bring up the rear. It takes them a little bit longer to get to the same place. A lot of people will tell-

Jason Buck:

About how many months for each?

Drew Knowles:

Conventional beef is probably going to be somewhere in the 18 month range. So we’re going to be more in the 24 to 30 month category is where we’re going to be. The steers are probably going to be a little bit earlier and the heifers are going to be a little bit later and you know, sometimes a cow has a small steer. Sometimes they have a big heifer. Things can change a little bit, but we would like to try to have a uniform group as best we can. Good genetics plays a big part of that.

Drew Knowles:

In terms of marbling, a lot of people are going to argue pretty strongly that they would prefer steer over a heifer any day of the week. I think that the best beef that we ever had was from a cull cow that was in a pasture, for one reason or another, with a nursing cow. That cull cow was robbing milk from the mother cow. All of those extra vitamins and minerals and everything else were going into number 675. I still remember her number, tag 675. We kept her for ourselves. That was the rancher’s reserve. A mutual friend of yours and mine was by the ranch a little while ago and he had some of the filets from that one. I was like, “I can show you a picture. Here’s a picture of that one.” I loved her so much.

Jason Buck:

Man. Now I’m going to be searching flights right now. I got to taste 675. Obviously part of that, too, is what breeds of cattle do you use?

Drew Knowles:

We focus primarily on Angus for the mother cows. We do have some SimAngus, Simmental Angus cross cows as well. Then the bulls that we had turned out this season were full blooded, registered Wagyu. And so a 50/50 mix between the Wagyu bull and the Angus cow would be an American Wagyu calf. American Wagyu is a popular type of beef because it’s incredibly rich, it’s incredibly fatty, but at the same time, it’s not so rich that you can’t eat a whole lot of it.

Drew Knowles:

If you ever go to a nice steakhouse and you order the A5 Wagyu from Japan, you probably get something like two ounces for $150 bucks. That is so rich. Some people can eat a lot of it. I can’t. Two to four ounces and I’m tapped out. I don’t want my skin to crawl. But it’s incredibly rich and flavorful and amazing. That American Wagyu ribeye, it might be a 50/50 meat to fat ratio. You might cut off a fair bit here and there, but it’s so rich, it’s so juicy. It’s really good. The steakhouse might sell that for a $150 bucks, too.

Drew Knowles:

The American Wagyu product I like quite a bit. I think it’s pretty interesting. And so we do have that as a part of our business. Those calves specifically are for the American Wagyu program. If that mother cow is a cull cow, because she doesn’t breed back, then that’s going to be a grass-fed Angus. Franklin’s Barbecue down in Austin, one of the things I heard on their Master Class was that grass-fed, grass-finished Black Angus is the closest thing possible to a conventional beef that’s out there, where maybe you can’t even tell the difference. Whether that’s just one person’s opinion or that’s actually gospel, that’s for each person to decide, but our restaurant partners that are going for the Angus product, that’s where that is.

Jason Buck:

I think I told you about somebody here locally that started with Scottish Highland Cattle and then decided to crossbreed with Angus. You and I both know that’s the same bloodline, so it’s a little bit odd to me to like be reintroducing a lower form of the bloodline.

Drew Knowles:

Yeah, it’s just a furry one with horns versus a slicker backed one. That’s kind of funny. Yeah. Hairy cues are so adorable. They make mini ones too. I think I might have to get my wife one as a birthday present next year.

Jason Buck:

Oh, man. I wish you wouldn’t have told me that. There’s a mini horse farm near here and it makes me laugh every time I drive by. So yeah, a mini hairy cue would make me just overjoyed. I want to talk a little bit about… You brought up pricing power earlier, so I want to talk a little bit of the business side. I think about often if we have a transition back to regenerative farming or if we don’t or if population keeps growing and we never have population attrition, part of it might be that protein becomes an extremely luxury good. Maybe I’m saving money here or there, but then maybe I have to spend a hundred dollars on a filet or a steak and that’s just part of making money in this world. You’re actually going to be spending a good portion of it on getting the highest quality protein you can because it’s maybe becomes a scarce commodity.

