Making equitable livestock lease arrangements
The recent economic downturn affects nearly everyone to some degree.
For the young rancher wishing to start a livestock operation, credit and uncertainty are stumbling blocks, especially if dependent upon off-farm employment. The situation affecting the young buyer also affects the ranchers considering retirement.
Perhaps a cow lease agreement may be one option that will fill a need for both.
Leasing cattle should be a win-win solution for both partners. The investor will capture some of the profits from cattle sales and the tax advantages of owning the cows. The working farmer, in turn, provides the labor and feed to operate the beef cow herd without the need for the capital investment.
The theoretical procedure for determining an equitable beef cow share agreement is really quite simple. An equitable beef cow share agreement is one in which the two parties share the calf income in the same proportion as the production costs.
For example, if the cow owner provides 25 percent of the production costs of operating the herd, and if the participating rancher provides 75 percent of the production costs, then the owner should receive 25 percent of the total calf income and the participating rancher should receive 75 percent of the calf income.
Expenses can be shared in many different ways. In some cases the cow owner provides the cows, the bulls, and sometimes even the pasture. Typically, however, the owner of the cows provides only the cows and the replacement heifers, and the participating rancher provides the rest of the resources. Each equitably shared arrangement should be tailored to the two participants' unique resource contributions.
Include all herd income in agreement
Although in a typical lease the equity question relates mainly to the sharing of the calf crop, it is important to note that "all" the income from the herd should be accounted for -- not just, as is frequently done, the calf income.
A beef cow enterprise can also generate income cull cows and bulls, as well as open yearling heifers. Each party needs to clearly understand the total income potential of the herd.
Project the full costs of production
An equitable beef cow share agreement should be based around the full costs of production. These costs should include all resources employed in the beef cow enterprise, including the enterprise's direct costs and the opportunity costs for the working farmer's labor and management, and the equity capital of both parties. Cow depreciation should be included in place of replacement heifer costs.
Equitable share agreement
Once the total costs are determined, the next step is to allocate each cost to one of the two participants, or they can also be shared between the two parties. North Dakota State University's in-depth analysis from one working ranch suggest the cow owner receive 39 percent of all income and the working rancher receives the remaining 61 percent -- even though the calf crop is to be shared 29-71. This is consistent with their surveys that find most cattlemen share the calf crop 40-60. All cull animal income goes to the party that provides the investment capital.
Two final cautions to any two business people entering into a beef cow share agreement. First, these agreements should be in writing and the written contract should clearly identify all of the specifics agreed upon. Secondly, participants are advised to cover all production costs, death losses and exactly how the business agreement will be terminated.
It's much easier to decide upon these details before the agreement is signed than to work out an agreement after an emergency or business disagreement occurs.
For more on this topic, see the full bulletin online at www.ag.ndsu.edu/pubs/agecon/farmmgt/ec1086w.htm, or contact me at the Polk County Extension office in McIntosh at 800-450-2465, or at the Clearwater County Extension office on Wednesdays at 800-866-3125. If e-mail is your thing, contact me at firstname.lastname@example.org.
Source: NDSU Extension Service