There are lots of ways to invest. You can put money in a bank savings account and earn a couple of percentage points. You can put it in bonds and earn 6% or more. You can put it in the stock market and, in recent years, earn 20% or more.
Or, you could put your money in ranching and perhaps lose your shirt - at least that's the way it sometimes seems.
So, if anyone asked which investment is better, the obvious answer is the stock market. On the surface, stocks win hands down. Ask Phyllis Gardner, who operates a combination cow-calf, farm and feedlot operation in Max, NE. "I really think if we'd invested the amount of money we had invested in our operation in the stock market, we would have been much better off, " says Gardner, an executive committee member of the National Cattlemen's Beef Association (NCBA).
But there's a downside. "We wouldn't have lived the life we lived," Gardner says. "We willingly made that trade. It's a wonderful life. I guess, if you wanted more material things in life, you would be doing something different."
So, you might make more money if you did something else for a living and spent your spare time playing the market. But then you wouldn't be a rancher. There's another problem. Even if you did opt out of ranching, you might not be able to invest in today's booming stock market. Many Americans don't have cash to invest.
And even if you had a high-paying job that allowed you to play the market, you might not earn the hefty returns you read about. You only get those kinds of returns if you pick the right stocks or mutual funds. There are still plenty of losers - stocks that go nowhere or mutual funds that lag behind the overall performance of the market.
Less Risk In Bull Market Still, if you picked well, you could probably do better on average in the market than buying a ranch, at least in the current bull market, which started in 1982.
"If you had an ordinary ranching operation, my gut feeling is that the return was better in the stock market," says Tom Creager, who was born into a ranching family and now manages individual investment portfolios at Pinnacle West Asset Management in Casper, WY.
But nobody knows whether today's hot stock market will last. "We've been in a bull market for a long time," says Roy Frederick, professor of agricultural economics at the University of Nebraska. "We can't expect the stock market will always be as vibrant as it has been in the last 15 years.
"If we have inflation, then the investment in fixed assets, such as ranches or feedlots, will probably be better than stocks."
Since the early 1950s, stock investments have averaged 12.44% returns, according to Standard & Poor's. But, there are times when the market stalls or goes into a free-fall. If you invest at the wrong time, your money just sits there, or you could lose your shirt. The 1929 market crash began the Depression. Stock prices overheated in the 1960s, setting the stage for the stalled-out market of the 1970s.
On the other hand, if you pick winners and ride out the ups and downs of the market over many decades, the returns can be fabulous. For instance, if an investor put $17.96 in the Standard & Poor's group of 500 leading stocks in 1936 and used all his dividends to buy more of the S&P 500, the investment would be worth more than $12,500 as of August 1997 (see Figure 1, page 72).
But such returns are easier said than done. The key to such huge returns is to pick winners, reinvest dividends in more stock and keep doing it for a long time without cashing out. Some investors pick losers. Others need the dividends to live on. And some investors are forced by necessity to cash out. Others lack discipline to weather the fluctuation of the markets.
Meanwhile, some ranchers may wind up rich even though they never put a penny in the stock market. How can that happen given the relatively low profits of ranching, and the potential for heavy losses when cattle prices plunge? The answer lies in land.
Land Is Still A Good Buy Over the very long haul, land has gone up and up. Of course, like stock prices, land prices periodically crash, most recently in the 1980s. But if you hold land long enough, your net worth may be substantial. Since ranchers seldom sell their land - if they don't have to - that asset tends to do well over the long haul.
Of course, land investments can be financially devastating if your timing is off, as those who bought just before the 1980's land price crash learned. If, on the other hand you paid fire-sale prices after that crash, the investment has paid handsomely.
For example, Nebraska ranchland has gone up only about 20% over the last 25 years, says Bruce Johnson, professor of agricultural economics at the University of Nebraska. But if you bought after the crash, it's a different matter. "If you looked at Nebraska in 1987, average non-tillable grazing land was $83 an acre. As of February 1997, it was $202 an acre, about a 132 percent increase."
The returns may be even higher for ranchland located in development corridors, such as Orlando, FL. The same goes for Western ranches in scenic hot spots, such as Jackson Hole or Buffalo, WY. One ranch which looks out on Wyoming's Big Horn Mountains sold to an East Coast executive for seven times its value as agricultural land.
But land is an asset ranchers can't spend if they want to be ranchers. As always, on paper they may be rich, but live in a mobile home and drive a truck with hundreds of thousands of miles on it. "It's a live poor, die rich kind of thing," says NCBA economist Chuck Lambert.
But most ranchers willingly accept their lot. For them, the bottom line isn't measured solely in dollars and cents. "For some people, there's much more of a turn-on seeing a nice ranch with green rolling hills than having a bank box full of stock certificates," says the University of Nebraska's Frederick.