Jason Buck:

Part of that is your efforts to really tell the story, to do everything right, is you have to tell that story and you have to go direct-to-consumer. Like you said, luckily people want to know where that animal’s coming from, what their life cycle’s been like. Originally, people started maybe doing cow shares to get people to buy other parts of it or maybe actually be able to take the cow in aggregate. Tell me about how you think about that pricing power because you have specialty breeds, because you’re telling that story, and you guys have been doing a phenomenal job on Instagram. Highly recommend people follow XIT Ranch on Instagram. Did you try cow shares at first? Then you decided people want specific cuts or how did that evolve on the sales side of the process?

Drew Knowles:

Starting off, we did more of a direct-to-consumer model than what we have now. In that model, we were generally doing subscriptions and it was by weight. Each month there would be a different set of cuts, but probably, say it was a 5 pound or a 10 pound box. They’re going to get a couple pounds of ground beef every month because you need your meat for meatballs or burgers or whatever. But then we would put in other cuts. Part of the value proposition that we brought to the table is that Abby’s a chef and we could also put in recipe cards so that people could try new recipes along with the cut. If they weren’t familiar with what to do with liver, Abby can tell them.

Drew Knowles:

A lot of people are like, “Oh, what am I going to do with stew meat,” or whatever? Here’s a way to use the bones to do marrow and things like that. Abby’s really into using the whole animal. She’s got Tacos de Lengua as one of the recipes that you can get off of our website and Instagram. That was part of how we got started with it. And as we grew, there’s a lot of work that goes into the direct-to-consumer subscription box business. When we wanted to scale up, we wanted to do it a little bit differently. We focused more on can we sell by the trailer load or the pot load or can we sell X to a restaurant group?

Drew Knowles:

Working with one restaurant is very different than working with a restaurant group. The restaurant group up in the Front Range that we work with. We sell them all the prime cuts out of a bunch of grass-fed and grass-finished Angus cows. They then feather that out to their restaurants based on menu planning. I’ll get a nice message from somebody saying, “Oh, I loved this cut that I had at this restaurant.” I didn’t even know that was going to be there. I sold it to the restaurant group and then they sent it to this one or they sent it to that one. It’s nice to get those. Sometimes I go onto their websites to see what they’re actually doing with the beef.

Drew Knowles:

These days we’re focusing more on larger relationships that allow us to really focus on the best possible culinary experience for the end consumer. There are other companies out there that are doing a really good job of filling that gap in between the producer and the direct-to-consumer person buying over the internet. I actually had a conversation this morning with some of the Land to Market guys about one of those companies that wants more regenerative beef. They have demand for it, but they need more producers. They basically handle that entire middle section so we can send it on a pallet somewhere. They’ve got people that then divvy it up into the boxes and send it out.

Drew Knowles:

Trying to get dry ice when you live in the middle of nowhere is a little bit difficult. There are some headwinds to that. I looked at what do I have to do to have my own dry ice factory. In terms of the pricing power, what I don’t want to do is price out people who need high quality protein. We still do have some friends that we sell cows to. A friend picked up a whole cow last weekend that we had had butchered. We do still do a little bit of that.

Drew Knowles:

One of the ways that we make sure that high quality protein is working its way into the system, irrespective of price, is that we donate a lot of beef to local food banks. There are a handful of organizations that we regularly donate our high quality, high protein, beef to. That’s one way that we try to stay involved at a more localized level and in a way where if they can’t afford this, we don’t want that to stop them from having good health and having good food.

Jason Buck:

Yeah. As you said, I always love the CSA box model of buying by certain weight and then you get whatever you get. It’s like an episode of Chopped. Then with Abby’s recipes you can figure out new things to make. I always felt like that was just a tiny fraction of the populace. Most people just want their prime cuts shipped to them the way they want. For you, you’re basically starting a logistics business, like you’re saying, trying to find dry ice and everything.

Jason Buck:

Part of it, too, I don’t think people realize is if you can plan ahead and you can buy a quarter or an eighth share of cattle, you can actually get grass-fed, grass-finished prices way down. You can get down to $6 to $12 a pound, depending on whether you’re using burger or prime cuts. People are like, “Well, people can’t afford it.” If you could just preplan and buy and larger bulk size, you can get prices really down. Especially if you’re able to shop across the country and maybe more than locally.

Drew Knowles:

For sure. That’s a great point. It’s a great point and there are a lot of wonderful producers raising animals the same way that we do that have scaled their business and are doing a million dollars a year in that type of business. They’ve got large families and they can do it that way and it works for them. My hat is off to them. I only have two kids and they’re not that old. It’s harder for me to compete with them when they’ve got a lot of kids and they are older. But all kidding aside, I think that one of the big misnomers is how much freezer space people think it takes to have a quarter of a cow or something like that.

