The magic of determining land values may have a different equation out West. While land is the key asset many farmers and ranchers hold, its value can account for more than its production capacity.

Ranchland value varies according to water rights, location, terrain, public land grazing allotment — and finally, its hay production and livestock stocking capacity.

Land values can also be impacted by economic downturns, including a pandemic.

Many ranches are priced according to their acreage amounts, both deeded and their public land allotments, instead of agriculture production value. A 2007 ranchland value study published in the Journal of Agriculture and Resource Economics found that ranches are overpriced relative to their income earning potential. Hedonic models of sales data over a seven-year period showed that for ranches in the Great Basin of Oregon, Nevada and Idaho, none of the value could be assigned to livestock production.

“Land buyers, including ranchers, value more than the land’s production,” says John Tanaka, an author of the study and a University of Wyoming professor emeritus of rangeland economics and sustainability. For the study, Tanaka worked with Neil Rimbey, a professor emeritus at the University of Idaho, and Allen Torell (now deceased), who was a professor at New Mexico State University.

“People are willing to pay more for ranchland than what it would produce in terms of cattle, sheep or any livestock product,” Tanaka says. “They value open space and the lifestyle — things that are hard to numerically value.” Ranchers’ ability to repay loans and returns on investment, which range between 0% and 2%, also moderates land value.

Grazing permit value

Ranchland is valued according to its public land grazing permits. There is a strong inverse linear relationship between a ranch’s sale price and its forage dependency on public land. “For our model, we calculated the market value of a 20-section Great Basin ranch, with 40% of the forage base supplied from federal land at $0.685 million [or $5,142 per AUY (Animal Unit Yearlong)] if located in eastern Idaho,” Tanaka explains, adding the market value would be “$1.02 million [$7,658 per AUY] for the scenic Lost Rivers area of central Idaho, and $0.395 million [$2,963 per AUY] for the desert areas of southern Idaho, northern Nevada and eastern Oregon.”

Tanaka and the research team report that adding 17 acres of federal land plus one additional federal Animal Unit Month (AUM) to these data suggests a marginal value for a federal permit — either U.S. Forest Service or Bureau of Land Management — of about $112 per AUM ($6.60 per acre) in eastern Idaho and the Lost Rivers areas. The value estimate, $160 per AUM ($9.40 per acre), was higher if the ranch is in the desert areas of Malheur County, Ore.; Humboldt County, Nev.; and the Owyhee River Plateau (in Oregon, Nevada and Idaho).

The economists found that seasonal, versus yearlong, federal grazing permits only contributed value if the ranches held greater than 75% of their acres and 25% of their grazing capacity on public lands. The land value increasingly reduced when public land permitted to the ranch increased, though the value estimate was relatively flat for ranches with mostly deeded lands. Marginal permit values were estimated up to $24 per acre ($400 per AUM) for these high-percentage public land ranches. Deeded land values ranged from $320 per acre in the Lost Rivers area down to $100 per acre for a high-percentage public land ranch in the Malheur-Humboldt-Owyhee region.

Public versus private lands

A 1992 study, which Tanaka’s team currently updates, found it costs more to graze on public land than private land. The 1978 Public Rangelands Improvement Act established the formula to calculate the federal grazing fee. It orders that the grazing fee cannot fall below $1.35 per AUM, and any adjustments cannot exceed 25% of the previous year’s level. The 2020 federal grazing fee, for both USFS and BLM, is $1.35 per AUM. Additional costs associated with federal permits — and counted by the study — include the maintenance of fences and water infrastructure, travel to the permit, salting and livestock management.

Tanaka and his fellow ag economists conclude that grazing permits will continue to add value to ranches whose combined total acres contain a high percentage of public lands, because the increased stocking capacity creates a positive permit value.

The land value study combined ranch sales and topographical data to find a correlation between an increase in land value and steeper terrain. “The rougher the land, the higher the value, which is opposite of what we think about when a ranch’s purpose is to raise livestock,” Tanaka says.

For the study, researchers excluded the ranch properties that sold for greater than $650 per total acre (the combined total acres of deeded and public lands) to avoid skewing the land value findings by sales motivated by nonagriculture uses, such as recreation and home-site development. The high-priced sales were deeded land parcels less than two-and-a-half sections in size and located near recreation areas near the Idaho towns of Challis, Salmon and Bear Lake.

Recessions can have an impact

Land is a non-depreciable asset. Farmland and ranchland value reflects discounted expectations over future economic returns to the land, from both agricultural and nonagricultural uses. “The value is a function of current income, expected future income and interest rates,” explains Dan Bigelow, assistant professor of agricultural economics at Montana State University. “The per-acre value of farmland serves as a barometer for the overall financial well-being of the ag sector.” For 2020, farm real estate is estimated as 83% of the ag sector asset value.

Though much uncertainty remains regarding the full economic impact of the COVID-19 pandemic, it is helpful to review the 2007-09 Great Recession’s effect on farmland values. Land values change according to how commodity prices and demand are capitalized into expectations over future returns.

“Pasture and range values tripled in the runup to the Great Recession in Montana, and then decreased by a third during the recession” Bigelow says. “Besides the spike and partial decline in value of pasture and rangeland, there was no apparent long-term effect on Montana’s farmland values. Since then, values continued upward and stabilized.”

One factor that affected rangeland value around the Great Recession was the spike and subsequent decline in crude oil production, which coincided with large swings in value in eastern Montana. In addition, during the Great Recession, per capita beef consumption declined, while returns per acre increased due to high wheat prices and stable livestock prices.

In 2020, wheat futures prices have remained relatively unchanged during the pandemic. Livestock futures are down and volatile.

Land values are inversely related to interest rates, which were rising at the start of 2020. Though the Federal Reserve lowered the benchmark rate to zero this spring, Bigelow says the action may take years to capitalize into land values.

The conversion potential of ag land at the rural-urban fringe drives up values, which are impacted by the broader economy. “From 2010 to 2015, non-ag development consisted of 20% rangeland and 29% pastureland,” Bigelow says. “Farmland investment, including for non-ag uses, from sources outside of Montana tends to rise with instability and poor performance of the broader macro-economy.”

Bigelow says if the pandemic recession is short-lived —  such as back to prepandemic normal by this winter — it will likely have a negligible effect on ag market activity and land values.

Hemken writes from Lander, Wyo.