The Value of Perspective: Walk a Mile in the Other Person’s Boots

     So, you just graduated college and have just started your first real job.  You earned a degree in energy management, or land management, or finance, or some other accredited degree providing you with a great entry point into your new profession.  You have chosen to embark upon a career finding, developing, and managing land for use in the energy and infrastructure projects vital to the continued development of the United States.  Congratulations.  If you keep learning, work hard, and associate with good people you’ll have a great career.

       No doubt that by now well-meaning individuals have told you that you need to have $1,000 in an emergency fund.  That you need to start putting ten percent of your pretax salary into a 401K plan or IRA depending on your work situation.  If you are fortunate enough to receive some form of equity in your employer there will be no shortage of investment advice that you will receive.  About to have kids? Make sure that you apply for a good life insurance policy and make sure you get the one that generates cash value over the years just in case (that little angel is going to grow up and want to go to college themselves one day).  They will tell you that any debt that is not related to your education or first home is an albatross around your neck and to avoid it at all costs.  This is all very sound advice.  Unfortunately, it also means that you share almost nothing in common with the individuals you will have to negotiate with as you acquire and develop land.

         Investment accounts, the cash value behind life insurance policies, and retirement plans are not how a farmer or a rancher conceives of or prioritizes their financial life. The land they own and work is the main, and in some cases sole, store of value that they have access to.  These are the people who invented the term, “land rich and cash poor.”  A farmer or rancher living well beyond the suburban spread does not merely live on and occupy their tracts of land.  They utilize them both as a source of current revenue, as collateral for the revolving debt they necessarily survive on, and a reservoir of future value.  It is where they site and conduct their operations.  In the end, it is often the only asset of any appreciable value that they have to offer the next generation as an inheritance.   Their understanding of value is not in fluctuating bytes stored in a digital bank server but in the dirt they stand on.

       Taken a step further, the value of their acreage and the crops and cattle they produce is the collateral that secures the necessary debt funding they rely on from multiple federal, state, and private loan sources.  Those underlying loans are as essential to the farmers and ranchers as the crops and meat are to the rest of us.   Constantly fluid market prices, droughts, hail and other weather events, fuel costs, labor availability and costs, tariffs and embargoes, and other macro events existing on a global stage are all well beyond the ability of the farmer or rancher to control.   If speed and altitude are life to a fighter pilot, continuous access to debt is life for the nation’s farmers and ranchers.

         Over the past century the United States has developed an integral and essential support system for those who grow the crops that feed the livestock and people residing in the nation (there are no similar subsidy programs benefiting ranchers or farmers growing non-subsidized crops).  These loans and associated subsidy programs ensure that they can survive the lean years.  Before you complain about what some refer to as the unfair or unjust enrichment offered by these subsidies, remember that your ability to go without food will become acutely problematic long before the farmer faces their otherwise inevitable financial distress.  The farm bill exists not to make farmers rich, but to make sure the rest of us do not face starvation every few years.  Hard lessons learned from the French Revolution – and they say no one learns from history.

         Also, the economic scale on which each group operates is spread far apart.  To a reasonably thrifty 25-year-old $10,000 is a decent sum of money.  It represents half the price of a reasonable used car, or half a year’s rent in much of the nation.  If a farmer’s combine breaks down to such an extent that it cannot be fixed on site it will cost up to $6,000 to load it onto a flatbed truck and bring it to John Deere for repairs and servicing.  That $6,000, mind you, is not to diagnose or fix the combine but just to transport it to the place where it can be brought back to life just in time to harvest (they only break down right before harvest – it’s a fun quirk of farm life).  When he needs to replace the tires on the tractor, and realize I’m referencing a reasonable mid-size tractor like the John Deere 6R-250, each rear tire will cost $3,500 before mounting (size 710/70 R42, if you were curious).  A set of four new tires easily runs over $12,000.  Move up to the John Deere 7R Series tractor and you have six wheels to manage and you’re probably not ready to hear about the costs associated with their tracked models.  The in-ground sprinkler system at the house you’re looking at buying is measured in linear feet.  A farmer or rancher has to move water acres or miles between source and point of use.  You have to feed the cattle and fertilize the crops before you can sell them.  It now costs about $900 per year to feed each beef cow and $220 to fertilize an acre of corn.  To put these numbers into perspective, nationwide the average beef cow herd size is 47 head, and the average farm planting corn will dedicate 725 acres to that crop.  That equates to initial input costs, just as to feed and fertilizer, at $42,300 and $159,000, respectively.  The average developer, real estate agent, landman, negotiator, etc. does not have to lay out either $42,300 or $159,000 before receiving a paycheck.

