Whoever first uttered the immortal myth about grass being cheap never tried leasing pasture. Despite anemic cattle prices the past few years, lease rates for grass continue to run north almost everywhere you go.
In the Nebraska Sandhills, for instance, Dick Clark says rates have more than doubled in the past decade to a 1998 average of $12/acre. On an animal unit per month (AUM) basis, he says rates have climbed from $16 to $24 in the Sandhills and southwest part of the state during the same period.
"My expectation is that you can't afford to pay that much for grass for very long," says Clark, an agricultural economist with the University of Nebraska's West Central Research and Extension Center in North Platte.
Unaffordable Lease Rates "What I see across the board is that lease rates are higher than the cost of production can afford," says Eddie Hamilton, an associate professor in the College of Veterinary Science at South Dakota State University. He also works on the economic side of the fence and is helping construct the database for the industry's Standardized Performance Analysis (SPA).
"A cow can't afford to pay $23 per month for grass," says Hamilton, explaining that profitability demands total nutritional costs of less than $200. "If you're paying $23 a month per cow for summer grazing, and you're grazing five months, that's $115 in summer nutritional cost alone." Even if the figure is buying more than grass for absentee cattle owners, that leaves only $85 for winter supplementation.
Whether or not producers are coming in under the wire (Table 1), they're usually reluctant to sacrifice real estate.
"A typical response is that if they turn it loose, there is a line of folks ready to take it," says Stan Bevers, Texas A&M University Extension economist at Vernon, TX. For one thing, he explains some producers use lease acres to control the total fixed costs of their operations.
Fact is, there is plenty of competition for grass from within and outside the industry, and no one has figured out how to make any more land. Sandhills rates were driven up, in part, by large feedlots searching for a spot to warehouse cattle. The $3-4/acre rates west of Vernon and the $5-10 paid east of town are buoyed by hunting and other recreational demands.
For broader perspective, the National Agricultural Statistics Service reported earlier this year that farm real estate values - up 67% since 1987 - reached a record high average of $1,000/acre.
Know Your Costs While producers can't control the price of grass, Hamilton says more could exploit an age-old tool.
"Some of those searching for lease ground don't necessarily know their cost of production. If they don't, they're at a disadvantage," he says. Hamilton provides this example: "If you determined your cost, knew your weaning percentage and calculated a break-even cost on grass of 65cents but had a backgrounding facility where the cost was 45cents, why would you want to put on weight at 65cents a pound?"
Besides knowing costs, Hamilton believes resource knowledge can pay dividends. "We've been talking about a generic price for grass. What is the nutritional value, what is the stocking rate? Does it have the nutritional value to justify a higher lease rate?" Frankly, some folks don't know these answers and pay the going rate simply because it's the going rate.
"The lease operators are in a Catch-22," says Bevers. "If I pay $3.50 per acre for 10,000 acres, once I sign the contract, it's a fixed cost to me. The only way to decrease a fixed cost is by increasing the number of units applied to it."
Although that means some producers can water down the total cost of an operation that includes both deeded and leased grass, it also means increased stocking rates are the only way to lower the fixed cost in a totally leased enterprise.
Either way, Clark says, "What you see producers doing is trying to make more efficient use of their forage." That can be everything from weaning earlier, decreasing the nutritional requirements of the cows, to implementing high-density, high-frequency rotational grazing systems on the leased ground or in tandem with deeded acres.
Leasing Is Ripe For Creativity What's more, current lease arrangements - usually by the acre, AUM or on a gain basis - may be ripe for a little creativity. Bevers doesn't know anyone who has got it done yet, but he's heard of some producers trying to tie the grass rate to the price of a 5-weight steer calf or some other market indicator.
Really, knowledge and innovation may be the only hedges against rising grass costs. Clark explains, "In the short-run, there isn't a lot of relationship between pasture rental rates and the price of cattle. My expectation is that we won't see it change too much, given the current conditions."