Nevada ranch investor says owning land is an investment and owning cattle is a business
by Allan Nation
ATKINSON, Nebraska: Omaha investor, Dr. Lom "Mickey" Keim, told his north central Nebraska rancher neighbors that absentee ranch investors such as himself should not be seen as competitors but as potential partners.
"Owning and marketing livestock is a very complicated, highly skilled business," he said. "As a physician there is no way I can compete with your skills and I don't intend to try."
Keim explained that his 12,376-acre ranch was bought and run as a real estate investment rather than a livestock business.
"Land ownership is an investment. Your cattle operation is a business. You've got cattle. I've got land. We are not in competition. We need to be partners," he said.
To try and explain such subtleties, Keim opened his ranch, its operation and its finances for study by any ranchers interested enough to make the journey to his remote Sand Hills location. Approximately 150 area ranchers took him up on his offer.
While he had family ties in the Sand Hills, his family background has been in row crop farming and hog and cattle feeding. As a result, he made a lot of mistakes in how to structure a ranch investment.
In the late 1980s he became interested in buying a ranch to graze a herd of cows he had put together over the years. He said he saw the tough times of the early 1980s knock Sand Hill land prices to less than $100 an acre, however, by 1989 they had recovered to $150 an acre and he thought they were clearly on their way up. Consequently, he decided to buy the 7241-acre Brush Creek Ranch (enlarged to 7416 in 1991) in the Sand Hills region near the South Dakota border.
The Nebraska Sand Hills are a sharply rolling landscape of grass-covered sand dunes interspersed with highly productive sub-irrigated meadows. It is critical that the dunes remain grass covered to keep them from moving with the wind.
He said that ranch investors like himself make their money in two ways - income from operations and income from land appreciation. However to an investor with a sizable off-ranch income, land appreciation is more important because it is tax-free until sold.
"As an investor, you buy a ranch primarily because you think it has appreciation potential, not necessarily because of its cash flow. I don't need the ranch's income to live on."
However, he said he did not ignore increasing the ranch's potential for increased cash flow from operations either.
Because of his row crop background, he initially focused his attention on maximizing the return from the two quarter-section center pivot systems already in place on the ranch. He put money into grain handling facilities and bin storage - investments that he quickly regretted.
"I realized that I wanted to grow a dependable, reproducible crop every year without the recurrent input costs. Focusing my attention solely on pasture and range management was the answer."
As a result, he now leases out the two pivots to neighboring corn farmers while retaining the grazing rights to the stalks in the winter. The rent on these two pivots pay the taxes on the entire home ranch. ($26,335.70)
He realized he had neither the background, expertise, nor the time to learn the nuances of livestock marketing, breeding and genetics. Consequently, he decided to specialize in custom grazing cattle for livestock owners who needed summer range.
THE BUSINESS OF SELLING PASTURE MANAGEMENT
"We are in the business of selling quality pasture management" is how he defines his ranch's chosen niche.
Nebraska is perhaps the heaven of custom grazing in the United States.
Many corn farmers in the state own cow herds to utilize their corn stalks in winter but do not have any personal summer grazing land. Also, since they are too busy with crop production during the growing season to take care of their cows, they seek our graziers willing to provide both grass and care for the corn growing and harvesting season.
In 1989, Keim started with 650 cow-calf pairs charged out at $75 for the five-month-long green season. The ranch initially only had 13 paddock subdivisions and was largely dependent upon live water sources such as streams and natural ponds for stockwater. He estimated that at least 80% of the ranch's surface was bare ground at that time.
Attending a Ranching for Profit School, he met Texas rancher and consultant Bob Steger. He subsequently hired Steger to create a comprehensive development plan for the ranch and to oversee its installation and management.
Each year Steger draws up a grazing plan for the ranch and sets the ranch's stocking rate depending upon the grass and soil moisture conditions.
