[Congressional Record Volume 140, Number 99 (Tuesday, July 26, 1994)]
[Senate]
[Page S]
From the Congressional Record Online through the Government Printing Office [www.gpo.gov]


[Congressional Record: July 26, 1994]
From the Congressional Record Online via GPO Access [wais.access.gpo.gov]

 
                     IMPACT OF GRAZING FEE INCREASE

  Mr. HATCH. Mr. President, last May, the Economic Research Service 
[ERS] of the U.S. Department of Agriculture released a report analyzing 
beef cow/calf operations with permits to graze on lands managed by the 
Forest Service and the Bureau of Land Management in 10 western States--
``Cow/Calf Ranching in 10 Western States''--AER-682. The report states 
that ranchers with permits to graze cattle on Federal land-permittees--
enjoyed higher net earnings than ranchers without such permits--
nonpermittees--even though certain required costs--fencing, breeding 
stock, hired labor, et cetera--cost permittees more. The report 
concludes that these permittees paid ``sufficiently less'' than 
nonpermittees to graze their cattle on Federal land that more than 
offset these higher costs.
  The current debate on reform of our Nation's grazing policies 
involves the issue of fees charged to graze on Federal lands. Secretary 
Babbitt proposes increasing the current Federal grazing fee of $1.96 
per animal unit month [AUM] to $3.96 per AUM by 1997, while I have 
joined several of my colleagues in supporting S. 1326 to increase the 
fee to $2.35 next year. This wide disparity about where the fee should 
be set is symbolic of a wider disparity in our views about the overall 
reform of rangeland policies. This debate, rather than being conducted 
and resolved in Congress, is being pursued through regulations put 
forward by the Secretary.
  Since the report from the ERS indicates that a higher Federal grazing 
fee ``will be relatively small for the average permittee,'' and thus 
justified, I asked two professors from Utah State University [USU] to 
review the ERS report. I believe it is imperative that my colleagues 
and others who are interested in this debate have a complete 
understanding and thorough knowledge of what is occurring on our 
western rangelands.
  Drs. Darwin B. Nielsen and E. Bruce Godfrey, acknowledged experts in 
the area of agriculture and agricultural financing, recently provided 
specific comments and questions regarding this report. I believe these 
comments are worthy of my colleague's consideration during the ongoing 
debate about grazing fee increases. Today, I am making these comments 
available so that, as my colleagues read the ERS report, they can have 
a second opinion on the report's contents. I ask unanimous consent that 
USU's analysis be printed in the Record.
  There being no objection, the material was ordered to be printed in 
the Record, as follows:

                [From the ERS Report No. 682, May 1994]

 Comments on the USDA Publication: Cow/Calf Ranching 10 Western States

              (By Darwin B. Nielsen and E. Bruce Godfrey)

       The following comments are responses to the portions 
     (Summary, etc.) of the original publication.


                                summary

       A big deal is made of the supposed fact that fees on public 
     lands are below the market value for forage. A single grazing 
     fee for all public land users cannot collect full market 
     value from each rancher. Regardless of the distribution of 
     individual rancher values of grazing, there will be some with 
     high total costs where the current fee is too high. There 
     will be others where they have a low total cost and/or high 
     returns associated with the use of public lands and the fee 
     is less than they would be willing to pay at the margin. Low-
     cost ranchers are in a position to pay for permits if they 
     choose. However, in recent years, new players have entered 
     the permit value game and have distorted the logic of the 
     original model of public land grazing. The new players are 
     environmental organizations who buy permits with the sole 
     purpose of retiring them from grazing. The Nature Conservancy 
     is one such organization. In addition, one of the main 
     thrusts of ``Rangeland Reform 94'' is to make it easier for 
     these groups to buy and retire permits via ``conservation 
     use.''
       The authors argue that permittees ``cannot own grazing 
     permits,'' but this is not a valid argument. The government 
     recognizes permit values for inheritance taxes. When the 
     government deems it practical, they purchase permits to put 
     land to other uses. BLM and FS officials have been party to 
     transferring permits and aiding the parties in determining 
     sale prices for permits. Thus, grazing permits are bought and 
     sold in the market like other types of property.
       The authors argue that current fees do not cover the cost 
     of administration, and that fees should be increased to cover 
     these costs. This, however, is looking at the problem from 
     only one side. Has anyone investigated to see if 
     administration costs are too high? In the short run, at 
     least, the cost of production has never been the driving 
     force to set market prices. If market prices do not cover the 
     costs of production in the long run, the producer of the 
     goods goes out of business since he/she is too inefficient to 
     produce and sell at competitive prices. Nonfee costs, which 
     are major costs and much more than the fee, are never 
     mentioned, even though they should be accounted for in the 
     budgets if they are accurate!
       The statement is made that rancher net income would decline 
     as the fees increase, but more funds for federal, state, and 
     local governments would offset ranchers losses in local 
     spending. This may not be the case. One important detail has 
     been overlooked. It has been assumed that ranchers will be 
     able to remain in business as the fee and nonfee costs 
     increase over time, which also implicitly assumes an 
     inelastic demand curve for federal grazing. If there is any 
     empirical data to support this, it should be listed. It also 
     assumes that all of the grazing fees collected would be 
     returned to the local area.


