A Kansas rancher recently told me he was considering buying a section of land adjacent to his ranch. The price was $300/acre. He figured the carrying capacity was about 10 acres/cow. He asked if he should buy it.
“That all depends.” I said. “Are you in the land business or the livestock business?” There's an important distinction.
Some people own vast tracts of ranch land but run no livestock themselves. You could say they are in the land business but not in the livestock business.
Some ranchers run hundreds or thousands of cattle on leased ground but own virtually no land. They are in the livestock business but not in the land business.
Those who own livestock and the land on which they graze are in both the livestock and the land business.
We don't usually think of our businesses this way. If this last category describes your situation, however, you would be well served to think of your operation as the “XXX Land & Livestock Co.”
Asset Rich; Cash Poor
The majority of ranchers earn a very low rate of return on their equity. At the Ranching for Profit School and in our Executive Link program we challenge our clients to achieve at least a 10% return on investment (ROI).
There are two ways to achieve a greater ROI. The approach most take is to try to increase the return. We've succeeded. Our cows are more productive than ever before, weaning more and bigger calves all the time.
However, the increase in production and income has been outpaced by increases in costs. As a result, increasing production has actually decreased profit.
The other, and most often overlooked way of increasing ROI, is to reduce the amount you have invested.
The bulk of most ranchers' money is tied up in the land they own. Ranch land produces lots of values. The wind that blows over it, the water that flows through it, the wildlife that lives on it and the minerals underneath it all have value. Yet the majority of land-owning ranchers harvest only one of the values the land produces: the grass.
A highly successful client recently asked me if I thought the name “Ranching for Profit” was misleading. He said he'd learned to make a 10% ROI on livestock (after paying rent). But when he added the value of his investment in land, the total return dropped to about 4% (that's still about 400% better than the industry average).
The answer lies in either developing other revenue streams from the other values the land produces or reducing the amount invested in the property (e.g., selling the development rights, mineral rights, selling the ranch and leasing it back, etc.).
How Much Is The Grass Worth?
Stan Parsons' rule of thumb is that grass is worth the value of the animal that it supports. For example, it takes about 10 acres of land in Kansas to support a cow. If the cow is worth $800, then the productive value of the land for grazing would be about $80/acre for grazing ($800 cow/10 acres = $80/acre purchase price).
When I worked this out with that Kansas grazier, he shook his head and grumbled that the land was over-priced. I disagreed. If someone will pay $300/acre, then by definition, that is what the land is worth to that buyer.
The other $220 of value must come from values other than the ability to support a cow. If he's willing to build his business to capture some of those values, it might make a lot of sense to buy that land. If he's not willing to do that, buying the land is probably not a good business decision (though it might be a good lifestyle choice).
Of course, there may be reasons other than the immediate economic return for buying this land. Perhaps it helps consolidate his holdings, allows him to simplify his operation or provides security, protecting the rest of his property. These are all good reasons to consider the purchase, but don't expect the cows to buy that section if you're really ranching for profit.