Steger's ranch development plan started by putting in a central two-inch stockwater line down the center of the ranch. From this central line, stock tanks could be plumbed in as additional paddock subdivisions were created. Taking advantage of natural folds in the land, more ponds were bulldozed into being as well.
The ranch has a four-strand barbed wire perimeter fence with a "shadow" electric wire on outriggers. The interior fencing is all two-wire aluminum. Both solar and 110-powered fence energizers are used.
Keim said a major initial mistake was the use of pie-shaped paddocks radiating out from the water points. These pie-shaped paddocks created very poor grazing distribution. They have subsequently been torn out and replaced with square or nearly square paddocks with the stockwater access in one corner. Currently, there is one stockwater tank for every five permanent paddocks.
A 36-foot corridor around the stocktank was found to be the optimum width to allow cattle to water without crowding but discourage them from loafing at the water point. Metal stocktanks with concrete bottoms 38 feet in diameter are preferred. Tanks of this size have been able to water herds as large as 1500 head with no problems.
Removable metal panels prevent cattle from getting into the tank but allow for easy tank cleaning and maintenance.
Over the years the paddock subdivision has been gradually increased by making the paddocks smaller. There are currently 108 permanent paddocks. Keim said he now considers a paddock 40 to 60 acres to be nearly ideal in size.
A paddock this size is typically grazed with a herd of 450 pairs for one to two days. This gives a high degree of stock density to which the native Sand Hill warm-season grasses respond exceptionally well and which actually increases grass growth.
HIGH STOCK DENSITIES GROW MORE GRASS
An early first-hand lesson was learned when he placed 1565 yearlings on a 26-acre sub-irrigated hay meadow for one day. That unfertilized meadow subsequently grew far more hay after having been "mistreated" in this manner than equivalent acreage under a heavily fertilized center pivot.
"This land was meant to be grazed at very high stock densities for very short periods of time. We have been very gratified to see the warm-season perennials returning with the proper grazing management. We've learned that if it ever grew on your ranch the seeds are still there and they will come back."
One warm-season species that has popped up and appears to be doing well is dallisgrass. Since this grass is traditionally seen in the blackland prairies of Texas, Mississippi and Alabama, its ability to grow so far north in latitude was previously unknown.
Keim said the grass cover on his largely sand dune ranch is now estimated to be 70 to 80 percent and is a mixture of both cool-season and warm-season plants.
An attempt to increase stock density by increasing herd size created a lot of stress problems when the herd was over 600 head. There have not been any problems at the 450 head herd size.
In 2000, thanks to its improvements, the ranch was reappraised at $315 an acre. This meant that the ranch's value had more than doubled in 10 years.
Keim "harvested" his accumulated capital gains via a new mortgage and spent them on an additional 4800 acres. Since this over-grazed and unsubdivided land was appraised at nearly $100 an acre less than his home ranch, Keim believed that the two new ranches could be brought up to the home ranch's value with water and fence developments.
In other words, he thought it was a reasonable land investment from a probable future appreciation standpoint.
FENCE AND WATER HAVE THREE BENEFITS TO INVESTORS
Fencing and water developments are not only deductible to current landowners but raise the tax sheltering depreciation basis available to a subsequent buyer as well. This development basis is important as the land itself is not depreciable.
When a ranch is sold the depreciation schedule on the improvements starts over and they can be depreciated again. This makes the ranch a much better buy to a subsequent investor from a tax standpoint.
Therefore, to an investor, fence and water improvements pay in three ways - increased current income from a higher stocking rate, increased tax shelter from current depreciation and a higher depreciable tax basis to a subsequent owner, which should raise the sale price of the land and the subsequent capital gains.
Because the new land was adjacent to the current property, stockwater could be brought in by just extended the home ranch's main line across the boundary fence. Keim said he is definitely not interested in buying little dribs and drabs of land far from his home ranch.
In 2003, the home ranch's appraised value had risen to $360 an acre and Keim again harvested this by refinancing. Harvesting accumulated capital gains through borrowing it out of the property is much more tax efficient than selling and re-buying properties.
