Evaluate cow/calf share agreements for owner and operator advantages
When looking at production options, University of Nebraska Extension Educator Aaron Berger shares considerations for cow/calf share and cash cow lease arrangements.
“Cow/calf production generally requires a large amount of capital, which can be a challenge to beginning producers. By leasing cows, the operator can gain access to cows without having to purchase them,” he explains.
Two options discussed by Berger are a cash lease and a cow/calf share arrangement.
In a cash lease, the cow owner gets cash payment from the operator.
“In a cash lease agreement, the owner gets paid a set amount per pregnant female each year,” he says. “This payment can come either as half up front when the cows are leased and half at the end of the year, or a full payment at the end of the year, depending on the arrangement between the owner and the operator.”
Owner advantages for this situation include less risk, known income and a payment plan that is easy to understand.
One disadvantage is that the owner does not receive the full profit when calf prices are high, Berger says.
“The advantage to the operator is that it simplifies payment. They know what they are going to need to pay each year, and they can work that into a budget,” he explains.
He also notes that the operator assumes all of the risk for prices and production in this scenario and that he or she must have the cash to pay for the lease.
In a share arrangement, both parties receive a share of the calf crop.
“In a cow/calf share arrangement, the owner gets an agreed upon portion of the calf crop,” Berger states.
In this situation, the owner has the advantage of either selling or retaining calves at weaning.
With this option, genetics can be kept in the herd, heifers can be kept in production and cows can be retained as an opportunity to perpetuate the owner’s cow investment.
“The disadvantage to the cow owner is that they are now participating in both production and price risk,” he says.
For the operator, the advantage is that he or she does not need to come up with cash to pay for the lease of the cows.
Berger adds, “The disadvantage is that they have to give up a portion of the calf crop that they may want to retain for their own herd or to build their own numbers.”
It is also important to consider the input from both parties for a cow/calf lease agreement, Berger notes.
“Feed costs, for example, might include growing season grazing, dormant season grazing, corn stalk residue, hay, distiller’s grain or protein supplements, salt and mineral,” he explains.
Cash costs can include medicine and veterinary expenses, as well as operating costs for buildings and equipment, such as those related to a pick-ups, tractor, livestock trailers or working facilities.
Berger states, “Do not forget about labor expense. The cow/calf operator must charge for labor because it is something that they contribute to the arrangement.”
Cow and bull ownership is a further expense.
Cow and bull depreciation, death-loss, interest on the animals and return on capital investment should all be taken into account, he continues.
“The value placed on the cow is important,” he says.
Replacement rates, cull values and bull prices for breeding are other factors that Berger encourages owners and operators to consider.
“We have to work with people we can trust,” Berger states.
He notes that evaluating the integrity of both parties is important.
“Both parties need to recognize that a win-win is needed for a long-term arrangement that works for both owner and operator,” he says.
Acceptable cow breed-up, hauling and marketing expenses, expected results and best- and worst-case scenarios should be discussed, notes Berger.
“The agreement needs to include cow/calf care needs, such as who the consulting veterinarian will be and how sickness and death-loss will be handled,” he adds.
He further explains that if a lender is involved, that person needs to be clear on the terms and expectations of the agreement.
“It is also important to have an exit plan,” Berger states.
Parties should discuss factors that will allow the agreement to dissolve, including how that process would take place and what the notification protocol would be, he continues.
Berger states, “It is critical to put the agreement in writing. In a cow/calf share scenario, it is important that both parties know what the expectations are so that there are no disagreements on the arrangement.”
Berger presented this information during a December 2014 webinar.
Natasha Wheeler is editor of the Wyoming Livestock Roundup and can be contacted at Natasha@wylr.net.