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A Losing Proposition

With today's land prices, cow income won't pay for western ranches. Scenic ranches offering privacy for their owners, as well as recreational activities, are boosting sale prices across the West.

America's rural landscape is changing quickly. A new type of landowner is buying up land once almost exclusively used for such agricultural purposes as raising cattle.

These buyers tend to be wealthy, upperclass businessmen, even celebrities, who purchase ranches expecting long-term capital gains from their investment.

Scenic ranches offering privacy for their owners, as well as recreational activities like fishing and hunting, are boosting sale prices across the West. Ranch values have little to do with the grass quality or the stocking rate.

It's a discouraging scenario for young folks hoping to enter the ranching business, or those looking to expand their family ranch enterprise. The fact is, in many parts of the U.S. today, you can't buy a ranch and expect to cash flow it solely by running cows.

New Mexico State University agricultural economist Allen Torell has studied New Mexico's land ranch values for two decades. He's chronicled and studied changes during the last decade indicating the impact of non-agricultural uses on land values.

“This research documents the declining importance of livestock production and the growing importance of recreation, wildlife and scenic appeal in determining the market value for western ranches,” Torell writes in his paper, “Recent Trends and Factors Influencing the Market Value of New Mexico Ranches.”

Studying land values

Between 1996 and 2003, Torell followed the sales of 500 ranches in New Mexico. And, working with the University of Idaho's Neil Rimbey, he gathered similar data from 85 ranch sales in the Great Basin — which includes eastern Oregon, northern Nevada and southern Idaho — between 1998 and 2004.

Torell says the study considered the sale price of the ranch and various other factors, such as ranch elevation, location, amount of public land, productivity and ranch income. Using regression analysis, he computed how these factors affected the sale price.

The model was able to predict 95% of the variation in per-acre selling price for the ranches studied, he says.

“For example, you don't really observe how the distance to town affects the price of ranches. But with a large enough sample size, and considering the variations and their distance from town, we can determine how that variable affected the value,” Torell says.

He adds only 5-20% of the market value of New Mexico ranches in the study, as well as the Great Basin ranches, was explained by livestock income. Instead, Torell says they found three major determinants of the market value for western ranches:

  • The ranch's income-earning potential — including cattle, hunting permits, recreational opportunties, etc.;

  • Expectations of long-term capital gains and asset appreciation as land values continue to rise; and

  • The desire to own rural property for improving the individual's and family's quality of life.

“People are buying these ranches as an investment because they expect the land to appreciate,” Torell says. “But mostly, they're buying a property to enjoy the recreational potential and a place in the country.”

Overpriced ranches

Torell cites “Ranchland Ownership Dynamics in the Rocky Mountain West,” a University of Colorado study looking at 200 ranch sales near Jackson Hole, WY, and Steamboat Springs, CO.

Researchers Hannah Gosnell and William Travis explored the rate of ranch sales and ownership changes on these ranches. Torell cautions the study probably isn't completely representative of western trends, because the communities are heavy with celebrity types. But, they found many buyers were “amenity” buyers — people buying for the lifestyle.

“That kind of buyer represented at least 20% of the buyers near Steamboat Springs, and 60% near Jackson Hole. People buying ranches to raise cows only accounted for 15% of the purchasers,” Torell says.

Such demand significantly limits an average cattleman's purchasing power — if his only intended purpose is to raise cows.

“There's a lot of talk about how to make ranches profitable, but these operations are valued at 5 to 8 times more than what cattle will make on them,” he says. “And, the idea a good manager can make them more profitable is a myth. You can't make a ranch you paid 5 to 8 times too much for, profitable.”

Torell says many hopeful buyers are trying to buy ranches to make a living, and don't realize the disparity between what they can afford and what they'll actually have to pay.

“But, if they want to be in the ranching business, they're going to have to pay that price,” he says.

One option is to work off the ranch to earn more money. A 2001 mail survey of 1,100 public land ranchers explored the social and economic characteristics of the permit holders. The survey by Oregon State University researchers Bradley Gentner and John Tanaka found public land ranchers could be divided almost down the middle.

Half of them depended on the ranch for more than 80% of their income. The other half worked off the ranch and received less than 20% of their income from it.

“Even though they needed to work those other jobs, they still considered themselves ranchers,” Torell says. “They didn't like being called hobbyists.”

Hunting leases

Besides off-farm jobs, Torell says ranchers are finding other value-added ways to make money on their operations. One option is capitalizing on hunting leases.

In his work, Torell looked at the value of wildlife income on the ranch and how it affected sale price. Of the 500 ranches studied, 125 had wildlife income. Some ranches had elk permits for hunting; others had antelope and/or deer permits.

“New Mexico has a unique program where the state's wildlife department gives wildlife permits to ranchers for improving wildlife habitat on their deeded land,” Torell says. The benefit only applies to deeded lands, not public lands where ranchers hold grazing rights.

For example, if a deeded-land ranch in northern New Mexico has a $6,000 bull elk permit, it can add as much as $127,000 to the value of the ranch.

“Just that one permit,” Torell adds. “And the coefficient on wildlife income was about three times the coefficient for livestock income.”

USDA's 2002 agricultural census showed 28,016 operations in the U.S. provide recreational services — hunting, fishing, camping, etc. — generating a total of $202 million in revenue. That's an average of $7,220/operation of additional income each year across the U.S.

Torell concludes, “Western ranches aren't valued for the same things they used to be. Today's buyers of western ranches are not the same people they used to be. Times are changing here.”

TAGS: Pasture