Thanks to low interest rates, the cash flow saved by the new mortgage was enough to pay the ranch's entire annual labor bill.
The ranch currently grazes 1700 cow-calf pairs. The ranch charges $150 per pair for a five-month graze. This gives the ranch an operational income of $255,000 or roughly $20 an acre.
The ranch is run by its 33-year-old manager, Daryl Butterfield, and his two children, with seasonal help from local high school kids. Butterfield is given an annual labor budget allotment and any monies he does not spend on outside labor accrue to him.
Butterfield also has a calving out service separate from the ranch and charges $25 for every live calf delivered for the ranch's cattle owners. He is also allowed to run 35 cows on the ranch for no charge.
Keim has learned that the best way to reduce labor costs is to pay a few good people very well.
There are two 400-head herds and two 450-head herds. Each herd has its own set of paddocks and are shifted on a one to two day move.
The ranch sells its grass in 400-cow minimums. Next he said he will go to 600 cows as a minimum.
"The fewer clients you have to work with the better it is," he said.
When he first started, cattle owners were leery of sub-divided ranches as many pioneer MiG ranchers left them in a paddock too long and animal performance was often low.
"We now have a waiting list. I consider that our greatest compliment."
Keim said that by moving cattle every day the grass quality, rumen function and animal performance tends to be constant. If cattle are kept in a paddock for several days, they eat the best of the grass the first day, the next best the next day and so on. This variable diet creates a roller-coaster for the animal's rumen and subsequent animal performance.
THE PROBLEMS WITH YEARLINGS
Ideally he would like to graze the whole ranch with yearlings as that would maximize seasonal stocking rate flexibility and thereby stock density per acre. However, the ranch has had poor luck custom grazing yearlings.
He said today's yearlings tend to come in too heavy in the spring to be profitable for a grazier. This is particularly true of heifers which gain poorly when they weigh over 800 pounds.
Then there is the difference in rates. Even though an 800-pound steer is nearly a cow's grass eating equivalent, stocker owners will only pay 60 cents a day whereas cow owners will pay a dollar.
Another problem is that most stocker cattle in Nebraska are assembled in feedlots and are fed grain prior to being shipped to the grazier. This grain feeding destroys the rumen bugs necessary to digest grass and makes for low to no gains for the first month they are on grass - a month when grass quality is capable of three pounds a day gains.
Keim hasn't given up on yearlings entirely yet. He is experimenting with a partnership arrangement with an adjacent feedlot.
Under this arrangement, the cattle will be assembled and backgrounded on a no-grain diet, moved to Keim's grass and then walked from his pasture into the feedlot for finishing the following winter. Any profits above the ranch's grazing fee and the feedlot's yardage and markup will be split between Keim, his manager and the feedlot owner.
"I dearly hope this works as I would love to have the whole home ranch grazed with yearlings rather than cows."
Keim has seen a tremendous increase in wildlife over the last 15 years. Gates are left open in all the un-occupied paddocks and during the off season to facilitate the movement of mule deer. While turkey, whitetail and mule deer numbers are high, he has made no effort to tap into this income source.
Like most cattle-only ranches in the Northern Plains, the ranch is having increasing problems with noxious weed and cedar encroachment. His consultant, Bob Steger, is pushing for the addition of both sheep and goats to control these invaders.
Brush Creek consultant, Bob Steger, said that 25-cow equivalent weights of sheep and/or goats could be added to every 100 beef cows (175 ewes for example) in the Northern Plains without the rancher missing any grass. He said this would add the equivalent of $100 more net income per cow while helping to control noxious weeds and cedar.
He said he believed the Sand Hills were best grazed with sheep year around but by cattle on a green-season-only basis. He recommends that hair sheep be used as they are less management intensive and will eat more browse than a wool breed sheep.
"I would say that multiple species grazing is the next paradigm I want to attack," Keim said.
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