                                  Text

       The statement is made that ``the cow/calf version of the 
     1990 FCRS represents just over 98 percent of the U.S. beef 
     cow inventory.'' If that is the case, why didn't they include 
     the states of Nevada and Washington in the analysis? North 
     and South Dakota are included but have been treated 
     differently in the fee issue for the past several years. The 
     argument has been that the Dakotas were different than the 11 
     western states. They make a statement that the grazing fee 
     formula or amount can be changed in two ways. ``Congress can 
     pass grazing fee legislation, the fee can be altered by 
     executive order or agency regulations.'' Isn't this three 
     ways fees can be changed?
       ``Most published research results indicate grazing fees 
     charged were below market value at the time of the studies.'' 
     Could a list of these publications be provided? If a 
     reasonable return on the permit value was counted as a cost 
     of grazing public land, I doubt that statement would be 
     valid. The argument--grazing fees do not cover the cost of 
     administration, thus, they should be increased--is an invalid 
     argument as mentioned above. If grazing fees were forced to 
     cover administrative costs, there would be even less 
     incentive for the agencies to be cost conscious. In fact, 
     increasing grazing costs could be an incentive to raise fees 
     and eliminate grazing. For example Nelson (1979) showed that 
     the difference between administrative costs and revenues for 
     most uses of Interior lands was much greater for other uses 
     (e.g., recreation) than it was for grazing. In addition, the 
     total cost of an activity is not a defendable basis for fees. 
     One has to consider the costs that would be incurred ``with'' 
     versus ``without'' an activity. In the 1986 Grazing Fee 
     Review and Evaluation, BLM personnel found that fees, based 
     on the ``with'' versus ``without'' principle, were nearly 
     equal to the fees being charged livestock operators to graze 
     federal lands. If the government insists that the cost of 
     administration is a valid argument for fees and fee levels, 
     why don't they apply this principle to all users of public 
     lands? Under this system we would not have to worry about 
     determining values to the users of public lands, we would 
     just have all of them pay the costs of administration of 
     their particular use. The authors discuss ``arguments for 
     higher fees'': (1) to cover costs of administration, (2) to 
     be reasonable, and (3) to reflect the value of public forage. 
     Which argument do the authors prefer?
       The authors talk about the size differences between 
     permittee and nonpermittee ranchers. The conclusion they make 
     is that there is ``some advantage accruing to permittees that 
     allowed them to become larger in the first place.'' What is 
     the empirical basis for this statement?
       A $106 cost differential between permittee and nonpermittee 
     is suggested. Is this difference statistically significant?
       ``Forage from other public sources was often more costly 
     per forage unit than FS/BLM. * * *'' Was this statement based 
     on fees collected by an agency or total cost of grazing to 
     the rancher or were the goods and services comparable? If it 
     was not based on total cost to the permittee or leasee, then 
     the comparison is erroneous.
       Permittees had more capital for fences, horses, and 
     breeding stock while nonpermittees had greater costs for 
     machines, equipment, buildings, and trucks. How were the 
     costs of these capital items allocated by enterprise and over 
     time? Is the allocation of these costs just to the livestock 
     enterprise, or where these costs allocated to other 
     enterprises? If so, what criteria was used?
       There are a few questions about Table 1 that need to be 
     explained, since they are not discussed in the text. The key 
     point made in the USDA publication is that permittee ranchers 
     are economically better off than nonpermittees. There are 
     several points to be made that question this conclusion.
       Permittee ranchers had more stocker cattle than the 
     nonpermittee ranchers and purchased fewer stockers than 
     nonpermittee. Permittee ranchers kept a significant number of 
     calves over as yearlings, so they gave up any profit on 
     calves. Looked at another way, permittee ranchers get 
     stockers at a lower cost than those purchased by 
     nonpermittees, thus they make more on them. Since 
     nonpermittee ranchers brought more stockers than permittee 
     ranchers, they have lower returns on their stockers by the 
     difference in the cost of stocker cattle going into the 
