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Sometimes people complain that all they ever read or hear in the news is bad. They may blame the messenger. “Why can’t they tell us about all the good things that happened today?”

The news people are just doing their job. Things are supposed to go right, so it is only news when they go awry. If no news is good news, it is also largely true that good news is no news. 

An old setup line for jokes is, “I’ve got good news and bad news. Which do you want first?” Real-life research, like most of the jokes, has it that people want bad news first. Unlike the jokes, bad news is not usually followed by a funny punch line.

Psychologists have studied how young people react to news of good or bad consequences for actions and found that we tend to disbelieve the bad until learning from experience as we mature. All age groups believe the good consequences.

Other research says our brains are wired to recall and react more strongly to bad news because at the dawn of time the most important things to remember were dangers. Of course, we learn early on that fire always burns, just like cattle learn the electric fence is to be avoided.

Moving to a practical model, psychologists have noted a typical pattern response to bad news, represented by the acronym SARA – shock or surprise, followed by anger or anxiety, then rejection or rationalization and finally acceptance.

We vary in how long we spend in step three and whether we simply accept it or try to change the situation. 

Good and bad news are common in every business, including cattle enterprises. Bad news is much more important than good, and again, it has much more impact. Since things are supposed to be going right, you want the bad news first and as soon as possible – not so that you can come to accept it, but so you can make changes.

When selling cattle in a market that has evolved to expect better-than-average performance, you can be sure of a quick shock of bad news if your cattle even look subpar. Bad news grows if they go on to disappoint in feedyard performance and grade, and that news more than likely comes back to your doorstep like a slow-burning fuse.

Buyers, feeders and packers keep good records, marking down gold stars or red marks by source. A bad experience means they will try to avoid your cattle, and you can only hope to learn why so you can adjust.

The final arbiter in this market is the consumer, however, who cannot usually exert direct influence on your cattle price. 

A bad eating experience stays with them, however, and they exert an influence further down the beef supply chain. A rule of thumb in the restaurant business is that people may tell somebody if they had a great steak, but they will tell 10 if they were disappointed.

Those who sell beef at today’s prices have increasingly adopted a strategy that few predicted a decade ago.  Creativity in making better use of new cuts and grinds was to be expected. But the surprise – and a good one if you produce high-quality beef – is that the beef marketers are turning toward premium brands that cost even more.

They are doing so to minimize the chance of diners spreading bad news about their food, and to build repeat customers who just want to share the good news with their taste buds.

Whatever link you call home in the beef supply chain, be thankful for bad news. Be proactive in looking for it and take corrective action when and where you can. Then, join with other consumers in celebrating your success with a flavorful, juicy steak.

Next time in Black Ink® Miranda Reiman will compare market share and demand.  Questions? Call 330-465-0820 or e-mail This email address is being protected from spambots. You need JavaScript enabled to view it..

A common dilemma among agricultural families is how to be fair to both on- and off-farm children. Because the assets of a farm or ranch typically represent the vast majority of an agricultural family’s net worth, there are typically few assets to leave to off-farm kids. As a way to equalize inheritance, parents can purchase life insurance for the benefit of their off-farm children. 

Parents often pass the farm or ranch equally to all of their children, leaving them to “figure things out for themselves.”  This is often a recipe for disaster because the off-farm children often want their value of the farm or ranch after their parents are gone. Because the on-farm child usually can’t afford to buy out their siblings share of the farm or ranch, he or she will be forced to sell. This often results in bitter feelings among the siblings. 

In the example below, we will examine a common scenario among agricultural families and show three solutions of how life insurance can be used to help the family achieve their financial goals.  

Example

John and Mary own a ranch valued at $8 million in central Montana.  They are both age 65 and have three children – Steve, Mark and Sue. Besides the ranch assets, they have savings and investments of $200,000. 

John and Mary’s son Steve has lived and worked on the ranch his entire life.  They pay Steve an annual salary of $30,000.  Mark and Sue have other careers and are not interested in coming back to the ranch.  