Nebraska rancher Phyllis Gardner puts it this way: "I think the most gratifying time for ranching, other than when you get the check, is when the calves are born in the springtime and the pasture greens up and the calves are running around. That's when you think - 'that's why we're here.' "
Some producers think ranching and stocks don't mix. In fact, it's possible to be a successful rancher and profit from the stock market, too.
There are three key benefits of investing. First, outside investments avoid the pitfall of putting all your eggs in one basket. Should the ranch run into hard times, investments may offer quick cash to avoid foreclosure. Or, if the ranch fails, outside investments could provide funds for a new start after debts are settled.
Investments can also fund retirement. If you haven't invested outside the ranch, the alternatives aren't pleasant. You can sell the ranch for top dollar to your children to get the money you need for old age. But, that would saddle your children with a lifetime of debt. Or, if your kids can't afford to buy the ranch, you can sell the ranch to outsiders. Or, you can work till you drop, leaving your children with a big estate tax bill.
On the other hand, if you've invested well, you can afford to gradually give ranch assets to your heirs tax free under federal estate tax provisions.
This option offers the next generation a chance to start out with little debt. And if you die suddenly, it cuts estate taxes, since some assets have already been transferred. Jim Hendry, a central Wyoming rancher, took this route to gradually transfer ranch ownership to his son, daughter-in-law and two grandchildren.
Hendry was able to do so because he began investing in stocks after returning from service in World War II. Though he was only able to invest small amounts, he held on to his investments, allowing them to grow. And, he concentrated on blue chips, stocks in well-known companies with solid prospects. "Since ranching is so cyclical, a rancher should invest in something that is more or less stable and more or less free of risk," he says.
Over time, even very small investments can yield big profits. The trick is to buy good stocks which are likely to rise in value, hold them and reinvest dividends in still more stock. Over time, a small investment can double in value again and again, if you pick well.
Hendry cites a recent news report on Coca Cola, one of the top stocks of all time. A single share of Coke, purchased for $40 early in the century, would have turned into over $5 million if the shareholder held it and invested dividends in still more Coke shares.>SBThe Ranch As A Portfolio>BYDou g McInnis
The secret to making money in the stock market is relatively simple. Buy good stocks at a reasonable price, hold on to them and reinvest the dividends in more of the same stock.
Building a ranch isn't much different. The trick is to buy good ranchland, hold on to it and invest profits in more good ranchland.
Of course, few ranchers can invest all their profits in more ranchland. They need money to eat, make car payments and pay off their house. But if they can hike profits through good management and put some of the extra cash into building their ranch, the results can be spectacular.
Wyoming rancher Jim Hendry returned to his family's 9,000-acre ranch after World War II. Over time, Hendry and his son Rob acquired neighboring ranches as they went up for sale. Today, the Hendrys' Clear Creek Ranch has grown to about 150,000 acres, including federal land.
Hendry followed the same strategy with land that he did with his stock market investments - buy well, hang on to it and reinvest the profits. "Neither I nor my son has sold any land with the exception of 40 acres that was separate from the rest of the land," he says. "We followed exactly the same policy with regard to the ranch that we did with stocks."
Would you be better off buying a feedlot or putting the money in the stock market? At times, feedlots are probably the better buy. Feedlots, especially very large feedlots, can be highly profitable. But feedlots can also take their owners through a red-ink bath when the prices of fed cattle plunge.
"There's the potential for substantial profit, but also the potential for substantial loss," says consultant Bill Helming of Bill Helming Consulting Services, Olathe, KS. "It's a crap shoot. The last thing you'd want to do is paint a picture of feeding as high returns and no risk."
At the same time, Helming says, large feedlots offer much higher returns than ranching. "It's a very profitable business, much more than anyone realizes. The total return on assets in ranching is about four percent. That compares to 27 percent pretax in owning a feedlot." In addition, assets of large feedlots have been appreciating at 7% a year, for an average return of 34%.
So how can feeders make that kind of return and still lose their shirts?
The answer lies in the way large feedlots make money. The trick is to run a large, highly efficient operation with an occupancy level in the 90% range. The higher the occupancy level, the better the financial return on fixed assets.
To maintain high occupancy, large feeders put a lot of their own cattle in their lots. There's the risk. If the fed- cattle market is up, they can make $100-150/head. That's on top of the money they make running the feedlot.
But if the fed-cattle market plunges, they can lose up to $150/head, says Helming. Let's say you had a $6 million, 40,000-head facility which runs two cycles a year. You could potentially make $1.8 million a year on the feedlot side. But let's assume the feedlot owners also own 50% of the cattle in the yard in order to keep the occupancy rate up. In that case, the owners would take a $4 million bath on the cattle if they lost $100 a head. Thus, losses on the cattle ownership side would outstrip profits on the feedlot side.
"In a lot of ways there are more risks in feeding than in cow-calf operations," says Helming. "The returns are higher. But the risks are higher."