My folks were in their mid-20s when they had the opportunity to move back to the family ranch and start investing in the operation. At that time, they purchased the home place and the surrounding land from my grandparents.
With so much money invested in the property, my dad says he was leery to take on additional debt, so he and my grandpa made an agreement for him to take cows on shares. My grandpa was the principle owner and my dad would provide the labor and feed. The agreement worked out well for several years until my grandpa was ready to phase out, and my dad was ready to take on the expense of full ownership.
An agreement like this certainly has its pros and cons, and there are definitely plenty of potential challenges and pitfalls to keep in mind. A cow-calf share or cash lease agreement can be mutually beneficial to both parties, but for it to be successful, there are key considerations to keep in mind.
Aaron Berger, University of Nebraska-Lincoln (UNL), reviewed these considerations in a recent UNL Beef Watch newsletter. Here are three tips for achieving a cow-calf share or cash agreement that works.
1. Major drivers that determine cow owners’ share
Berger says there are four major drivers to determine what is fair in terms of a cash lease or percentage of the calf crop the cow owner should receive, including: average cow herd value, cow salvage value, replacement rate and expected rate of return (interest rate) on cow value.
He writes, “Average market value of bred cows and cow salvage values are drastically less than they were two years ago. This dramatic change in market value is impacting what is ‘fair’ in terms of the amount of cash lease that would go to cow owners or percentage of the calf crop a cow owner should receive. This change is due to the current market value of a bred cow versus what the bred cow value was in the fall of 2015. This drastic change in cow value means the person owning the cows may need to expect a smaller cash lease payment or percentage of the calf crop to more accurately reflect what a ‘fair’ lease agreement is.”
2. Determine how to divide the calf crop equitably
Berger says it’s important to factor in costs of feed, veterinary supplies, services, pasture and winter grazing costs, utilities, equipment, labor and calf crop revenue to determine the best way to split expenses and income.
“By sharing revenue in proportion to the share of contributions incurred, the lease arrangement is likely to be ‘fair’ for both the operator and the cattle owner,” writes Berger. “An electronic spreadsheet that uses an enterprise budget can be a helpful tool for making this determination.”
3. Understand the goals of both parties
Berger writes, “Cattle owners and operators who have not worked together previously should clearly outline the goals of the share lease agreement. A one-year lease may be considered, as it allows the terms of the lease to be revised annually if needed, or the share lease relationship can be dissolved. A multiyear lease also has its benefits, allowing a relationship to develop between both parties.
“However, a multiyear makes it difficult to terminate prior to the ending of the lease if issues arise. Therefore, it is common to find parties who write a one-year lease and renew the contract annually. The flexibility in making adjustments each year due to unforeseen situations is advantageous in a share lease agreement.”
For additional considerations on creating a cow-calf share agreement that works for both parties, click here.
The opinions of Amanda Radke are not necessarily those of beefmagazine.com or Penton Agriculture.
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