Leasing cows may be mutually beneficial for starting operators, retiring ownersWritten by Emilee Gibb
In light of overwhelming startup costs in cow/calf operations, as well as a volatile market for established producers, University of Nebraska-Lincoln Extension Educator Aaron Berger recently advised producers to consider whether entering into a cow leasing agreement is an economically viable option for their operation.
Lease agreements can meet the needs of both the cow owner and the operator, said Berger.
“Cow/calf production requires a large amount of capital, which can be a challenge to beginning producers,” he said. “When leasing a cow, the producer can access cows without having to purchase them.”
Cow owners are then able to maintain or phase out of ownership without providing labor.
“This option can be particularly attractive to those cow owners who are nearing retirement and want to phase out of the production side of the business,” explained Berger.
Two main agreement options exist for cow leases. The first option is a cash lease.
“This is where the cow/calf owner is paid a set amount by the person leasing the cows,” continued Berger.
The second option is a cow/calf share agreement. In this type of agreement, the cow owner receives a percentage of the calf crop based on their contribution toward the production of calves.
Pros and cons
Each type of lease agreement has benefits and disadvantages for the owner and lease operator, said Berger.
In cash leases, benefits for the owner include having a known income, lower risk and simplicity.
“It’s simple to understand and owners get a guaranteed payment,” noted Berger.
However, cow owners may lose income if calf prices are high.
Cash leases benefit the operator primarily in the simplicity of the agreement.
“It’s a simple payment of the cow/calf’s owner for the portion they would normally get in the calf crop, except the cow owner gets their payment in cash from the operator,” said Berger.
The disadvantage of a cash agreement for the operator is that they are accepting all of the calf price risk and must have cash to pay the owner.
A cow share agreement benefits the owner because they have the option to sell or retain the calves in their share, but they also share production and price risks.
“That might be an impact to them in terms of what they might get back in return on their investment,” he continued.
Operators do not have to pay for the lease in cash. They do, however, give up a portion of the calf crop.
“It may be a situation where the operator wants to grow their herd,” said Berger. “Maybe they have an investment in the genetics that are there and they would just as soon keep the calves and give the cow owners the cash value instead of giving them calves.”
When agreeing on a cash price or percent of the calf crop, many factors influence the needed price for both the owner and operator.
The first factor driving price for cow owners is cow value. Berger noted that owners should expect a different return in investment in a cow valued at $2,500 compared to a cow valued at $1,200.
Other important considerations include replacement rate, interest rate and cull cow value.
“Cull cow value is the difference between cow purchase price minus her salvage value,” explained Berger. “If we can find ways to increase the value of those cows when they leave the herd, that’s going to decrease depreciation expense and decrease the amount that the cow owner needs to get back from the calf crop percent or as a cash lease.”
The final major factor for owners is whether the owner or operator is responsible for the bull.
“In some arrangements, the cow owner provides the bull. In other arrangements, the cow operator provides the bull. That can make a significant difference on what the breakout should be,” said Berger.
As feed costs account for 60-65 percent of annual cow costs, a major driver is price for the operator, said Berger.
Overhead costs, including equipment and labor, are other important factors for the operator to consider.
“How much equipment is used in the care of those cows and whether the operator is providing labor himself or is hiring someone is important,” continued Berger.
Like cow owners, the agreement on the bull in a significant factor for operators in lease costs.
“If that person who is operating the cowherd is keeping back calves, they might specifically want to provide bulls to move themselves genetically toward where they want to go,” said Berger. “That can be an impact in terms of what they’re going to get, percent of calf crop or cash leasing those cows what they need to pay that cow owner.”