Calculating animal units (carrying capacity) is a great way to look at a ranch acquisition.
Valuing Ranchland – From an Animal Unit (AU) Perspective
Affluent investors look at many aspects of a property when determining the appropriate value of a ranch. Market price is far too often based on area sales and what’s deemed to be a comparable ranch, which in many cases is not even close to the same type, condition or quality of property. In most these cases the only thing they share in common is proximity.
When valuing ranchland there are a multitude of factors that enter into the pricing model, for example water, forage, access, topography, fencing and improvements to name just a few. These are important elements that a prudent investor will take into consideration as they prepare an offer to purchase ranchland. Of these, none may be more important than the “carrying capacity” of a ranch, especially if the primary purpose or intent for purchasing the ranch is for livestock production.
Depending on the size or purpose of the property an investor is researching, different elements of the property may be more important to the buyer. For example if the buyer is looking at a hunting property, then they may tend to lean towards seclusion and privacy, with adequate wildlife habitat and cover. Or if the buyer is looking at smaller tracts of land, they may put more emphasis on a residence or outbuildings and purchase the property primarily for their home. But for the purpose of this article, we will focus on buyers that are looking for a working cattle ranch. They will be interested in how many cattle it will hold and what they can expect to receive from livestock production as a solid return on their investment.
So let’s focus our attention on how to calculate the value of a working cattle ranch based on the cost per animal unit approach. Before we discuss how to calculate this ranch metric, it is important for you to understand what an animal unit is. The definition of an animal unit (AU) has traditionally been cited as the planning, analysis and administration of forage use by grazing livestock in North America. Simply put, it is a ranches capacity to supply forage (feed requirement) needs for a mother cow and her offspring over a twelve month period. In most cases this is based on the concept that a 1000-pound (454 kg) cow, with or without a calf (unweaned), accounts for one animal unit, with the assumption such a cow will consume 30 pounds (about 12 kg) of forage dry matter per day. This equates to 3% of its total body weight per day in consumption. Regardless of how many acres it takes to grow/provide 30 pounds of forage, the cost per animal unit (AU) approach provides a basis for comparison to other regions and other operations and may be used in converting acreage values.
Earlier we mentioned comparable sales which are used to determine a price per acre. Unfortunately many agricultural lending institutions and appraisers tend to focus on the per acre price approach when valuing ranchland and completely miss that the real value of the ranch is its production capacity, ability to produce revenue. The important focal point should be the carrying capacity or production capacity of a ranch, especially if that is the manner in which it will be used to repay the debt and produce a return on the investment.
Now that we understand what an animal unit (AU) is, let’s find out how many acres it takes to support a cow annually in your area. Commonly referred to as the Stocking Rate, you can typically do this by contacting your state agricultural department or the local ag extension office in your county. They will provide stocking rates and other valuable information about your area. I live in Missouri, so we will focus our attention on this area for the purpose of this article.
The portion of Missouri where I live typically requires approximately 2.5 - 3 acres of forage to sustain an animal unit. Keep in mind that different areas of the country will have dramatically different acreage to animal unit (AU) ratios due to factors like (moisture, soil types, terrain, climate change, season duration, etc.). Certain areas of the U.S. require stocking rates as low as 45-50 acres per head, which is a very low stocking rate, while other areas like Missouri allow for 1.5-3 acres per head, which is a very high stocking rate. Obviously a higher stocking rate allows for more density of animal units to be managed on a smaller number of acres, which increases productivity and revenue. The pricing model on ranchland with either a high or low stocking rate will typically have a direct correlation on the sales price (higher or lower). Property values can be impacted by other external factors unrelated to ranching operations (ie. development, recreational, local economic boom, etc.) but that is a story for another day.
Let’s apply the information we have learned above to determine a cost per animal unit for a ranch that is for sale in South Central Missouri. Due to information provided by the county extension office and the NRCS office we have determined that (3 acres per head) is a reasonable stocking rate for a ranch with the characteristics of the subject property. The ranch has good open grass pastures and adequate water supply which further support the stocking rate. The ranch is 1,500 total acres divided by 3 acres/animal unit equals a carrying capacity of 500 head or animal units (AU). The selling price is $4,500,000 divided by the carrying capacity of 500 head. This gives us the cost per animal unit (AU) equal to $9,000/AU, based on the asking price.
Knowledgeable investors are interested in the cost per animal unit (AU) of a ranch is because it gives them a quick look at other like-kind ranches in the region to see how it compares based simply on a revenue estimate from livestock production. Keep in mind, this information is only as good as the data that is used to calculate the (AU), but typically this will give the buyer a first glance look at the asking price to see if it is in line with a reasonable acquisition in the area.
Ranches tend to offer additional investment revenue streams such as crop production, hay production, hunting & recreational leases, oil & gas royalties, etc. Land has always been a very safe and diverse investment strategy for prudent investors, not to mention the rural lifestyle has a certain quality that is hard to find in any other investment.
The information outlined above allows an investor to look at a ranch asset from a production stand point and make a well informed decision based on key production metrics that help solidify their purchasing decision as a sound investment. Use this information to better serve your clients or in a personal acquisition. Best of Luck.