As this decade's cattle cycle moves from the turn-around phase into expansion, expect a renewed interest in beef cow leasing. Typically, leasing increases when producers are looking to expand herds but can't or don't want to borrow the money.

In addition, senior ranchers wishing to retire need to minimize the tax consequences of the sale of herds. By leasing the cows to a working rancher, a retiree can spread the investment transfer payments over several tax years and substantially reduce his income tax and social security consequences. In fact, I have one client exploring the use of leasing as an estate transfer tool.

Last month, we discussed how to develop a beef cow lease that is equitable to both parties involved. This month, we'll review the economic underpinning of beef cow leases.

Leasing livestock is a form of borrowing capital. Rather than borrow from a bank, however, the working rancher borrows from the cow owner. Leasing cows allows the working rancher to acquire control over the use of the beef cow assets without an actual capital outlay. Instead, he pays the cow owner a share of the calf crop as payment for use of those beef cow assets.

Leasing beef cows on this basis is advantageous to both parties involved. Some of the advantages to the working rancher include:

  • Obtain control of beef cows without going into debt to buy breeding stock.

  • Share some of the risk of the beef cow operation with the cow owner.

  • Gain equity in the total herd when the working rancher provides the replacement heifers.

  • Borrowing investment capital at a fair rate (provided the lease is equitable).

Meanwhile, the advantages of leasing to the cow owner include:

  • Ability to maintain a breeding herd without providing the labor and feed required to run the cowherd.

  • Provides an economic return (sometimes substantial) from investment capital.

  • A means of transferring ownership over a period of years.

  • Spreads the income from selling the cowherd over several years, thus reducing the income and social security tax consequences of the cowherd transfer.

  • Allows the next generation to gain control and ownership over the cowherd assets by having the working rancher provide replacement heifers as needed.

  • A means of estate transfer from one generation to the next.

With a properly designed lease, beef cow leasing can be a win-win situation for both sides involved. Unfortunately, however, I've analyzed as many leased herds with unequitable leases as with equitable leases.

When calf prices were high, these unequitable leases sort of worked for the working rancher, but the leases tended to favor the cow owners. When calf prices were low, these working ranchers just worked hard. In fact, the economic reality for these working-ranchers was typically substantial economic losses.

My analysis of leased beef cowherds reveals two common problems:

  • The first is that working ranchers tend to not know their potential costs of production when entering into a lease. Meanwhile, cow owners typically have a good handle on their costs.

Frequently, the perception among these working ranchers is that the biggest cost of running cows is the capital investment in the cows, and that is paid by the cow owner. But when the capital cost is annualized and it has to be annualized this perception is just not true.

The biggest annual cost of running beef cows is feed, which is typically paid by the working rancher. Just having a good handle on production costs can go a long way towards negotiating an equitable beef cow lease.

  • The second major problem is that the two parties tend to use a “community standard agreement” similar to what farmers use for leased farmland. They use this format to avoid the work of determining each party's economic contribution.

In the Northern Plains, this community standard agreement for leased beef cows has been 60/40. Under this standard, the working rancher gets 60% of the calf crop and the cow owner gets 40%.

However, when the cull cow income is added to the cow owner's 40% of the calf crop, the cow owner actually collects more than half of the beef cow income. A typical cow owner, however, simply does not contribute half the economic costs of running a beef cowherd.

I recommend that the beef cow lease be re-evaluated twice during a typical 10-year cattle cycle. Do this once for the expansion phase of the cattle cycle and again for the contraction phase. Typically, the equitable share-lease agreement will be different for each of these cattle cycle phases. Properly done, leased cows can be a win-win business decision.

Harlan Hughes is a Professor Emeritus at North Dakota State University. Retired last spring, he is currently based in Mankato, MN. He can be reached at 701/238-9607 or harlan.hughes@gte.net.

Evaluating Market Alternatives For 2000 Calves

These planning price projections (Table 1) are based on both the futures market price and Western North Dakota sale barn prices for the current week. The price projections in Table 1 were used to evaluate six marketing alternatives for year 2000 calves shown in Table 2.

The “buy/sell margin” in Table 2 is the buying price of animals going into a lot subtracted from the selling price of animals coming out of the lot. Since selling price is normally less than purchase price, the buy/sell margin is normally negative. The negative buy/sell margin represents the marketing loss/cwt. on the purchase weight of the animals. The cost of gain (COG) represents the cost of the added weight while in the lot. Profit/head represents the combined marketing losses and profits from gain.

Table 1. Suggested planning prices

Lbs.

Fall 00

Wk May 23

Mar 01

Spg 01*

Fall 01*

400

$119

$107

$120

$107

$108

500

$105

$103

$110

$103

$103

600

$96

$97

$102

$97

$97

700

$90

$91

$93

$91

$92

800

$88

$85

$85

$85

$85

900

$89

$78

$78

$77

$78

Slaughter

$72

$77

$79

$75

$75

*Projected week of May 23, 2001

Table 2. Traditional marketing alternatives

Marketing Strategy

Buy/Sell

COG

Profit/Hd

1. Sell at weaning

N/A

$0.70

$149

2. Bckg high ADG

-$17

$0.49

-$16

3. Fin bckg steer

-$16

$0.46

$22

4. Grow and finish

-$11

$0.42

$43

5. Steers on grass

-$11

$0.45

$3

6. Fin grass steer

-$10

$0.45

$57

The six marketing alternatives evaluated here are: 1) selling 565-lb. calves at weaning, 2) backgrounding 565-800 lbs. sold after first of the year, 3) finishing backgrounded steers 800-1,200 lbs., 4) growing and finishing 565-1,175 lbs., 5) steers on grass 625-800 lbs., and 6) finishing grass steers 800-1,250 lbs

.