Hazards have structured their ranch as a profitable family investment vehicle
by Allan Nation
WEST POINT, Mississippi: Can a cattle ranch be a profitable, multi-generational investment vehicle? Gordon Hazard believes it can.
Hazard is who is well-known for his “tight but not cheap” approach to ranching has a plan that will allow his ranch to continue to operate as a family investment for at least two more generations.
Currently, the Hazard ranch consists of 3000 acres of mostly fescue pasture in the Black Belt Prairie region of Eastern Mississippi. The Black Belt Prairie region features a shallow, black clay soil underlaid with limestone. This limestone prevents the growth of the pine tress that cover much of the rest of the state and keeps the land grassy and open despite the region’s 60 inches of annual rainfall. It is a premier cattle country.
The 3000 acres is divided into 40 paddocks for rotational grazing and supports a herd of 1800 stocker cattle. The cattle are bought as lightweight calves primarily in the fall of the year and are grazed until the following August when they are sold as heavy feeders.
With very few cattle on the place after August, the fescue can be stockpiled for winter grazing and no hay is needed to overwinter the 1800 calves. This natural “unfair advantage” of cheap wintering combined with an average weight gain of 300 to 400 pounds per head has allowed the Hazard family to average a return over all direct costs of $100 to $130 a head for many years.
FIRST LAND BOUGHT WITH SOLDIER’S PAY
Gordon Hazard started the family ranch by buying 80 acres of land for $20 an acre while serving as an infantry officer during World War II. Offering to pledge his whole Army pay check as repayment, a local banker turned him down warning that buying a ranch “would be a millstone around his neck for the rest of his life.” The banker across the street had a little sunnier disposition and lent him the $1600 needed to buy his first land.
This is the only loan the ranch has ever had.
After the war, he supplemented his ranch earnings by custom combining local crops with a pull type combine with a six foot header. One day after his combine choked three times in a row, he sat down and thought of jobs he could do that would involve cattle. He considered becoming an auctioneer but decided to become a vet instead.
Using the GI Bill he went to veterinary school at Auburn and worked for a short time for the State Veterinary office. Recalled to the Army during the Korean War he became a Major in the Army Veterinary Corps.
Returning to Mississippi after the war, Gordon built a lucrative large-animal practice that eventually became one of the largest in the Deep South. However, despite his success as a veterinarian he still really wanted to be a cattle rancher.
Starting with 35 cows and a bull, he reinvested the ranch profits each year in more land and cattle. Realizing that stockers provided a more consistent profitability than cow-calf and a higher return to the land he soon switched to stocker cattle. Using leased land to free cash flow for cattle purchases, he grew entirely from retained profits.
Using tax-free land exchanges, he was able to swap his original properties near town for much larger rural acreages which speeded up the process of assembling a large ranch. In those early wealth building years, he had to check his own cattle by the lights of his truck after a full day of working on other people’s cattle. He said it was tough working two jobs but he never lost sight of his goal of assembling a large cattle ranch.
“I promised Sara that the day I had a thousand steers and the land it took to graze them paid for I was quitting veterinary practice,” he said.
RETIRING AT 55
That day arrived in 1978 when Gordon was 55.
He was totally burned out as a vet and was more than willing to sign a non-compete clause with the vet who bought his large practice. Thanks to the payout on his veterinary practice and occasional consulting income he never needed any of the ranch’s income for living expenses and was able to reinvest all of it in additional land and cattle.
In 1978, he formed a C corporation to own the ranch’s stocker cattle. The Hazard Cattle Company’s five stockholders consisted of Gordon and his wife and their four children.
Gordon said he felt that C corps are best for stocker operations because there is no tax sheltering depreciation as there is with cow-calf. He said that C corporations are particularly attractive for cattle companies such as his where no funds are being taken out as a salary and the plan is for all of the profits to be retained within the corporation.
While cattle ownership definitely needs the liability protection of incorporation, land is usually best held as an individual. The cattle company then pays out its profits as a grazing lease payment to the landowner. Since rent is not subject to Social Security and FICA taxes, this arrangement at one time offered significant tax relief by avoiding the payment of Social Security and FICA taxes. Today, an “arm’s length” separation must be proven between the landowner and the owner of the cattle for this tax dodge to be legal.
(This arm’s length separation only applies to farming and ranching. Doctors and lawyers are able to pay themselves rent on their offices as always. This is highly discriminatory. Ed.)
GIFTING THE LAND AWAY
With inflation soaring in the late 1970s, Gordon and Sara realized that their ranch land presented a significant inheritance tax consequence to their children. Starting in 1979, they began to gift their land holdings to their children on a piecemeal basis at the maximum rate allowed by the law.
(The current law allows you to give $11,000 a year tax free to any individual. This means that a husband and wife can give each of their children (and grandchildren) $22,000 worth of land or assets a year tax-free. Land and business assets must be gifted at their present-day value. Estates are now tax-free up to one million dollars.)
Gordon said that because his children were still young he made them sign a 20 year lease to Hazard Cattle Company that would prevent them from selling their property. Later, confident that his children inherited his frugality, he no longer required this.
“I wanted to give my children their inheritance while I was still living so I could have the fun of seeing my children do good and succeed,” he said.
Today, at age 82 all of the ranch assets have been transferred to his children and he currently serves as the ranch manager at no pay. (The ranch has one part-time, occasional cowboy.)
