Ways to Build Wealth ?

[Lucky]

Working on my taxes this week. I am tired of paying income tax on profitable growth. :help: What are proven ways to efficiently increase ranching wealth ?

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.

That's all very interesting Branded. I have a few questions though. I'm assuming the rancher AId to registered cattle? 50 registered Angus at lets say $2,500 a head is $125,000 starter heard. Only 38 made it so you are making nearly half your investment back in 1 year, thats without feed inputs. Still sounds pretty good though. My main question on the registered deal and selling registered cattle is how do you keep up with new EPD trends every year? The bull is only half the equation in all this. Guess what I'm asking is how do you breed the latest and greatest bull to a 5 year old cow and keep up with the trends. I run commercial and have no desire to do the registered thing at this point. Maybe later on though.

 

[Stocker Steve]

Your writing off pennies on the dollar.
You are not getting dollar for dollar back on your taxes.You reduced your taxable income over several years saving a few hundred by spending thousands.
Again great deal if you need the equipment.

It only has value when you sell it.
The rest of the time it's a liability to pay taxes, insurance, upkeep etc. on.
Your fooling yourself to think otherwise.

Mostly true, but there are always a few appreciating exceptions that are not liabilities. That's what I am looking for:
- buying an older loader tractor that is, or soon will be, collectable
- putting together small groups into a potbelly load
- buying replacement heifers during the increasing price phase of the cattle cycle, then selling for a capital gain (BR mentioned this one)
- buying land and converting it to a higher use, perhaps renting it out, then using step up basis (BR mentioned this one)
- regenerating soil organic matter

Any other ideas like this? Hard for me to think of a an infastructure example. Perhaps water? I used to think hay sheds could be wealth generators, but rented bale wrappers have gotten common here.

The sexed semen + genetics idea is interesting, but I am not sure how well it would work for a commercial operation. Perhaps only during the transition phases of the cattle price cycle?

 

[CattleMan1920]

[/quote]That's all very interesting Branded. I have a few questions though. I'm assuming the rancher AId to registered cattle? 50 registered Angus at lets say $2,500 a head is $125,000 starter heard. Only 38 made it so you are making nearly half your investment back in 1 year, thats without feed inputs. Still sounds pretty good though. My main question on the registered deal and selling registered cattle is how do you keep up with new EPD trends every year? The bull is only half the equation in all this. Guess what I'm asking is how do you breed the latest and greatest bull to a 5 year old cow and keep up with the trends. I run commercial and have no desire to do the registered thing at this point. Maybe later on though.[/quote]

I didn't mention inputs because raising 50 registered animals is no different than raising 50 commercial, assuming both are given the same care.

As far as EPD trends, you can ask any breeder out there and they will all tell you something a little bit different than the other. In Kentucky, it seems to be all about high CED, out west it's more about $B. On our operation, we use newer bulls that many might call unproven, but one thing is for sure, their pedigree is rock solid. You may breed with the greatest of intentions, but end up with traits that are somewhat different than what you hoped for. That's another reason why I like to pay close attention to the dams of the AI bulls I use, they give me reassurance along with the actual EPDs.

I've made no bones about it, I'm a big fan of SAV, they have cows that are in a league of their own. If I breed to SAV Raindance for example and get a daughter, she may not be a Blackcap May 4136 cow, but she will have some of her genetic code, along with the predecessors of Blackcap May 4136. That's a good start right? Especially for a $75 straw of semen. That's a screaming bargain, considering SAV Raindance cost $450k.

Right now there are only 55 progeny of Raindance according to the Angus Association that are proven via DNA parentage. We have two of them, they turned out pretty darn nice. Would I sell them for $2k, nope, $10k, still no. Could I move them quickly for $7500, probably. What I'm getting at is this, $150 in semen (both settled first try) turned into $15k in daughters that are going to produce a lot more daughters.

Replacement heifers are expensive, people need them, if you are mastering sexed semen and producing 50 AI daughters a year, I think it would be safe to assume you would be profitable.

You may ask if it's so simple why isn't everyone doing it? I don't know, it takes a lot of effort, it takes discipline, most producers see AI'ng that many as too time consuming. I think it makes sense economically, even considering all of the above.

As for only 38 out of 50, I'm assuming a less than optimal settling rate. For me personally, I would look at 48 out of 50. Do that math and it looks even better.

 

[Stocker Steve]

Guess what I'm asking is how do you breed the latest and greatest bull to a 5 year old cow and keep up with the trends.

Half the females are above average, so they "keep up" for a while.

Half the females are below average, so they need a new home sooner than year 5. In the old days - - some registered producers would have a partial dispersal every couple years. Now days, I suspect the trend setters are commonly utilizing DNA testing and flushing.

 

[Bright Raven]

Mostly true, but there are always a few appreciating exceptions that are not liabilities. That's what I am looking for:
- buying an older loader tractor that is, or soon will be, collectable
- putting together small groups into a potbelly load
- buying replacement heifers during the increasing price phase of the cattle cycle, then selling for a capital gain (BR mentioned this one)
- buying land and converting it to a higher use, perhaps renting it out, then using step up basis (BR mentioned this one)
- regenerating soil organic matter

Any other ideas like this? Hard for me to think of a an infastructure example. Perhaps water? I used to think hay sheds could be wealth generators, but rented bale wrappers have gotten common here.

