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Cropland and Livestock Leasing in Montana

Cropland and Livestock Leasing in Montana. George Haynes, Ph.D. MSU – Bozeman Agricultural Policy Specialist. Presentation Contents. Cropland Leases Crop share lease principles Cash lease principles Example Livestock Leases Livestock lease considerations Example Summary.

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Cropland and Livestock Leasing in Montana

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  1. Cropland and Livestock Leasing in Montana George Haynes, Ph.D. MSU – Bozeman Agricultural Policy Specialist

  2. Presentation Contents • Cropland Leases • Crop share lease principles • Cash lease principles • Example • Livestock Leases • Livestock lease considerations • Example • Summary

  3. “Rules of Thumb” • Crop-share lease • 1/3 – landlord ---------------2/3 – tenant • Livestock lease • 40% – cow owner ----------- 60% - caretaker

  4. Test of a good lease . . . • Is it written? (Montana handshake) • Is the crop shared in the same % as resource contributions? • Does it encourage proper amounts of yield increasing expenses? • Does the tenant have potential for profits? • Does it promote conservation? • Does it plan for needed improvements? • Are lease duration and conditions understood? O'Brien, D.M. Kansas State Research and Extension

  5. Cropland Leases

  6. Crop Share Lease Principles • Variable expenses that are yield increasingshould be shared in the same proportion as the crop share. • Goal – maximize net returns for the operation • All crops are shared alike. O'Brien, D.M. Kansas State Research and Extension

  7. Crop Share Lease Principles • Both parties should share in total returns in the same proportion as they contribute resources. • Landowners: • Land • Crop inputs • Management (perhaps) • Tenants • Labor • Machinery • Crop inputs • Management O'Brien, D.M. Kansas State Research and Extension

  8. Crop Share Lease Principles • When new technologies or crops are adopted, leases often need adjustment. • More intensive crop rotations • More reliance on herbicides and less on tillage • New GMO seed/herbicide O'Brien, D.M. Kansas State Research and Extension

  9. Crop Share Lease Principles • Tenants should be compensated at lease termination for the unexhausted portion of long-term investments. • Fences, buildings, irrigation, etc. • Current (ongoing) communication is essential between the landlord and tenant O'Brien, D.M. Kansas State Research and Extension

  10. Crop Share Advantages • Risk & rewards are shared • Management may be shared • Less operating capital “tied up” for tenant • Tax management timing opportunities with crop sales and input purchases • Landowners may prove material participation (versus cash rental) • Social security implications O'Brien, D.M. Kansas State Research and Extension

  11. Crop Share Disadvantages • Variable landowner income • More records • Landowner may participate in marketing and management • Need to keep reviewing lease arrangements for equity O'Brien, D.M. Kansas State Research and Extension

  12. Cash Rent Advantages • Landowners • Fewer farm decisions • No price or yield risk • No crop marketing decisions • No material participation • Tenants • More control of decisions • More income for best farmers • Benefit of windfall profits O'Brien, D.M. Kansas State Research and Extension

  13. Cash Rent Disadvantages • More difficult to renegotiate • Landowners • No “good year” windfall profits • Few income tax management opportunities • Risk of tenants “mining” land • Harder to establish Social Security base • Tenants • Have all yield and price risk • Higher expenses / higher lending needs O'Brien, D.M. Kansas State Research and Extension

  14. Example • See Handout • Methods and Procedures of Estimating Rent for Crop Share and Flexible Cash Leases

  15. Crop Share Lease

  16. Livestock Leases: Cows on shares

  17. Livestock LeasesIf You Are Going to RunCows on Shares RUN THE NUMBERS!!! DO NOT COUNT ON TRADITION

  18. Livestock Leases . . . • Based on cost contributions approach • Both parties should share in total returns in the same proportion as they contribute resources. • Cow owners (in our example) • Livestock ownership • Other inputs • Tenants • Feed • Livestock care and handling • Facilities and equipment • Ownership

  19. Livestock Lease Considerations • Length of Lease • Long Enough To Provide Continuity in The Livestock Herd (Operation) • How Are Replacements Provided • How and When Are Cows Culled and Sold • How and When Are Calves Sold • Death Loss Percentage Allowed • Incentives for Lower Death Loss and Higher Calving Percentage • Provisions for Drought and Disasters

  20. Depreciation in Livestock Lease • If replacement are raised and the tenant (person running the cows) pays for development costs. • Do NOT include depreciation for the cow herd in the lease calculations. • Individual cows are “wearing out” but the asset (cow herd) is not depreciating • Tenant is paying the costs of developing replacements • Revenue shared is …?????

  21. Example • See handout • Cost of production estimates for commercial cow-calf enterprise

  22. Livestock Shares

  23. How good were our “Rules of Thumb” • Crop-share lease • 1/3 – landlord - - - - - - - - - - 2/3 – tenant • Livestock lease • 40% – cow owner ----------- 60% - caretaker Volatility in crop/livestock markets makes procrastination in lease reviews very costly

  24. Leasing ?

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