Historic Forage Productivity and Cost of Capital for Cow-Calf Ranches in California

Much has been made of the low returns on investment for western rangeland ranching. However, little work has been done to empirically compare these returns to the return that would be demanded by financial markets from assets with similar risk and return characteristics. This study uses historical forage productivity data from three locations in California’s Mediterranean rangelands to simulate financial statements for three hypothetical cow-calf ranches and measures the variability in return on investment from year to year. This performance is then compared to the actual performance of a diversified portfolio of investment assets using the Capital Asset Pricing Model (CAPM), from which the theoretical cost of capital for these hypothetical ranches is derived. Much like other agricultural enterprises, cow-calf ranching in California is found to have low market risk and a low theoretical cost of capital based on the CAPM, approximately equal to the risk-free rate of return, which averaged 4.8 percent for the period 1988-2007. This cost of capital is still significantly greater than the historical return on cow-calf ranching in the western U.S. of 2.0 to 3.0 percent, implying that ranchers are receiving benefits from their business beyond financial returns, and reinforcing the idea that they derive amenity or other environmental values from these investments.