There are not enough good working ranches in the Southwest and Southern Plains. So says the brokers and realtors who know the area.
“Quite a bit of demand,” said Scott McNally, owner/broker of Bar M Real Estate in New Mexico. “What we see in our area is just a lack of inventory of good quality ranches.”
Jim Webb, president of Hebbard and Webb Inc., echoed this of his experience in recent years in Arizona.
“From my perspective, there aren’t a lot of quality ranches on the market and they have been slower to come on the market,” he observed. “The higher priced ranches have been taking a little bit longer to sell than they used to.”
Webb and McNally both stressed the market axiom: If it’s priced right, it will sell. If it’s not, it won’t.
“Naturally, every seller thinks their property is better than the one next door. … [But] you can price yourself out of any prospect even looking at it.”
According to the USDA’s most recent annual Land Values report (August 2019), pastureland in the Southwest (Arizona and New Mexico) and the Southern Plains (Texas and Oklahoma) increased in value about 5.7 percent between 2018 and 2019. This compared to the average pastureland value increase of 2.2 percent across the country.
In Oklahoma, average pasture values were $1,460/acre and in Texas it was $1,660/acre. For New Mexico, the value was $417/acre, the lowest in the country, but also among the fastest growing value. Only Utah (+6.9 percent), California (+7.1 percent), and Nebraska (+7.7 percent) saw larger gains in pasture values.
There was no data available on Arizona’s pasture values in the USDA Land Values report due to too few sales. Reporting was “withheld to avoid disclosing data for individual operations,” according to the report.
Even though he agreed the lack of inventory in the Southwest makes it a seller’s market, Webb stressed the need for proper pricing in his advice to potential sellers: “If they need to sell, they need to put it on the market and it will sell. If they’re just wanting to test the market and price it at their dream price, they’re probably going to be sitting around pushing cows for a long while.”
McNally had much the same to say about his experience.
“Naturally, every seller thinks their property is better than the one next door. If they price it, they price it a little above, or a lot above, what I see as the market,” he observed of seller’s behavior.
“You can price yourself out of any prospect even looking at it.”
On the other side, he pointed out that sellers know the market too and finding something cheap is increasingly unlikely.
“I get numerous calls of people wanting to buy ranches at a bargain and I just don’t see any bargains. Very seldom do you see something that’s priced where you think you can move it in 30 days. The sellers are educated. They study the market.”
Financing and debt
Webb, McNally, and Gregg Pickens—broker/auctioneer at Pickens’ Auctions in Oklahoma—all identified financing and debt as key challenges in 2019 and going forward in their area.
“If the cows are paid for, you’ll be able to cover the expenses, but if you have to borrow money to buy the cows and the ranch too, that debt load is going to be pretty tough to service just from the production off the cattle.”
The lending regulations have changed and have made it a little tougher for people to borrow money for land. If they can’t borrow the money, it affects the market,” noted Pickens.
“Especially smaller permit ranches where cattle people are trying to buy into them, we still see quite a bit of financing needed through farm credit,” elaborated McNally.
“These banks are looking at cash flow and repayment potential. That’s not going to change.”
Unfortunately, repayment potential is not strong on many of the Southwestern and Southern Plains ranches.
“For the most part, these ranches won’t service the debt,” McNally continued. “If the cows are paid for, you’ll be able to cover the expenses, but if you have to borrow money to buy the cows and the ranch too, that debt load is going to be pretty tough to service just from the production off the cattle.”
Webb agreed that it is pretty tough to get a working ranch to cover the debt on the production of cattle alone, but that there’s an area of potential.
“The more reasonably priced ranches that are able to get drouth insurance that’s effective, they’re moving along,” he noted.
“With the advent of drouth insurance being available in the last several years, these desert ranches in the formulas that they’re using … can make their land payments off of the drouth insurance if everything hits just right. It’s one of those government programs that has some unintended consequences and I think that’s one of them.”
State specific details
Location is everything in real estate, so even within the Southwest and Southern Plains regions, each area had their own unique concerns according to the brokers. Below are some of the details:
Arizona: Webb told WLJ that in his area he was seeing something of a split between large working ranches (over $4 million) and those under $3 million. He described the usual audience for the larger ranches as being more cautious—likely because of economic concerns—whereas the smaller working ranches were seeing good demand from generational ranchers expanding or moving in after selling in another, higher-priced state.
“There’s only so much deeded land in Arizona … so if you have a ranch with some pretty good deeded land, it’s like having a pretty good bank account.”
“A lot of neighbors are buying up the federal leases that are near them, but there’s a lot of Californians coming this way now with the higher taxes and policies and fires in California,” he explained. They’re mostly buying the 40-acre ranchettes than they are buying ranches, but it just takes one or two of those guys and they help the overall attitude quite a bit.”