Drew Knowles:

If you have a chest freezer in your garage, it’s probably one of the best investments you could ever make for yourself. It might cost you $30, $40, $50 bucks a year in energy to have that freezer, but all of a sudden you’re buying grass-fed beef at a 30% discount to what it would cost buying it one cut at a time at the store. It’s something that makes a lot of sense to me. Even before we were a producer, we had two chest freezers in our garage. There are a lot of people that were getting metered at the grocery store during COVID because of the packing house problems that you alluded to when they shut down during COVID.

Drew Knowles:

Well, people who’d been buying a quarter, half [inaudible 00:52:06] of beef and had that in their freezer. They were fine for the couple months of quarantine. They had all the high protein beef that they could’ve ever wanted. It was just sitting right there. Then all of a sudden a lot of people started cooking the cuts that they wouldn’t usually do. Everyone goes for like the nice cuts first, because it’s their favorites. Then at the end of the quarter share or whatever it is, it’s what do I do with this cut? What do I do with that cut? That was the time when people learned. Just like sourdough starter. You probably have a sourdough starter that you started during quarantine too, right?

Jason Buck:

No, I’m thankfully not that bad. But chest freezers. I love getting the vegetable CSA boxes. It’s like, “What the hell am I going to do with this?” Thankfully for YouTube and Google makes it so much easier now.

Jason Buck:

Speaking of off cuts, I’m a one man band I’m trying to promote suadero tacos. Those are my favorite locally. I’ll send you and Abby some recipes for suadero. That’s my favorite form of beef taco. Thinking about this, I heard an anecdote the other day. Tell me if this is true. I heard you’re never supposed to ask a rancher how many head of cattle they have because that’s like looking into their wallet.

Drew Knowles:

That’s correct. Yes. 100%. And don’t ask them how many acres as well. Those are some big no-nos. Yeah. Some people get pretty upset about that.

Jason Buck:

The idea because I can figure out what like the dressed weight price is for cattle and then multiply it by how many cattle you have. So I know exactly what your net worth is. Is that the general?

Drew Knowles:

Yeah. I mean your bank account’s sitting out in the field over there. It’s a very personal thing. Whether it’s the price per acre or it’s the price per pound or whatever, there’s a lot of transparency there. So, yeah. Asking somebody those questions is like, “How many dollars do you have in equities?” It’s a pretty personal question.

Jason Buck:

Exactly. I was thinking about it as everybody says farm to table now, but I was trying to think you went from finance to farmer or more specifically finance to rancher. Let’s get into why did you make that decision? You come from a financial family and everything and you run your own finance businesses. Why did you want to get back into ranching? I said back into, cause I know the story, but tell me, what made you step out of the corporate world and get into ranching. Then from there, maybe we could tell the XIT story through the years as well.

Drew Knowles:

Ranching is the ultimate macro trade is the short answer.

Jason Buck:

Volatility for the end of the world’s… like a Hugh Hendry St. Barts house kind of thing.

Drew Knowles:

Exactly, exactly. Gosh. There are a lot of different answers to that question. When I worked in finance, I always sought hobbies that were tangible, where there would be a completed tangible project at the end. Making a table, for example. I made a dining room table once and I really enjoyed that process because I had something at the end of it that I could look to and point to. Whereas markets go up a little bit one day, they go down the next. Depending on how you’re judged, maybe you don’t know how you did for 10 years. Ranching is very tangible. It’s very hands on. You see these animals get born, you raise them, and then you sell them later.

Drew Knowles:

There’s a journey that you go. With the ranch down in Texas, we’ve had to mend a lot of fence down there, miles and miles of fence. You can look down that fence when you’re done, after hours of work, and you can see the completion of it. Then it holds your animals where they’re supposed to be because cows are always getting out. It’s what they do. If there’s a fence they can try to squirm through, they’re going to do it. So, I’d say that for me a lot of it came down to the tangible nature of fulfillment.

Drew Knowles:

I love markets and the horse market is another market. Cattle’s another market. There are all these different things. There are just other markets and navigating them and figuring out how to put the puzzle pieces together.

