Leasing considerations important during drought, low hay stocks
Beginning producers may find it more difficult to break into the cow/calf business because of the amount of capital it takes to get started. But, during a recent University of Nebraska webinar, Extension Educator Aaron Berger explained ranchers may be able to get a start in the cow-calf business by considering cash leasing cows or cow-calf share arrangement.
“Capital values have increased in recent years, making it a challenge for beginning producers to get started in the business,” he said. “A lease arrangement could work for beginning producers by giving them access to cows without having to purchase them right away.”
“It also allows someone who has cows an opportunity to have them as more of an investment. A cash lease or cow/calf share arrangement allows the cow owner to maintain or phase out ownership of their cows without providing the labor, such as if they plan to retire,” he continued.
Cash versus cow shares
With a cash lease, the cow owner will receive a set amount per pregnant female each year. This type of arrangement is simple to understand, carries less risk for the owner and provides a known income. However, the owner receives the same income even when calf prices are high and no benefits from an excellent calf crop.
For the operator, it is a simple, straightforward method of leasing cows, Berger said.
“They know up-front what they owe,” he said. “It also simplifies the payment for the cow owner’s portion. The disadvantage is the operator accepts all the calf price risk and must pay cash for leasing the cows.”
In a cow-share arrangement, the cow share owner gets an agreed upon portion of the calf crop.
“The advantages of this type of arrangement are the cow owner can either sell or retain their portion of the calves at weaning,” Berger said. “However, the downside is they share in the production risk. If there is above normal death loss or the calf price goes down, they may net less than they would have in a cash lease.”
For the operator, they don’t have to come up with cash to pay for leasing the cows, but they have to give up a portion of the calf crop.
“For an operator trying to build his own herd, and possibly phase out the share cows, it may be more of an advantage to cash lease the cows if they like the genetics and want to retain more of the calves for replacements.”
The operator and cow owner can sit down and determine which type of lease works best for them by simply accessing the Cow Share Cow-Q-Lator. This excel spreadsheet is downloadable at westcentral.unl.edu/web/westcentral/agecon3.
“This program provides a detailed input analysis to determine a fair share arrangement or cash lease,” Berger said. “It allows both parties to input what they can contribute to the lease arrangement. Based on the numbers inputted, the program will determine a fair share arrangement for each party.”
“It can also determine a cash lease amount for cows only, or for cows and bulls,” he added.
The Cow-Q-Lator program is split into categories.
The first category is general, includes replacement and breeding inputs, and allows producers to determine the average value of the cows in their herd, if the entire herd was marketed today.
The next cost is budgeted amounts and shares, which includes feeding costs and who is responsible for them.
“It allows the operator and cow owner to break out feed costs and who is responsible for each one,” Berger said.
Another category includes all other expenses like veterinary and medicine, cash costs for buildings and equipment, AI and miscellaneous costs like insurance. Interest on purchased feed and cash costs and labor is also included. This program also allows producers to determine cow and bull ownership costs, which are costs incurred for ownership including cow or bull depreciation, death loss, interest and insurance.
Berger encouraged each party to make sure the other is someone with integrity that they trust and feel they can work with.
“If I was the cow owner, I would ask for references, visit their place, talk with them, possibly see some cows they are caring for now and talk to people they have worked with before,” he said.
Any arrangement agreed upon needs to be a win-win arrangement for both parties.
“Remember that chances are this is more than just a one-year deal,” he said. “Most leases are at least two years or more.”
Both parties should also meet with the lender and make sure there is full and clear disclosure of the arrangement and who owns what.
It should also be understood and agreed upon what expectations are for cow/calf care, what an acceptable death loss is, acceptable percentage breed up and what happens if the numbers fall outside these values. They should also agree on how sickness and death loss will be handled, who is responsible and if a consulting veterinarian is available. They should also agree on how hauling and marketing expense will be shared.
Berger also encouraged both parties to develop an exit plan in case the cows need to be sold, or something happens to one of the parties where they can’t continue with the arrangement. Lastly, he urged them to make sure the arrangement and all the details are in writing.