Permit Value: A Hidden Key to the Public Land Grazing Dispute

This chapter returns to the question, "Why does permit value exist, and how can it be assessed?" The chapter starts by discussing different methods for ranch appraisal, then looks at the two theories as to why permit value exists. These theories, in turn lead into a discussion of the total true cost of public and private leases. Next, various methods used to assess permit value will be discussed, followed by a look at the results from key academic studies of permit value, and the factors that could explain the variability of their results.

• TYPES OF RANCH APPRAISAL
• TWO THEORIES ON THE SOURCE OF PERMIT VALUE
• THE TRUE COST OF GRAZING LEASES
• ESTIMATIONS OF PERMIT VALUE
• FACTORS INFLUENCING PERMIT VALUE
• ESTIMATING THE TOTAL NATIONAL VALUE OF PERMITS

As discussed previously, in simplest terms, permit value is the additional real estate value of a ranch gained from having the privilege and use of a public land grazing allotment from either the Forest Service or BLM. Still, since both the agencies and the judicial system have made it clear that these permits are not owned, then where does that value come from?

Any understanding of permit values requires at least a cursory understanding of ranch appraisal. Traditionally one of the simplest and easiest (although not necessarily more accurate) ways to appraise a ranch is to base the value on the ranch's carrying capacity (American Institute of Real Estate Appraisers; Gee et al.; Oppenheimer), i.e., the sheer numbers of livestock that the forage and feed available to the operation can support. The other traditional assessment method is based on estimating the expected income of the ranch, then using capitalization techniques to project the ranch operation's expected worth and investment potential.

Both carrying capacity and expected income are still often used for a quick estimate of a ranch values, but appraisers and economists now routinely consider and assign values to more than a dozen factors including the value and upkeep of the buildings, the distance to the nearest town and railroad, scenic value, acreage in crops, water rights, the percentage of irrigated land, operational costs, and the percentage of deeded forage compared to private leased forage, state leased forage, Forest Service leased forage and BLM leased forage. Operational costs are, in turn, broken down into numerous associated factors.

This type of breakdown, when applied to a large set of unforced ranch sales, allows economists to do a type of regression analysis known as hedonic modeling. In a hedonic model, each factor that is expected to influence the price significantly is measured and assigned a unit value, then put into an equation with a variable coefficient. With a large enough set of data, these variables can be solved. The solution gives the average influence that each unit of a given factor has on the sale price. For example, each acre of irrigated rangeland may end up valued at $100 more than non-irrigated land, or each mile from a railroad station might reduce the value of the whole ranch by $50, i.e. reducing the value of a ranch 40 miles from a station by $2000.

Up until the 1960s, there was little documentation of permit value. Starting in the 1960s, a number of agricultural economists began to study it, primarily because of its relationship to grazing fee levels. Until recently, these studies generally agreed that the existence of permit value was a result of the economic benefits from public land leases grazing fees being set lower than those paid in a competitive market setting. Lower fees result initially in a yearly operational savings to the rancher. This savings, in turn, becomes an expected part of the yearly operation of the ranch. Then, since allotment permits and leases traditionally get transferred with the sale of the ranch, buyers and sellers began to see the expected savings associated with them as an investment; however, the security of that investment required that allotment grazing fees remain lower than fees for private leases. To estimate the worth of that investment, economists could then use traditional appraisal and capitalization methods similar to those used on a variety of investments.

Another theory, promoted by Iqbal and rooted in traditional ranch appraisal techniques, finds that there is often no significant cost savings from public allotments compared to private leases or private land. Instead, permit value is found to be the result of the benefits associated with the economy of scale that comes with holding allotments (or contracts for private leases). Simply put, larger ranches cost less to run per cow, because many overhead costs either remain fixed or increase only marginally in a larger operation. These costs include such factors as maintaining a homestead and office, accounting costs, purchasing and maintaining tools, and often fencing, herding and riding costs.

Iqbal's theory is also closely related to those of scholars who claim that permit value was simply the result of the initial assignment of allotments. The ranchers who were awarded the first allotments were given what can be seen as a gift from the government. Between that original assignment and the late 1960s, over 85% of allotments had been sold to new owners (Nielson and Workman). The percentage of these leases that have changed hands by that late 1990s is even higher. Each new lease holder paid the original lease holder for the value associated with that "gift" when they purchased their ranch and lease(s) at full market value. That value, according to Iqbal, is the advantage related to the economy of scale that is retained in these larger operations through federal grazing allotments.

