With only a two-and-a-half hour distance from New York City, land prices in that area were typically high. So with careful consideration and a fair amount of risk, Eisele packed up and headed north to an area where land availability was more prevalent.

Woolsey cassidy
Managing Editor / Ag Proud – Idaho
Cassidy is a contributing editor to Progressive Cattle and Progressive Forage magazines.

But it wasn’t just his willingness to move that helped Eisele expand his stocker operation, it was his well-researched financial plan, patience and determination that helped him recognize when there was an opportunity to purchase land and when he should rent land instead.

“I didn’t grow up in a ranching family, so I basically had to start on my own,” Eisele says. “I started out by working for some big farms and running my 200-head stocker operation on the side.

My end goal was always to end up doing my stocker business full-time, so I was always looking for the right time and the right opportunity to expand.”

Although it took nearly 10 years for Eisele to build his financial plan and get in a situation where purchasing land was a possibility, Eisele says he is better off financially than if he would have purchased land right from the start.

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Recognize when you should rent and when you can purchase

Dr. Tom Field, director of the Engler Agribusiness Entrepreneurship Program at the University of Nebraska – Lincoln, says it is critical for stocker operators to determine what their best options are in terms of purchasing or renting land.

He says there are a variety of situations that can be utilized for expansion without having to make a capital investment.

“I think long-term leases or year-to-year rents are a way to expand,” Field says. “They have their own set of risk with them but if you have a capitalization rate where money isn’t falling out of the truck, it is better to keep your money working in working capital then tying up all your assets in long-term debt.”

A lot of successful stocker operations have at least some base property, he says. But the most successful stocker operators he knows lease land in multiple states based on what moisture conditions are giving them.

They are depending on the ability to lease and rent land outside their operation because they would prefer to stay liquid and make the money work for them, he says.

Field strongly urges stocker operators to have multiple enterprises if considering buying land. If a stocker operator only has one enterprise or only sells one set of cattle during the year, it is important they understand the difficulty of generating enough cash flow to make the land payment, he says.

Field gives some examples of people in the eastern U.S. who are utilizing old 100-head dairy operations as a backgrounding facility. Since these facilities are no longer practical for today’s dairy market, stocker operators are capitalizing on these facilities and benefitting from the diversity.

The stocker operators are not only able to use the facilities but are also able to take advantage of the pasture for either summer grazing or for growing and selling crops. This way the land is generating revenue continually, not just in the growing season, he says.

He also suggests operations consider generating revenue from a hunting, heifer development or custom-feeding perspective. Whatever the case may be, stocker operators looking to purchase land should take advantage of multiple resources to make their payments.

“In a stocker enterprise, if you have long-term debt and you’re in an environment where all of a sudden you have three years of drought and have to take your stocking rate from optimum to sub-optimum, your cash flow goes down with it,” Field says.

“At that state, if you don’t have other sources of income to make those payments, you have got yourself in a jam. It is literally a situation-by-situation decision to purchase land, and it has to be based on running the numbers and making rational choices, not emotional ones.”

Purchasing land in today’s market

John Blanchfield, owner of Agricultural Banking Advisory Services, says for those cattlemen who have their financial house in order – meaning solid earnings, solid equity (cash is good) and a program that works – this is a great time to buy land.

For others recovering from a financial setback in the past – like last year’s Atlas blizzard, for example – this is a great time to get the operation healthy and not necessarily a good time to take on more financial obligations, he says.

This can be hard for an individual to decide on their own, Blanchfield says. He recommends speaking with a banker about these key points before making any decisions:

  • How much do you need to borrow? Perhaps the most important thing to discuss is that if you are planning on borrowing money to acquire land, how much do you need to borrow and how do you propose to pay it back?

    Does the existing ranch have the financial resources to repay increased debt caused by the land purchase, or do you need to buy some additional cows to increase the herd?

    Typically, the banker will structure the land loan over a longer term and the cattle acquisition piece over a shorter term.

  • How to pay for it? What will the cash flow of the entire operation look like when the new debt is in place?

    This is something the banker can help you with, but be prepared to do some pencil work before going to the bank; you are the operator, you have to do the initial calculation of feasibility, and you have to then work with your banker to convince him or her that it will work.

  • How to secure or collateralize the loan? In addition to knowing the repayment of the loan, banks want to see a collateral margin on the land.

    For example, if the new land costs $100,000, the most banks will typically lend on this is $70,000. (Frequently, this will be lower.) How will the buyer cover the rest? Typically, ranchers do not have a lot of cash, but they have additional assets.

    The banker may suggest “spreading” the debt for the new land over the rest of the rancher’s land holdings if there is equity in that. This should be thought through carefully: Do you really want to have debt on all of your land in order to buy the additional land?

    This is done all the time, but if your goal is to have the ranch “free and clear,” meaning no debt on it, this may conflict with your goal.

“The downside to prosperity in cattle country is that when there is prosperity, asset values tend to inflate. Buyers should know that the cattle cycle is just that – a cycle with ups and downs.

Right now we are on a great up cycle, but that doesn’t mean it will last forever. But for those who have their financials in order, and have the capacity to take on and manage more, the bottom line is that this could be the right time to expand,” Blanchfield says.

Making it work financially

Eisele says the land purchase he made worked for him because of the location. The land was fairly inexpensive because of its cold winters, but it proved to be a great place to develop stocker cattle with its fertile soils and high-moisture conditions.

He says he can now stock more cattle on less acres, and he has future plans to incorporate a vegetable enterprise into his operation. Today he owns 400 acres, rents about 600 acres and has doubled his numbers to roughly 500 head of stocker cattle.

“Luckily for me, I had a good consultant that helped me through my purchase,” Eisele says. “But if you know what your goals are and you have a solid financial plan, purchasing land can definitely have its benefits. You just need to be smart about it.”  end mark

Cassidy Woolsey is a freelance writer based in Utah.

PHOTO
Stocker operators wanting to purchase land should look for other ways they can utilize the land’s resources to help make the payments. Photo courtesy of Cassidy Woolsey.

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