Ranch Values and the Federal Grazing Fee

Abstract

Past analysis of the impacts of higher federal grazing fees on ranch vrlues have been purely speculative due to the absence of observations on sales of Western cattle ranches under a wide range of fee levels. An income approach to ranch value determination is described here in which numerous parameters affecting value can be varied. Solutions attained under different grazing fees are crpitaiized into the net present value of a potential ranch investment. Substantial decreases in ranch revenues and ranch values can occur with large fee increases in cases where public land forage comprises a large share of a ranch’s annual forage supply. Many factors affect the purchase price of a Western beef cattle ranch. The productivity of the ranch and the expected distribution of future cattle prices influence potential income. Estimates of the costs of production, including the federal grazing fee on public land-dependent ranches, are subtracted from gross revenues to provide an estimate of expected annual before-tax net revenues. Adjusting these estimates by expected inflation rates, changes in land and cattle asset values, applicable tax rates, and interest and opportunity costs of investment capital results in an estimate of the net present value of the ranch investment. Changes in the expected production, price, and cost relationships affect the present value calculations. The purpose of this paper is to explore how changes in one of the costs of production affect net present value. Specifically, how do changes in the fee charged for grazing cattle on public rangelands affect ranch values? Expected after-tax net present value is calculated as a random variable under different grazing fee levels with stochastic livestock prices. The influence of alternative federal grazing fee levels on the distribution of annual revenues and on ranch net present value is analyzed. The paper is organized into 5 sections. Following the introduction is a brief review of the literature addressing rural land valuation approaches, with specific reference to factors hypothesized to affect ranch land. The third section describes the model developed during this study to determine ranch values using the income approach to rural land valuation. The fourth section of the paper discusses the procedures developed to incorporate the stochastic nature of livestock prices into what are normally deterministic, nonrandom approaches to estimating ranch values. The empirical procedures employed and the results of changing parameter values on ranch values are discussed next. The paper concludes with a discussion of the results and the implications for those involved in the grazing fee debate.