       When you put all this together you will quickly realize the gulf existing between the rural landowners and the urban and suburban project developers negotiating with them.  When I speak with project developers they frequently, and rightly, speak to the project economics of which they are beholden.  At the outset of a project $10,000 can be considered a burden to a project and a $100,000 cost is anathema to all in the decision-making chain.  People like to use round numbers and often we seem to fall back on $1,000 as everyone’s favorite round number.  As in $1,000 offered in support to have their attorney review your draft agreements, or $1,000 as an execution enticement bonus, or $1,000 per acre for a surface use waiver with $250 paid up front and $750 paid at time of construction.  These amounts have been poured over by senior managers and valuation consultants.  They have been approved by corporate executives.  They have been pitched to investors who now anticipate them as the foundation of a probable and acceptable return on investment.

       When you consider what these sums are leading to, either a loss of productive acreage or an encumbrance existing on their remaining acreage, you start to understand why these offered amounts are either ignored by the landowner or serve to enrage them.  This isn’t passive income for the landowner.  Unless you are offering a separate revenue stream from an oil well or a wind turbine, both of which can be godsends to a land rich and cash poor landowner, then you are likely unintentionally burdening them with an offer for less money than that acre of land is currently generating for them.  When I am directed to offer the corn farmer a $10,000 option payment he doesn’t hear a meaningful sum, he hears that I am willing to pay six percent (6%) of his fertilizer bill.  When I am instructed to offer the rancher a $1,000 signing bonus (and only if they sign by the end of this week), he hears that I am offering to pay the mounting costs of the new set of tires for the tractor he uses to move hay bales.  These moments are at best sources of irritation for the landowner and at worst insults that serve to prematurely and abruptly end negotiations.

        So how do we bridge this divide between rural landowners and urban and suburban project developers?  Perhaps the best solution is to better align each party’s perspective of the intended project and of the needs of the other party in general.  That answer sounds easy enough, but the reality of what is involved in accomplishing that goal is far more complicated.

          The landowner, for their part, must maintain an open mind.  If approached respectfully and by a land developer with a reasonably competent offer they should take the time to listen and entertain that offer.  Farming and ranching are not high margin businesses.  I have never met a farmer or a rancher who wasn’t in some need of passive income.  Work with the developer to see if your operations and theirs can mutually and profitably coexist.  Realize that as the nation’s population has exploded in the last century its energy and infrastructure needs have evolved as well.  Being possessed of a well sited tract land offers an opportunity to earn a return far higher than normal fair market value would otherwise allow.

         The land developer, for their part, needs to consider the impact that their intended operations will have on the current landowner.  Can that landowner continue to operate profitably after you have either taken or encumbered a portion of their acreage?  Will their neighbors in the community their family has lived in for generations forgive them if they sell or lease to you?  Can their current financial structure (income, costs, collateralized and subsidized debt, etc.) sustain your proposal?  Take the time to get to know that landowner.  Show them the respect of understanding their needs.  And if possible, go visit them.  Sit at their kitchen table and have a soda or a beer with them.  Listen to them.  Walk their property – not your intended project site, but their property.  Head into town with them and buy them and their neighbors lunch at Dairy Queen (it’s always a Dairy Queen).  This is so infrequent now and that’s causing real problems in land development programs.  It is very difficult to close a deal without there existing some level of trust between the parties, and it is very difficult to establish a bond of trust if you never leave your office in Houston, or Dallas, or New York City, or San Francisco or Chicago, or anywhere else these rural owners don’t live.  Without that trust you are only as good as your last offer and there is always a bigger fish swimming in the sea with you.

       By a wide margin, the best land negotiators and developers that I have had the pleasure to work with were themselves rural landowners, cattlemen, farmers, or their sons and daughters.  One was a goat herder – he had the best stories of them all. They understand intrinsically the landowner’s world view, needs, and plight.  They know how far they can push a landowner on behalf of their project and when they have to stand up for that landowner against the unreasonable demands of that project.  They are comfortable in that world and can move freely in it.  Most importantly, they respect the people who own those farms and ranches and that is an essential quality that is both noticed and appreciated.

         So, if you have chosen to make land acquisition and development your profession, then take the time to develop the perspective necessary to really be an effective practitioner.  Walk a mile in your theoretical counterparty’s shoes.  If able, buy yourself a tract of land and become a landowner, or at the very least take the time to get to know the person opposite you at the negotiating table because if you cannot understand one another, you will never be able to work with one another.  This nation is in desperate need of new infrastructure and energy sources, and these cannot be brought online without acquiring the land on which to site them.  You don’t get the land if you have not first gotten the landowners.