Underling Iqbal's theory is the assumption that the total costs of grazing on public lands are generally equivalent to the total cost of grazing on private lands. This assumption is based on studies that found that the non-fee costs were higher on public land due to increased costs from herding and moving livestock, transportation, lost animals, improvements and maintenance. These increased costs make the total cost of public land allotments equal to those of private leases.

The question of the "true costs" of grazing on public lands remains a highly debated issue and has been the object numerous articles and studies. Its importance comes largely from the legal mandate in the Federal Land Policy and Management Act of 1976 (PL 94-579) that requires, "The United States receive fair market value of the use of the public lands and their resources..." (§102(a)). It is almost universally acknowledged that the fees charged for the use of Forest Service and BLM allotments are less that those charged for private and (most) state allotments.

It is, however, also generally agreed that the costs to the rancher of running cattle on federal lands are somewhat more than those of private lands because of the extra services provided in those leases, and the extra costs associated with federal allotments. These services vary with different contracts, but often include fence maintenance, salt and watering, and may include transportation and herding. The extra expenses of federal land may include increased animal loss, riding and herding, maintaining improvements, paperwork, and dealing with federal bureaucrats.

There is extensive disagreement, however, over the difference between the (average) total costs of grazing on federally leased compared to the (average) total costs of grazing on private leases. Some studies (Bartlett et al.; Obermiller; Rostvold and Dudley; Torell, Van Tassell et al.) conclude that after including the federal fee, the total costs of federal and private leases are comparable, and that some ranchers are paying even higher costs for federal leases. The data for these studies came through extensive surveying of ranchers, who were asked detailed questions about their public and private land operational costs.

Not surprisingly, these studies and their methodologies are disputed by environmentalists and others, partly because the figures used for estimating average costs are often based on surveys of the ranchers themselves, and not on outside accounting methods. Jacobs also points to evidence gathered in the Committee on Government Operations that show extensive (illegal) subleasing of federal leases at rates approaching private lease rates, and concludes that if there is someone willing to pay a higher price, that allotments' forage must have that higher value.

Other studies (Gee et al.; Obermiller and Lambert; Rimbey; USDI and USDA 1977) find that the total costs of federal leases are below those of private leases. Interestingly, well before the requirement that fees be based on fair market value, Gardner reports that, "The ranchers in the survey who had Bureau of Land Management permits reported no cost differences between renting private pastures and BLM district grazing, except for fencing expense" (55). He also finds that not including fees, ranchers with Forest Service permits have higher costs, but these costs are still well below the total cost of private leases.

One element offered as significant, but often overlooked as part of this debate, is the question of whether the cost of the interest from the investment in the permit value of mortgaged ranches should be included as part of the total cost of federal leases. The agencies and courts have ruled that in determining grazing fees, it should not be considered (because they do not recognize the legal existence of permit value). Many economists argue that the cost of interest from loans needs to be included, because failure to do so creates the apparent discrepancy found in some studies between the total costs of public and private leases.

After examining the arguments over the "true cost of leases," it appears that the expectation of savings on forage costs, and the additional savings from the economies of scale that come along with the ranches' increased size are both important factors that can lead to the development of permit value for allotments tied to ranch operations. Any profitable ranch may benefit from increased carrying capacity, below market forage costs or savings from the economy of scale. The increased carrying capacity that comes with a permit gives it larger income and profit potential. Over and above increased carrying capacity, any other savings from lower fees or economy of scale should be seen as extra benefits which would increase permit value.

Obviously, ranch operations and their associated allotments are extremely varied, so different ranches benefit from these factors to different degrees. Generally, in smaller operations it is likely that expected savings would be the least significant. In mid-sized operations it is likely that expected savings on forage costs would be significant, and there would be some savings due to economy of scale. In larger operations, where the costs of fencing, herding and riding are more likely to decrease with size and the expected savings on monthly forage costs increase, the savings from the economics of scale become more significant.

There have been over twenty different studies attempting to determine the permit value of public land allotments. As can be seen from Tables 1-3, the studies vary in method, date, and location, thus it is difficult to directly compare them. No method claims to be completely accurate, and most of the studies focus on finding an average permit value for a specific state over a specific time.

