bball wrote:Brookhill Angus wrote:Bright Raven wrote:
You are asking how to build wealth without incurring an annual income tax burden. The only way I know is what I referred to in the profitability thread. That is: increasing the value of your estate. This can be done in several ways.
1. Infrastructure. Barns, shops, handling facilities, fences, etc. During active operation, these capital investments can be depreciated against your annual revenue thus reducing your tax burden. Over the period of depreciation, the investments are written off. Thus, when the estate is sold, the value of the improvements are unencumbered.
2. Land improvements. Such as clearing low value land and converting it to pasture. Thus, the land value increases. Improvements to land productivity also increases land values.
3. Building your cattle herd. It is like putting money in the bank.
Items 1, 2 and 3 build wealth without the annual tax burden, however, at the time of estate sale, the increased sale price of the estate is going to result in capital gains tax.
I think you just about covered it A to Z Ron, but you forgot "GENETICS". That's almost an intangible, but let's say a rancher says to himself/herself "Hey, I'm going to AI 50 cows/heifers this year versus letting the bulls do the job" then let's assume that said rancher gets serious and AI's all 50 using sexed semen from ST Genetics, SAV Raindance, for example. Let's then assume that maybe 40 settle, and out of the 40 let's assume 38 make it. You now have 38 Raindance daughters, which are, as you said "money in the bank", and easily marketable.
Let's compare that to "let the bull get them" which results in calves on the ground, but calves that have a far different value proposition than the calves mentioned above.
That is one way I see to increase your "net worth" with marginal capital expenditure.
$75 x 100 straws (for good measure) $7500
AI Tech (not sure what you pay, assume $50 per AI) $50 x 100 tries $5000
Lutalyse, synch etc (not sure how much, I don't use this)
Labor (not sure how much you are worth per hour)
All told you might invest $15k give or take $1k
38 Raindance heifers are probably worth a minimum of $2k, so let's stick with that assumption.
38 x $2000 equals $76k. A registered Angus heifer around here from Stone Gate brings a minimum of $2k, but closer to $3k, and that is not even for a heifer from AI.
$15k to $76k???? Try that day trading on Etrade, harder than it looks, you can't turn real estate from $15k to $76k in the same time period, at least not under normal conditions. Maybe day trading Bitcoin, flipping muscle cars, etc. You asked about ranching wealth however, I digress.
Now let's assume you keep those super nice heifers and AI them, now you are ready to double your money and make it stack.
Don't forget, that semen, AI tech, and everything else is most likely a deduction. Now this idea is looking even better.
Devils Advocate here for a moment. I appreciate the time, effort and love the math in your post. Reality is this: for commercial guy to throw his hat in the registered ring here, you're not selling all those 40 daughters for that 2k dollar premium your first several years. You're just the next 'Johnny come lately` with no reputation selling in an area ( I will be the first to confess) that does not have an overly strong cattle market.
Do like the improve pasture/soil ideas..
Many aspects of maintaing a beef operation, while depreciable, also do not hold up for 40 years. To maintain and build that estate does require some spending and time. Just drive around and look how many are not kept up with; overgrown, broked own fences, corrals, old iron, abused pastures with no legumes or poor pH, etc. I believe building wealth in ranching is a very tricky proposition- can be done, but is not the norm. One more thought on cattle: back in the 90s in Tx, an old cattleman told me this, "Son, no matter what papers a cow has behind it, when times get hard, she's only worth her salvage value." I have always remembered that, probably cause I just really enjoyed the old fart that told me that.
B-ball he was absolutely correct on the value of a cow. The only for sure buyer for a bovine on any day is the salebarn.
Wolf Brand Chili always needs something to grind.