     operation. This difference is equal to the profit given up on 
     selling calves.
       It is very difficult to allocate costs between sheep and 
     cattle enterprises on the same ranch. Permittee ranches have 
     more sheep than nonpermittee ranches. If the costs allocated 
     to sheep production are overestimated, it will make permittee 
     ranches appear more profitable than nonpermittee ranches.
       Cost of bulls is not included in the budget (Table 1), and 
     it is not clear if the value of cull bulls is included in 
     receipts from other cattle. Permittee ranches would normally 
     require more bulls per 100 cows than nonpermittee ranches. It 
     is conceivable that a permittee ranch would require one bull 
     per 25 cows, while a nonpermittee ranch-pasture operation 
     might require one bull per 50 cows. Permittee ranchers would 
     have significantly higher costs per cow for bull service.
       The year 1990 appears to have been a relative good year for 
     running stocker cattle. Price data for Utah shows 1990 as the 
     highest price stocker cattle year from 1988-92.
       The materials presented by USDA are confusing as to what 
     year they are reporting. The budget in Table 1 is for 1991, 
     the material in Tables 2 and 3 is for 1990 and is used in 
     Table 1. On page one, it is reported that the data used was 
     collected in the 1990 Farm Costs and Returns Survey.
       It is mentioned that permittees use more pickup trucks and 
     three times as many horses than nonpermittees. Given all of 
     the harvested feed used by nonpermittees, how can permittees 
     use more fuel and lube than nonpermittees? Is all the 
     difference in gas for the pickup? Where is the cost of horses 
     in any of these budgets? Horses are not free and they eat 
     year-round so they should have a cost to the cattle 
     enterprise. The fact that permittee ranchers have more horses 
     than nonpermittee ranchers is probably related to the type of 
     grazing land permittees are using (public land), which is 
     usually more difficult to manage for grazing.
       If stocker enterprises were relatively unprofitable and if 
     the purchase and sale of stockers were a larger part of 
     nonpermittee costs and receipts, this would bias the results 
     downward for nonpermittees. While one is not able to 
     determine the profitability of stocker enterprises for either 
     permittees or nonpermittees from the data provided in this 
     publication, data from Cattle Fax suggest that stocker 
     operations were not profitable in the 1990-91 period.
       The authors indicate (page 6) that the average costs for 
     permittees were significantly less than they were for 
     nonpermittees. Was this purported difference statistically 
     significant? If so, how was this determined? The authors also 
     indicate that regression was used to determine if differences 
     in size could be used to account for the difference(s) in 
     costs. However, these results are not given. The only 
     indication of the ``goodness'' of these regressions is 
     suggested in footnote #10, where the R-squared values 
     ``ranged from .32 to 0.006.'' If this is the R2 for the 
     regression equations, it is likely that the equations could 
     not be used to test the significance of any variable. As a 
     result, the suggestion that there was no difference according 
     to size could not be tested!
       The statement (page 7) that there should be no difference 
     between permittee and nonpermittee costs and returns is only 
     true, theoretically, in the long run--after inefficient 
     producers have been forced out of business. If small 
     operators are willing to subsidize cattle operations as a 
     ``way of life,'' one would expect their costs to be greater 
     than (larger?) operators who are not able to subsidize their 
     cattle operation.
       The statement in paragraph 2 (page 8) suggests that the 
     cost of operating on rough terrain with inadequate water 
     would be higher than it would be on lands where water is in 
     ample supply and where the land was level. This difference is 
     not reflected in the budgets (Table 1)--unless one assumes 
     that permittees operate on ``better'' land than do 
     nonpermittees.
       Given the size differences in the number of cattle and 
     sheep for permittees and nonpermittees, there would be many 
     more full-time livestock ranchers in the permittee category. 
     The residual returns part of Table 1 is misleading. If you 
     are a full-time rancher with a permit, you are much more 
     dependent on these residual returns than a small part-time or 
     hobby livestock man in the nonpermittee category. Even though 
     neither group is doing very well, a full-time rancher with 
