Have you ever heard the saying, “Farmers are the poorest millionaires you’ll ever know”? Millionaire status is not based on the amount of money someone has sitting in the bank but rather on their overall net worth. Agricultural businesses are asset-heavy. When considering the value of real estate, equipment and livestock, many farmers and ranchers would indeed be considered to have a high net value. This is why inheritance taxes are so detrimental to the generational transition of ag enterprises. The taxes on the net value of all those assets are far greater than cash on hand, forcing the next generation to liquidate enough assets to pay the bill or sell the operation as a whole.
A high-asset business often translates to a high fixed-cost business as well. Costs can be categorized as fixed costs or variable costs. Fixed costs are those costs that remain constant regardless of changes to operations. Examples include insurance costs, interest costs and depreciation costs. Some salaries can be considered fixed costs as well. These are all expenses that stay constant as operational shifts happen. For example, a ranch manager manages livestock, land resources and employees. Their salary would not change if those numbers shifted reasonably up or down. Variable costs, on the other hand, are expenses such as vet supplies, feed costs or fuel. These costs can be managed through operational changes or will adjust as the number of livestock in your operation shifts.
Lowering fixed costs can be a struggle or may require large inputs of cash. Keeping depreciation costs down by strategic capital expense planning is one way. Another way is by paying off land notes or large note balances. This helps lower interest costs. There are other options as well, but all of them can be just as challenging.
Rather than make efforts to lower fixed costs, livestock producers may find more success evaluating how they can generate additional revenue with their current assets. Think of this as dollars generated per acre owned. This can be illustrated in various ways. When considering the largest and most successful ranches in the country, the ones that have survived for generations, they have often been able to do so through diversification and increased revenues for each acre owned. Consider the numerous oil wells that have helped pay for ranches. Each operation will have its own available opportunities.
One option is to add additional classes of livestock. Multispecies grazing can be beneficial to rangelands. It has also been shown that sheep or goats can be added to a cattle operation without lowering cow numbers, if pastures are managed appropriately. While this does add additional fixed costs depending on infrastructure needed and possible increases in depreciation, the additional revenue per acre owned can offset that, not to mention the benefit of diversification on your market risk management. The purchase of stockers to take advantage of additional forage in high-growth years is also a possibility in many areas.
The addition of different classes of livestock can be an easy and comfortable place for many livestock producers to start. There are other options that can be implemented as well. Agrotourism is an opportunity that is overlooked by many, though it is easier in some areas than others. Agrotourism can be implemented at varying levels based on ownership preferences. Day tours can be offered to nature lovers, such as bird-watching groups or painting workshops. It is feasible that a rancher could charge $25-$50 per person. For a group of 20 people, that is a total of $500-$1,000 for a day of allowing access and telling a few stories.
Overnight rentals can bring in revenue as well if there are underutilized buildings on the property. It is not unrealistic to consider charging $100 or more per night for a clean and well-functioning space. A one-day cattle drive could be sold for a per-participant fee from $250 and up, even if participants bring their own horses. Full “dude ranch” type vacations can bring significantly more revenue. Again, there can be added expense with some of these options, but it may be as simple as a few clean wall tents and decent food. Of course, this is not for everyone. It does take a certain personality. Remember, if people are allowed on property not covered by workers’ compensation insurance, a liability policy should be in place.
Sometimes it is valuable to think about what resources a landscape already has that can be leveraged. It is surprising what some will pay to spend a day target practicing on varmint. Larger wildlife can be leveraged as well. Hunting is a very lucrative industry. This may be a pay-to-play situation, leasing to an outfitter or managing hunts in-house. Other resources may include gravel that can be sold or timber that can be harvested. The carbon credit industry is growing rapidly and has increased revenue potential. Mineral assets, if owned, can be leveraged. There are even ranches that use pond systems and natural plant species to clean wastewater from local municipalities.
If a business owned a 20,000-square-foot warehouse but only needed 10,000 square feet for its own operation, why wouldn’t it lease out at least some of the additional space it is already paying for? Similarly, livestock producers should evaluate what assets they have and how they might be able to leverage them to generate additional revenue. Business-minded producers who do so will have an advantage going forward. Any advantage the ranching industry can find will become increasingly important as the industry becomes more and more challenging.
