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Where will it end?

Where will it end?
Private grazing rates across the Western U.S. climbed more than 5% for the 12 months through January to $14.50/animal unit month (AUM). That’s up from last year’s 4.5% pace, according to the latest USDA January Cattle Survey. Yet, given the developing profit squeeze caused by steeply rising feed prices and other production costs, market participants say lease rates will eventually have to retreat

Private grazing rates across the Western U.S. climbed more than 5% for the 12 months through January to $14.50/animal unit month (AUM). That’s up from last year’s 4.5% pace, according to the latest USDA January Cattle Survey.

Yet, given the developing profit squeeze caused by steeply rising feed prices and other production costs, mar ket participants say lease rates will eventually have to retreat or at least flatten if cattle prices don’t rise to offset the increased cost structure.

“You can’t help but be bearish on lease prices over the next two to three years,” says Gene Dunbar, national manager of farm and ranch services at U.S. Trust- Bank of America Wealth Management Services in San Antonio, TX.

“If feed prices go up like the market is predicting, a guy can stock lighter and feed less during winter and bad times, or pay a lower lease rate to afford the inputs,” adds Dunbar, who oversees 1.6 million acres of rangeland trust properties located mostly in New Mexico and Texas.

Dry weather, high corn prices and rising energy costs are prompting further herd cuts. The U.S. cattle herd is now 6.6% under the 1996 peak of 103.5 mil- lion head. There are 546,500 fewer beef cows and replacement heifers competing for pasture than a year ago. Graziers worry about rising lease rates in the face of stable to decreas- ing cattle prices.

Up, up in the West

The Western region’s firmest pasture markets are in Washington and Oregon, where rates spiked an average of 26% to $12.10/AUM, and 12.8% to $14.10/AUM, respectively, over last year. Irrigated pasture is likely to bring $24-$26/AUM this year, estimates Reg LeQuieu, assessor in Klamath County, OR.

Grazing rates in the Pacific Northwest are being driven by stiff competition for grass following last year’s drought, cattle herd rebuilding, and a shortage of hay and irrigated pasture as farmers shift land to wheat, corn or canola production to capture high grain prices.

“It’s raising hell with the cattlemen,” says Robert Burns, owner of Northwest Farm & Ranch Appraisals LLC in Pendleton, OR, who leases out 800 acres of pasture.

Alfalfa hay is currently fetching around $150/ton in eastern Oregon, vs. $65-$85/ton typically. Locals predict hay prices could hit $200/ton. Ranchers are substituting baled corn stalks, wheat straw, barley straw or other lower-quality feedstuffs for hay, says Bill Moore who runs 700 cows near Unity and is president of the Oregon Cattlemen’s Association.

Competition for pasture in this region is likely to increase: Beef cow numbers are up 3% in Washington and 5% in Oregon; beef cow replacement heifers are up 11% and 4.5%, respectively, from a year ago.

Drought and land conversion to grain production is fueling increases in pasture rates across the West. Rates rose 10% or more in Montana, New Mexico, North Dakota and Utah, according to USDA reports.

USDA’s survey reflects state averages. Local rental rates vary widely based on such factors as forage quality, proximity to roads, and the availability of stock water, size of the acreage, lease term and landowner services. Charges for counting, checking health and water, providing salt and minerals, and maintaining fences vary with each situation.

The chart on page 22 reports average grazing rates for three common pricing methods: per AUM, a cow-calf basis, and per head. An AUM is the amount of forage needed to sustain one cow and calf, one horse, or five sheep or goats for a month.

Contracting in Nebraska

The January survey shows that grazing rates contracted in Nebraska and held flat in California and Nevada – all states that posted net declines in year-over-year cattle numbers.

“It is a pretty tight margin game right now, and people aren’t very enthusiastic about bidding lease rates up, especially with lower cow herd numbers,” says economist Bruce Johnson at the University of Nebraska in Lincoln.

In past years, cattle moved from New Mexico and other droughty southern states to graze in Nebraska from May to October. That appears to be waning with rising transportation costs, Johnson says.

Moving south to the Kansas Flint Hills, net rents to landowners for Bluestem pasture are expected to rise $1-$2/acre to $12-$13/acre, with some tracts fetching $25/acre, says Mike Holder, a Chase County Extension agent. Custom grazing fees for the early intensive grazing period are likely to increase $5-$10/acre.

With feedlot costs now pushing 85¢/lb. of gain, grass pasture has gained appeal. Holder figures cattlemen can save at least 15¢/lb. of gain by grazing 500- to 600-lb. cattle in the Flint Hills, vs. putting them in a feedyard. “People will be looking for grass to try to get a couple hundred pounds of cheaper gain on their cattle,” he says.

Up 8% in Oklahoma

Turning to Oklahoma, grazing rates are up more than 8% to $9/AUM. Winter wheat pasture is especially in short supply across the north central region. Market participants were anticipating wheat-pasture rates of 40-45¢/lb. of gain. But a dry fall and late seeding produced a poor wheat stand, so that virtually no wheat or small-grain pasture was leased, reports J.C. Hobbs, Oklahoma State University farm management specialist in Enid.

As a result, many lightweight stocker cattle from Texas and the east that are normally moved into this region in mid-November to graze on wheat until March went directly into the feedlot, Hobbs says.

The Bureau of Land Management (BLM) and the Forest Service left the federal grazing fee for Western pasture lands unchanged this year at $1.35/AUM. The fee, which takes effect March 1, is the lowest rate allowed under the current formula. BLM says declining beef-cattle prices and rising production costs outweighed higher private lease rates. The fee applies to more than 26,000 grazing permits and leases on public land administered by the two agencies.

At the state level, grazing fees on state-owned trust lands moved up and down, depending on differences in state rate formulas and local market conditions. Lower calf prices prompted Oregon officials to cut 2008 grazing rates 12.7% to $5.06/AUM for the 638,000 acres of arid to semi-arid state rangeland in central and eastern Oregon.

Montana also cited lower cattle prices in trimming 2008 grazing rates nearly 12% to a range of $6.18 to $6.94/AUM on state land.

In Colorado, state grazing lease rates are up from 5.5% in the northeast to $10.78/AUM, to 19.5% in the southwest to $9.13/AUM. Beverly Rave, field operations manager at the Colorado State Land Board, says the sharp increase in southwest Colorado rates is being driven by a shortage of grass caused by a persistent drought that began in 2001. Another factor pressuring rates: increased custom grazing by absentee landowners who are charging higher rates for yearling cattle shipped in from Texas, Mexico and other regions.

In North Dakota, ranchers bid an average of $7.69/acre for leases on state pastureland in October public auctions. That’s up 10.5% over the prior year’s rate.

In Nebraska, net grazing rates on state-owned land are generally 1% to 3% lower in the eastern and western Sand Hills, but about 2% higher in Lincoln County in the southern Sand Hills, reports Ron Vance, field supervisor with the Nebraska Board of Educational Lands and Funds. State leases for sandy soil pasture range from an average $23.50/AUM in the western Sand Hills, to $30/AUM in the eastern Sand Hills.