Drew Knowles:

Like I said, it’s one big macro trade. You’ve got a commodity linked business. You’ve got real estate. You’ve got financing. You’ve got all these different things going at one time. Shoot, right now there’s now a carbon market. So if I measure how much carbon I’m capturing into the soil, I can sell that into a market because we now have a price on carbon. There are all these things that exist in this that really scratch a lot of itches that I have in terms of professional fulfillment, but in a tangible way.

Jason Buck:

Yeah. I want to even get into carbon sequestration later. This why I wanted to have you on because to me, it’s all trading and investing and finance. There’s no difference. It’s just different formats.

Jason Buck:

What do you think though was more stressful, the vastitude of financial markets or the vastitudes of weather and nature and all that? But at least you get the satisfaction at the end of the day feeling like you did something.

Drew Knowles:

There’s some days when I wonder why I’m doing this and not sitting in front of a Bloomberg terminal. Then there are other days where I’m really thankful that I’m not sitting in front of a screen all day.

Drew Knowles:

Somebody asked me recently how much time is split between the two. It changes based on what workflow needs are. Getting ready to ship cattle down to Texas from Colorado, it was a 4:00 AM to 10:00 PM week long stretch to get ready to do that. Horseback the majority of the time. And some of the hardest work you could imagine but some of the most enjoyable, fun times at the same moment.

Drew Knowles:

There are trades that I’m involved in the financial markets that I enjoy a lot. Maybe it’s Eurodollar futures or options on Eurodollar… There’s all sorts of things that I can do that I really can dial in on and have a lot of fun with, but at the end of the day to have the satisfaction of raising the animal and selling it for a good price and making a good margin on everything, there’s a lot of fulfillment there that’s very different than financial markets. So I think that’s something.

Drew Knowles:

I’d say also the ability to model hard work for my children and for them to be able to learn off of the land is something that’s very important. Because when my kids were little, and they’re 12 and 7 now, but when they were very little, I didn’t really know how to teach them what I did. So I came up with a game. I said, “Okay, we’re going to have a scavenger hunt.”

Drew Knowles:

The scavenger hunt led my older of the two, who was old enough at the time to do this, to find some Nike sneakers that were in her closet and different public company goods. Then we were able to put them down and have a conversation about fractional ownership of the company, being a shareholder and all this stuff. Earnings and dividends. She just looked at me and she was like, “I don’t understand what you’re talking about.” I thought I’d come up with such a great idea as to how to explain this that when you buy these sneakers, if I’m a shareholder, I’m entitled to a little fraction of those cash flows and she just didn’t get it. Whereas now, the baby calf comes out, the baby calf gets big, the baby calf goes away. Rinse and refill. It makes a lot more sense. I think there’s a big bit of that for me in it.

Drew Knowles:

I do, at times, miss managing money professionally, because I did really enjoy that and I took a lot of pride in it. But at this stage, I am really enjoying building our ranching business and the employees that were hiring and the decisions that we’re making are very complex. So I have a lot of enjoyment for this. But as you know, as we talk about sometimes, the grass is always greener and sometimes it’s like, “Gosh, I should do a fund because this idea, carbon related is so cool and investors should be all over this.” But then I come back to my senses when people tell me, “No, no, stay outside on that horse all day. It’s a way better thing.”

Drew Knowles:

It’s funny to still span the two worlds, but not professionally managing money for other people. It’s a gift not to be doing that and to be outside ranching all day is a lot of fun. But at the same time, I have to run the business, which means when we switch payroll, like we did a couple weeks ago and two people didn’t get paid, I’m then running around on a Friday afternoon to make sure people have money in their accounts, but that’s just part of life for any business owner.

Jason Buck:

Yeah. I would say just theoretically now you’re just a discretionary global macro trader and that I would think at least you, through your physical exhaustion, you at least sleep better at night than I do just staring at screens and living in this digitized financialized world. I think this is a good spot. I know you’ve told it a million times, but can you tell us about the history of XIT Ranch and how it started and how it got to where you are today?

Drew Knowles:

So, my family… Well, this branch of the family was in Chicago and the Farwell brothers originally hailed from Steubenville, New York and they moved west to the Chicago area pre-Civil War. John V. Farwell, my third great grandfather had a dry goods merchant business in Chicago that did quite well and had a lot of pricing power. We’ll come back to pricing power. Post Civil War boom, that business did pretty well.

