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What are the economics of a beef cow lease agreement?

Last month, we discussed an equitable arrangement for sharing the calf crop in a beef-cow lease agreement. That lease shared the calf crop in the same proportion as the partners shared the production expenses. In addition, the “cow owner” owned the cows and the bulls, while the “working rancher” provided the labor, management, facilities, pasture, winter feed and all health expenses.

My example 2014 beef-cowherd budget suggested that the working rancher provide 60% of the production expenses, while the cow owner provided the other 40%. This is a common sharing ratio in beef cow leases.

This 60/40 allocation deals only with the calf crop, however. What if cull animal prices have increased or decreased relative to calf prices? Thus, the relative cull animal income of a herd needs to also be taken into account in a fair lease arrangement, with a “fair lease” being one where the two lease partners share the year-end projected profit equally.

Let’s take an in-depth look at the total herd economics behind the suggested 60/40 equitable beef-cow lease discussed in the November issue. 

Figure 1 presents the production parameters for my eastern Wyoming/western Nebraska study herd. The year’s beginning and ending bred female inventory is 250 beef cows. In addition, 44 replacement heifers were exposed to the bull in 2013 for a total of 294 exposed females in the 2013 breeding cycle. This herd generated an 87% calf crop.

In this analysis, all calves born were sold at weaning. Replacement heifers were the total responsibility of the cow owner, and were purchased at fall 2014 preg-check time and added back into the herd. Thus, the ending inventory was again 250 bred females.

Annual gross income for this herd comes from record calf prices and record cull prices. Figure 1 also presents the herd’s gross income after the total calf crop is allocated; the rate used is 60% to the working rancher and 40% to the cow owner. Since the cow owner owns the cowherd, replacement heifers and bulls, he gets the cull animal income.

This herd’s total gross income (calf sales and cull sales) is projected at $449,194. Under the 60/40 lease, the cow owner gets $212,640 (49%), while the working rancher gets $236,564 (51%).

The full economic cost allocation on a per-cow basis is presented in Figure 2. These include charges for operator labor and herd management, and an interest charge for the investment in the breeding herd. Winter feed ($199/cow) and summer pasture ($200/cow) costs are allocated to the working rancher.

The non-feed costs consist of livestock costs, including supplies, fuel and oil, repairs and operating interest; and overhead costs, which include hired labor, farm insurance, utilities, interest, machinery and building depreciation, dues and professional fees, etc. This total is $202/cow, and veterinary and medicine costs are $18/cow. These are all expenses of the working rancher.

The herd investment includes the initial purchase of the 250-cow breeding herd at $1,600/cow. The addition of bull investment brings the total herd investment for the cow owner to $1,800/cow.

Developed replacement heifers were purchased from a third party at $2,000/preg-checked heifer. Replacement bulls cost $5,000/head. Total replacement animals (35 preg-check replacement heifers and three replacement bulls) came to $127,200, or $509/cow. This cost is allocated to the cow owner.

Labor is eight hours/cow and is valued at $15/hour or $120/cow — all allocated to the working rancher. Management was figured at 5% of gross income; it is allocated as 10% to the cow owner (covering initial purchase and scheduling the development of the replacement heifers) and 90% to the working rancher for managing the cowherd. The cost of investment capital for the beef cowherd was set at 5% and is allocated entirely to the cow owner.

Total economic costs (bottom of Figure 2) of $1,427/cow were allocated at $608 to the cow owner and $820 to the working rancher. This suggests a 57/43 sharing of the expenses. I recommend changing this to 60/40, with 60% of the calf crop going to the working rancher and 40% to the cow owner.

Carry this 60/40 lease on through, and the herd is projected to generate $369/cow in economic profit. Of that profit, $283 is allocated to the cow owner and $86 to the working rancher.

This may be an equitable split of the calf crop, but I don’t consider it a fair business agreement. Given today’s cull prices and the production costs of running a beef cowherd, what beef lease agreement would lead to a more equal allocation of the economic profit between the two partners?

Figure 3 presents the same herd with a different split of the calf crop, which is designed to generate an equal split of the economic profit between the two lease partners.

This 64/36 lease is projected to generate an economic profit of $183 for the cow owner and $187 profit for the working rancher. Since this is a projection, one might want to round this off to a 65/35 lease.

I consider a 65/35 lease as more “fair” in today’s price scenario, as it would allow the two partners to earn the same economic profit from the leased beef cowherd. 

Harlan Hughes is a North Dakota State University professor emeritus. He lives in Kuna, ID. Reach him at 701-238-9607 or [email protected]

Promotional Photo Credit: Thinkstock Images

 

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