Weighing land profitability
“Buy land, they’re not making it anymore.” – Mark Twain
“The wise young man or wage earner of today invests his money in real estate.” – Andrew Carnegie
“The best investment on Earth is earth.” – Louis Glickman
The tie between farmers and ranchers and their land that they manage, need, and care for is immeasurable. One of the biggest challenges and one of the biggest frustrations of my job is working with people who are financing land purchases with the expectation that land will “pay for itself” from the livestock and/or crops produced on that land. A recent exchange with one of my peers, Scott Clawson, Extension Area Agricultural Economist, resulted in the following article that he published in an Extension newsletter. I offer it here for consideration.
As the quotes at the beginning of the article indicate, the historical reputation of real estate investment is robust. The graph below, from the Oklahoma Land Values website at OSU Extension, helps illustrate the increase in pasture and cropland average values since the early 1970’s. Of course, this graph leans in the direction of real estate being a good investment in terms of appreciation over time. Still, this does not get us through the acquisition of the land. The producer that is liquid enough to purchase land outright is dealing with a different set of decisions than the producer that is relying on financing a significant portion. For the latter, the cash flow required to service the debt is significant and becoming more so as land prices increase. Many folks I work with are planning to cover this debt service with income from running cattle. In cases where cattle are debt free, annual cow cost is low, and the land price is modest, we can get close to covering the payments with calf sales. This is a rare occurrence otherwise. Established operations that are less leveraged are starting with a leg up. Still the thought of acquiring land at current price levels can be stressful for even the most financially viable ranchers.
When looking at the cash flow on a new land purchase, stocking rates need to be a part of the discussion which means a forage budget should be completed along with your enterprise budget. The table below shows the debt service on a per acre basis with two common financing options. To look at what we are asking of the cow in terms of generating cash inflow, take the number from the table that fits your situation and multiply it by the number of acres planned per cow. In eastern OK, another adjustment may need to be made to look at grazable acres not just total acres to remove wooded acres from the scenario. Asking that cow to cover the debt of two acres may seem more appealing than four acres. But the cost ramifications from overgrazing and additional winter hay and feed expense can exceed that cost rapidly.
The obvious comparison is to look at leasing additional ground. For startup operations, this is a viable starting point if we need cows paid for before land. $25/acre as opposed to a $130/acre annual payment is a big cash flow advantage. Unfortunately, across eastern OK pasture leases are difficult to attain at best. This leads to a question that may become more prevalent as land prices climb. That is, how do we do more with what we have when getting more land is not financially feasible from my operation? The easiest answer is a more detailed look at our grazing and forage fertility program. Different grazing strategies can improve grazing efficiency and adding fertility can add production at a per acre rate usually cheaper than leasing ground. As an example, the rule of thumb that an additional ton of warm season production can be achieved with 50 pounds of actual nitrogen. The nitrogen cost is usually less than a lease payment.
Altogether, the land constraint on our operations is not going away. It could even be argued that it will be an even larger issue going forward. As profit margins get squeezed and the prices of our feed and land go up, our first option should be to look towards our capital and the management of our forage resources. Follow me on Facebook @ https://www.facebook.com/leland.mcdaniel
— Leland McDaniel is the extension educator – Ag of the Carter County OSU Extension.