Drew Knowles:

He had partners such as Marshall Fields who then took the dry goods merchant wholesaling business to the next level and had the department store. When John V’s brother Charles heard from another politician… So John B. Farwell served in both the House and the Senate, Charles B Farwell did. He heard from one of his friends from Texas, that they needed a new state capital building, and they were going to finance it by a land swap, their ears perked up.

Drew Knowles:

Keep in mind, these guys are a little bit older at the time. They’ve just rebuilt Chicago post the huge fire. A lot of guys might not want to take on such a big endeavor, but they did. There were three proposals, three architects, threw their hat in the ring for what would be the new state capital building in Austin. The Farwells really wanted that deal. So they backed two out of three of them and one of those two got picked. In return for building the state capital in Austin, my family received 3 million acres in the panhandle of Texas.

Drew Knowles:

Today if you watch Austin City Limits, you see the state capital building in the background. There it is. It’s still there today. The financing of it is a pretty interesting story. At the time, unless something was quoted on an exchange, no bank would lend on it. This is 1870s or so mid to late 1870s, early 1880s. Unless it was quoted on an exchange that wouldn’t lend on it, so they couldn’t find anyone to lend on the dirt. What was that dirt? It was nothing. It was raw land. Nobody lived there, it was empty.

Drew Knowles:

John V. had offices over in Europe and a lot of contacts in London. So he went to London and he raised three and a half million sterling in debt in The Capitol Freehold Land and Investment Company, converted the sterling back into dollars. So we’ve got a foreign exchange trade here. So you can see where I get this stuff. It’s one big macro trade. They converted it to dollars. They built the state capital building.

Drew Knowles:

Later, in the late 1890s, they sold off some of the land to repay the note holders in the UK. The difference between that was how much the family was left with at that point in time. Charles died, I’m going to say in 1903, John V. died in 1909. The business was still going in Chicago. At the time was when maybe family offices were becoming en vogue. They had that business and they had other things going on. The ranch was another portfolio position in today’s words. They continued to ranch it until 1912.

Drew Knowles:

Then in 1912, the cattle were sold and the family decided to go into the land leasing business and the land sales business. Their original vision was always to colonize that area and for Americans to be able to move west, have a plot of land that they could farm and ranch on and provide for themselves and be able to make a living for themselves as the population grew and the west was explored. They really had this idea of self-actualization and people being able to provide for themselves and make a life for themselves.

Drew Knowles:

From 1912 to 1963, land was leased out and sold. And in 1963, the last of it was sold. So for the last 59 years, my family had been ranching until we purchased the ranch outside of Channing, Texas, just in the [inaudible 01:07:00] months.

Drew Knowles:

We have XIT branded cattle running on original XIT ranch lands right now. It’s a pretty exciting thing for us after 110 years, we’ve got XIT cattle running around again. To me, it’s very fulfilling. I view my role in all of this is that of a steward. It’s my job to take care of the land while it’s my turn and what happens after I’m gone, I don’t know, but hopefully I raise my children with the right mindset to be stewards as well.

Drew Knowles:

Not this weekend, next weekend is the XIT Rodeo and Reunion. In 1936, a bunch of the, we’ll call them alumni, the former employees, started a Rodeo and Reunion, and it’s still going today. I talked to the president of the board yesterday and we’re going to be down there and everybody’s all excited. It’s a big PRCA rodeo. We’re going to go and thank them for keeping the history alive all of these years. They’re just so excited that a descendant of the family is back running XIT again. It’s pretty neat.

Drew Knowles:

What a lot of people don’t realize, Jason, is that prior to what we did in the panhandle, nothing existed there. There were zero railroad lines going through that area. Zero, period. By the time John V. died, there were four rail lines going through the property. I know he was really proud of that and that meant a lot to him. The family’s taken a lot of pride as to what it meant for westward expansion and the colonization of our country.

Drew Knowles:

A lot of people don’t understand that on that ranch, I don’t know, six, seven miles away, probably, there’s one of those rail lines, and I can hear the rumble of those trains going away. It goes and comes down this valley. I can hear it. When I first got there, I’m thinking, “Is this wind turbines that I can see on the horizon? What is this?” Figured out it was the railroad. It was pretty cool to be able to hear that from that property. That’s in our Rita Blanca division and it was the mare pasture back then. It’s pretty exciting for us given our horse program and what we’re doing with our cattle to be back down there. Today we want to do the best job we can do to take care of that land and to carry the torch for the XIT. To honor the past and the legacy is really important to us.