The sexed semen + genetics idea is interesting, but I am not sure how well it would work for a commercial operation. Perhaps only during the transition phases of the cattle price cycle?

I endorse your suggestion of regenerating soil organic matter. Regenerating the soil or productivity of land is a method of increasing wealth that is working for me. AND...there are no annual income taxes on it. My farm is much more productive than when I purchased it. I get that comment from neighbors and have been recognized by the County Cattle Association. They held their annual field day here a few years ago on the theme of Forages. When I sell my estate, there are high prospects that practice will have created wealth.

On infrastructure, fencing is one that has worked for me. I bought my farm 15 years ago before I retired. The fences were obsolete, broken down, cows walked right through them. This was not a frivolous expenditure, it was essential. So I build all new fence. Those fences have a 7 year period of depreciation. By the time I sell my estate, all the fences will have been written off on my annual taxes by depreciation. HOWEVER....there will still be life and value in those fences for the buyer. Thus, it should increase the property value which enhances my wealth.

 

[Bright Raven]

I bought a new 2008 Kubota 8540 cab tractor for 37,500 sold it for $37,000 in 2013 to get a new 100 hp Kubota for 50k. Got offered 48k for that tractor last year but kept it and bought a new skid steer instead. Sold old skid I'd been using for 3-4 yrs for a 2k loss. Bought a dozer for 30k 3 yrs ago and put a 1,000 hrs on it cleaning this place up. Probably sell it for 30k this summer. Tractors had no break downs, skid maybe couple hundred bucks, dozer probably 3k in repairs but it got abused pretty hard. Those are my numbers. Explain to me how I lost a bunch of money on that stuff and we'll talk cross fencing and hay barns.

I did well on a dozer.

A Cat 2005 D3G LGP with 1600 hours. I bought during the S&L crisis. I put another 1600 hours on it and sold it for $500 less than I paid for it 2 years later. In those 2 years, I transformed a farm that didn't have enough pasture to support 4 cows into a farm where 20 cows are now understocked.

The value of the 80 acre farm has increased a 1000 dollars per acre based on actual appraisal. Not all that increase is due to dozer improvements.

 

[True Grit Farms]

That's all very interesting Branded. I have a few questions though. I'm assuming the rancher AId to registered cattle? 50 registered Angus at lets say $2,500 a head is $125,000 starter heard. Only 38 made it so you are making nearly half your investment back in 1 year, thats without feed inputs. Still sounds pretty good though. My main question on the registered deal and selling registered cattle is how do you keep up with new EPD trends every year? The bull is only half the equation in all this. Guess what I'm asking is how do you breed the latest and greatest bull to a 5 year old cow and keep up with the trends. I run commercial and have no desire to do the registered thing at this point. Maybe later on though.[/quote]

I didn't mention inputs because raising 50 registered animals is no different than raising 50 commercial, assuming both are given the same care.

As far as EPD trends, you can ask any breeder out there and they will all tell you something a little bit different than the other. In Kentucky, it seems to be all about high CED, out west it's more about $B. On our operation, we use newer bulls that many might call unproven, but one thing is for sure, their pedigree is rock solid. You may breed with the greatest of intentions, but end up with traits that are somewhat different than what you hoped for. That's another reason why I like to pay close attention to the dams of the AI bulls I use, they give me reassurance along with the actual EPDs.

I've made no bones about it, I'm a big fan of SAV, they have cows that are in a league of their own. If I breed to SAV Raindance for example and get a daughter, she may not be a Blackcap May 4136 cow, but she will have some of her genetic code, along with the predecessors of Blackcap May 4136. That's a good start right? Especially for a $75 straw of semen. That's a screaming bargain, considering SAV Raindance cost $450k.

Right now there are only 55 progeny of Raindance according to the Angus Association that are proven via DNA parentage. We have two of them, they turned out pretty darn nice. Would I sell them for $2k, nope, $10k, still no. Could I move them quickly for $7500, probably. What I'm getting at is this, $150 in semen (both settled first try) turned into $15k in daughters that are going to produce a lot more daughters.

Replacement heifers are expensive, people need them, if you are mastering sexed semen and producing 50 AI daughters a year, I think it would be safe to assume you would be profitable.

You may ask if it's so simple why isn't everyone doing it? I don't know, it takes a lot of effort, it takes discipline, most producers see AI'ng that many as too time consuming. I think it makes sense economically, even considering all of the above.

As for only 38 out of 50, I'm assuming a less than optimal settling rate. For me personally, I would look at 48 out of 50. Do that math and it looks even better.[/quote]

In the cattle bussiness you need to sell to make money when the market is there, otherwise all you have is hamburger. A lot of fools were building their herds by holding back heifers a few years ago during times of historic high prices. That works for those who have more money than brains, but personally I believe in getting when the getting is good.
It won't be long till another bull of the month comes out and your heifers will be on the back burner. Olé TB said something that I'll never forget, "Making money is never a bad thing."

