This morning I had a call from an alumnus considering a big move.  He is thinking of selling his place and relocating.  He has his eyes on a property in another state and asked me, “Can the cash flow generated from a cow/calf operation make the land payments?”  

As a general rule, I figure a cow can pay about 1½ times her value for the land it takes to support her.   So, if a cow is worth $1,000, and assuming she has a decent gross margin, the cash flow she generates should be able to cover the land payment for property valued at $1,500.  If it takes 10 acres to carry a cow, that means the value for grazing is $150 an acre.  Good luck finding that!  Of course if you have a better gross margin, you can afford to pay a little more.  A crummy gross margin, and you’d better improve your gross margin before you think about buying land. 

The land he was considering was priced at $6,000/cow. Using the “1.5 x Cow Value” rule, that is roughly 4 times what he can afford to pay based on the annual income from a cow/calf enterprise.  The land isn’t necessarily over-valued; it is just over valued for grazing.  Water, mineral, wildlife, the scenery and other attributes of the property all contribute to its overall value. 

People who buy ranches often cite the long term appreciation of the land as the rationale for the investment.  But appreciation won’t create cash flow to make the payments.  If we want the purchase of a ranch to work financially we need to look for ways to capitalize or concessionize these values. Concessionizing means developing an enterprise to create income from an unused resource. Capitalizing means divesting yourself of a resource you don’t intend to use (e.g. selling an easement).  

If we can off-set the value of our purchase by capitalizing some assets and create some income from other enterprises, the cows won’t have to make the whole land payment themselves.  In this case there wasn’t anything obvious that could be capitalized or concessionized that would make a significant difference. 

In the last ProfitTips I wrote about alumni who doubled their carrying capacity using cell grazing.  If this is possible on the ranch I was being asked about this morning, rather than being able to pay for ¼ of the land payment, grazing may be able to comfortably make ½ of the payment. 

But be cautious.  I warn people about being overly optimistic about the improvement they will make through cell grazing.  I advised the caller this morning, that if he thinks he can increase the capacity by 100%, pencil in a 50% increase.  After all, while you can make an educated guess about the potential, you won’t really know how much the capacity will increase until you start cell grazing. Even then, unless you can point to areas that are currently underutilized, you shouldn’t increase the stocking rate until you’ve increased the capacity and that may take a few years.  In the meantime, you still have a land payment to make. 

There are often compelling, non-economic reasons for buying land.  Perhaps it helps consolidate holdings, simplifies the operation or provides security, protecting the rest of the property.  These are all good reasons to consider the purchase, but let’s not kid ourselves.  Even with cell grazing, the price of land is usually well above the value of the grass.  However, capitalizing or concessionizing resources combined with cell grazing can make buying a ranch a smart financial move.