How to set up an equitable cow lease arrangementHow to set up an equitable cow lease arrangement
One of the best ways for a retiring rancher to transition out of the business and for a young rancher to get started is with a cow lease arrangement. While the specifics will vary depending on the desires of both parties, there are many benefits to both sides of the arrangement.
March 30, 2018
Periodically, I get a phone call asking what would be a fair beef cow lease arrangement. Usually, one partner wants to own the cows and the other partner wants to run the cows. Their question is generally, how should they share the calf crop?
Often, the cow owner is a senior rancher looking toward retirement, and the other business partner is a younger rancher wanting to get into the beef cow business. The question they ask me is, how should they set up this business agreement so that it is fair to both parties?
A beef cow leasing or sharing agreement allows the two business partners to share the production costs and, in turn, the cow herd’s income. The beauty of a share lease is that the production expenses can be shared in many different ways, as long as the calf crop is shared in the same proportion as the expenses are shared.
This, in turn, suggests there should not be one common leasing arrangement across the industry for leasing beef cows. Yet, this is what I tend to run into. Each lease agreement can and should be tailored to the specific business situation at hand.
There are some do’s and don’ts in setting up a beef cow lease. First, the lease should run from weaning one year to weaning the next year. The annual leasing agreement should end on the day the calves are weaned. At that time, the calf crop is either sold or divided between the two business partners. Each partner is responsible for his or her share of the calf crop after weaning. Remember, the cow owner gets the cull cow income.
If this is to be a perpetual cow herd, the cow owner generally provides the replacement heifers or bred replacement cows. Even though you may want to, DO NOT put the replacement heifer development inside the cow lease. This just does not work and can quickly lead to disagreement — and even a lawsuit. Replacement heifers actually work best if they are developed by a third party, and the cow owner pays the development costs and then transfers the preg-checked heifers into the mature breeding herd just after weaning time each year.
Making the transition
Leasing a cow herd to another rancher is a nice way for the senior rancher to transition out of the cow business — especially from an income tax standpoint. It is also a good way for a young rancher to get started with a beef cow herd.
In this case, the working rancher might develop the replacement heifers each year, and these new cows are all his and are kept out of the lease. Now, the cow owner gets the cull income from only the original leased cows. The working rancher gets the cull income from the replacement heifers when they are eventually culled from the herd.
After seven or eight years, the complete herd has been transferred to the working rancher. The cow owner has sold his cow herd over seven or eight tax years, and the working rancher has bought his herd over a seven- or eight-year investment period.
Making it work
Let’s take a detailed look at this proposed joint business venture and see how these two business partners might go about setting up an “equitable” agreement: i.e., how they will share the production expenses and total income generated from the leased cow herd.
I argue that an equitable beef cow lease agreement is one where the two business partners share the calf crop from the beef cow herd in the same proportion that they share the production expenses. So now, let’s determine how the production expenses will be shared.
One business partner will be designated the cow owner; the other business partner, the working rancher. I then suggest that these two partners construct a detailed, annual full-cost budget for running that beef cow herd.
A full-cost annual budget includes all normal annual production expenses such as feed, vet costs, etc., and also includes the cost of the investment capital, all labor costs and a management charge.
This full-cost budget should have five columns:
List of individual production factors
List of quantities associated with each production factor
Total dollar cost associated with each production factor
A column labeled “cow owner”
A column labeled “working rancher”
This special budget will be used to allocate each production expense to each business partner. Each production resource should be valued at its fair market price. Figure 1 presents my example cow leasing budget. The figures are my estimates; your figures will likely be different.
Winter feed costs are projected to be $161 per cow, and all of that cost is to be allocated to the working rancher. All pasture costs are also allocated to the working rancher. On the other hand, the cow owner agrees to pay all vet and medicine costs. The working rancher agrees to give the vaccination shots to all the animals as part of his labor.
Share gross, costs proportionally
Since this is to be a perpetual beef cow herd, the cow owner agrees to furnish all replacement heifers and the replacement bulls. The agreed-upon labor of eight hours per cow is all provided by the working rancher. Management charge is agreed to be 5% of gross, with 10% to the cow owner and 90% to the working rancher.
If the columns are added up, the cow owner contributes 33% of production costs, while this working rancher is scheduled to contribute 67% of the production costs. This, then, suggests the calf crop should be shared 33% to the cow owner and 67% to the working rancher.
Remember, in addition to getting 33% of the calf crop, the cow owner also gets the cull cow income. Once the cull cow income is added back in, the cow owner, in this example, is projected to get 41% of the gross income generated in this cow lease enterprise.
Let me summarize:
First, these agreements should be in writing, with the written contract clearly identifying all the agreed-upon specifics.
Second, be sure to cover all production costs, identify expected death losses and establish associated penalties on the part of both parties for excess open cows; and excess death loss of cows, bulls, and/or calves. Specify exactly how the business agreement is to be terminated. It is a lot easier to work out the details before the agreement is signed than to work out a termination agreement after an emergency or disagreement occurs.
Third, any two parties can enter into any legal agreement that both parties agree to, even if it is not equitable.
Both parties should have their lawyer review the final draft before either party signs the agreement.
The University of Nebraska West Central Research & Extension Center has a software Decision Aid spreadsheet titled “Cow-Calf Share Lease Cow-Q-Lator” available free on the internet.
Hughes is a North Dakota State University professor emeritus. He lives in Kuna, Idaho. Reach him at 701-238-9607 or [email protected].
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