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277226

Equitable Cow Leasing

Leasing cows by either a cash or a share arrangement offers benefits to both cow owner and herd operator. However, when market conditions are volatile, economic provisions written into the lease can swing rapidly toward unprofitability for one party or the other.

“While a cow lease should be an agreement spanning a relatively long period of time – such as three years – it should be reviewed and renegotiated annually in order to reflect changes in market value of both cows and calves,” says Aaron Berger, Extension educator for the University of Nebraska-Lincoln (UNL).

“For example, cow owners may have bought bred cows in 2014 for $3,000 a head, but they’re worth $1,500 now,” he says. “If you’re leasing those cows out, it’s not fair to expect the lessee’s share or cash payment to provide you with a return on the full purchase value.”

appraise each person’s contribution

Determining a share percentage of calf income or cash rental payment that’s equitable for both cow owner and herd operator requires an appraisal of the value of each party’s inputs. 

“The lease should accurately reflect what each person will contribute to the production of weaned calves and what the compensation should be either in cash or in a percentage of the calf crop,” says Berger.

Lease agreements typically center around a lessor’s offering of bred females to lessees. Thus, an appraisal of owners’ contributions to cost should reflect average cowherd value, cow salvage value, replacement rate, and the expected rate of return on cow value.

Lessees provide most production inputs, such as land, labor, management, feed, veterinary care, and other operating investments. An economic appraisal of these inputs comprises the operator’s financial contribution to the lease arrangement.

A UNL spreadsheet titled “Cow-Calf Share Lease Cow-Q-Lator” is available online to help in the calculating and decision-making process. “This spreadsheet takes into account the contributions of all parties involved in the cow-calf enterprise, and then it calculates a fair cash-lease value as well as what would be an equitable share arrangement,” says Berger. 

Find the spreadsheet at agmanagerstools.com.

assess agreements

“A share rental arrangement is more common than a cash rental arrangement,” says Berger. “Rather than the operator paying a set fee to the cattle owner for the use of the breeding herd – as in a cash lease – a share lease divides the calf crop between the operator and owner based on what each person contributes to the production of the calves.”

A benefit of share leasing is that both parties bear risk. “The major economic difference between a cash lease and a share lease is that a cash lease rents the cows for a set cash price for a period of time. A share lease guarantees each person a portion of the year’s calf crop,” says Berger.

“These lease agreements differ as to which person bears risk,” he says. “In a cash lease, the operator is usually bearing the production risk. In a share lease agreement, the cattle owner receives a share of the calf crop and, therefore, shares both the production and price risk with the operator.”

benefits of share arrangement 

Leasing cows on a share arrangement has worked well for cow-calf producer Brady Cross, Harrisburg, Nebraska. For the past five years, Cross, who also farms in partnership with his father, has leased 40 cows to run alongside another 40 cows he owns.

“Our share arrangement is very beneficial to my wife, Keah, and me,” says Cross. “We sell all the calves from the share cows. The cow owners take 30% of that income, and we take 70%. We pay for everything that goes into producing the calves.”

An advantage of the share arrangement that the Crosses value is the flexibility it brings to whole-herd management. Operating as they do in a region prone to drought, Cross sees the share cows as providers of a downsizing cushion if needed.

“If we had to, we could sell off our owned cows in order to deal with drought, and we’d still be able to count on that 70% calf crop from the share cows,” he says.

A potential downside of a share arrangement is the cumbersomeness of keeping replacement heifers from the cows. The full value of the calf crop is best accounted for by a sale of all calves. But the splitting of calves into groups presents potential differences in economic value due to variations in quality and weight among groups.

“One pricing method for replacements is for owner and operator to agree on a price for all heifers by pay weight,” says Berger. “After getting a weight on the keeping heifers, the operator could pay the owner for the owner’s share of that group of heifers.” 

Cross sidesteps the complexity by selling all calves from the share herd. With advance planning, his operating budget provides room for him to use a portion of his share of the income from the share cows to buy replacement heifers from the cows that he owns.

Cash leases have the benefit of making it easier for the operator to keep back replacement heifers. Because owners receive a cash payment per cow, the operator is free to choose management and marketing practices for calves. 

“Operators could even choose herd sires for maternal traits, despite the fact that steer calves from such sires might not perform as well as calves out of sires selected for calf performance,” he says.

Whatever terms cow owner and herd operator agree upon, it’s important to put these down in writing and to review the terms annually. 

“That’s especially important under current rapidly fluctuating market conditions,” says Berger. “In order for cow share or lease agreements to be successful long term, the lease must work for all parties involved.”

Learn More

Aaron Berger

308/235-3122

aberger2@unl.edu

beef.unl.edu/faircowleaseagreement

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