Recently, I've received several queries regarding beef cow leasing. Some were from owners interested in leasing their cows. Others came from folks who wanted to lease cows. The question from all of them was: What's an equitable beef cow lease for my unique situation?
The answer is simple. An equitable lease is one in which both parties share the calf crop in the same proportion that they share the costs of running the beef cowherd. For example, if the leasing rancher provides 70% of the costs of running the cowherd and the owner picks up the other 30%, then the equitable share-lease ratio for the calf crop should be 70/30.
In addition, the cow owner gets the cull cow income. In a typical herd, this would bring the owner's share up to 40-45% of the total herd's income.
An example of a full-cost, equitable lease is posted on my Web site, www.ag.ndsu.nodak.edu/cow/lsmanews/11-10-99.htm. By full-cost, I mean the budget includes all resource costs including a charge for unpaid family and operator labor, management and the capital invested by both parties in the cowherd.
Here are three steps for establishing an equitable lease. An equitable agreement should be based around the projected full costs of production, of which there are two components. The first is the direct operating production costs plus the annualized overhead costs. The second is the opportunity costs for the resources used by the working rancher's family, plus the capital investment costs of both parties.
(The numbers used to illustrate an equitable beef cow share-lease ratio in the example below will be those of my North Dakota Demonstration Herd.)
Step 1: Identify and project the direct costs of production for the cowherd.
The direct costs are the combined operating and the annualized overhead costs for the primary resources used in the beef cow enterprise. Farm-raised feeds fed are charged at fair market price and overhead costs are annualized for just the equipment and buildings utilized by the beef cow herd.
Farm operating costs and farm machinery costs are not included when feeds are charged in at fair market value. Cow depreciation should be included in place of replacement heifer costs.
After accounting for all the above operating and annualized overhead costs in my example herd, the total cost is $336/cow.
Step 2: Calculate the opportunity costs of family resources and investment capital provided by both parties.
Next, determine the full cost of production by adding opportunity costs to the direct costs. Opportunity costs include the working rancher's unpaid family and operator labor, management and both parties' equity capital.
In my example herd, the eight hours of labor required/cow was valued at $8/hour, while management charge was valued at 5% of gross income. The charge for equity capital was valued at 8% of fair market for the beef cow assets.
Adding the labor charge of $64, management charge of $28 and equity capital charge of $89/cow, the full-cost budget is $516/cow.
Step 3: Allocate each resource cost to one party or the other.
Once the full cost of production is determined, allocate each cost item to one of the two leasing partners. In a few cases, the costs will be shared.
Total each of the three columns to determine the cost contribution for each partner. Then calculate each partner's total cost allocation as a percent of the herd's total costs. These percentages become the equitable share-lease ratio.
In my example herd, the owner is projected to contribute 29% of the full costs, while the rancher will contribute 71%. Thus, an equitable agreement would be one in which the owner receives 29% of calf income and the rancher receives 71%.
Remember, the cow owner also gets the cull cow income. And, because the owner also provides the bulls in this case, he also gets the cull bull income.
No one share-lease ratio is equitable for all producers. If the resources were provided in different proportions, the equitable lease would be different.
There's no shortcut to determining an equitable share-lease ratio. The time spent up front designing an equitable beef cow share-lease ratio can prevent most problems down the line, particularly legal fees that might pop up at termination of the agreement.
Leasing agreements often end because of disgruntled partners. A poorly designed lease or no written business lease at all can lead to all kinds of legal and financial problems.
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A good written business plan documents in detail how the agreement will be terminated — things like when the cows are to be returned, what condition are the cows to be in at termination, how will death loss be handled, who feeds the animals in the last year, etc. Most legal and financial problems that arise at termination can be prevented with a thorough, thought out, written business plan at the beginning.
Harlan Hughes is a Professor Emeritus at North Dakota State University. Retired last spring, he is currently based in Mankato, MN. He can be reached at 701/238-9607 or email@example.com.
Evaluating Market Alternatives For 2000 Calves
These planning price projections (Table 1) are based on both the futures market price and Western North Dakota sale barn prices for the current week. The price projections in Table 1 were used to evaluate six marketing alternatives for year 2000 calves shown in Table 2.
The “buy/sell margin” in Table 2 is the buying price of animals going into a lot subtracted from the selling price of animals coming out of the lot. Since selling price is normally less than purchase price, the buy/sell margin is normally negative. The negative buy/sell margin represents the marketing loss/cwt. on the purchase weight of the animals. The cost of gain (COG) represents the cost of the added weight while in the lot. Profit/head represents the combined marketing losses and profits from gain.
|Lbs.||Fall 00||Mar 01||Wk Apr 19||Spg 01*||Fall 01*|
|*Projected week of April 19, 2001|
|1. Sell at weaning||N/A||$0.70||$149|
|2. Bck high ADG||-$17||$0.49||-$16|
|3. Fin bckg. steer||-$16||$0.46||$38|
|4. Grow and finish||-$10||$0.42||$66|
|5. Steers on grass||-$12||$0.45||-$5|
|6. Fin grass steer||-$10||$0.45||$60|
|The six marketing alternatives evaluated here are: 1) selling 565-lb. calves at weaning, 2) backgrounding 565-800 lbs. sold after first of the year, 3) finishing backgrounded steers 800-1,200 lbs., 4) growing and finishing 565-1,175 lbs., 5) steers on grass 625-800 lbs., and 6) finishing grass steers 800-1,250 lbs.|