Transcript Beef cow rental arrangement -PPT

AGRICULTURAL ECONOMICS
Beef Cow Rental Arrangements
Kevin Dhuyvetter
Department of Agricultural Economics
Kansas State University
[email protected] -- 785-532-3527
Damona Doye
Department of Agricultural Economics
Oklahoma State University
[email protected] -- 405-744-9813
Loan Payments for a $2,000 Cow
Purchase at 6% Interest
Down Payment
Repayment Period
3 years
4 years
5 years
20% = $400
600
463
381
40% = $800
450
350
286
60% = $1,200
300
231
190
Ag leasing resources…
 www.aglease101.org
(lease-related information
developed as part of a North
Central Region project)
NCFMEC-01 – Fixed and Flexible Cash Rental Arrangements for Your Farm
NCFMEC-02 – Crop Share Rental Arrangements for Your Farm
NCFMEC-03 – Pasture Rental Arrangements for Your Farm
NCFMEC-04 – Beef Cow Rental Arrangements for Your Farm
All bulletins include examples and fillable forms and in some case reference
supporting spreadsheets that are available.
Beef Cow Rental Arrangements For Your Farm (NCFMEC-06) and
KSU-BeefCowLease.xls spreadsheet
 Identifies questions to answer, discusses factors
impacting equitable arrangement, and includes
examples of leases and worksheets that can be
used for individual operations.
Basically does all the math behind the
worksheets shown in NCFMEC-06 
Breeding Livestock Share Leases
Advantages to livestock operator:
• Makes use of working capital without tying up capital for
breeding livestock
• Obtain capital over and above the limits of credit agencies
• Borrowing of capital at a fair rate of interest (assuming the
lease is equitable)
• Permits an increase in the volume of business
• Helps the beginning operator get started in livestock
production
• Provide return to labor if the operator is underemployed
• Share the risk of the operation with the owner
Breeding Livestock Share Leases
Advantages to livestock owner:
• Can maintain a breeding herd even though labor is not
provided
• Provides a source of rental income
• Provides an opportunity for returns on capital investment
• Means of transferring ownership over a period of time
• Possible income tax and social security advantages
Breeding Livestock Cash Leases
Advantages to livestock operator:
• Generally operator has full control and responsibility for
management decisions
• Benefits from above average prices and production
Advantages to livestock owner:
• Provides a fixed income without any operating expenses
• Possible income tax advantages
Often viewed as easier than share leases. Are they?
Determining the terms of a lease ...
How are cash lease rates or the terms of livestock share leases
established?
P
S
Cattle
owner
Producer
D
Q
Economist’s definition of “FAIR”
A good crop share lease should follow 5 basic principles
1. Yield increasing inputs should be shared
2. Share arrangements should be adjusted or re-evaluated as
technology changes
3. Total returns divided in same proportion as resources
contributed
4. Compensation for unused long-term investments at
termination
5. Good landlord/tenant communications
Determining equitable shares…
1. Identify all costs to be included
2. Identify the costs contributed by each party and
the costs to be shared
3. Calculate the percent of total costs contributed
by each party
When all three factors are determined, the owner
and operator should share income in the same
proportion as they contribute to the operation.
Other factors to discuss…
1. How will replacements be handled?
2. What about pasture, crop ground, machinery and
equipment, buildings, etc.?
3. What is acceptable death loss and how will death
loss be documented and shared?
4. Condition of cows when returned, breeding and
vaccination programs to follow.
While there is no right answer that fits every situation,
it is generally recommended to keep replacements and
other assets out of the cowherd lease.
Other factors to discuss…
• Quality and usefulness of contributions
– Owner may have buildings and equipment that
served him or her well, but are of little value to
the new operator’s management plan.
– Quality and value of assets can vary considerably
(e.g., genetics, age, and condition of cows).
– Negotiation and communication skills are
essential to resolving disagreements of the value
of such contributions.
– Is management considered a contribution, who
provides it, and how is it valued?
Basic Principles
• Economies of size: What costs should be
used to value contributions?