Jason Buck:

It’s such an amazing story. And I was hoping you tell that even that the financing tangent too, because you and I have done many speculative investments that we’ve had bankers try to finance, and it’s so hard in modern times to get bankers to financing anything. I can’t imagine taking a steamship to Europe to try to convince European. Then it comes from a circle, because it shows how you love trading Eurodollar markets. It’s the original almost Euro dollar market, even though it’s more of an FX exchange from sterling back to dollars. It’s an interesting part of the story. I can’t imagine, I know how proud you were to re-brand XIT, even with the Colorado ranch, and to watch how excited you’ve been in the last few months to bring back to raising cattle on the original XIT land. It’s amazing to watch it coming full circle. And like you said, you be in the stewardship of that.

Jason Buck:

Part of that I want to finish talking about is the modern version of ranching, so to speak. It comes full circle with our conversation is we were originally talking about, what’s the difference between grass-fed grass-finished, et cetera. You really got to learn these names. Unfortunately there’s no good names for anything. We’ve talked about organic, regenerative, all these different forms and naming conventions that people are trying to figure out. Part of it is, you and I have privately talked about this a lot, is the idea of what ruminate animals and hoof systems and everything is it’s part of an ecological system. They create indentations in the grass or in the land with their hooves that then larvae can facilitate and water can combine within those hoof systems.

Jason Buck:

Then the chickens can come in and feed off those larvae and how it creates a full cycle system. More importantly is also then though even the way that the teeth structure of cattle are used to even rip grass is a form of regenerative farming. Like we were alluding to earlier, it creates a permaculture where you’re maintaining or building the integrity of the soil and the microbiome that lives in the soil, which provides us better nutrients as humans when we harvest these animals.

Jason Buck:

But one of the biggest part of its that you mentioned is if done properly with regenerative farming and building this permaculture, you have a form of carbon sequestration. Now that we have these modern carbon markets, you could be using those ranch lands to get credit for the carbon sequestration. I know you and I have texted back and forth about you having even people come out to assess ranch lands that you’re looking to buy and see what the carbon sequestration impact would be and if you could sell those credits into different marketplaces.

Drew Knowles:

First off I should say, if we are going to hire a new marketing director, you should throw your hat in the ring first because you’re definitely pretty savvy. As it pertains to the carbon markets, I think there are a couple of different important things in play. The first is the EU has a compliance market. They are the leaders in that space and we have a voluntary market here in the US and a couple different regional ones at that.

Drew Knowles:

The market’s over in the EU, that’s an allowance market, meaning you are a allowed to burn so many fossil fuels, to emit so many pollutants. The price of carbon it is the dirty price. It’s not actually the clean price of carbon. I think the shift that we ought to see, and maybe it’s the US that’s the leader in this space, would be that instead of an allowance market, it turns into a sequestration market.

Drew Knowles:

What I mean by that is that if a producer such as myself, sequesters carbon into the soil, and there’s a verified process for that, and you can say with a high degree of certainty that I’m not going to till it next year and release all the carbon and all this other stuff. If you can do it that way, then we’re actually starting to turn back the clock a little bit. Whereas if you’re going to whittle down, like in the EU compliance regime for example, they reduce the supply of these allowances every year which should artificially increase the price of carbon in the EU, for example. So they’re creating a demand curve. That makes a lot of sense to me, but it’s still an allowance.

Drew Knowles:

If we want to move to a place where we’re actually trying to turn back the clock in terms of what’s going on, then I think a sequestration market is where we need to end up going with this. I think, frankly, we have the capabilities to do that, but we need a national standard. Right now there’s four or five different registries that have their own standard. Shoot, you can even buy a Bitcoin with a carbon credit wrapped around it right now. There’s all sorts of crazy stuff that’s out there. A fig leaf of carbon that’s wrapped around a Bitcoin. So you’ve got a net zero token when it comes to the energy usage to create a single Bitcoin. I find that to be fascinating, but I digress.