Table 1: Permit Value by Method

Table 2. Permit Value by Date

Table 3. Permit Value by State

Each method has some tendency to focus on certain factors that weigh the results. The capitalization method is dependent on the expectation of savings from public land forage, and often ignores documentation on sale values. Surveys of ranchers, appraisers and Realtors are dependent on perceived values and are thus influenced by national politics, local policy enforcement by BLM and Forest Service officials, and the degree of interest and influence of environmentalists in a particular area. Results based on regression analyses are dependent on the hedonic model chosen, and various models can give different results to the same sets of data. Models are chosen and modified in attempts to produce results that realistically reflect the importance of each chosen factor in the real estate market, but it is possible that some of these modifications are influenced by expected results rather than actual market-based influences and variations.

The first serious attempt at evaluating permit value was published by B. Delworth Gardner in 1962. He discovered that the permit value, tabulated through a survey of ranchers who had recently bought or sold allotments, was much lower than the value he expected to find using the capitalization method. He thought the difference was due in part to, "transfer restrictions [which] may be preventing permits from moving to ranches (ranchers) where they would have greater economic value." He also found that 44% of Forest Service permits in the study area were reduced upon transfer, and in some of these areas there was an expectation that cuts would continue in the future, further reducing permit value.

For BLM allotments considered in that study, reductions were not a significant factor. Gardner’s argument is that for BLM allotments the greater differential between the surveyed value ($10.92) and those expected through capitalization ($44.33) is due to transfer restrictions that were even more limiting than those of the Forest Service. Although it is true that BLM transfer restriction are more limiting, as BLM allotments cannot be transferred with the sale of livestock, this argument is not very convincing. Since BLM allotments almost always abut to the deeded ranch, and are sometimes even enclosed by the ranch they are tied to, they are almost certainly more valuable to that ranch, rather than another ranch further away. Rimbey, who also predicts permit value through the capitalization method, had a more reasonable explanations for this discrepancy, for he includes expenses that Gardner does not for BLM lands, bringing the value predicted by capitalization down to a value similar to Forest Service lands. Others have noted that BLM lands tend to be less productive than Forest Service lands.

Values calculated for permits using capitalization methods are clearly dependent on both the expected monthly savings for forage and the capitalization rate used, as well as the formula used to figure the value of the capitalized savings. Methods used to figure this capitalized value vary. Workman and Gardner both use a "simple" formula that divides the expected savings by the capitalization rate: (Value of forage) - (Cost of forage)/ (Capitalization rate). However Workman uses a capitalization rate of 8%, compared to 6% for Gee et al.

Rimbey also uses a capitalization rate of 8%, but uses a different formula to figure out how much a "prudent investor" would pay for a permit (5):

Assuming the annual cash cost savings remains constant over a period of years, we can derive an estimate of the amount a prudent investor would pay to take advantage of these cost savings. The investor should be willing to invest up to the net present value (NPV) of the stream of benefits (or cost savings) or,

where:

j = years from 1 to n
i = interest rate
PVTn = private costs year n
BLM = BLM costs year n

Using this equation he finds that. "With a 30 year investment period and 8 percent discount rate, the net present value of the $2.59 cost savings would be $29 per AUM."

If each of these studies used only the same "simple" method for capitalization, Gardner, Rimbey, and Workman's data would show, for their increased values of BLM forage calculated at $2.66, $2.59, and $2.89 respectively, only a small variance in range of permit values ranging from $32-$36. In contrast, Rimbey finds the increased value of Forest Service forage to be $0.52, compared with $1.38 for Gardner, and up to $7.50 for Gee et al., making the range of permit values (again using the simple method at 8%) to be $7 for Rimbey, $17 for Gardner, and $45 and $94 for Gee et al. The last two figure are clearly much higher, but they are for specific ranches and not averages for a set of data on ranch sales. They could be reflecting unusually beneficial allotments. In any case, the figures for estimating permit value though the capitalization method are clearly dependent on the expected savings from public land forage and the formula used.

Permit values determined through surveys appear consistent with various factors that will be discussed in detail later in this chapter. In brief, they generally increase over time, partly due to inflation and partly due to an increase in ranch values over and above the inflation rate. They also reflect higher values associated with the year-round allotment leases generally found in New Mexico and Arizona. The study with the eleven state average seems to find unusually high permit values, but its results come from data reflecting the period that is generally considered the height for both ranch and permit values.

