The riddle
What Do You Call a Happy Cowboy?
Jolly plus rancher
"Jolly" means cheerful, which is the happy of the question. A rancher is a person who owns or runs a ranch, and a cowboy works on one. Merriam-Webster defines a cowboy as a mounted ranch hand who tends cattle. The two jobs overlap on a ranch, which is why the answer can stand in for the cowboy of the question. The trade has Spanish roots, too: Merriam-Webster traces vaquero, the Spanish word for a cattle herder, to vaca, the word for a cow.
A candy brand in the answer
Jolly Rancher is the name of a candy. The riddle uses the name because it is made of two ordinary words that fit the cowboy, and nothing more about the product is needed. Listeners who know the brand get the joke immediately, and listeners who do not can still reach it by working out the two words.
Where the word ranch comes from
Merriam-Webster traces ranch to the American Spanish word rancho, a small farm. In English it names a large farm for raising cattle, horses or sheep.
Telling it
Ask the question and pause on "happy". Listeners will try words like cheerful, glad and merry, and the group often lands near the answer before anyone says it. The method is to swap each word of the question for a near-synonym: happy becomes jolly, and cowboy becomes rancher. The answer assembles itself from the two swaps, and a group can try the same trick on a sad cowboy or a tired one. If the joke falls flat, say the words "jolly" and "rancher" separately and the candy will come to mind.