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184: Lease or Own? The Pasture Decision That Defines Your Cattle Operation · CattleUSA Daily

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  Welcome to the Cattle USA Daily podcast, your go to source for
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  the latest livestock markets, industry insights and the update
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  shaping agriculture today. I'm your host, Lauren Moylan, a
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  passionate advocate for agriculture, here to keep you
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  informed and connected. Now let's dive into today's
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  episode. Land is one of the biggest
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  investments in any cattle operation, but owning pasture
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  isn't always better. Leasing can sometimes make more
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  sense depending on your cost, cash flow, risk and goals.
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  Today, we'll compare lease versus ownership side by side.
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  I will lay out the factors, the math and decision points and you
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  decide which makes the most sense for you and your ranch in
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  the long term. Let's start with what each gives
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  you. Leasing pasture gives you access
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  without huge capital outlay. You avoid mortgage, property
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  taxes and many fixed costs. It gives you flexibility to
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  scale up or down. Many extension guides point this
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  out as a major advantage for newer or expanding producers.
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  Owning pasture, on the other hand, gives you full control.
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  You can invest in improvements, capture land appreciation and
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  avoid lease rate risk, but you also take on debt, taxes,
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  maintenance, depreciation and all the downside risk.
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  Now the meat. What do you actually pay or save
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  in each scenario? Owning land?
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  Costs include land payment or opportunity cost of capital,
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  property taxes, insurance and liability maintenance.
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  You've got fence, water, weed control, all of the repairs that
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  you need to do. You've also got depreciation and
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  then you've got risk or catastrophic losses like flood,
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  drought or soil degradation. Leasing costs include cash, rent
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  or grazing lease payments. Sometimes the leasee pays
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  portions of maintenance or improvements depending on the
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  contract. You've got less control over
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  long term investments in the pasture and you maintain the
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  risk of lease rate increases, lease non renewals, or changes
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  in lease terms. To split risk, some lease models
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  use a contributions approach. Each party accounts for their
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  costs and then share gains proportionally.
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  That helps align incentives. Also, flexible leases are
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  becoming more common clauses that let lease rates vary with
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  productivity, rainfall, or the market that shares risk.
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  Another factor to consider is that lease rates rise over time.
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  Fixed long term taxes and payments often favor the
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  landowner. That works in their favor but
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  can squeeze the lessee unless lease escalators or
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  renegotiation clauses are built in.
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  And one more thing to consider is that owning gives you the
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  option to capture and value appreciation, which can be a
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  major component of total return over decades.
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  That's something a lease simply cannot provide.
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  Leasing may out pencil owning when you lack capital or prefer
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  to keep capital free for livestock, infrastructure or
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  other investments. You're uncertain about long term
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  herd or land expansion. Flexibility sometimes matters.
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  Land prices or interest rates are high, making ownership
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  expensive to finance. You don't want to absorb full
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  downside risk from drought, degraded soils or other shocks.
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  Available lease rates in your region are favorable relative to
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  owning costs. If lease rates are low relative
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  to what land cost or maintenance would be offering, a lease might
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  be a great option for you. In those cases.
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  Leasing decouples your livestock business from land ownership
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  risks. Ownership may make more sense
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  when you plan to hold long term and benefit from land
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  appreciation. You can reduce costs by
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  internalizing maintenance, improvements, fencing and water
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  systems, things you'd otherwise pay as a leasee.
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  You want complete control over grazing improvements, tree
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  planting, or fencing decisions. Your operation scale justifies A
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  motorizing fixed cost. In this situation, large acreage
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  spreads your fixed cost thinner. Another point is when lease
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  rates are rising or unpredictable, making leasing
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  riskier over time. And the final one?
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  On this point, you have tax advantages, low interest rates,
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  or favorable financing available.
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  If you also expect to reinvest in pasture improvements, the
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  increased carrying capacity owning lets you capture the
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  benefit. That's the upside many purchase
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  advocates point to. Here's how you run the numbers
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  #1 estimate all owning costs on a per acre or per AUM basis.
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  Include land payment or the opportunity cost that you would
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  have, taxes, overhead, maintenance, depreciation,
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  interest and insurance. In this then you need to
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  estimate least cost in your region either per acre per AUM
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  or per head per month. Use local extension surveys in
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  your area as benchmarks. Then you need to project your
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  returns to your livestock. What gain or revenue do you
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  expect from grazing those acres? Then Step 4.
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  You need to include appreciation project potential land value
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  increase over a planning horizon in your area.
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  Again, leaning on your extension agents or local realtor groups
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  is going to help you here. Step 5.
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  You need to look at your risk and flexibility discount.
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  Assign a risk factor or discount to ownings downside or leasing
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  uncertainty. Then you need to compute net
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  present value or NPV or internal rate of return, which is
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  sometimes called IRR of owning versus leasing for that period.
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  And finally, you need to run sensitivity analysis.
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  What if drought cuts your forage, interest rates go up,
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  lease rates increase, or your maintenance cost spike?
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  Doing all of these things lets you compare apples to apples,
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  owning A posture versus leasing the same grazing service and
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  pick the option where the margin is higher given your
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  assumptions. So here's how I see it.
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  Neither leasing nor owning is universally better.
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  The right choice depends heavily on your capital, risk tolerance,
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  local lease markets, and your long term vision.
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  Leasing gives you flexibility, lower fixed burden and less
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  downside exposure. Ownership, on the other hand,
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  gives you control, upside and land value and the ability to
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  capture returns from improvements.
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  If I were you, I'd run the full math.
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  Owning cost versus lease cost versus projected return,
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  factoring in your risk. If the gap is narrow, lean
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  towards leasing. If your projections show strong
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  land returns and you can manage risk, owning might be the way to
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  go for you. Next time you look at your
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  pastor decisions, don't default. Let the numbers do the talking
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  for you. This is the Cattle USA daily
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  podcast. I'm your host, Lauren Moylan.
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  Thank you so much for listening to another episode of the
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  podcast. I hope you guys enjoyed today's
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  breakdown. If you did, I would love it if
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  you could take a minute to like, subscribe, rate and review this
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  podcast. We would really appreciate it
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  here at the team. Have a blessed rest of your day
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  and we will see you all tomorrow on another episode.