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3 Steps To Negotiating A Great Cow Lease

Author: Kristy

by Harlan Hughes in Market Advisor

Today’s record-high market prices are renewing interest in leasing beef cows. Doing so allows a rancher to run more cows without the added capital investment. Meanwhile, outside investors can gain a potential return on investment capital, plus a tax advantage from the cow depreciation. Cow leasing, if done properly, can be advantageous to both parties.

A common question I get on cow leasing is how the calf crop should be shared. In other words, what’s an equitable lease arrangement?

A typical cow lease is where one partner owns the cows and perhaps the bulls, while the other partner provides facilities, feed and labor. I’ll refer to the outside investor as the “cow owner,” and the partner running the cows as the “working rancher.”

The cow owner gets the cull-cow income, while the owner of the bulls gets the cull-bull income. Typically, the cow owner wants total control of the genetics of the herd, so the cow owner typically owns the bulls. This, however, is negotiable in the lease.

Here’s my three-step process for setting up an equitable beef-cow lease. In this example, I’ll use my 2014 beef-cow budget for eastern Wyoming and western Nebraska.

Step 1: Assemble the herd production facts for the beef cowherd producing 2014 fall-weaned calves.

The partners should never mix replacement heifer development into the beef-cow lease. It’s a bookkeeping nightmare, and someone typically gets taken. I recommend that heifer development be contracted out to a third party, with heifer development the sole responsibility of the cow owner.

My study herd’s production data is summarized in Figure 1. This herd weaned 256 live calves in fall 2014 for an 87% calf crop. The herd’s average fall-2014 weaning weight was 584 lbs. for steer calves and 554 lbs. for heifer calves. This generated 495 lbs. of weaned calf per female exposed.

 

cow-calf stats

 

The herd’s average culling rate was 14%, and the average heifer conception rate was 80%. Cow death loss was 1%. These are the minimum production records I recommend for any leased beef cowherd.

As mentioned before, the cow owner gets the cull-cow income, as well as any inventory changes (positive or negative) and all beef-cow depreciation. Generally, the cow owner also provides all the preg-checked replacement heifers.

In some leases, the working rancher provides the replacement heifers, as this is one way for the working rancher to slowly gain investment control of the total herd. In about seven years, the entire herd will be the working rancher’s. This works especially well when the cow owner is a retiring rancher who wants to sell his cowherd over time in order to reduce his income-tax liability on the sale.

The owner of the bulls gets the cull-bull income and buys all replacement bulls.

The upper limit on acceptable cow and calf death loss can be set in the lease agreement to encourage proper management by the working rancher to protect the cow owner’s capital investment. Thus, cow losses up to that limit are the cow owner’s responsibility. Losses above that threshold are instead charged to the working rancher. This is negotiable at the time the lease is drawn up. A suggested standard is 1%-2%.

Deciding who absorbs calf losses can also be negotiated. One suggestion is that losses up to 8% might be shared by both partners, and losses beyond that figure might go to the working rancher only. Again, this is done to encourage good management and should be negotiated in the lease agreement.

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