John and Mary would like to pass the ranch to Steve and provide a “fair” inheritance to Mark and Sue. Their goal is to leave Mark and Sue an inheritance equal to half of the current value of the ranch divided equally between them.  John and Mary meet with their advisory team to explore their options for providing Mark and Sue each with $2 million.

Exploring options

The first option that John and Mary have is to save money.

The family estimates John and Mary’s joint life expectancy to be 20 years. Assuming they could earn an average annual return of six percent on an investment, they calculate they would need to save over $110,000 per year for 20 years to come up with $4 million to leave Mark and Sue.  

Option one won’t work.

Their second option is to borrow the money.

They call their local banker and Farm Credit Services representative to see how much it would cost for Steve to borrow $4 million. Using a fixed interest rate of six percent and a term of 20 years, Steve’s monthly payment would be $26,398.23.  

Over 20 years, his payments would total $6,335,575.  

Option two also won’t work.

Insurance option

Their third, and final, option is to utilize insurance to provide Mark and Sue with an inheritance equal to $4 million.

The family obtains quotes on a $4 million Survivorship Life insurance policy on John and Mary’s life.  Based on standard ratings, the annual premium would be $60,000. 

The family concludes that using life insurance to equalize the estate is the best option.  

Solutions

Three potential solutions are presented involving life insurance. 

The first solution is thatJohn and Mary establish an Irrevocable Life Insurance Trust (ILIT) and purchase a $4,000,000 Survivorship Life insurance policy with the ILIT as owner and beneficiary of the life insurance policy.  

John and Mary name their two off-farm children, Mark and Sue as beneficiaries of the ILIT.  When John and Mary pass on, Steve inherits the ranch and Mark and Sue split the $4 million life insurance proceeds 50/50.  

Their second option is to provide for each of the children in a will or living trust.John and Mary could provide for a distribution of a one-half interest in the ranch to Steve and a one-quarter interest each to Mark and Sue.  

During their lifetimes, they have Steve, Mark and Sue execute a binding cross-purchase agreement whereby Steve agrees to buy-out, at fair market value, the one-quarter interests – $1 million each – that will be distributed to Mark and Sue.  

Steve then purchases a $2 million Survivorship Life insurance policy on John and Mary. If he needs additional funds to pay the premiums on the policy, the ranch may be in a position to increase his salary or bonus additional money to him on an annual basis.  

Upon the second to die of John and Mary, Steve uses the death benefit to acquire their interest, per the cross-purchase agreement.   

A third solution in purchasing life insurance also exists. 

The family determines they cannot afford the $60,000 annual life insurance premium. To come up with the money to pay the annual premium, they decide to sell a lesser productive portion of their land valued at $1 million through a Charitable Remainder Trust (CRT) and use the annual income from the CRT to pay the annual life insurance premium. 

Because the CRT is a tax-exempt entity, it will not have to pay capital gains tax on the sale. Assuming they net $1 million from the sale of land and select a six percent payout in the CRT, they will receive approximately $60,000 per year from the CRT. They will use this income to pay the annual life insurance premiums. 

Benefits of life insurance

Life insurance can be an effective tool for an agricultural family. There are many types of life insurance polices and many ways of structuring policies for achieving one’s goals.  

There are also serious tax ramifications associated with the ownership of life insurance.  

It is important to work with an experienced independent agent and to involve the assistance of an estate planning attorney.  

For more information, request Wealth Guide titled: Life Insurance: An Effective Estate Planning Tool for the Agricultural Family.

Chris Nolt is the owner of Solid Rock Wealth Management and Solid Rock Realty Advisors, LLC, sister companies dedicated to working with families selling a farm or ranch and transitioning into retirement. For more information, call 406-582-1264 or visit solidrockwealth.com and solidrockproperty.com.

As farmers and ranchers, we are acutely aware of the value of water. Two years ago, drought, coupled with wildfires, brought about hay shortage, herd reduction and difficult times for Wyoming ag producers. We are always looking for ways to get maximum use of water in dry years and wet years – our livelihood depends on it. 

