Transcript Livestock agreementscash lease and share

LIVESTOCK AGREEMENTS
CASH LEASE AND SHARE
MARKET TRENDS, RATES,
PRODUCTION
• Historical cycle of cattle production.
• Decline in the cattle supply has had an inverse
affect on the value of beef.
• Number of livestock is not expected to increase
any time soon.
• Livestock leases become extremely important for
those looking to expand their current herd, start a
herd, or maintain a current herd without the risk.
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CASH LEASE VS. SHARE: WHAT
IS BEST FOR YOUR CLIENT?
• Cash Lease
 Owner of a cow herd and possibly the bull(s) to
service the cows rents the herd to an operator
for a specific term.
• Equitable Share Lease

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Owner leases the cow herd to the operator
for a share of the calf crop.
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CASH LEASE ADVANTAGES AND
DISADVANTAGES
• Advantages for the operator
 Operator has full control and responsibility of
managing the herd.
 Allows the operator the full benefit of the
current high prices for calves produced.
•
Advantage for the owner
 Fixed and guaranteed income without incurring
the operating costs or incurring the risk.
 Avoids the self-employment tax.
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• Disadvantages for the operator
 Operator takes on all the risk
• Disadvantages for the owner
 Owner gives up complete control of his/her
herd for the termof the lease.
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EQUITABLE SHARE LEASE
ADVANTAGES AND
DISADVANTAGES
•
Advantages for the operator
 Operator shares the risk in producing a calf crop with the
owner.
 Allows for expansion of the operation and more efficient use of
labor.
 Efficient and cost effective way for beginning rancher to get
started in the livestock industry.
•
Advantages for the owner

Maintain a herd without providing the labor along with a source
of rental income while maintaining some management of the
herd.

Avenue for an owner to transfer the herd to another over a
period of time.
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• Disadvantage for the operator
 Sharing the calf crop when market prices are
favorable.
 Generally gives up some management control
of the herd.
• Disadvantage for the owner
 Sharing in the risk of a poor calf crop.
 May incur a self-employment tax.
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PRICE, PRODUCTION AND
QUALITY PROJECTIONS
Parties have to decide that sharing the calf crop is
worth the potential risks.
Before entering a lease the owner and operator
should put together separate budgets.
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CALCULATING EQUITABLE
AGREEMENTS WITH SAMPLE
WORKSHEETS
No one way to calculate an Equitable Share Lease
“The devil is in the details.”
Objective of any equitable agreement is to split the calf crop in
proportion to the parties’ respective production costs.
“Keep it Simple”
Leases are rarely so simple and even the simplest breakdown of
inputs can get complicated.
Parties need to include all inputs that go into producing a calf
crop.
Values of these costs, along with others, may fluctuate
throughout the term.
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MAJOR INPUT COSTS IN
EQUITABLE SHARE
AGREEMENTS
• Cow Herd
 “Whole Herd” or “Cow Unit”
“whole herd”: value of the herd is
valued as one price.
“cow unit” is the cow, the calf, the cow’s share
of the bull and the cow’s share of the
replacement heifer.
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• Annual depreciation of cow herd and
equipment
 The difference between the market value of the
cows and bull(s) when placed in the herd and
the salvage or cull value of the livestock.
 The operators may consider the depreciation of
his/her machinery and equipment.
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• Annual interest
 Owner may want to consider the annual interest rate on
the value of his/her cows.
 Operator may consider the interest on his/her machinery
and buildings.
•
Annual insurance

Cost of insurance is credited as contribution to whoever
provides the insurance for the herd.

Some leases allow for the owner and operator to split
the insurance cost or death loss if the operator
guarantees a maximum number of deaths per the lease
term.
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• Annual Taxes
 Owners and operators must consider their respective
taxes on the livestock, buildings and equipment.
• Annual Cost of Bull
 Contribution should be considered the value of the bull
divided by the number of cows served each year.
• Cost of Machinery, Equipment and Buildings
 Operator may use the rental rate for machinery,
equipment and buildings.
 Otherwise, operator may consider the annual interest
rate, depreciation and taxes.
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• Pasture Value
 Simplest figure for the contribution of pasture is
the fair cash rental rate.
• Feed and other expense
 Contribution is calculated at the current market
value for one year leases.
 In multiple year leases, the operator may use
the long-run market price.
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• Labor and Management
 Operator normally figures out the rate of labor at the
hired rate in the market.
 General figure of annual labor is 6 hour per cow per year
although smaller herds require more hours per cow.
 Additional labor value must be included where
replacements are raised within the herd.
 In some rare occurrences the operator and owner
determine the value of their respective roles in managing
the herd.
 A number that has been used is 5 to 10% of the
production value.
 A management value is usually a zero sum gain.
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SELECTION OF REPLACEMENTS
AND PROCEDURES
• Replacements are purchased by owner
 If owner purchases the replacements the proceeds from
the calf crop are split by the percentage of the parties’
respective contributions.
 The owner is entitled to the cull cow sales.
• Replacements are kept but raised in separate
operation

Market value is placed on replacement heifers as if sold.

Parties then split their respective share of rest of the
calves sold and the owner purchases the operators
share of the replacement heifers or the operator
receives a higher percentage of the cash sales.

Owner retains all cull cow income.
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•
Share value of production of calves (sold and
replacements)
 Owners share of the contribution and receipts would be
smaller.
 Owners cost is also lower because the cost of growing
replacements is included in the contributions of the operator.
 Owner would own all replacement heifers and cull cow
sales.
•
Share all sales

Owner and operator would share all sales including cull cow
sales based on the respective percentages of each party.

Cow sales are substituted for the value of the replacements.
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KEY AGREEMENT CLAUSES
CONDITION OF LIVESTOCK, BREEDING,
VET SERVICES, INSURANCE, ETC.
• Lease must be in writing.
• “Exit strategy”; provide a termination process.
• # of cows and bulls; generally in one-year leases
the owner provides the bull(s); in a multi-year
leases the operator may want to provide the bull.
• Multi-year leases must provide whether
replacement cows will be provided out of the
calves produced.
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• Agreement on when and how culling occurs.
• Condition and overall health of the herd.
• Special management programs.
• Responsibility for veterinarian bills.
• Acceptable amount of death loss.
• Insurance: the level of the insurance and who is
responsible for insuring.
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• Establish expected stocking rates and maintenance
responsibilities.
• Provision for settling disputes.
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TAX CONSIDERATIONS
• Owner may be subject to self-employment taxes
under an Equitable Share Agreement if she or he
materially participates in the management of the
cow herd.
• The IRS has defined material participation
accordingly:
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(1) The owner does any of the following three:
 Inspect production activities (calving or
feeding) (inspecting property or
improvements does not count).
 Consult with caretaker about production of
the cow enterprise.
 Furnish at least half (maybe less depending
on circumstances) of tools, equipment and
livestock used in enterprise.
 Share at least half (maybe less depending on
circumstances) of production expenses.
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(2)The owner regularly and frequently makes decisions
that significantly affect the farm operation.
(3)The owner works at least 100 hours spread over five or
more weeks on activities connected to the cow herd.
(4)The owner’s activities when considered in their totality
constitute material participation even if not specific to
items (1), (2), or (3).
Owner’s have to be wary of the IRS’ subjective analysis
regarding material participation if the owner desires to
avoid the self employment tax.
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CONCLUSION
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