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With 2016 already in the books, we are looking ahead at the New Year and pondering some of the factors that could drive livestock markets for the next 12 months. Any such list is inherently flawed because the real market movers tend to blindside the market.

As Rumsfeld would probably say, it’s the unknown unknowns that really get you.

With this in mind, below are few items to consider.


Meat demand and consumer preferences

When we look at meat demand and consumer preferences, this is one of those topics we have been highlighting in our year-end review for a number of years. It is always important.

We think there has been a shift in the way in which U.S. consumers approach meat protein. Fat is no longer taboo. The industry is no longer trying to eliminate all traces of fat from its products at the detriment of flavor.

Recently, we noticed some marketing materials from the National Pork Board informing consumers that “marbling can improve pork’s flavor and moisture.” Too bad we need to remind consumers of this, but good for the Pork Board for doing so. It’s about time we bring the focus back on flavor.

What is important to the consumer today above else appears to be authenticity. And a well-marbled, juicy steak speaks for itself. Some new dietary work done also is raising doubts about long held beliefs about the dangers of fat.

Economy and incomes

The state of the economy directly impacts consumer meat demand. While we saw somewhat softer consumer demand during the first half of 2016, the situation shows signs of improving.

Consumer incomes are increasing at a faster pace, unemployment is down to pre-recession levels, and consumers feel more wealthy, thanks to higher home values and equity markets.

With a hard fought election battle behind us, we think the consumer also feels a bit more relaxed and willing to return to their normal daily routine. Prices at retail have been slowly adjusting lower, and in time, this should expand protein availability and accessibility for U.S. consumers.

International trade and the U.S. dollar

Everyone involved in the U.S. meat industry knows that we are heavily dependent on export markets. The United States is a low-cost meat producer, with significant natural resources, and is a very reliable supplier. These are all important considerations for global buyers.

As incomes in a number of large, populous nations rise, they opt to upgrade their diet to include more protein. Over 20 percent of all U.S. pork, 16 percent of all U.S. chicken and 10 percent of all U.S. beef currently goes to export markets. As U.S. meat supplies are expected to expand further in 2017, we will need all this export demand to remain in place and grow further, which is why markets tend to react negatively to any indication of export disruptions.

The strong U.S. dollar generally is negative for exports, but by far the most significant negative impact is from non-tariff trade barriers. This is a fancy way of saying some nations will look to raise barriers in order to protect special interests within their borders.

Drought

Grain production in the U.S. in the last couple of years has exceeded all expectations. The last USDA projections pegged U.S. corn yields at an all-time record 175 bushels per acre and corn production at over 15 billion bushels.

Ending stocks are some of the largest of the past decade. There is a lot of corn available for livestock and poultry and feed costs for producers are some of the lowest in years.

But Mother Nature holds the cards on this one. The drought monitor currently shows areas in the Southeast are experiencing exceptional drought. So far, the Corn Belt has been spared, but this is a real risk.

Pasture conditions for livestock producers also have been above average the last two years. This has provided the opportunity to retain more heifers and bulk up hay supplies for the winter. It’s all been good and helped bolster cattle supplies.

Expanding drought conditions could quickly reverse that, initially pushing more calves onto feedlots, with a short-term bearish outlook, but setting the stage for a more bullish beef market in 2018-19.

Many ranchers today would like to transition out of ranching into and retirement, but don’t want to pay the capital gain tax associated with a sale. Fortunately, there are ways to bypass taxes on the sale of land. 

The most common method for bypassing capital gain taxes on the sale of appreciated land is to use a 1031 exchange.

Section 1031 of the Internal Revenue Code (IRC) states, “No gain or loss shall be recognized on the exchange of property held for productive use in a trade or business or for investment, if such property is exchanged solely for property of like-kind which is to be held either for productive use in a trade or business or for investment.”

To defer taxes on the sale of appreciated land with the IRC section 1031 exchange, an investor must purchase, or exchange into, other real estate. Contrary to what many agricultural families think, land does not need to be exchanged for other land. We can exchange land into many types of investment property, such as office buildings, rental houses, apartment complexes, storage facilities, retail strip malls, et cetera. Ironically, a family that is selling land and investing the proceeds into other types of property can often triple their income without having to work nearly as hard for it.

Income-producing real estate

The goal for most families who have sold their farm or ranch and are transitioning into retirement is to generate income. Most families want secure income-producing real estate they do not have to personally manage. 

