Return On Investment
Last week I showed you this chart of what pasture land was worth, on average, in different states in the U.S. in 2014 Remember, that’s just an average. Some pasture will be worth more, other pasture worth less depending on where it’s located in the state, the kind of forage it produces, etc.
What we can do with this information is plug the numbers into a formula that allows us to figure out how much we’d like to charge for a given pasture so that we get some kind of return on our investment. Here’s a sample calculation from a University of Arkansas fact sheet (downloadable here).
If the land is assessed at $200 per acre and banks charge 8 percent for loans (or a return of 8 percent on investment is desired), then pasture rent is calculated as follows:
($200) x (8%) = $16/ac per year base cost
The problem with this method if you’re the person leasing is that it doesn’t take into account forage quality or production or whether there is adequate fencing, water and other things that you need to care for livestock on pasture.
On Pasture reader Gene Schriefer noted last week in the comments that forage value is another good way to look at how much you should pay for pasture. So let’s take a look.
We start by figuring out how much a given piece of pasture might produce in tons of forage. You may already have a good idea what to expect. If not, you can ask a local farmer, talk to your Conservation District, NRCS, or Extension staff, or, you can use the NRCS’s online soil survey tool. Not only will the tool tell you about the soils in the pasture that you’re considering, but it will also tell you how much forage production you might expect. Here’s an On Pasture article with instructions for using the soil survey tool to get that information.
As Gene suggests, one way you can do the math from here is to figure the value of the hay (estimated production) and then subtract the harvest costs and the cost of livestock transportation and your own time and travel to check on your livestock to arrive at the maximum you might pay.
Iowa State University Extension Economists suggest taking the estimated forage production and multiplying it by with 25 % of the price of grass hay during the grazing season for pasture, or 35% of the price of hay if you’re looking at an established hay stand. Here’s what their math looks like:
Price of hay/ton x 25% or 35% depending on your forage = rent/acre
With numbers plugged in it looks like this:
Pasture at 25%
$100/ton x .25 = $25 per acre rental rate
Established Hay Stand at 35%
$100/ton x .35 = $35 per acre rental rate
Whew! Are you tired of math already? Hang in there! Since this is all in an effort to help us make good choices and be successful in our business, let’s keep going. Next week we’ll talk about figuring pasture rental rates based on how many animals your pasture will feed. It means stretching our brains to understand Animal Unit Months (AUMs), but it’s well worth the effort as you’ll be able to use this information as part of your overall pasture management too. And before we’re done, we’ll even add some math about how you can put numbers to pasture quality as you go about figuring how much a pasture is worth.