After the state’s energy strategy was released in May 2013, we set to work next on developing a state water strategy. The process includes public involvement, like the process used to develop the energy strategy. We hope to complete the water strategy in 2014, and I want to thank the Wyoming ag community for participating in this important project.

As we all know, Wyoming agriculture has quite a history – here’s a lesser known bit of it.  Aldo Leopold, the author of A Sand County Almanac, is credited with being the father of modern environmental ethics. 

He wore many hats as scientist, teacher, hunter and farmer and famously said, “There are two spiritual dangers in not owning a farm. One is the danger of supposing that breakfast comes from the grocery and the other that heat comes from the furnace.”  

He understood the land, as we do. We know where meals and energy originate, and we are rightly proud of our contribution to the nation’s food and energy needs. Perhaps not surprisingly, Aldo’s family found its way to Wyoming. 

Aldo’s son Luna had strong ties to the Pinedale area. He did a great deal of watershed and runoff related research in the Wind River Mountains. He had a cabin near Fremont Lake. Like his father, Luna was an influential scientist. He shaped the direction of hydrography and geomorphology. 

Luna, who was known to sit by the river near Pinedale in his tattered silver belly Stetson, once wrote, “Water is the most critical resource issue of our lifetime and our children’s lifetime.” 

Luna passed away in 2006, but his legacy lives on in the best work of today’s top scientists and civil engineers.

We are glad Luna’s father provided such an example and inspiration for his son, and we are fortunate to have had a gifted scientist like Luna in our midst. Their words were true during their lifetimes; they are true during ours; and they’ll be true when our children share them with our grandchildren. 

Wyoming water merits the attention it gets. Our waterways have been explored, studied, written about, played in and photographed. It is easy to understand why our water gets so much interest. Wyoming is the headwaters of the nation. We see 17 million acre feet – 5.5 trillion gallons of water – flow out of our state every year. The water sources start high in our mountains and meander from there to shape America. 

We beneficially use about 3.3 million acre feet in our state and know the significance of the phrase “beneficial use.” It means using water to improve our lives and our businesses. It means growing our crops and raising our livestock – putting meals on the table. It means unlocking energy resources for fuel that turns on our lights. It means generating electricity, manufacturing commodities, washing laundry and otherwise adding quality to our daily living. It means work and recreation. We must protect this precious resource and maximize what it can do for Wyoming. 

The primary beneficial use of water in Wyoming is agriculture. Mining, thermoelectric and public supply are our next most important uses. Eighty-five percent of our water use comes from surface water. Nine compacts and/or decrees indicate how much surface water from our state is shared with our neighbors. 

Wyoming has no less than six agencies that are in some way involved in water and have nationally recognized expertise. Whether water rights, development, quality or habitat are involved, the professionals who work for the state of Wyoming represent the tops in their fields. One of the challenges we face is coordinating our subject matter experts to create something together bigger than any one area of expertise – a synergy that results in more than any single group or agency could do by itself.  Having a lot of expertise is actually a good dilemma – we can focus it in the water strategy. 

Like the energy strategy, Leading the Charge, the water strategy will be centered on strategic themes and then will identify actions that are ripe for implementation. The water strategy is not a study, but it does use the studies and work that have been done in the past by our agencies and citizens to define opportunities. Implementing initiatives in the areas of water development, water management, water conservation and protection and restoration will result in realized opportunities. The initiatives will have definite and measurable outcomes. 

We have not identified all the initiatives at this time, but within the next several months, we will be defining exactly what they are. They will be based on the feedback that you provided in the nine official listening sessions held throughout the state, the comments and emails you have sent us and the input we will get from you moving forward. Like the energy strategy, the water strategy will be designed for flexibility, so it can be modified and revised as needed and initiatives can be added, as well.

