As the nation's drought expands and worsens, I get more calls on the economics of moving a cow herd to another ranch for feeding over the next year. Typically, folks want to know what is an equitable share-lease when one party owns the cows (and maybe even the bulls) and the other party provides the winter and summer feed, labor, etc., for the herd over a year's time?
This month, I'll discuss just such an arrangement I evaluated for a client. The herd numbers are from my Integrated Resource Management demo herd, which I have permission to share, but what's important here is the process.
Most all business partners in share-lease arrangements want an equitable (fair) agreement. It's one where the cow owner and working rancher share the calf crop in the same proportion they share the production expenses of operating the beef cow herd.
The key to an equitable agreement is first calculating the total production expenses for the herd to be shared, then allocating these total costs — one item at a time — to one or other of the partners. The cow owner's costs and the working rancher's costs are then totaled up and their percentages of the total costs determined. The calf crop is then divided according to these two percentages.
Table 1 presents the cow herd's cost of production data calculated for this share-lease analysis. The Table 1 cost data is on a per-cow basis.
Total feed costs are calculated at $275.54/cow, livestock costs are $41.77/cow, bull depreciation is $14.24, operating interest is $3.74, and fixed costs (including cow depreciation) is $101.58. (Depreciation on the breeding herd was used in place of the cost to bring replacement heifers into a perpetual herd. You can use either depreciation or cost of replacements for a perpetual herd but do not use both.)
This gives a total operating cost for this beef cow herd (excluding labor, management and a charge for equity capital) of $429.32. This figures out to a unit-cost-of-producing (UCOP) a cwt. of calf of $84.
Table 1 presents a detailed breakdown of the operating-cost contribution of each business partner. The bottom line presents the total operating costs ($429.32) divided into a $95.64 cost contribution for the cow owner and a $333.68 contribution for the working rancher.
In order to determine an equitable share agreement for this share-lease herd, we need to work from the “full costs” of production, considering labor, management and equity capital. This allows us to arrive at the total (full) costs of both parties, and thus determine the cost contribution of the cow owner and the working rancher.
Table 2 presents the “full costs” of production, including a charge for labor, management and equity capital. The full costs of production are calculated to be $610.28/cow, which works out to a UCOP of $120/cwt. of calf produced. The cow owner's cost contribution is $31/cwt. of calf produced, while the working rancher's cost contribution is $89/cwt.
In this example herd, the cow owner cost contribution to full costs is $156.91, while the working rancher's is $453.37. This works out to the cow owner contributing 26% of the full costs, and the working rancher contributing 74%. Based on my cost-analysis work with other ranchers, these cost contributions probably won't change a whole lot as we progress through the beef-cattle cycle.
This suggests then that the cow owner should get 26% of the calf crop and the working rancher 74%. Remember, the cow owner also gets the cull-cow income, but the cow owner is responsible for any preg-checked replacement heifers that might be added back into the breeding herd.
I recommend rounding this share agreement to 25% of the calf crop going to the cow owner and 75% to the working rancher. The bottom half of Table 3 illustrates the income allocation for this herd under a 25/75 share lease.
Thus, the cow owner gets 25% of the calf crop, plus all cull-animal income, bringing his portion of the beef-cow income to $237/cow or 36% of gross income. The working rancher gets $426/cow, or 64% of the total gross income. Remember, a typical beef cow herd derives 15-25% of its — gross income from cull-animal sales.
These percentage-income allocations won't change a whole lot as we progress through the cattle cycle, but the absolute values of these gross-income allocations can change substantially each year for each business partner.
Is there extra profit in a lease?
A second point — share-lease agreements don't generate any additional profit. In fact, there's no guarantee either party will make money with a share-lease agreement in any given year. The partners will, however, share the good years and bad years together.
My final point is to get these agreements in writing, paying particular attention to the start and end dates. The beef cow herd's year should start immediately after weaning and go through to the next weaning. That way, the beef-cow year corresponds to the production of one calf crop, making it easier to administer the agreement.
If drought feeding begins before weaning, the cow owner should pay a daily feed and labor cost until weaning. The two parties can then enter into an annual share-leasing agreement.
For multi-year agreements, the written agreement should explain clearly how both parties can terminate the agreement. Legal squabbles that occur generally tend to center on the termination process. Agreeing to, and signing off upfront, on the terms for ending the agreement will minimize headaches.
Editor's Note: Harlan Hughes offers a CD entitled, “How to make the cattle cycle Work for you.” For a copy, send $25 to Harlan Hughes, 30 Ramble A Road, Laramie, WY 82070.
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