While land can offer tremendous appreciation potential, it does not offer the cash flow returns we can generally achieve with other types of income-producing real estate such as office buildings, apartment complexes, storage units, retail centers, etc.

Effectively analyzing income properties can be very complex and is something best left to professionals. A commercial real estate investment professional can help identify and evaluate income producing real estate investments. With that said, it is helpful to understand some things when evaluating income producing real estate investments.

While location, supply and demand, and good demographics are important factors in evaluating real estate investments, when it comes to investing in cash flow real estate, one is mainly interested in buying the income stream the property offers. Therefore, the most important factor for evaluating income producing real estate investments are the numbers. 

Investors use many different approaches to evaluate investment properties.  We should be familiar with the different approaches as we begin our property search. 

Cap rates are one of many financial tools used by investors to establish a purchase price for an investment property in a given real estate market.

The capitalization rate, or cap rate, is a ratio used to estimate the value of income producing properties. It equals the net operating income divided by the sales price or value of a property expressed as a percentage.

Cap rates based on figures from recent transactions of buyers and sellers provide the best market value estimates for a property. If we are able to obtain reliable cap rate data, we can then use this information to estimate what similar income properties should sell for. This will help us to determine whether or not the asking price for a particular piece of property is too high.

The cap rate can be calculated by dividing the net operating income (NOI) by the value of the property.

Estimated property value is calculated by dividing NOI by the cap rate of the property.

For example, a property has a NOI of $140,000, and the asking price is $2 million. The cap rate is equal to $140,000 divided by $2 million, which is seven percent.

Another example is an office building that has a NOI of $150,000. Cap rates in the area for this type of property are eight percent. The estimated property value is equal to $150,000 divided by eight percent, which equates to $1.875 million

Chris Nolt is the owner of Solid Rock Realty Advisors and Solid Rock Wealth Management, sister companies dedicated to working with families throughout the country who are selling a farm or ranch and transitioning into retirement.  For more information call 800-517-1031, or visit solidrockproperty.com.

President Donald Trump and Interior Secretary Ryan Zinke have made promises about moving federal agency decision making back to the local level, putting Americans back to work and ensuring that the public lands are managed for “multiple use.” While that sounds wonderful, making those promises means more than a directive from Washington, D.C. It means that your local governments have to take the lead in dealing with the federal agencies. Local decision-making is not just for counties with federal lands, but federal decisions can impact the use of private property as well.

There are three major ways that a local government can influence federal agency decisions – the type of process used by a local government will depend on the type of decision to be made and the time constraints of the local government. One type of local participation is not “better” or “worse” than another type, again, it depends on the type of decision to be influenced and the preference of the local government.

So, again, I would pose the question, is your local government prepared for local decision making? The following should help.

Consistency review

The National Environmental Policy Act (NEPA) and the Federal Lands Policy and Management Act (FLPMA) mandate that federal agency actions be as consistent as possible with local land use policies or plans (LUP) and that the federal government must attempt to reconcile its federal decisions with the local LUP. Those provisions are key in implementing the President’s promises, but there is a catch. To require this “consistency review,” a local government has to have a written local LUP. Otherwise, there is nothing for the federal agencies to be consistent with.

In my view, first, a local government should start with a review of the federal actions that the local government thinks will happen within the area. For example, are there threatened or endangered species or species of concern that will impact your constituents’ private property? Is the BLM or Forest Service revising its land use plans or implementing their land use plans? Was a local area included within a National Monument meaning that a management plan will have to be prepared? Are there any special designation lands that have been proposed, like wild and scenic rivers, wilderness or conservation areas? Or are there other federal decisions that may impact the private property of your constituents and/or the public lands?

Second, the local government should determine its processes for dealing with the federal agencies. When do you want to update the federal agencies regarding the local government’s activities and when does the local government want updates from the federal agencies? How do you propose transmitting the local LUP to the federal agencies and offices? What is the local government’s view of “early consultation”? How does the local government want “coordination” to occur? These processes should be carefully articulated in the local LUP.

Third, the local LUP should discuss the “custom and culture” of the citizens, the history of the area and the environmental features important to the local government. This information can come from historical accounts, personal stories and environmental descriptions, such as state wildlife habitat maps, National Resources Conservation Service (NRCS) soil descriptions, forage surveys and other data. I do not believe that a local government has to gather new data or participate in new studies, but it is important to compile existing data from as many sources as possible to support your policies.

