Texas Cowman Saves Ranch Using Conservation Tax Law- With Environmentalists’ Help, Ranch Uses Tax Loophole to Raise ‘100% Organic’ Cattle

FORT DAVIS, Texas — At a time when cattlemen are selling the farm due to falling beef prices, searing drought and rising energy costs, William "Rocky" Beavers is riding high in the saddle.

By JOEL MILLMAN
Staff Reporter of THE WALL STREET JOURNAL

His 3,847-acre ranch here is showing other cattlemen how they can compete in tough times and take advantage of the Food and Drug Administration’s recent recognition of "100% organic beef."

The new regulatory classification opens a new line of business for Mr. Beavers and other landowners in West Texas’ last wild rangeland, a place where antelope still play and buffalo roam — albeit often behind barbed-wire corrals at the postage-stamp-size "weekend" ranches that urban professionals from Austin, Dallas and Houston have been buying here since the booming 1990s.

Cattlemen hate breaking up their ranches almost as much as they hate the low prices feedlots pay them for calves each spring. Mr. Beavers’s ranch stands as an example of how ranchers can benefit from the uncertain economics of organic ranching — and how they can take advantage of a tax-code loophole that helps keep pristine grasslands out of the hands of developers and ranching dilettantes.

Virgin grasslands, free of herbicides and pesticides, made it relatively easy for Mr. Beavers to qualify his ranch as organic. So long as he fattens his herd with certified organic grain (and eschews antibiotics and growth hormones), he can make a hefty premium selling his beef to a specialty market. "Most cattlemen make $100 to $200 per calf selling to industrial feedlots," Mr. Beavers says. "I think I can double that profit raising calves to slaughter."
[Photo of William ‘Rocky’ Beavers]
In the Davis Mountains of West Texas, William ‘Rocky’ Beavers gets tax benefits from keeping his 3,847-acre ranch intact.

This month, Mr. Beavers will get his chance to put that formula to the test when he sends his first shipment of organic hamburger to a major supermarket chain. After lengthy discussions, H.E.B. Corp., the 275-store San Antonio chain, agreed to stock Davis Mountains Organic Beef. The deal is crucial for demonstrating to Mr. Beavers’s neighbors that they can make more money selling into the organic market than they can under the current system.

"This is the real deal," says Chancey Burrows, of the HEB store in Midland. He says he moves a tractor-trailer load of beef a day through his meat department, which hadn’t previously offered a 100% organic product. Under previous FDA regulations, some ranchers sold "natural beef," which indicated only that the steer were eating antibiotic-free feed for the last two weeks before slaughter. The "organic" designation has a more rigorous standard — and taps into consumers’ growing interest in organic products. "We’re starting with the hamburger," Mr. Burrows says. "But we can’t wait to get the whole line."

Convenient Loophole

Mr. Beavers’s foray into organic ranching might have ended quickly if it weren’t for a provision of the tax code aligning the interests of cowmen and environmentalists. The two groups are at odds throughout the West, as environmental hard-liners seek to protect wildlife and prevent erosion by challenging ranchers’ permits to graze livestock on federal wildlands.
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Yet an environmental group is at the center of the save-the-ranch movement in West Texas. The Nature Conservancy, of Arlington, Va., has been promoting a real-estate gambit allowing ranchers to treat some of their landholdings as a charitable contribution if they don’t develop it. Mr. Beavers got a $400,000 tax deduction on the $1.1 million purchase price of his ranch four years ago — a break that has helped him over some tough times in the launch of his organic beef.

Mr. Beavers’s deal has its roots back in 1996, when the Nature Conservancy’s Fort Davis office acquired the 32,000-acre U-up/U-down ranch through a donation and converted most of it into a nature reserve. The group used the rest for an experiment: to see whether commercial land use could be compatible with environmental protection.

Swearing Off Development

The Nature Conservancy wanted to sell the land, but only to a buyer who would agree to sign an agreement permanently swearing off development, even at the cost of long-term appreciation of the investment. Open land here is valued at from $200 to $1,000 per acre, depending on the size of the tract. The acreage Mr. Beavers and his wife bought was assessed at around $240 per acre, a value that would increase substantially if they subdivided it into weekend ranches.

But the purchase agreement the couple signed dropped the value of the land to $140 an acre. The $100-per-acre difference represents a charitable contribution that helps Mr. Beavers out with his tax bill each year. "I basically agreed that my rancho couldn’t become little ranchitos," says Mr. Beavers, 53, who tends 320 steers and heifers on a slope in the Davis Mountains redolent of wildflowers and fragrant sagebrush.

Mr. Beavers’s deal has raised eyebrows — and hopes — among local cattlemen, who have long been suspicious of outside groups like the Nature Conservancy. Many West Texans see environmentalists as shills for the feds, lobbying to take land out of ranchers’ hands and turn it into national parks.

"A lot of guys’ grandfathers out here fought the Indians for their land, so keeping their ranches intact is pretty important," says Wayne Seipp, one of Mr. Beavers’s neighbors. "Show them a way they can keep their land and keep ranching, and they’ll listen."

The Nature Conservancy has supervised such transactions covering more than a half-million acres of ranchland in Colorado, Montana, Wyoming and Arizona since 1998. "This is a great way for working ranchers to get paid for keeping their land in one piece," says Ben Pierce, director of the Nature Conservancy’s Buyer Fund in Denver.

Selling the Family Farm

Similar agreements are gaining popularity elsewhere, helping keep family farms intact and, in some cases, putting them to use in organic agriculture. In the case of the Cota family of Starksboro, Vt., a local conservation trust went one better than the typical tax break, giving them $300,000 for their pledge not to pave paradise with a parking lot. The Cotas were able to reduce their asking price and bring their 186 acres to within reach of organic growers looking for more space.

The tax benefits, though, are of use only to ranchers making enough money to owe taxes in the first place. Under current tax law, Mr. Beavers’s $400,000 donation could offset up to 30% of his income tax each year for the next five years.

Yet to realize its full benefit, he would need a tax liability in excess of $130,000 a year — implying a profit that isn’t so easy to eke out in a region where cattlemen are doing poorly. "A rock star might have the income to make this work," Mr. Beavers says, "but it’s hard for a rancher."

Write to Joel Millman at [email protected]