Drew Knowles:

The fact that farmers and ranchers can have another outlet to monetize their land is what’s really important here because with government subsidies and all these other things, we have a lot of pricing that is not as free as one might expect in various commodity markets. If we can create an opportunity for somebody to have one more source of revenue off of an existing piece of land, then maybe they can make ends meet and they don’t have to sell land to live. Which you do see a lot of that these days where old ranching families are having a hard time making ends meet and they might have to sell land in order to do so, which is pretty sad. It used to be that you could run a cow-calf operation and be profitable. That was it. Now you need 3, 4, 5 different sources of revenue in order to be successful as a rancher.

Drew Knowles:

I’m not just a rancher. We’ve got horses, we’ve got cattle, we’re going into merchandise. Hopefully we’ll be doing the carbon stuff, on and on… Outfitter. We’re going to be selling hunts and things like that. All of a sudden you have to be in all these different businesses at one time, which that takes a lot of work and it takes a lot of people to pull off.

Drew Knowles:

I think carbon is one of those things that could be one more lever to pull and to be pretty profitable. I know some guys that have organic farmland in the Mississippi Delta that are really excited about it, and they’ve got a bunch of acreage that they just have to now quantify what’s happening underneath it and they can monetize that. That’s good for them. It’s good for their investors, so I’m very much for it. I’m not for regulation per se. So I wouldn’t mind it staying a voluntary market, but going to a sequestration market and having to be something that people want organically, as opposed to it being regulated.

Jason Buck:

Yeah. One of the things I think you’ll love is the perverse incentives that can even come off the way the European market’s structured that I’ve been looking into is, essentially it’s a weird coal play, in a way. If in the UK, if Nat gas prices spike, they’re going to fire up the coal plants, which means they’re going to increase their buying of carbon credits in Europe to offset that. It’s a perverse way of playing coal, which makes no sense when you’re buying carbon credits, but that’s a whole different story. One of the things that we’re going to have to save for a future episode that I was going to get into is looking at these ranches and figuring out the six to eight different income sources.

Jason Buck:

It’s been serendipity that we’ve had the rise at the television show Yellowstone. I always joke with you that your text messages are like a living breathing episode of Yellowstone. Whenever you’re sending text messages, when you’re looking at ranches to buy, and you’re flying around in helicopters scoping out the land, but then you’ll send me the prospectus and we’ll go through.

Jason Buck:

Like you said it’s the cattle, it’s the horses, it’s the water sources. It’s how do we create merch out of this? Is it King Ranch working with Ford or whatever it is? All these different merch opportunities. Then carbon credits and sequestration is another form. Yeah, it’s figuring out all the layer cake to make this a going concern. We’ve always talked about lodges and tourism and all those sorts of things.

Jason Buck:

I enjoy it immensely, but I always joke with you that getting your texts are just unbelievably enlightening as far as what it’s like to live that Yellowstone life. And I’m always the one that’s discouraging you from going back into running financial firms. That’s my fault.

Jason Buck:

One of the things you did bring up that I want to mention is I was thinking about, when we were talking about what’s more stressful running a financial firm or running a ranch? And you brought up the idea of stewardship. Especially with the history of XIT is that you think about, I’m just a steward of this land. I always wondered if that long now type of thinking actually reduces anxiety and stress where I’m getting a P&L on an intraday basis and that’s heightening my stress. I wonder what your thoughts are in that longer term form of thinking. Thinking in stewardship terms, does that quell a lot of the anxiety for you?

Drew Knowles:

That’s a great behavioral finance question. One of the things that became popular during my career was high frequency trading. The way that I dealt with high frequency trading was to be a low frequency trader. I can’t beat those guys. They’re too good at coding. They’ve got their hard line in right behind the server at NICE. Another fund manager I was talking to about that at one point, he said, “I think it probably costs us a hundred basis points a year.” I thought to myself, “Man, that’s a lot.” The old how do you beat Bobby Fisher thing? Play him in anything but chess. That was always part of how I liked to think about things. Take the other end of the trade. I’ll take the long trade and I’ll just let things work out over time.

Drew Knowles:

In some ways, when you take on this stewardship mindset, it puts you in a position to start thinking about things in terms of generations or decades, as opposed to the here and the now. Now, fact of matter is I got payroll to make, so I have needs for the here and the now today, but if my primary asset, the land, is going to be chugging along in the background at, I don’t know, 7% a year or something like that, that’s okay. That’s all right. Then what can I do with all of these other lines of revenue and assets that I have? I think that definitely helps us to sleep a little bit better at night, because I’m not so worried about what’s the price of cattle going to do tomorrow or whatever else.

