Transcript Pasture Rental Arrangements

Pasture Rental Arrangements
AgLease101.org
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North Central Farm Management Extension Committee
Why Seek Equitable Lease Arrangements
• Situations and locations vary
• Successful leases meet the needs of
both parties
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Factors to consider
when developing an equitable lease
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Stocking Rates
• Possible ways to delineate stocking rate
– By the head
– By animal units (both parties should agree on
what an animal unit is)
– By pounds
• Important to agree on the number, size
and type of animals and the duration of the
grazing period
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Establish Land Owner and
Livestock Owner Contributions
Land owner costs may include:
• Interest on land value (valued for
agricultural purposes)
• Taxes associated with the leased land
• Development cost conservation,
drainage, improvements…
• Facility and buildings, fences, barns,
wells (including the “DIRTI five”)
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Sample: Land Owner Cost
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Livestock Owners Net Returns
• Net Returns is usually estimated on a dollar per head
($/Head) basis
• State Budgets are usually available from local extension
offices (these budgets are generalized and may need to
be adjusted to fit the circumstances)
• Net Returns to grazing for terminal animals is equal to the
value of the animal at the lease expiration minus the
purchase cost/value and other operating expenses
incurred during the lease period. Breeding animals and
those used for other purposes require adjustments to this
calculation
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Sample: Livestock Owner Net Return
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Lease Rates
• Using the information about cost of both
the livestock and land owner,
negotiations can proceed to determine
and equitable agreement
• An equitable lease includes the type of
payment. Either
– Cash lease
– Share lease
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Cash Lease
• In this example land owner desires
$27.03/acre or $108.13/head (sheet 1)
• The livestock owner wishes to pay only
$15.23/acre or $60.91/head (sheet 2)
• The process of negotiation between the
two parties will hopefully result in a price
with which both can be happy.
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Share of Gain
• Another method of establishing the price is
to use share of contribution
• This requires honesty and credibility
between both parties
• Lease rate is based on contribution
percent (see the following slide worksheet
3, based on worksheets 1 and 2)
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Sample: Share of Gain
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Including Price and
Production Risk in the Lease
Characteristic of a variable lease
agreement
• Both parties can bare some of the risk
– Actual lease rate is dependent on the
outcome
– Requires a good understanding and a high
degree of confidence and trust between
parties
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Production Risk
• Base rate for expected gain is estimated
on a per pound basis
• At the conclusion of the production
period actual gain is used to adjust the
base rate
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Sample: Production Risk Rate
• A 4 month lease for $25.00 per head per month
or $100.00 a head has an expected outcome
for the yearling calves to have gained 220
pounds
• These factors translate into $.45/pound gain
per calf ($100.00 divided by 220 pounds)
• A higher rate of gain such as 300 pounds would
result in the land owner receiving $135.00/head
for the 4 months (the agreed upon $.45/pound
gain
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Price Risk Adjustment
• Flexible rate formula method
• Uses a base rate derived from the
Expected Price (long term 5 year average,
Oct-Nov good-choice local steer price)
• Adjust based on an agreed upon price
source (Current Price), such as average
price for good-choice steer for the months
of October and November at the local
auction market.
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Sample: Price Risk Adjustment
• Expect Price is $80/cwt
• Current Price is $100/cwt
• Base rate is $100/head for the lease term
• Then the $100 is multiplied by quotient of the
Current Price of $100 divide by the Expected
Price of $80 or 1.25
• Making the adjusted lease rate $125/head
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Other Factors Affecting Lease Rates
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Productivity
Local conditions
Adjacent rates
Location
Water
Landlord services
Size and scope of the land leased
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Improved Pasture Leases
• Factors that are added with improved
pastures
• Includes the added productive nature of
the pasture and the added cost
associated with its maintenance
(irrigation, fertilizer…) and who bears
the expense and the benefit
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Drafting Your Lease
• Written Lease is superior to verbal lease
• Written details can solve problems before
they occur and clarify ambiguity
• Serve as a reminder to the actual terms of
the lease
• Serves as a go-to document in the case
where heirs or others become involved
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Things To Remember
• Not all states have the same laws when it
comes to leased pasture and farm ground
• Termination dates and methods vary from
state to state
• The information provided in this packet is
for educational purposes; actual leases
should be made with the appropriate legal
advice from qualified advisors
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Lease Publications at AgLease101.org
• Fixed and Flexible Cash Rental Arrangements
For Your Farm (NCFMEC-01)
• Crop Share Rental Arrangements For Your Farm
(NCFMEC-02)
• Pasture Rental Arrangements For Your Farm
(NCFMEC-03)
• Rental Agreements For Farm Buildings and
Livestock Facilities (NCFMEC-04)
• Beef Cow Rental Arrangements For Your Farm
(NCFMEC-06)
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North Central Farm Management Extension Committee
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AgLease101.org
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AgLease 101 was developed with funding provided by the North Central
Risk Management Education Center.