John Nalivka: What is the ranch production value of Federal grazing?
July 30, 2016
Following up on my article last week, how do we put a dollar figure on the Federal grazing used by western ranchers?
The first step in this valuation process is to catalog all grazing resources on the ranch by AUMs and the season of use for those AUMs. This represents a forage balance sheet and seasonal availability has an significant impact on the value of the AUMs included. Winter grazing generally has a higher value as the alternative has a higher cost – feeding hay. Quality spring grazing also is typically valued higher because once again, the alternative involves feeding hay and whether produced or purchased represents a major ranch cost.
Once the forage balance sheet for the ranch is constructed, then the next step in the process is to compile a complete analysis of ranch costs and revenue. This should include not only the current and accurate financial picture, but historical data as well. This financial statement can be created from your F-Schedule tax return and I have used this data quite a lot. However, there is more "value-added" if you spend the time to build a spreadsheet or use financial software, i.e., QuickBooks. You will have a solid foundation to create a tool for financial management decisions on your ranch as well. This financial data is linked to and analyzed along with your ranch production data to generate the cost to produce and market a pound of beef on YOUR ranch. Revenue minus cost equals net return. The capitalized value of net return per pound of beef produced is one value indicating the productive value of your ranch.
The second indicator of your ranch value is not independent of net return per pound of beef produced. This is the net return per AUM of grazing. This value is generated by combining your grazing balance sheet with the financial information referred to above. But rather than calculating the net return per pound of beef produced on your ranch, the financial information is based on your grazing capacity or AUMs of grazing. You now have the two key indicators of your ranch's productive value – net return per pound of beef produced and net return per AUM of forage available. Capitalizing both values, they quantify your ranch's productive economic value. This value may or may not be the same as the sale price.
So, to answer the original question posed, the productive value of your ranch is the capitalized net return per AUM of grazing coupled with the capitalized net return per pound of beef produced from that forage. So, what is the value of the Federal AUMs? In most cases, those Federal grazing AUMs are closely tied into the total grazing and productive value of the ranch and oftentimes, contribute value because of season of use.