Please continue to weigh in. We know Wyoming has the best water law in the nation. We need to keep it. We know water is vitally important to our people and our major industries. We need to use it to keep them prospering. We know protecting our water, watersheds and way of life means having a plan that puts water to use yet also balances development and stewardship. 

In a world where water grows more precious every year, making the optimal use of Wyoming water will continue to be the most critical resource issue of “our lifetime and our children’s lifetime.”  A water strategy will serve Wyoming well.

What is the second biggest cost to keeping a cow?  Most of your neighbors don’t even know it exists!

Well, perhaps before we start discussing that, let’s talk about the biggest cost – feed cost, of course.  But this is probably only true if you consider the “opportunity cost” of your own pasture as feed cost. Let’s assume a cow grazes out nine months a year, worth $25 per month, and she is on hay worth $200 per ton for three months. This brings her feed cost to $495 per year, not counting any other supplemental protein or mineral.

So what is the second biggest cost?  Cow depreciation!  We are not talking cow depreciation for tax purposes but rather the “economic” cost of cow depreciation. Even though you don’t write a check for it – it is a real cost!

What is cow depreciation, and what can you do to manage it? 

I’m guessing your neighbor spends quite a bit of effort trying to manage their feed cost, but if they don’t even know cow depreciation is a cost then how can they spend any time at all managing this cost?

The truth is most producers don’t spend much effort at all managing cow deprecation.  It is my opinion that all producers would be well served to spend some management time focusing on this major cost to keeping cows.

Let’s think about how we would calculate annual deprecation on a pickup. If you thought about it a bit, you would probably tell me this formula:

(Purchase price – Salvage Value)/Years of Use

We can use this same formula to calculate annual cow deprecation. What is a young cow worth? What is a cull animal worth? How many years of service do we get from her?  

Let’s assume a young cow is worth $2,000, and a cull cow is worth $1,000 to make the math easy. The average cow in North America produces less than three calves in her lifetime.  You might make an argument that your cows stay in the herd longer, but I’m guessing if you actually took the time to figure it out, you would be surprised. We all remember the cow that stayed in the herd till she was 13, but what about all those that fell out after only one or two calves?  Let’s give you the benefit of the doubt and say four.  Our formula would look like this:

$2,000 - $1,000/4 = $250 

If we used three years for the average years of service for a cow, then the math would look like this:

$2,000 - $1,000/3 = $333 

For most ranches, cow depreciation runs between $250 and $350 per cow per year, making it the second biggest cost to keeping cows next to feed cost.

Since cow deprecation isn’t a cash cost, we don’t think about it very much.  

How do most ranchers pay for cow depreciation?  They keep heifer calves and develop their own heifers.   

If we hold back a heifer calf worth $900, run her for another 1.5 years and get calves from 70 percent of them, then we have at least $1,500 in each developed heifer.  If we are replacing 14 percent of our herd a year, then we are right back around that same cost in annual cow depreciation shown above.  Either way, cow deprecation is a big deal.  

So how do we manage cow depreciation?

The answer lies in the formula.  There are three things we can do, and they relate to the three items in the formula. 

We can, one, reduce the purchase price of development costs, two, increase salvage value or, three, increase years of service.

Of these I would encourage you to focus on the first two items before you focus on the last. I believe most ranches reading this are already productive and the managerial leverage you have to affect item three is limited. Also, all the alternatives to affecting item three likely cost significant money.  

If you raise your own replacements, are there ways you can reduce development costs and still meet your needs?  Many ranches have found that treating heifers as stockers with a short breeding season results in well-adapted heifers, and they can market the opens for a profit.

Can you increase the value of your culls by strategically marketing these into a better seasonal market or add value through other creative ways?  For most cow/calf operations, a large portion of the gross income comes from cull cows.  Give them the attention they deserve in your marketing program.

Managing cow depreciation is one of the keys to being a profitable ranch.  Spend some managerial time figuring out what your ranch’s annual cow deprecation costs are and then get some people around the table and tackle the three strategies mentioned above to try and reduce cow depreciation and increase profit.

I hope moisture finds your grass this spring.