Tips for planning, negotiating, documenting and reducing your land lease expenses.
To own or to lease is a decision that involves numerous factors, not the least of which is your management direction, both long and short term. There's no doubt that it's usually more profitable to lease than buy. But, a combination of buying and leasing is often the most beneficial in the long term, and the easiest on management.
But, how do you lower the stress level of lease property? A long-term lease with payments tied to the calf price is the ideal situation, but how do you get this accomplished?
Start With a Plan It starts with a good Integrated Business Management Plan (IBMP). In the absence of a plan, it's impossible to determine what you can feasibly afford to pay for grass. I know a lot of grass in the Midwest at $160 or more per cow-calf unit is too much no matter what the plan.
Your plan should include any improvements you plan to make and their projected pay out. Sharing your plan with the landowner can help improve your lease cost. Being open and honest with him, as well as showing an interest in capital improvements that will improve the value of the property, may also improve your chance for a more favorable lease cost.
The excuses I often hear are "It's not my land. Why should I spend the time and money to improve it?" or "I'm only leasing, I don't get paid for capital improvements!" Both views are definitely wrong.
Cross fencing for an intensive grazing system can pay big dividends, especially in the South. A properly designed and diligently implemented grazing system can, in many cases, double the stocking rate. Therefore, if your lease is set up on a per-acre basis, you have automatically cut your grass cost in half. (We'll discuss grazing systems more in a later issue.)
Many types of electric fence can be constructed for less than $750/mile. Assuming we're in a perfect world, let's say we have a square mile of ground (640 acres) that we've divided into 10 equal-sized pastures. The total fence required, excluding the existing exterior, would be five miles or $3,750 in fence and labor.
Straight-line depreciation over seven years requires an annual depreciation of $535.71. For our water systems, we'll consider a worst case scenario which would require two additional water tanks and 31/44 of a mile of extra line or an additional $5,210 in capital investment. Total annual depreciation from the fence and water projects is $1,280/year plus $694.40 in opportunity costs ($8,960.00 x 7.75% interest). Total annual cost is $1,974.40.
Consider Stocking Rate Now, let's assume a traditional stocking rate of one cow-calf unit per 6.4 acres (100 head) and the pasture lease cost is $17.50/acre or $112/exposed female. As we know, intensive grazing will provide for an increase in stocking rate, but let's not assume a likely doubling of cattle. Let's expect only a 50% increase.
We now have 150 cows on the same 640 acres reducing the lease cost per exposed female to $74.66 (640 acres x $17.50/acre/150 cows). That's a land lease savings of $37.33/exposed female. Total additional depreciation and opportunity costs for the fence and water project is only $13.16/exposed female.
The net bottom line improvement would be $24.17/exposed female. Therefore, the breakeven on the fence and water project spread over seven years would be a mere 18 head of additional females.
This illustrates the importance of negotiating the lease on a per acre or lump-sum basis. It also points out the need for a long-term commitment on both parties involved.
Additionally, you may be able to negotiate the lease cost down because of adding improvements to the property or possibly get the landowner to kick in some of the capital required to put the improvements in place. It may be as simple as providing the labor if the landowner agrees to provide the materials.
The easiest way to do this is simply tie by 10s as in the following table concerning a standard 500-lb. steer.
Calf Price $/cwt. $ Lease/Cow-Calf Unit $50 -- $100 $60 -- $110 $70 -- $120 $80 -- $130 $90 -- $140 $100 -- $150 $110 -- $160
This is the simplest example and is but one type of shared loss and/or gain. Each individual deal must be negotiated with the landowner.
Of all of the above, tying the lease to the calf price is the most difficult to pull off as pasture is rented by the basic economic principle of supply and demand.
Therefore, when cattle inventory is down and cattle prices up, land leases are normally lower (more grass, less cattle). The nature of economics produces the opposite situation of what would be the healthiest environment for both parties involved. In a strong well-negotiated, long-term relationship, the landowner should be more than willing to work within this type of situation since it would be in his best long-term interest.
Documentation Whether a private or governmental lease, remember to document everything. Have a detailed written agreement signed by both parties (AGRI-PLAN has sample agreements available, see the phone number at end of this article). Be sure to record the in-dates, out-dates, rainfall, production levels (i.e., pounds of beef produced/acre), number of head in and out, and pasture condition.
It's also a good idea to get as many "before and after" photographs as possible. When taking photos spread over several years, be sure to use a recognizable, solid reference point for each year's photo (i.e., a big tree, a crooked post) or put in your own marker (i.e., a post with a sign and a number on it).
Have you improved a riparian area with your grazing practices or healed a blow out? Document what you've done and take a progression of pictures to show your progress.
In the case of private leases, this tactic may help you negotiate a better price on your existing lease or on another lease. With state or federal leases, it may become the saving grace that allows you to remain on the property. Properly done, it may well open doors to other opportunities with government grazing.
A number of individuals are actually being paid to graze land. They are utilizing livestock (sheep and/or goats) to consume noxious weeds. In some cases, they actually net more from the grazing revenue than livestock sales.
Tom Hogan owns and operates AGRI-PLAN Corp., an operational efficiency and financial management consulting firm. For more information or his 100+page manual, "Planning Your Way To Profit," which guides you through the development of an Integrated Business Management Plan (IBMP), call 800/793-1671 or e-mail: [email protected]