The 2002 and 2006 droughts have stoked interest in beef-cow leases, as drought-impacted ranchers seek to lease their cows to operators with grass and winter feed. In addition, drought-impacted ranchers who depopulated in 2002 are finding it's better economics to repopulate with outside investor-owned, leased cows than purchase expensive replacement females.
With a “first right to purchase clause” in the lease agreement, these drought-impacted ranchers should be able to buy the leased cows in 4-5 years when cow prices are projected to be lower. This can be a win-win situation, as the outside investor gets a tax writeoff and the rancher gets his cows back when bred-cow prices are lower.
My five steps to a fair cow lease include:
Assemble the herd-production facts for the beef cow herd to be leased.
Prepare an economic budget for the herd to be leased.
Convert the economic budget to a “full cost” of production with labor, management and equity capital imputed costs included.
Determine the equitable calf crop allocation between the “working rancher” and the “cow owner.” Share the calf crop in the same percentage as you share the “full” production costs associated with the leased cow herd.
Calculate the herd's total gross income distribution to the working rancher and the cow owner.
Get it documented
It's critical a written agreement be prepared and signed even in the typical informal rancher setting. A written contract helps ensure both parties understand the terms right from the beginning, and prevents misunderstandings.
I would refer to the party owning the cows as the “cow owner,” and the rancher who feeds and cares for the cows as the “working rancher.” The contract should call for the cow owner to deliver a specified type and number of preg-checked females to the ranch at a specified start time.
Based on the percent of the calculated annual full production costs paid for by the cow owner (e.g., 25%), the cow owner should get 25% of the calf crop and the working rancher the remaining 75%. Remember, the cow owner also gets the cull-cow income, but provides all replacement females.
Eventually one party will want out of the agreement. That isn't the time to decide how to terminate the deal. It should be done upfront while both parties are excited about this agreement.
I generally recommend termination be at weaning time — a payday time for both partners. If another termination date is selected, the cow owner should agree to pay the working rancher for his feed and labor on a per-day basis (say $1.50/day) to be mutually agreed upon at contract signing. But early termination dates tend to not work very well for either party and should be discouraged.
If the termination date is other than at the weaning payday, be sure to specify who pays for the cow feed in the last partial year of the contract. This is often a real source of contention in verbal agreements and such issues often end up in court.
It's also important that both parties think through the income distribution of a cow-lease agreement. The cow owner provides preg-checked females at day one of the contract. In return, the cow owner gets all cull-cow income but is normally also responsible for all replacement females put back in the herd each year. Whoever owns the bulls gets the cull-bull income. In many cases, the working rancher's total gross income is his percent of the calf crop.
Some other thoughts:
Heifer development is a problem area in lease contracts, as it doesn't work for replacement females to be developed under the general cow-leasing contract. In fact, many lease contracts fall apart over the inequitable cost sharing for developing replacement females. The cost of developing a preg-check heifer comes in totally different proportions than the cow-lease agreement specifies. In short, the working rancher generally gets taken, but many working ranchers continue to try it in their leases!
The cow owner should contract with a third party for heifer development. At weaning time, the cow owner could take some of his calf share in heifer calves and contract with a third party to develop the heifers. Then, at preg-check time, the cow owner brings the preg-checked replacement females back to this leased herd to be covered under the regular cow lease agreement.
The cow owner should provide the vaccines needed for the cow herd; the working rancher provides the labor giving the shots. This helps ensure the cow owner that cows actually get their shots.
A 1% death loss on the cow herd is typical and should be absorbed by the cow owner. Death losses of 2-4% should be shared, with losses above 4% probably absorbed by the working rancher. While the death loss-sharing concept presented here is what's important, the percentages can be changed to reflect the beliefs and wishes of the two partners.
A 5% calf death loss (based on live calves born) is about normal and should be absorbed by both parties together, possibly even as high as 10%. The working rancher should probably absorb death losses greater than 10%.
The cow owner should remove all open females at preg-check time so the working rancher doesn't have to feed and care for them once they're determined open.
All this should be put in a written draft and given to a lawyer to draw up in legal terms. Each party needs to sign the written lease agreement putting the cow-lease program in operation. Properly prepared and documented, a cow-lease program can be a win-win situation for both parties.
Harlan Hughes is a North Dakota State University professor emeritus. He lives in Laramie, WY. Reach him at 701/238-9607 or [email protected].
Click below to download Figure 1.