Most potential lease partners just don't realize the flexibility available in setting up an equitable beef cow lease. Even more critical is a cattlemen's tendency to set up a beef cow lease without considering the data associated with that particular beef cowherd.
An equitable beef cow lease needs to be based on specific herd data and the resource contributions of the cow owner and the working rancher. Such leases often encounter difficulty when the participants use a community standard agreement similar to that used for leased farmland.
In the Northern Plains, the community standard agreement for beef cows is 60/40. This, however, often isn't equitable.
Using my demonstration Integrated Resource Management (IRM) herd to illustrate the process, here are five steps in forming an equitable beef cow lease.
Step 1: Assemble the herd production facts for the beef cowherd.
Here are the facts for the demonstration herd's production of year 2000 calves. At bull turnout in 1999, there were 191 breeding females with 13 flagged for fall culling. Thus, the standardized performance analysis (SPA) adjusted females exposed was 178 (191-13).
Not included in the figure for number of breeding females are 31 replacement heifers held over for breeding during summer 2000. Excluded from this lease, these heifer calves were moved to another location and rejoined the herd in fall 2000 as pregnant heifers.
Never mix replacement heifer development into a beef cow lease. It's a bookkeeping nightmare, and someone typically gets taken.
The herd weaned 154 live calves in fall 2000 — an 87% calf crop. There was a 5% calf loss (eight pre-weaning deaths). Weaned steer calves weighed 579 lbs., while heifers weighed 548. This herd weaned 489 lbs./SPA adjusted female exposed.
These are the minimum production records I would demand if I were to lease a beef cowherd. I'd expect these same records to be kept for the herd while under lease.
Now, let's look at gross income generated by this cowherd in 2000. A cowherd has six sources of income — steer calves, heifer calves, cull cows, cull open heifers, cull bulls and inventory change.
The key question behind a lease is “what's a fair and equitable division of this herd's $97,629 gross income between the two lease parties?” First, divide the calf crop into the same proportions that each party contributes to the total costs. The cow owner normally gets all income from the culling of cows, open heifers and bulls. The cow owner also gets any inventory changes (positive or negative) and absorbs all cow depreciation.
For all of this cull income, the cow owner needs to provide all replacement heifers. This is why the replacement heifers were physically removed from this ranch for development.
The upper limit on acceptable cow and calf death loss can be set to encourage proper management by the working rancher to protect the owner's capital investment. Thus, cow losses up to that limit are the owner's responsibility. Losses above that limit are charged to the working rancher.
Where calf death losses are concerned, losses of up to 8% might be shared by both parties. Losses greater than 8% go against the working rancher. Again, this is done to encourage good management.
Step 2: Prepare an economic budget for the herd to be leased.
Economic costs are based on pasture rental rates, fair market value of the raised feeds fed, annualized cost of assets used by the cowherd and the out-of-pocket livestock costs of running the herd. Let's calculate the economic costs for this study herd.
Break the feed costs into summer grazing and winter stored feed. In a 153-day grazing season, this herd consumed 847 animal unit months (AUM) of grass. With grass priced at the rental rate of $10/acre, this computes to $12.13/AUM of grass consumed. Add mineral and salt costs, and the total summer pasture cost is $67/cow.
For the 212-day stored feeding period, each cow will average 29 lbs. of hay/day (including waste) for a total of 3.47 tons of hay/cow. Total winter feed cost, including salt and mineral, is $156/cow. Thus, the total winter and summer feed cost is $222/cow.
Depreciation on the cows (8% annually after adjusting for cull value) and overhead costs such as insurance, repairs and taxes on the breeding herd, facilities and equipment used by the cows totaled $96/cow. That's a total economic cost of production of $373/cow (see Table 1). Interest on investment is not yet included nor is a charge for unpaid family and operator labor, management and equity capital.
Step 3: Convert the economic budget to full costs of production (see Table 2).
Full costs of production starts with economic costs and imputes a charge for unpaid family and operator labor, management and equity capital. Because these costs are more subjective than the economic costs, I separate them from the economic costs and refer to them as imputed costs. The full cost of this herd was $560/cow.
Step 4: Determine the equitable calf crop allocation.
To determine the share of the full costs of production contributed by each leasing party, see column 3, 4 and 5 in Table 2. This is the data for a typical lease in which the cow owner contributes the cows and bulls. Meanwhile, the working rancher contributes labor, management, feed, facilities, equipment and all out-of-pocket livestock expenses.
The cow owner has an annualized full cost of $156/cow, while the working rancher contributes $404/cow. The cow owner's ownership costs of the cows and bulls account for 28% of the full costs of running that herd. The working rancher contributes 72% (see bottom of Table 2).
Dividing the calf crop proportionately to the costs contributed, the cow owner should get 28% of the calf crop and the working rancher gets 72%.
Step 5: Calculate the herd's total gross income distribution to both parties.
It's critical that both leasing parties understand the total gross income distribution. Using 2000 prices (72/28 lease agreement with the owner also retaining income from cull cows, open cull heifers and cull bulls), the working rancher would claim 61% of the total gross income while the cow owner would get 39%.
Most working ranchers forget the non-calf income that typically goes to the owner of the cows and bulls. I've seen many 60/40 lease arrangements in which the cow owner received more than half the gross income from the herd. My experience suggests 70/30 leases are typically more equitable.
If you're seeking help in the pre-lawyer phase of leasing, I can help generate a beef cow budget, which will serve as the basis for the lease. I also can help draft a written draft lease that can be taken to a lawyer for final preparation.
Harlan Hughes is a Professor Emeritus at North Dakota State University. Based in Laramie, WY, he can be reached at 701/238-9607 or [email protected].
|Cost Item||Total Cost Per Cow||% to Cow Owner||Cost to Cow Owner||Cost to Working Rancher|
|Total feed costs||$222.00||—||—||—|
|Vet & medicine||$21.00||0%||$0.00||$21.00|
|Bull description & insurance||$13.00||100%||$13.00||$0.00|
|Interest on operating debt||$3.74||100%||$0.00||$3.74|
|Cattle depreciation & insurance||$72.00||100%||$72.00||$0.00|
|Taxes on cattle||$0.00||100%||$0.00||$0.00|
|Total economic costs||$373.00||—||$85.00||$288.00|
|Cost Item||Total Cost per Cow||% to Cow Owner||Cost to Cow Owner||Cost to Working Rancher|
|Total economic costs/cow (from Table 1)||$373.00||—||$85.00||$288.00|
|Labor cost (8 hrs @ $8/hr)||$64.00||0%||$0.00||$64.00|
|Management charge (6% of gross income)||$35.00||0%||$0.00||$35.00|
|Cows @ $800/cow||$64.00||100%||$64.00||$0.00|
|Total interest on inv capital||$87.61||—||$70.75||$16.87|
|Full cost of production||$560.00||—||$156.00||$404.00|
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