NEWS for North Dakotans
Agriculture Communication, North Dakota State University
7 Morrill Hall, Fargo, ND 58105-5665
November 10, 1999
Harlan Hughes, Extension Livestock Economist
NDSU Extension Service
"Harlan, I've been thinking about adding some leased beef cows. What do you think?" Many phone callers are looking at share-leasing their beef cows rather than spending investment capital to acquire or expand their beef cow herd. They certainly want the share-lease arrangement to be fair to both parties. In other words, they're asking what would be an equitable share-lease when one party typically owns the cows and bulls and the other party typically provides the facilities, feed, labor and management.
My response is really quite simple. A beef cow share agreement is equitable when the two businessmen share the calf crop in the same proportion that they share the production costs. If the cow owner provides 25 percent of the production costs associated with a beef cow herd and the working rancher provides 75 percent of the production costs, then an equitable share-lease would be one where the beef cow owner receives 25 percent of the calf crop and the working rancher receives 75 percent.
Over the last decade several of my Integrated Resource Management (IRM) cooperators have run leased cows. As a result, I have had the opportunity to conduct economic and cashflow analyses of share-leased herds for 10 years now -- through one complete cattle cycle.
Leases were very popular in the late 1980s and early 1990s when calf prices were high. On the other hand, many leases were terminated during the past five years of low beef prices. Now that calf prices are again turning upward, there appears to be renewed interest in share-leasing beef cows.
The most common lease arrangement I have encountered is a 60/40 share-lease arrangement where the working rancher receives 60 percent of the calves and the cow owner receives 40 percent of the calf crop. In most of these 60/40 share-lease contracts, the cow owner typically gets the cull cow income. When the cull income is combined with 40 percent of the calf crop, a 60/40 share-lease arrangement generally leads to the cow owner receiving over 50 percent of the total gross income from the beef cow herd. Rarely is a 60/40 share-lease arrangement equitable.
The perception of many working ranchers is that the capital investment in beef cows is the biggest production cost associated with running beef cows. This is just not true! The biggest cost in the Northern Plains is feed.
So... how should one determine what is an equitable lease? I recommend that anyone considering leasing beef cows construct a detailed budget for the cow herd under study. List all resources required to run this cow herd, and itemize the economic cost of each resource. My recommended format is a two-column budget where the first budget column lists and describes the input items and the second budget column lists the cost of each individual input item. For those of you with an IRM herd analysis, SPA analysis, SPA-EZ or whatever your state's analysis is called, use it.
The next step is to add two more columns to your budget with the first labeled "cow owner" and the second "working rancher." Take the total cost figures and prorate them into the cow-owner column and the working-rancher column in proportion to who is going to provide that resource. Once all individual cost items are allocated, total up the three columns. Finally, calculate the percent of the total costs paid by the cow owner and by the working rancher. This, then, becomes the equitable percent of the calf crop that should go to the cow owner and to the working-rancher.
An equitable beef cow share agreement should be based on the projected full costs of production for the herd. Full costs include the feed costs; direct non-feed costs; overhead costs of facilities and equipment; and opportunity costs for the operator's labor, management and the equity capital of both parties.
When working out an equitable beef cow share-lease, I recommend that cow depreciation be included in place of using the costs of replacement heifers. I recommend that the heifer replacement program be negotiated and set up under a separate business arrangement. Including heifer replacements inside a share-lease arrangement is difficult and not recommended.
My work with leased herds suggests that some share-lease agreements are being based on less than full cost of production -- which I believe is a serious mistake. Here are the numbers from my IRM demonstration herd to point out what might be typical numbers for the various resources consumed by beef cows.
Everyone includes feed costs ($223 per cow for my demonstration herd). However, feed costs should be based on fair market value of feeds fed and not costs of production. Everyone also remembers to include veterinarian and medication expenses ($21/cow). Other non-feed livestock costs that typically may or may not be included are bull semen checks, cow wormers, the beef cow herd's portion of utilities and general farm expenses, power and fuel used in the beef cow herd, marketing, bedding and even a miscellaneous category. Typically these non-feed livestock costs will run $40 to $50 per cow.
Building costs--composed of 20-year depreciation (5 percent), repairs (1 percent) and insurance (1 percent)--are budgeted at a total fixed cost of 7 percent of fair market value of building assets. Livestock equipment--composed of 10-year depreciation (10 percent), repairs (2 percent) and insurance (1 percent)--is budgeted at a total of 13 percent of fair market value of equipment assets. In my demonstration herd, these two fixed costs add up to another $20 per cow in annual production costs. The $320 depreciation is assumed written off in five years, giving a $64 per cow depreciation cost. Insurance on the cows added another $8 annual cost per cow.
Seldom do people remember to include the opportunity costs for the operator's labor (8 hours per cow, excluding feed harvesting, at $8 per hour equals $64 per cow), a management cost (5 percent of gross income or $27 per cow), and an equity capital charge on the participating rancher's livestock buildings and equipment ($17 per cow). Finally, there is the opportunity costs of the beef cow investment ($800 cows at 8 percent opportunity costs equals $64). These opportunity costs come to $172, or 31 percent of the $552 full cost of operating this demonstration beef cow herd.
In my example budget, the owner of the cows agreed that he pays $149 and the participating rancher agreed that he pays $403 of the $552 full cost of production. This, in turn, projects that this cow owner pays 27 percent of the full costs of this herd and the participating rancher pays 73 percent of the full costs. An equitable agreement, then, is one where the owner of the cows gets 27 percent and the participating rancher gets 73 percent of the total calf crop. Add in the cull cow income (13 percent of gross income) and the cow owner is projected to get $198 per cow or 36 percent of the per cow gross income from this 73/27 equitable share-lease arrangement.
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Source: Harlan Hughes (701) 231-7380
Editor: Tom Jirik (701) 231-9629
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