     negative returns is shown to be better off than a 
     nonpermittee ``rancher'' with negative returns. These 
     negative returns only amount to a small portion of his/her 
     business and/or time for the small nonpermittee rancher.
       The fees paid to the BLM/FS for grazing should give some 
     strong evidence of dependency on public lands. The grazing 
     fee in 1991 was $1.92/AUM. Since calves go on the cows and 
     are not counted, the cows would be the major grazing animal 
     on the allotment. There should be a few bulls in the summer, 
     and some yearlings might be grazed on a permit. But, these 
     exceptions do not explain all of the problems of reported 
     dependency on public lands. Let us look at data from Table 1.
       Cow-calf.--$11.13 paid in fees  $1.92/AUM = 5.8 
     AUMs/cow unit.
       Cow-calf yearling.--$13.80 paid in fees  $1.92/AUM 
     = 7.2 AUMs/cow unit.
       Average.--$12.50 paid in fees  $1.92/AUM = 6.5 
     AUMs/cow unit.
       This would indicate that, on average, 6.5 months of grazing 
     are provided by the BLM/FS. This appears to be significantly 
     different than the 25 percent dependency reported in the text 
     of the report footnote 6 on page 3.
       An examination of the materials in Table 2 raises a few 
     questions. The peak number of cattle per operation for 
     permittees is reported to be 471 head. In footnote 9, this 
     number is broken down as follows: 471 hd. cattle - 221 hd. 
     cows - 250 hd. cattle - 206 hd. calves - 44 (assumed by 
     report to be yearlings) - 10 (what about bulls--assume 10 hd. 
     needed) - 34 (what about replacement heifers? - 34 (assuming 
     15 percent replacement rate) = 0.
     There does not appear to be any room for yearlings except for 
     replacement heifers. This raises questions about the assumed 
     number of yearlings for sale in Table 1.
       If grazing fees (page 9) should be increased to account for 
     inflation, one would also expect permit values to increase as 
     a result of inflation. The data available suggest, however, 
     that they have not increased in either monetary or real 
     terms. This suggests that permits have declined in value 
     (rate terms) even when fees have not increased (monetary).
       The report seems to put a lot of importance on permit 
     values until it comes time to use them. Let us assume the 
     value of permits per ranch of $56,168 is correct. The 
     permittees should be entitled to a return or an opportunity 
     cost on the money invested in permits. If this amount is 
     added to the full ownership costs for permittee ranches, it 
     will erase more of the reported difference between permittee 
     and nonpermittee ranchers.
       There are problems with the cost of production approach to 
     value that have been discussed earlier in these comments.
       In the conclusion section, they say: ``One reason 
     permittee's costs average lower is their lower costs for 
     forage and pasture to which the relatively low FS/BLM grazing 
     fees contribute.'' Since fees were the only item listed, they 
     must think they are the only cost of grazing public lands. On 
     the same page, they say: ``the effect of increasing FS/BLM 
     fees is relatively small for the average permittee because 
     FS/BLM fees are only 3.7 percent of total cash costs per 
     cow.'' Again, they fail to recognize nonfee costs, which 
     would raise the percentage significantly.
       The fee collected by the government is not the total cost 
     to the rancher of obtaining an AUM of federal forage. The 
     nonfee portion of total costs is not handled well in this 
     report, and realistic comparisons of public and private costs 
     of grazing can only be made on a total cost basis.
       This statement is made in the conclusions: ``Permittees 
     adjust to lower land charges by increasing expenditures per 
     cow for some other production items, such as hired labor, 
     horses, fences, protein feeds, fuel, and lubricants.'' These 
     items comprise many of the nonfee costs of grazing. Yet, it 
     is difficult to see where they are considered in the budget. 
     Horse costs are not considered, fence costs are hidden in 
     labor, and miscellaneous, if they are included. Much of the 
     time of the owner-manager is spent on public land grazing 
     tasks that are required by the agencies. This time was 
     ``lumped off'' in a negative return to management.
       In the discussion of permit values, these economists slip 
     over into the policy arena and forget their economics. They 
     list the economic institutions that recognize permit values 
     as assets to be taxed or held as security but cling to the 
     policy that they have no value.

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