He said an 1800 head stocker operation is a nice size for a part-time grazing operation. He he goes to the ranch at 7 AM every day and is through in three hours. On days when cattle are being wormed or shipped, his work day might extend to 11 AM.
He said the ranch consistently earns between $60 and $80 an acre for reinvestment. Due to what Gordon currently considers is a too high price for land in his area, these profits are now being invested in financial instruments rather than to expand the ranch.
He said that land in the Mississippi prairie had a history of being highly erratic in its value. Ranch land sold for $1000 an acre in the early 1980s and $175 an acre a few years later. In recent years it again returned to the $1000 an acre level but is now receding due to the recession. He foresees that buying ranch land will be a good investment again in the future.
Gordon guesstimated that he could sell his ranch today for around $800 an acre. He said the ranch cost an average of $240 an acre to acquire.
Based upon its original cost, the ranch returns 25 to 30 percent a year to the family. This means the family’s net worth has doubled every two and one-half to three years. Based upon today’s inflated valuation the ranch still returns a healthy eight to ten percent. This is equal to the return of the very best public corporations (who do not mark up to market the value of past assets).
WHAT HAPPENS WHEN THERE IS NO GORDON?
Of course, the big question is “What happens to the ranch when there is no Gordon?”
Gordon said not to worry. His 55-year-old son Mark has been interested in cattle and has run his own personal stocker operation since he was 18. However, after receiving a degree from nearby Mississippi State, Mark decided to go to law school.
After a stint in Washington, D.C. as an attorney to the Senate Judiciary Committee, Mark returned to Jackson, Mississippi as a banker.
He eventually became the president of the First National Bank in West Point and resumed his childhood interest in cattle ranching. He currently has a part-time stocker operation separate from the family ranch with 850 head.
“I taught Mark the stocker business by letting him make his own mistakes. This cost me thousands of dollars but Mark always learned from his mistakes and never made them again. He’ll make an excellent ranch manager for the family.”
Gordon said that Mark’s compensation would be left for Mark to work out with his siblings. However, he thought a small salary with most of the compensation coming from a percentage of profits would be appropriate.
“It’s very important that a manager’s pay come mostly from profits,” he said.
Mark said that the bank he is president of has recently been purchased by a large regional bank chain. He has told them that he would eventually like to go part-time and work as an agricultural lending consultant. The bank seems amenable to this.
Mark has built a large portfolio of stocker loans for the bank and no one else has any expertise in this highly specialized field. He said this would free him up for the half day needed to manage the family ranch.
PLANNING FOR FUTURE GENERATIONS
Gordon said, “Part of your planning as a rancher is to have a plan to move your ranch down through the generations in an orderly and financially sound way.”
To that end Gordon has also been training a replacement for Mark Senior in Mark’s son - Mark Junior.
Twenty-five-year-old Mark Jr. studied at nearby Mississippi State while running a herd of 70 head of stockers of his own.
Mark Jr. started working on the family ranch as summer help when he was nine. Gordon said he gave Mark Jr. the option of taking his first summer’s pay in cash or in the form of a steer. “I had planned on paying him a hundred dollars but it wound up costing me $500 when little Mark opted for the steer,” Gordon said.
When the steer reached 800 pounds Mark Jr. figured out that he could buy back two calves for the yearling and he did. And he kept doing so.
“When he got up to 30 head I told him he needed to be grazing them on his Daddy’s ranch and not mine,” he said.
Mark Sr. bought 160 acres of former CRP land for his son. They have planted the ranch in fungus-free fescue and Max Q fescue.
Gordon hasn’t set a date for his formal retirement from managing the ranch.
“I’m still making plans, establishing pastures and building new fences. I’ve loved cattle all my life and have never wanted to do anything else.”
However, for all the romance Gordon has told his children that a ranch is first and foremost a business and it has to earn a profit.
“I’ve told my children that if the ranch ever turns unprofitable, they should sell it. I told them don’t keep it as a memorial to me if its not making money.”
GORDON’S ADVICE ON RANCHING AS A SECOND CAREER
Gordon Hazard said that a well-planned grazing operation is a low labor operation and one shouldn’t allow age to deter you from doing it. He has found an 1800 head stocker operation to be a fun, half day job.
The key factor in planning for a second career is to follow your true passion.
“If your first career was for the wife and kids, the second one should be for yourself.”
He said the biggest problem he saw was that most people try to retire too early with too small of an operation. He said you will need a retirement income comparable to what you made before retirement particularly if you retire in your 50s.
Gordon said that with a year-round stocker grazing operation like his you can figure on an annual positive cash flow of around $100 a head per year. He said to take your current income and divide it by 100 and that will give you the size ranch he thinks you will need before you quit your day job.
He said that because the return on investment from stocker cattle is greater than from most financial investments you will need fewer investment dollars for the same income.
He said that a key element in being successful with a second, retirement age career was to leverage off of what you already know how to do.
“You need to plan your retirement just as much as you planned your work. When you are older you should know more. Leverage that.”
Hazard said a major goal in his life has been “no yard work.” He said that if he didn’t have the ranch to go to each morning he might be asked to mow the lawn.
He said to keep in mind that real estate costs for both housing and land (on a per head basis) are much lower in the rural South than in other regions. He said one of the best ways to reduce the amount of money needed for retirement was to move to a low cost area of the country.
“Whatever it is, plan to have something to do,” he said. “You need to get up and get out of the house everyday. Your wife will be much happier and you will be too.”
Copyright © 2005 Stockmangrassfarmer All rights reserved.