With its deep roots in the Old West, ranching is as much an American tradition as baseball, cars and Broadway. But, like all traditions, it is changing to adapt to modern America.
First, although cattle and sheep have grazed U.S. ranch lands since at least the 1800s, many ranch owners have recently been adding variety to their roster of “critters.” Some have expanded the herds of elk and other local species already present on their properties. Others have added non-native, even exotic, animals and fish.
Their goal in most cases has been to supplement returns derived from traditional grazing by offering fee-based activities including fly-fishing, hunting and bird watching. “Wildlife leases can sometimes offer more income than grazing leases,” says John L. Taylor Jr., the Dallas-based national executive for U.S. Trust’s Specialty Asset Management Farm & Ranch Services team.
Second, drawn in part by this reorientation, a new wave of wealthy individuals, spearheaded it seems by baby boomers, has been purchasing ranch land. Some owners are managing their own land, while others are long-distance landowners, buying a property mainly for its investment potential and then leasing it to professional ranchers.
These long-term changes, which have altered certain dynamics of operating a ranch, are prompting more owners to turn to management companies, for everything from advice on herd size to the full oversight of a property.
“A professional ranch management group should simplify the ownership of a ranch,” Taylor says. “At U.S. Trust, the Farm & Ranch team’s approach is to develop custom plans to help meet an owner’s objectives in the most cost-effective manner.”
So how do managers go about analyzing ranch land and implementing their plans? And what steps do they take to ensure implementation when, for instance, a ranch tenant’s goals differ from management’s? Taylor, along with Eric Redeker and Shane Cole, managers in the Farm & Ranch team in Fort Worth, share insights on these and other issues.
A first step in any assessment of ranch land is an inventory of current conditions.
Starting Point: Inventory
A first step in any assessment of ranch land is, as you might expect, an inventory of current conditions. “When we look at ranch land that’s new to us — or already under our management and in line for a periodic assessment — our starting point is usually to assess the overall conditions,” says Taylor. “We focus on determining the populations of cattle or sheep, as well as what kind of wildlife is present. We look for evidence of appropriate levels of grazing or if there’s been overgrazing. Are invasive plant species, which might include mesquite or cedar, encroaching to an unhealthy extent? We assess the condition of native grasses and streams, ponds and lakes. All of these characteristics help us determine the potential of a property.”
Once they’ve established the health of the land, the Farm & Ranch team will usually determine what enhancements might be necessary, their goal being “to generate as much revenue as we can while making it sustainable for the long term,” says Redeker. “We look at what is there and what kinds of adjustments we can make to increase the value of a resource.”
Farm & Ranch team members collect ecological and economic information that helps them assess the health and valuation of a property. Indicators might include:
- Animal. Estimate the populations of domestic herds (e.g., cattle and sheep) and wildlife (e.g., white-tailed deer and prong-horned antelope, quail and pheasant, trout and bass) on the property. “The type of wildlife should be reviewed against the goals and objectives of the landowner and the available habitat,” Redeker explains.
- Plant. Measure the abundance and distribution of plant life. This might be important ground cover or fodder for the livestock, which is valuable. Ascertain the range of invasive plant species, especially when they can be detrimental to the economics of a ranch. “These might include exotic thistles, knapweed and mesquite, depending on the region,” Taylor explains.
- Soil. Estimate the percentage of ground that is bare and determine the potential for soil erosion. “Ranch management is essentially ecosystem management and is a balancing act,” says Redeker.
- Water. Establish the volume and accessibility of water in creeks, streams, surface lakes or ponds, and well water. “Water is a key resource because it provides the richest habitats for waterfowl and local aquatic and terrestrial species,” says Redeker.
- Legal. Confirm that the ranch property abides by applicable state and federal laws. These statutes might be related, for example, to the proper disposal of waste from drilling or mining activity on the property. “Sometimes we find ourselves being environmental detectives,” says Cole. “There might also be issues of animal protection if species have only recently been listed as protected or endangered.” Ideally, these data points are measured periodically, giving the team a sense of the land over seasons and years. Habitats can be wide-ranging, “from streams and lakes to grasslands and woodlands to mountains and deserts,” Cole says.
Sustainable Land, Sustainable Income
A key to the team’s approach, Taylor says, is planning for long-term sustainability — not only of the land itself but also of the income the land produces. Maintaining these two types of longevity requires balance and restraint. “Ideally, try to generate the highest income but also keep that asset generating income for as long as possible,” Cole explains. “Simply put, with sustainability as a touchstone, don’t just take profits all at one time.”
That might mean reducing grazing or hunting or fishing for a while, until conditions for those activities improve, he says. “Basically, in ideal circumstances, we do whatever we can to increase the longevity of the land’s potential.”
Or as Taylor puts it: “It’s not simply about maximizing the income; it’s about maximizing the sustainable income.”
As part of their commitment to sustainability, the Farm & Ranch team typically vets potential tenants for a property with a goal of leasing to someone who shares the values of the ranch owner. “You do a little background research. Have they leased or do they own any land nearby? And how have they treated it? You might even talk to other ranchers and get a feel for the person,” says Cole.
The team hopes to educate new lessees in depth about sustainability.
The Tenant Lease
When it comes to an actual contract, “We try to build in certain constraints that favor sustainability,” Cole adds. “The tenant might be required to treat X amount of brush or limit the herd stocking rate to Y, or less if it’s a dry year.”
The team also usually favors longer-term leases. There’s a good reason for that, Redeker says. “One of the concerns about short-term leases — those lasting a year or so — is a tenant who might be focused solely on profit; that stands to hurt the overall viability of the land.” By the same token, he adds, “We find that longer-term lessees are often less inclined to go f or maximum profit at all costs because they figure, ‘If I beat up the land this year, I’m probably going to get less out of it next year.’”
In addition to favoring longer-term leases, the team hopes to educate new lessees in depth about sustainability, ideally helping them become better stewards of the land. “That way they are more likely to have sustainable income from a property,” says Redeker. On occasion, the managers discuss federal or state programs that may help tenants improve their stewardship. “For instance, there might be a cost-share program aimed at limiting invasive plant species,” he says. “We teach lessees that they can take advantage of that.”
Ranch Ownership and Management
Ranch land is a growing investment consideration for many wealthy individuals. If you are interested in purchasing a property, or in engaging the services of a ranch management company, be sure to contact your U.S. Trust advisor. They can talk to you about ranch land in terms of your overall portfolio goals and risk tolerance, as well as the kind of services the company’s Farm & Ranch team can offer.
Investing involves risk. There is always the potential of losing money when you invest in securities.
Always consult with your independent attorney, tax advisor, investment manager and insurance agent for final recommendations and before changing or implementing any financial, tax or estate planning strategy.
OTHER IMPORTANT INFORMATION
Nonfinancial assets, such as closely held businesses, real estate, oil, gas and mineral properties, and timber, farm and ranch land, are complex in nature and involve risks, including total loss of value. Special risk considerations include natural events (for example, earthquakes or fires), complex tax considerations and lack of liquidity. Nonfinancial assets are not suitable for all investors.