The first attempt at using regression analysis to determine permit value was done by Martin and Jefferies for Arizona ranches sold from 1957-1963. They tried twelve different formulations on a relatively simple model with only six variables, from which they chose four equations that gave similar results: values of $13/AUM for BLM leases and $23/AUM for Forest Service leases. These values are lower than other values found for year-round leases of that era. This can be explained in part because their procedure was, "based on the rancher's actual use of the land rather than the agency-suggested stocking rates. This procedure increases the animal-units figure on "section 15 BLM lands by a factor of about two." They do not indicate the extent of section 15 lands compared to section 2 and 3 lands, but if the agency-suggested levels were used, the AUM value for those lands would presumable double. Another factor that might have influenced their results was the use of deeded acres as a factor, rather than deeded AUMs. Intuitively, it would make sense to used the latter, considering all the leases were measured in AUMs. Later regression models do make that change.

The most extensive set of regression models used to determine permit value have been done by Torell and his student Kincaid, in combination with a number of other scholars. They have done numerous studies of ranch and permit values in New Mexico from 1979 to 1994, which follow the work of Fowler and Gray who studied the same values through surveys from 1966-1979. (See Figure 2.) They found that changes in permit values generally follow changes in ranch values and that both peaked around 1982.

The results from the three studies by Sunderman and Spahr, looking at data from sales between 1979 and 1993 in Wyoming, are based on models that differ from those used in New Mexico, and most of their results are inconsistent with other studies of permit value. They were the only ones to find no permit value for any set of BLM leases, and their results for Forest Service leases during two of the three periods studied were much higher than expected. I cannot explain their results. One factor that may have influenced their results from studying 175 sales was the inclusion of sales taking places through auction (16) and repossession (63). Other studies did not include such sales.

Looking through the variety of permit value studies, despite some variation, one of the most remarkable aspects of the accumulated results is their general consistency. With the exception of the results for BLM allotments in Sunderman and Spahr, every study found that permits had value. Studies also consistently found that permit values peaked around 1982, after an era of generally rising values for ranches. They also found that year-round allotment leases in New Mexico consistently had more value per AUM (typically about double) than allotments in states to the north that could only be used for part of the year.

Most of the studies of permit value agreed that with reasonably simple explanations, location, year, and length of grazing season can be identified as basic factors influencing permit values. Some studies also identified a few other factors that were likely to influence permit values, through the influence that they could have on either fee levels or AUM levels. These include the passing of new environmental laws and some federal court decisions on how to implement those laws. Also noted were some trends in national politics that could affect the stability of fee or AUM levels, particularly the "Sagebrush Rebellion" and the controversies surrounding the Clinton/Babbitt RR '94 measures. On a more localized level, the likelihood of reductions in AUMs due to the ecology of the region, grazing practices, the presence of endangered species, and the enforcement practices of federal officials also influenced permit values. The degree that these issues actually effect permit value is difficult to determine.

In 1968, Roberts and Nielson published what is probably the first attempt to make some estimate of the collective worth of federal grazing permits. They were estimating the loss of permit value if fees were raised to the full value of the forage. They took their estimate of $10/AUM for BLM leases in Utah and used simple multiplication to find a value of $13.5 million for 1.35 million AUMs. They also noted that implementing such a fee increase would mean an additional yearly cost to ranchers of $434,000 annually.

In 1980, in "Economic Analysis in Public Ranchland Management," Nelson estimates that, "The total capital value of all grazing on BLM rangelands is very likely no more than $1 billion." In their 1996 work, "Market Forces Would Benefit US Rangelands," Holechek and Hess estimate that 25-30% of all federal AUMs could be purchased for less than $420 million, making the total worth of all federal AUMs less than $1.68 billion.

In 1993 there were 13,303,068 BLM AUMs and 8,765,829 Forest Service AUMs for a combined total of 22,068,897 AUMs (USDI BLM). Using $150/AUM, one of the highest permit values found for year-round allotments, the total permit value for all allotments would be $3.31 billion. Using the 11 state average permit value level of $68, the combined permit value would be a bit over $1.5 billion. Since this figure comes from one of the years with the highest permit values, the current average is probably closer to $50/AUM, which would give a total national permit value of $1.1 billion.

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