Drew Knowles:

Ultimately it impacts us, but if I do a good job taking care of the land and taking care of the animals, they can take care of me. I always viewed, previously, that if I did a good job taking care of my clients, they would take care of me as well. I think to be able to sleep well at night, sometimes I refer back to reminisces of a stock operator and selling to the sleeping point. If I have a position on that is keeping me up at night, then I need to get it to the right size. What’s Jared Dillan say? There’s two sizes, too big and too small.

Jason Buck:

Exactly. Always in hindsight, you were either too big or too small.

Drew Knowles:

Yeah. That’s what it is. Yeah.

Jason Buck:

Speaking of sleeping at night or keeping you up at night, I’m sure… This is final question… But I’m sure it’s a million things at both of the ranches and you even enlighten me to ones I hadn’t even thought about before of like, when are the leaves are poisonous and are my animals going to eat them at that time of year. Right at this particular time of the year at all the ranches, what is keeping you up at night? What’s on your mind right now?

Drew Knowles:

Right now what’s on my mind is is there anything I can do to push this storm system south a little bit so it tags some more of the ranch down in the panhandle. We’ve been getting a lot of really good rain in Colorado and we’re only about a three and a half hour drive to the ranch in Channing. They’re catching the tail end of it down there. So we’re getting a little bit of rain, but right now, rain is one of the things that I’m thinking about. Ultimately that really impacts what we can do with the land. If it doesn’t rain, then the land can’t rest. We have to have rain in order for the land to rest. If a ranch is capable of running 500 cows, in a drought year maybe it’s 250 or something like that. Then if you’re overstocked and you take too many bites out of that apple, then there’s nothing left to eat.

Drew Knowles:

Fortunately right now we are under stocked down in Texas where we don’t have as much rain right now. Because prices are going down because a lot of people are destocking right now. There’s pictures on Instagram of mile long traffic jams on highways of producers with trailers taking their animals to the sale barn right now because they don’t have any grass. Rain’s not coming. People are trying to see if they could last and people are just capitulating.

Drew Knowles:

There are pockets of prices where they’re getting to be pretty inexpensive. As somebody who’s under stocked, that’s a good thing for me. Now I can stock up and prices are lower so that helps my P&L. You’re talking about your P&L. I still have a P&L. I need to buy right and I need to sell right. If I buy high and sell low, it’s a pretty quick recipe to not do very well, but if I can buy low and sell high, then I’ll be better off in the long run.

Drew Knowles:

At our place here in Colorado or at our place down in Texas, we will err on the side of what’s best for the land before we will let it drive a financial decision. That might mean that there are financial repercussions for that. But if we don’t put the land first, then we’re not in it for the right reasons. We’re not going to be able to have this land take care of us over multiple generations,

Jason Buck:

Like every great trader you’re structuring a countercyclical P&L. That way you can be there for the long term. I want to thank you for coming on. We talked about cattle this whole time. We didn’t even get into horses and breeding stallions for income. Maybe I can convince you one day to come back on and we’ll go over the horse trading and stallion trading and try to enlighten the viewers and listeners to what it’s like to also be running a horse business as well. So Drew, I just want-

Drew Knowles:

That’ll be part two.

Jason Buck:

… thank you so much for coming on. Yeah, exactly. Part two later.

Drew Knowles:

Yeah. Part two. We’ll do it.

Jason Buck:

Thank you.

Drew Knowles:

Yeah. All right, Jason. Thank you, sir. Good to see you.

Taylor Pearson:

Thanks for listening. If you enjoyed today’s show, we’d appreciate it if you would share this show with friends and leave us review on iTunes, as it helps more listeners find the show and join our amazing community. To those of you who already shared or left a review, thank you very sincerely. It does mean a lot to us.

Taylor Pearson:

If you’d like more information about Mutiny Fund, you can go to mutinyfund.com. For any thoughts on how we can improve this show or questions about anything we’ve talked about here on the podcast today, drop us a message via email. I’m taylor@mutinyfund.com. Jason is jason@mutinyfund.com or you can reach us on Twitter. I’m @TaylorPearsonMe and Jason is @JasonMutiny. To hear about new episodes or get our monthly newsletter with reading recommendations, sign up at mutinyfund.com/newsletter.

 

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