The Financial Returns of Grass
By Ellie Winninghoff
How do you cash in on other people’s cattle and add value to your ranchland?
The first part is straightforward enough: manage other folks’ cattle and collect fees based on how much weight the animals gain. The other part is a little more complicated. But John Fullerton, former managing director at JP Morgan, is betting on the “holistic management and planned grazing” practices developed by Allan Savory, a controversial Zimbabwean biologist and rancher.
Savory’s TED talk, “How to Green the World’s Deserts and Reverse Climate Change“, has received over 1.3 million hits on-line since getting posted in March 2013. Whereas ecologists blame livestock for degrading the world’s grasslands, Savory controversially insists that animals can restore these lands. ”Mimic nature,” he exhorts.
What he means by that is, emulate the behavior of wild animals of by-gone eras, which, chased by predators and moving with the seasons, roamed the plains in tightly knit herds. Their migrating, trampling hooves break up the surface of the land, so it can absorb rain like a sponge, while their dung fertilizes the plains.
“This is permaculture on a huge scale,” Fullerton explains, referring to a concept that brings together whole-scale sustainability with respect to energy, waste, water and fields. (For more on this concept, read Penta’s profile on Narendra Varma in our December cover, “The Giving Generation.”) Not surprisingly, Prince Charles is an avid fan of the Savory Institute and its ideas.
To fulfill his game plan of capitalizing on Savory’s theories, Fullerton has teamed up with Belgian investor Larry Lunt, whose family made a fortune in sugar. They jointly own 100,000 acres in the northern Great Plains of South Dakota and Eastern Montana; their custom-grazing company, Grasslands, LLC, is based in Greenwich, Connecticut, and has partnered with the nonprofit Savory Institute, to capitalize on the Zimbabwean’s ranching ideas. The company’s game plan: healing the land will boost its productivity and feed more animals, which in turn should allow annual cash returns to double to some 5% or 6%.
Nice, but how precisely does this work in modern America, when great swaths of land have been carved up into parcels? With a lot of portable electric fences to keep cattle in tight herds, and moving the cattle frequently, it turns out. Savory’s theories were shaped by French pastoralist Andre Voisin, who, observing his cattle in Normandy, noted that if they were left in the same space for more than a couple of days, they overgrazed the plants they liked and under-grazed the others. So he advocated “following the grass,” or carefully rotating livestock in different paddocks to eat grass at the optimum time in its growth, for the optimum amount of time.
“Most of the land in the northern Great Plains has grass on it that the cows don’t eat, and that [bad] grass tends to get multiplied rather than balanced with the good grasses,” Fullerton explains. “By herding cattle into [many] smaller pastures, they eat various grasses more evenly, which improves all the grasses in the ecosystem. This means more grass density and species diversity, more roots at different depths sequestering carbon, and an ability to stock more cows per acre.”
As a company offering custom grazing, Grasslands is paid both a monthly fee and an incentive based on weight gain, typically $25 to $35 per month per cow-calf pair, and 32 to 42 cents per pound of weight gained. There are two types of wards: mother cows with their babies, generating predictable monthly cash fees; and yearlings that have been weaned off their mothers and are in their fast-growth (teenage) years and generating the per pound weight-gain fee. Ultimately, yearlings create the highest value because the grass they eat translates quickly into the weight-gain bonus coin.
But the condition of the grass must be really good for the yearlings to gain enough weight to make them more attractive to Grasslands than the steady cash flow of the mothers — and that depends on the weather.
ot a small problem for gentleman farmers trying to run property on this more eco-friendly and potentially lucrative system of serving other farmers’ herds. There has been drought for two years running in the Great Plains, for example, meaning Grasslands had to adjust its expectations by de-stocking its ranches compared to more normal precipitation years. Fullerton’s operation is still stocked at double the rate of nearby ranches, but it also ended up grazing fewer hungry yearlings and more mother cows than anticipated.
Returns are positive, but substantially below Grasslands’ expectations. “It’s definitely a long-term average situation, not like a coupon of a bond that you can count on every year,” Fullerton says. “And it’s definitely dependent on the weather.”
On a good year with decent rainfall, Fullerton figures Grasslands can earn 6% on the land they bought back in 2009, and less on the land bought in 2011. In the years he’s had bad rainfall, last year and the year before, the rate of return turns thin and wispy, and, remember, too, he’s only been operating since 2010. Also a concern: possible unintended consequences that will only reveal themselves after years of deploying these radical grazing techniques.
It must be said, however, that Grasslands did not expect optimal returns until year 4 or 5, until after the land had a chance to respond to its management practice. But the drought has already pushed back the target date for achieving a steady and higher return, so the jury is still out as to whether Savory’s soaring oratory and airy claims will pan out or run into a reality check in Fullerton’s fields.
Last month, though, there was an onslaught of rain in the northern Great Plains, and Fullerton is now “stunned” at how quickly his land has recovered and how much grass is growing; in his mind, there is no doubt the grass’ quick recovery is because of the new grazing technique.
The firm now expects to graze more yearlings this year than was even recently expected, allowing the outfit to shift from its previous defensive focus on the mothers. The cattle owners it contracts with are mostly traders, and they can suddenly buy more cattle at auction. ”They will buy more cows if we have good grass,” he says.
Other risks to the business include grasshoppers, hail and fire. But drought is the biggest risk, while also, ironically, providing a built-in hedge. Although land in the area is getting drier, the offsetting factor for Grasslands is the increasing resiliency of its land compared to other farmers who have allowed overgrazing for years. It’s a classic lesson in economics – the value of something is determined by its relation to the things around it. “We’re going to have a relative advantage over most of the grass-owners,” Fullerton claims.
In other words, as grass becomes scarcer, its price escalates, which means grazing rates are growing faster than inflation (but not as fast as corn) and are ahead of expectations. Land prices, meanwhile, have jumped 25%, and even 50% in some places, since Grasslands acquired its first properties in the distressed days of 2009. So, adding in the land appreciation, it’s already been a good investment for Fullerton and his partner, despite the unpredictable rain and the reduced grazing fees.
So look at that ancient field of yours with fresh eyes. There might be new ways to win healthy returns – both of the financial and environmental sort.