Estimated labor requirements for beef cowherds
36
Annual hours/cow
32
28
24
20
16
12
8
4
0
0
100
200
300
400
500
Number of cows in herd
Source: USDA ERS, EIB #73, McBride and Mathews, March 2011
600
700
Basic Principles
• In competitive industries, Price = Cost
(on average in the long run)
– Difficult concept for many to grasp
– Opportunity costs often are not considered
– Even competitive markets can deviate from
this principle for relatively long time periods
– Can be multiple year time periods when one
party appears to be getting a better deal
Cow-calf profitability drivers…
• Analysis of KFMA cow-calf enterprise analysis
returns
– 1979-2011 all operations
(examine time effect)
– 2007-2011 operations with
at least three years of data
(examine producer effect)
• Paper available on web
(www.agmanager.info)
17
Average returns are highly variable over time…
Re turn ov er Total Costs
100
Avg = -$101.34 and Std = $85.91
(top 1/3 = -$8.29 and bottom 1/3 = -$199.09  $190.78)
D olla r s /c ow
0
-100
-200
-300
-400
79
83
81
87
85
91
89
95
93
99
97
03
01
07
05
Source: Kansas Farm Management Association (KFMA) Annual Enterprise Analysis Reports
11
09
18
Returns are more variable across producers…
Beef Cow-calf Enterprise, 2007-2011 (min of 3 years)*
All
Farms
91
37.1
145
131
High 1/3
Head / $
30
47.3
191
173
Profit Category
Mid 1/3
Head / $
31
32.1
151
137
Weight of Calves Sold
Calf Sales Price / Cwt
582
$110.82
592
$112.11
580
$109.25
573
$111.17
Gross Income
$585.86
$628.17
$594.00
$535.15
$93.02
17%
Feed
Interest
Vet Medicine / Drugs
Livestock Marketing / Breeding
Depreciation
Machinery
Labor
Other
$383.62
$125.94
$20.55
$14.84
$36.75
$79.70
$120.90
$37.66
$344.13
$106.16
$17.11
$12.71
$26.73
$58.47
$102.83
$28.37
$382.81
$127.77
$23.99
$14.05
$35.39
$82.30
$99.82
$36.62
$423.96
$143.85
$20.45
$17.76
$48.18
$98.25
$160.74
$48.02
-$79.82
-$37.69
-$3.34
-$5.05
-$21.45
-$39.77
-$57.91
-$19.64
-19%
-26%
-16%
-28%
-45%
-40%
-36%
-41%
Total Cost
$819.96
$696.52
$802.74
$961.20
-$264.68
-28%
-$234.10
-$68.35
-$208.73
-$426.05
$357.70
Number of Farms
Labor allocated to livestock, %
Number of Cows in Herd
Number of Calves Sold
Net Return to Management
* Sorted by Net Return to Management (Returns over Total Costs) per Cow
Low 1/3
Head / $
30
32.2
92
83
Difference between
High 1/3 and Low 1/3
Absolute
%
98
90
107%
109%
19
$0.94
3%
1%
Beef Cowherd Lease Analysis
Example of equitable
shares calculated using
KSU-BeefCowLease.xls
spreadsheet and costs
from KSU budgets.
Note: given inputs entered for
share lease, the spreadsheet
also calculates cash lease
values using various methods
as well.
Example – avg costs
• Replacements purchased or
raised outside of the lease
• Owner provides breeding
stock (cows and bulls) and
portion of misc costs
• Vet, drugs, and supplies
shared equitably
• Operating costs based upon
MF-266 (KSU)
• Total cost = $1,129
Equitable split = 68.0/32.0
Example – high costs
• Replacements purchased or
raised outside of the lease
• Owner provides breeding
stock (cows and bulls) and
portion of misc costs
• Vet, drugs, and supplies
shared equitably
• Costs based upon MF-266
(KSU) with adjustments to
reflect low 1/3 profit group
• Total cost = $1,227 (+$98)
Equitable split = 70.4/29.6
Example – low costs
• Replacements purchased or
raised outside of the lease
• Owner provides breeding
stock (cows and bulls) and
portion of misc costs
• Vet, drugs, and supplies
shared equitably
• Costs based upon MF-266
(KSU) with adjustments to
reflect high 1/3 profit group
• Total cost = $1,030 (-$99)
Equitable split = 65.1/34.9
Determining equitable shares…
So, what is the “right” answer?
1. Average cost operator = 68/32 (operator/owner)
2. High cost operator = 70/30
3. Low cost operator = 65/35
Basic Principles
• Competition: We observe owners getting a
larger than “fair” share
– Difficulty in accounting for all costs
– Willingness of operator to sell labor and capital
at below market rate
– Low cost operators sharing their advantage with
owner via higher rent (i.e. it is “fair” rent)
– Local “thin” market conditions
Basic Principles
• Non-Profit Motivations
– Motives other than profit appeal to beef cowcalf livestock industry participants
– Retiring generation may simply want to “help
out” the younger generation
Other Issues/Considerations…
• Written leases are strongly encouraged
– More detailed thought process
– Reminder and guide
– Spell out annual negotiation, termination, etc.
• What is the motivation for the lease?
– Is everybody on the same page?
• Communication is key!
– Expectations of parties need to be clear and realistic
For more information and decision tools related to leasing, go to
AgLease101 or aglandlease.info or beefextension.com
Thank You!