Buying Land

In 1912, Scottish immigrant William Hendry bought 160 acres in central Wyoming. Over the next nine decades, Hendry and his heirs bought up more than a dozen neighboring spreads and gradually turned their tiny operation into the 150,000-acre Clear Creek Ranch, one of the larger cow-calf operations in Wyoming.Could anybody do that today? Probably not unless you're someone like media mogul Ted Turner.

In 1912, Scottish immigrant William Hendry bought 160 acres in central Wyoming. Over the next nine decades, Hendry and his heirs bought up more than a dozen neighboring spreads and gradually turned their tiny operation into the 150,000-acre Clear Creek Ranch, one of the larger cow-calf operations in Wyoming.

Could anybody do that today? Probably not unless you're someone like media mogul Ted Turner. The business of buying land has become a complex undertaking fraught with risk. Land prices have soared while ranch profit margins have shrunk, leaving less money to buy ever more costly land.

Still, you can't run a ranch without land. The trick is to buy the right land at the right time at the right price, which is easier said than done. Ranchers still talk about the fallout of the 1980s, when both beef and land prices crashed and thousands of ranches failed.

Fortunately, experts have come up with land buying rules to keep ranchers out of trouble. While the rules aren't foolproof, they can help avoid some of the worst ills that go with buying land. Here are some of the basics:

* Know where you stand financially before adding more land. If you don't, you won't know whether you can afford more land. This rule involves paperwork, first-rate accounting and attention to small financial details. Unfortunately, many ranchers would rather spend time working with cattle than balancing books. "They don't like to do it," says Harlan Hughes, Extension livestock economist at North Dakota State University.

"Farmers and ranchers are lacking the financial records to get the signals that they are starting to deteriorate. They expect the banker to tell them when they are in trouble," says Hughes. When the banker finally does call, it's often to foreclose.

* Don't overpay. If you do, you won't make money raising cattle. Harlan Ritchie, professor of animal science at Michigan State University, says buyers should pay no more than $2,000 per cow-calf unit. To see where your potential purchase meets this guideline, divide the asking price for a piece of land by its carrying capacity - the number of cows that tract will sustain.

Be sure to estimate the carrying capacity conservatively. Land will, for example, sustain more cattle in an abnormally wet year. "Estimate what you think the land would carry in a dry year," Ritchie says.

* Know what you're buying. Soil conditions, vegetation and rainfall can vary dramatically, especially in the mountainous West.

"On one side of a mountain, you may get more rain than on the other side, even though the elevation is the same," says Ken Sanders, professor of range resources at the University of Idaho.

Sanders says buyers should personally inspect as much of a potential purchase as they can. He also suggests a visit to the Natural Resources Conservation Service for additional information on soil conditions, rainfall and other data.

* Don't forget the cattle cycle. "Ranchers say 'I can make the payment,' and they probably can with calf prices at $1 a pound," says Hughes. "But when prices dip into the $50s and $60s, it gets to be tough. Once they miss a payment, the whole thing can snowball pretty fast."

Don't Depend On Your Banker You may think your bank will keep you from buying land you can't afford. Think again.

"You can't depend on bankers to keep you out of trouble," says Hughes. "Nor should you."

John Hay, president of Rock Springs National Bank in Rock Springs, WY, concurs. "Realistically, you are better to depend on yourself. You need to stay on top of your finances like any other business person, and keep your debt service in line with what income you have. The responsibility is indeed on the borrower."

Banks, after all, are in the business of loaning money, not running ranches. Of course, they try to head off bad loans, but sometimes they don't. Lending institutions made numerous loans for high-priced ranch land in the early 1980s, only to watch many of the those loans go sour when beef and land prices collapsed later in the decade. When the crash came, many ranchers lost their spreads while lenders suffered big losses on ranch loans.

"The bankers are going to look at the cash flow," says Hughes. "When you talk to them when beef prices are at $1 per pound, they will be more likely to make the loan. They tend to use current prices to make a decision and tend not to look at the cattle cycle."

If you're determined to go ahead, you may be in for a rude awakening. Land buyers from outside the ranching business have inflated ranch prices. The problem is perhaps worse in the West, where wealthy industrialists are paying a premium for the scenery.

"Bona fide ranchers cannot afford to buy land any more," says Wyoming rancher Rob Hendry, co-owner of the Clear Creek Ranch.

A case in point: the asking price for one scenic Wyoming ranch with 105,000 acres exceeds $25 million. No one could make money running cattle at that price.

If your region boasts similar prices, you may need a new land strategy. It goes like this. If you buy, pay cash if at all possible. If you can't afford much land, buy acreage that will enhance your operation, such as a tract that connects sites you already own. Finally, get more productivity out of the land you own. New grazing methods allow ranchers to run substantially more cattle without damaging the land. This method avoids new debt and boosts profits.

"The quickest way to cut costs is to increase the productivity of the resources you've already got," says Hughes.

Intensive grazing plans are one way to do this. But there are many others. "You've got to use the program that suits your range," says Hendry.

At his Clear Creek Ranch, for example, cattle graze each pasture only once each year. "We use some pastures in the spring, some in the fall and some in the summer," said Hendry. "We bring the cows home and feed them hay in the winter."

"We're in the country with six to twelve inches of rainfall," he said. "You graze it once, and it's not going to grow back for a year." The system has allowed Clear Creek to increase its cattle count by more than 25% in the last decade.

When you buy more land, there are a lot of ways to lose it. Failing to account for the cattle cycle is the most obvious. But there are others.

Take, for example, equipment. As you're paying for your new land, at some point you'll also face major expenses for trucks, hay balers or other equipment. If you're lucky, you'll just get stuck with major repairs. If you're not, you may be forced to buy new or used equipment.

The dangers are especially great for hybrid operations that combine cow/calf ranching with either farming or feeding operations. Both farming and feeding entail major equipment outlays. The danger is that you may be caught between a rock and a hard place, able to pay either for farming or feedlot equipment costs, or to pay for the mortgage, but not both.

To avoid this crunch, factor in the age and condition of equipment and a conservative estimate of replacement or major repair costs.

Health costs represent another pitfall. Some ranchers go without health insurance. If they get sick or hurt, they must pay the bills out of pocket. That could pull cash from the mortgage account and sink the ranch.

Many other ranchers carry health insurance with a high deductible - $2500 and up. No one expects to get hurt or get sick, but if you do, will you have the cash to pay the deductible and the new mortgage?

"My guess is that there are a number of things out there that can affect cash flow," says John Hay, president of Rock Springs National Bank, Rock Springs, WY. "You can have machinery breakdown. You can have a difficult winter (extra feed costs.) You can have a drought."

"Health insurance is certainly part of that. If you have a high deductible or no insurance, you may have potential problems down the road. Sooner or later, we all become sick or can be injured."

Perhaps the safest way to go is expect the worst and hope for the best. That means be prepared for a scenario that includes falling beef prices, a land price collapse, a new feed mill and a stay at the hospital.