 

[ddd75]

keep in mind, equipment purchases are 100% deductible in the first year now.. even used.

 

[Bright Raven]

keep in mind, equipment purchases are 100% deductible in the first year now.. even used.

You are exactly correct. In my case I would rather spread it out under the rules of "period of depreciation ".

 

[TennesseeTuxedo]

Doesn't look near as pretty when you see the true outputs.

I see your line of thinking..... This was shaping up to be an excellent thread.....maybe you can start one on how every dollar you spend on the farm is waste and how the sun never shines. Lets get this one back on track.

Amen!

 

[Bright Raven]

CB,

I think everyone gets you point:

Spending a dollar to save 20 cents is not wise policy.

What you are not acknowledging is that when you have to spend money for essentials, the depreciation tool allows you to write it off against cash flow and thereby reducing the ANNUAL tax burden.

The greater benefit to that is the building of equity in the estate. The issues are apples and oranges. Everyone is on apples, you are on oranges.

 

[TennesseeTuxedo]

CB,

I think everyone gets you point:

Spending a dollar to save 20 cents is not wise policy.

What you are not acknowledging is that when you have to spend money for essentials, the depreciation tool allows you to write it off against cash flow and thereby reducing the ANNUAL tax burden.

The greater benefit to that is the building of equity in the estate. The issues are apples and oranges. Everyone is on apples, you are on oranges.

I'd have said bananas but you're still spot on.

 

[Stocker Steve]

So we have come up with these wealth building themes:

1) appreciating land, ideally also improving it via. your management :banana:
2) appreciating cattle, ideally also improving them via. registered females, and/or direct marketing :banana:
3) jockeying assets, ideally with a rapid turnover :banana:

Amateurs pay for the privilege of ranching, pros pile up more wealth. :cowboy:

 

[bball]

Working on my taxes this week. I am tired of paying income tax on profitable growth. :help: What are proven ways to efficiently increase ranching wealth ?

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.

 

[Stocker Steve]

There are a lot of people who like to buy cows for close to or at their salvage value. In certain situations they will appreciate. A common one here is buying feeding cows during the fall run. Just not my favorite.

 

[Bigfoot]

I totally get what people are saying, but in my opinion depreciation isn't your best friend, it's your worst enemy. I also never met a derpreciable asset, that didn't also require upkeep.

 

[Bright Raven]

I totally get what people are saying, but in my opinion depreciation isn't your best friend, it's your worst enemy. I also never met a derpreciable asset, that didn't also require upkeep.

Not an enemy. Fundamental economics. Depreciation is the only tax tool you have to recoup some ot the cost of capital expenditures.

Obviously, there are still repair and maintenance expenses, but those too can be itemized on the Schedule F to reduce the tax burden.

 

[Beefeater]

Brook hill Angus Quote - "Right now there are only 55 progeny of Raindance according to the Angus Association that are proven via DNA parentage. We have two of them, they turned out pretty darn nice. Would I sell them for $2k, nope, $10k, still no. Could I move them quickly for $7500, probably. What I'm getting at is this, $150 in semen (both settled first try) turned into $15k in daughters that are going to produce a lot more daughters."

So at what point do those heifers become $2k because they're common? Wouldn't taking a flush or two and send them on for $15k put you ahead? The second I would try it there would be some new bizarre genetic condition carrier gene announced bringing my high dollar cows back to hamburger. That being said I have benefited financially from using AI and registered cattle to sell so far. Just nothing like your examples...

Back to the original post - Assuming your personal house is being separated from the ranch. Good fencing improvements seems pretty logical to me. It can increase our carrying capacity, maximize management flexibility and holds a decent value well beyond depreciation. Improving water access would be right up there as well in most locations. How would buying more land look with your situation?

 

[True Grit Farms]

I totally get what people are saying, but in my opinion depreciation isn't your best friend, it's your worst enemy. I also never met a derpreciable asset, that didn't also require upkeep.

Not an enemy. Fundamental economics. Depreciation is the only tax tool you have to recoup some ot the cost of capital expenditures.

Obviously, there are still repair and maintenance expenses, but those too can be itemized on the Schedule F to reduce the tax burden.

If it wasn't for the conservation programs that are in place to save on property taxes you'd never make farm land pay off around here. Our taxes and insurance make it hard to pencil out property as an investment. Let alone if you add interest payments in for those who have notes on their property I see no way. I think building your cow herd is money in the bank It's not so good when interest rates are low, but at least the traders can't steal it....all.

 

[Caustic Burno]

Doesn't look near as pretty when you see the true outputs.

I see your line of thinking..... This was shaping up to be an excellent thread.....maybe you can start one on how every dollar you spend on the farm is waste and how the sun never shines. Lets get this one back on track.

Amen!

Wow TT another one of your insightful one liners that offer absolutely nothing.
But that's par for the course isn't it.