Fourth, your local LUP should include economic data and analysis. This should be more than just gathering employment statistics. Rather, the economic data included in the local LUP should support the local governments’ policies. For example, if agriculture is important to the local economy, the local LUP should describe the economic detriment of a federal decision that would reduce Animal Unit Month (AUMs) on public land or restrict grazing on private land. Most land grant universities have good statistical data that can assist you with this analysis. You should also include information like circulating dollars, job numbers for the various economic segments, etc.

Finally, once the data is gathered, the local LUP should include the policies that the federal agencies should use for consistency review purposes. I believe that these policies are always stronger and provide a good basis from which the local government can work, if they are based on the data described above regarding custom and culture, economic stability and environmental protection. I do not believe a simple “wish list” from the local government is a strong basis for protecting your constituents. Additionally, in making decisions in compliance with NEPA, the federal government must use the “best data and information available.” The best available information about the local effects of a federal decision on the local custom, culture, economy and environment should come from the local government itself.

Note that your local LUP has to be compliance with federal statutes and regulations with the “full force and effect of law.” However most federal statutes are very broadly written and allow for the survival of the local citizens, businesses and economies. The local government just has to assert those requirements.

Coordination

FLPMA and the National Forest Management Act (NFMA) also require “coordination.” Coordination is a process not a result.

Additionally, while your local government should “coordinate” with the federal agencies to protect their constituents and influence federal decisions, there is no statute dictating the specifics of the coordination process.

Because the elements or steps of coordination are not statutorily defined, local governments should use their local LUP to define what coordination means and how it should work.

Cooperating agency status

NEPA also allows local governments to participate in agency decision-making processes as “cooperating agencies.” An applicant for cooperating agency status must both, one, be a locally elected body, such as a conservation district board of supervisors or a county commission, and, two, possess “special expertise.”

A local government’s special expertise is defined as the authority granted to a local governing body by state statute. Being a cooperating agency allows the local government to participate in the “identification team” with a federal agency. It is just another tool that a local government should consider when dealing with federal agencies.

Final thoughts

Local governments can have a major impact on federal agency decisions if they are prepared and willing to take on the challenge.

There are over 1,000 counties in the U.S. with a population less than 10,000 citizens. Each one of these rural counties should have a voice in federal decisions that impact it.

Is your county prepared?

Visit Budd-Falen Law Offices online at buddfalen.com or contact Ms. Budd-Falen at 307-632-5105.

On National Ag Day and every other day, I take my hat off to the Wyoming agriculture industry. It is, reliably, Wyoming’s third largest industry. It is a cornerstone of Wyoming’s financial stability, with more than 11,000 farms and ranches and $1.6 billion in annual farm and ranch income. It continues to provide a wealth of benefits to our state, citizens and nation – food for the table, open spaces, wildlife habitat, a pleasant western style of living and much more.

Thank you, Wyoming ag producers, for all you do. 

Agriculture is a challenging business. Whether it is drought, grain scarcity, disease, predators or commodity prices, there’s always something that tests the industry, and the industry perseveres. The centennial farm and ranch families we recognize annually show the long-term commitment of so many to Wyoming agriculture.   

Even in constrained budget times, we press ahead as best we can. Implementation of the state water strategy, issued two years ago, continues. One of the initiatives in the strategy is the 10-in-10 project to build 10 new reservoirs in 10 years. The first four of these projects, in five counties, have been funded by the Omnibus Water Bill – Construction this session. We support agriculture and make the most of a precious resource when we plan well for water storage.

The ENDOW Initiative, which I announced last November, is underway. The Legislature took up the initiative, passing a bill this session that gives it structure, deadlines, continuity and funding. In the coming months and years, the focus will be on developing and executing an economic diversification plan for Wyoming. This is an all-inclusive, all-industry effort, and I know the Wyoming ag industry will provide input and great ideas. Our kids and their kids will be beneficiaries of what we accomplish.     

The calendar tells us spring is here. In Wyoming, spring brings not only moisture but also a sense of renewal. The land greens up, plants and animals fill the fields, and like every spring, it feels like a new beginning. This year, there is more of that feeling than usual – with the prospect nationally of pro-growth economic policies, fewer federal regulations and more authority for the states. We are ready for this change in direction.

Here’s to a great 2017 for Wyoming ag!