He also explained that, unlike other nearby states, Arizona does not have the same landowner wildlife tag rules, meaning recreational ranches are not as big an impact on the Arizona rural land market.
“Our recreational properties are generally smaller and less tied to the ranching industry. They’re more second residences is what they amount to.”
Webb said he is optimistic for Arizona ranch sales, due in large part to the nature of the state’s available land.
“There’s only so much deeded land in Arizona, and its smaller than in New Mexico or California. Nevada’s the only one with smaller deeded land, so if you have a ranch with some pretty good deeded land, it’s like having a pretty good bank account. The increase, the appreciation in value has been fairly steady over the years, so it’s been a very solid investment I’d say.”
New Mexico: McNally described his state’s recent and future ranch real estate market as one shifted by oil and gas. Tired of interacting with large ranch owners and having trespass, water, and surface damage problems, the oil and gas companies just started buying the big ranches when they could to avoid conflicts. This generated a lot of cash, said McNally.
“These [New Mexico] forest permits are bringing quite a bit more money than they did five to 10 years ago.”
“In most cases these were cattle people and they went out with that money and into the market and purchased numerous ranch properties; cattle ranches, recreational ranches, and so on and so forth. Anything of any significant quality or inventory that was either on the market or perhaps not even presented to the market were purchased.”
“As Texas continues to grow in population and economy, the demand for rural land, especially in areas surrounding major urban centers and transportation corridors, will continue to increase…”
McNally said that while some of these ranchers looking to reinvest through the 1031 exchanges have stayed in New Mexico, some may have moved into Texas or Oklahoma. Other areas of interest for ranchers looking to buy new ranches has been properties with Forest Service permits.
“These forest permits are bringing quite a bit more money than they did five to 10 years ago,” he noted.
“Part of it is the reduction in cost-per-animal unit. Whereas some of these other working ranches that are outside the forest are bringing somewhere between $6,000-8,000 per cow unit, the highest forest permit I know of here was around $6,000, but they range anywhere from $3,000-5,000 a cow unit.”
Texas: According to the December 2019 “Texas Land Trends” report on Texas’ working lands—farm, ranch, or open space land—the state lost approximately 1.2 million acres of working land between 2012-2017. At the same time, the value of that working land went up 24 percent to $1,951/acre in 2017.
The Texas Land Trends report uses some of the same information the USDA National Agricultural Statistics Service does to compile the annual Land Values report, but the valuation is slightly different. In some ways, it is more specific.
“We’re seeing situations where the [Oklahoma] grassland will bring as much or more than a farm because of the consistency in the market for cattle.”
For example, the report found that 57 percent of all of the state’s working land is managed for grazing livestock. However, working lands used for grazing in Texas have declined by 4.6 million acres since 1997. Much of this working land was converted into open space land managed for 1-D-1 “wildlife valuation,” which increased 5.4 million acres over the same span of time.
“As the use of wildlife management increases across the state as a viable land management strategy, the current trend suggests working landowners are utilizing various tools to maintain sustainable operations,” read the report.
“As Texas continues to grow in population and economy, the demand for rural land, especially in areas surrounding major urban centers and transportation corridors, will continue to increase and have long-term impacts on working lands. These lands across the state are following much of the same trends in ownership fragmentation and conversion in the last five-year period as observed in previous years since 1997.
“Population growth increases land values and markets, creating incentives for landowners to subdivide and sell their land. As ownership sizes decrease, the likelihood of maintaining a profit with traditional farming, ranching, and forestry uses also decreases, facilitating the conversion of working lands to non-agriculture uses.”
Oklahoma: Pickens told WLJ that he has seen an interesting location-focused trend in buyer interest lately. Though “location, location, location” is the motto of all real estate concerns, he explained that—since ranching margins are thin and a ranch can’t often carry its own debt through cattle production—proximity to an off-farm job is a value point.
“It seems like we get a little softness in value once you get out to a true representation of agriculture, where that’s solely how people make their living, and there’s not opportunities to have an off-farm job.”
However, he also pointed out that the state has a diverse commodity portfolio, meaning the prices of crops other than cattle have an impact on ranch values.
“We’ve had oil and some different income potentials for a lot of our producers in the past several years and that has kind of went away for the most part. We’re starting to see a little bit of the wind energy has driven the market a little bit so, you know, there’s ebb and flow everywhere,” he explained.
But there’s also value in consistency. Pickens noted that in some places, ranch land is outselling farmland.
“We’re seeing situations where the grassland will bring as much or more than a farm because of the consistency in the market for cattle.”
Overall, he says he sees good, steady value in ranches in his state, with some cause for optimism.
“For our area, the cattle prices have maybe found some stability in the market. That’s going to be a plus to our producers.” — Kerry Halladay,WLJ editor
