The option of leasing cows looks brightest when profits begin creeping into the cow/calf pasture, as they are today. But owners who lease out their cows (lessors) or producers who pay to lease them (lessees) can quickly snuff out all profit potential on the front end if they ignore equitable allocation of cattle costs and revenue.
"The key is to have equitable leases, and I haven't found leases to be very equitable in the past," says Harlan Hughes, livestock marketing economist with North Dakota State University (NDSU).
In fact, Hughes explains, "I had quite a few IRM cooperators in the early '90s who were leasing cows. When everyone else was making money, some of them were just working hard."
The problem wasn't necessarily the costs producers were accounting for as they negotiated their percentage of the calf crop. It was the revenue and the fact that owners retain all of the cull cow income in a typical lease arrangement.
"Ranchers sometimes forget that, and they'll give 40 percent of the calf crop to the owner, plus all of the cull cow income," says Hughes. In round numbers, that means in a typical 60:40 lease, the lessee is paying 60% of the expenses, but may be getting half or less of the total income. In other words, the typical 60:40 split may in fact not be equitable.
For all of the variables, Hughes says it's fairly easy to calculate a lease where both parties share the costs and the revenues equitably. He says costs should include all of the normal feed, grazing and livestock costs for the lease cows, as well as the opportunity cost of the lessee's labor and management, plus account for the equity and capital of both parties.
On the revenue side of the fence, Hughes emphasizes cull cow, cull heifer and cull bull income must be considered along with the calf income. In other words, since cow owners typically retain cull income, the percentage of the calves they receive in an equitable lease will be lower than if you disregarded the culls.
As well, Hughes advises lessors and lessees to negotiate replacement females up front. While lessors frequently supply the replacements, he points out that's not always the case.
The Opportunities Pushing a pencil to explore the possibilities of leasing can pay other dividends besides cash. As an example, Chev Sherman at Mullen, NE, began leasing cows eight years ago when he needed more of them. The returns, however, couldn't justify borrowing the money or putting up the cash.
"It allowed me to get my numbers up to fill a lease on some ground I had, and I didn't have to borrow the money on them and pay the interest," says Sherman. Plus, he explains adding numbers that way can sometimes help flesh out an extra potload for marketing leverage.
On the flip side of the leasing coin, John Buxton at the X Bar Ranch at Laramie, WY, began leasing out cows the last time the market turned south.
"We had some awfully good cows here and I didn't really want to sell them ... We retained them at that point because we thought we could make more money than by selling them," he says.
The Challenges Although Buxton still has some cows out on lease, he thinks he may have been money ahead to take his medicine by selling them.
"You lose control of your cattle. They wound up being worth more when I put them out than when I got them back," says Buxton. Even though the market improved, and there are lessees who treat the cows like their own, Buxton found that others treated them as a disposable commodity and sucked the value out of them.
Moreover, Buxton explains, "Some people are looking to lease cows because they don't have the money to go to the bank and borrow the money."
With these concerns in mind, Buxton encourages owners considering lease arrangements to visit the operation of the prospective lessee for a look at their management. Then, go visit with their banker to make sure they have enough equity and credit to take care of the cows.
Sherman also says lessees need to enter leases with their eyes wide open. "What everyone involved needs to know is that the lessor will probably just maintain his numbers because the operator has to have about all of the calf income to make it work," says Sherman.
That means both parties must be flexible and willing to adjust percentages based on markets and weather served up by a given year.
Still, leasing can offer producers the chance to restock or expand without borrowing money, and it can allow owners to broaden their cow-based equity without taking on more land. If leasing will ever work for an operation, the odds run highest at this stage of the cattle cycle.
"When there's profit in the cow business, there's something to share," says Hughes. "I think the timing is about right and as profits go up, I think it will make more sense for both parties." Just as long as it's equitable.
For detailed leasing and budgeting information, you can request NDSU's, "Leasing Beef Cows for a Profit," by calling Paulanne at 701/231-7393.