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Leasing Arrangements in the Beef Cattle Operation

Learn about the benefits and terms of leasing arrangements in beef cattle operations, including livestock lease agreements, cow/calf share arrangements, and cash lease agreements. Understand how to determine fair share rent and the tax considerations involved.

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Leasing Arrangements in the Beef Cattle Operation

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  1. Leasing Arrangements in the Beef Cattle Operation Damona Doye, OSU Extension Economist

  2. Lease Agreements • Means of sharing capital, risk, talents, labor of two parties • May include cash or share components or a combination • Terms are negotiable

  3. Lease Agreements • What portion of theincomeis received? • What portion of the costsdo I contribute? • What portion of the riskdo I bear? • What management practices will be followed? • What will be the condition of the assets at the end of the lease?

  4. Livestock Lease Agreements • Owner must be willing to risk some capital • Owner and caretaker must have mutual trust and confidence • Return on investment must compare favorably to other opportunities

  5. Terms in Livestock Lease Agreements • Starting date, length of agreement, options for renewal, grounds for termination • Acres of land, type of pasture and crops included • Expected stocking rate • Partnership intentions • Who pays for, provides • Feed • Water • Care • Vet Services • Fencing

  6. Terms in Livestock Lease Agreements (continued) • Bulls: type, quality, etc. • Share of products (calves, culls, death losses) • Disposal of culls • Growing, purchase, selection of replacements • Insurance • Facilities • Records required • Animal identification

  7. Terms in Livestock Lease Agreements (continued) • Handling of extenuating circumstances, such as drought • Incentives, disincentives for performance • Limits on activities • Settling disagreements • Compensation upon termination • Improvements

  8. Determining a Fair Share Rent • Determine the percent contribution of total value of fixed items contributed by each party • Share variable expenses in the same percentage as production is shared • Adjust share arrangements to reflect the impact of new technologies, improvements, land quality • Share total returns in the same proportion as total expenses are contributed • Compensate tenant at the end of the lease for the unused portion of investments

  9. Alternative Cow/Calf Share Arrangements

  10. Alternative Cow/Calf Share Arrangements

  11. Alternative Cow/Calf Share Arrangements

  12. Alternative Cow/Calf Share Arrangements

  13. Central – North Central OK average land values agecon.okstate.edu/oklandvalues

  14. Cow Herd Investment Data • Acres and improvements, value, tax rate, rate of return sought • Number of cows and bulls, value, purchase price, average life, tax and insurance rate, death loss • Value of machinery and equipment, proportion charged to this enterprise, average life, tax and insurance, interest • Calf crop, death loss, number kept for replacements • Conservation, management, labor

  15. Valuing Fixed Contributions • Land • “Safe” rate • Divide annual cash rent by per acre land value • Divide per acre net income by per acre land value • Machinery and equipment • Management • Percent of average capital invested • Percent of gross farm receipts • Labor

  16. Feed and pasture Labor Fencing Veterinary and supplies AI, semen Insect control Marketing Hauling Fuel, lube, repairs Registration Water Interest Other Cow Herd Operating Expenses

  17. Cow Herd Expected Receipts • Steers • Heifers • Cull cows • Cull bulls • Replacement heifers

  18. Tax Considerations Self-employment tax if sharing production risk through material participation • Any three of the following: • Inspect production activities • Consult with caretaker about production • Furnish half (maybe less under some circumstances) of the tools, equipment, livestock • Share half (maybe less under some circumstances) of the production expenses • Regularly and frequently makes decisions that significantly affect the success of the farm operation • Work at least 100 hours spread over five or more weeks on cow enterprise

  19. Web Fact Sheets and Spreadsheets Breeding livestock lease agreements, AGEC-571: http://agecon.okstate.edu/faculty/files/CowShare.xls Stocker lease agreements, AGEC-572: http://agecon.okstate.edu/faculty/files/StockerShare.xls

  20. Cash Lease Agreements • Tenant pays landlord a fixed amount per acre per year. • May be single or multi-year. • Government payments go to tenant. • Can add flexible component.

  21. Advantages to the landlord More stable income Payment can be scheduled for any time of year Eliminates or greatly reduces cash expenditures Reduced management responsibility Shifts risk Fewer potential conflicts about sharing and marketing crops Advantages to the tenant Total managerial freedom Fewer chances of conflict over decisions Receive all benefits of a “good year” and superior management Eliminates time and effort associated with dividing crops and input purchases as well as the related record keeping Cash Lease

  22. Disadvantages to the landlord Can become inequitable due to changes in prices, costs and technology Fewer opportunities for income tax management Will not realize benefits of good price and/or yield years if the agreement is not flexible Greater chance of soil depletion, neglected improvements Disadvantages to the tenant Must shoulder all the price and yield risk if the agreement lacks flexibility Large capital requirements for inputs May be required to pay part of the rent early in the year before the crop is planted Landowners may attribute above average yields to soil rather than management Cash Lease

  23. Determining a Fair Cash Rent • Market approach • Landlord’s ownership costs plus return to equity • Residual income method

  24. Northcentral Northwest East Southwest Oklahoma Farmland Leasing Regions

  25. Average Annual Pasture Cash Rental Rates ($/acre) Source: OSU CR-216, November 2010

  26. Average Annual Pasture Cash Rental Rates ($) Source: OSU CR-216, November 2010

  27. Native Pasture Rental Rates Source: OSU CR-230, November 2010

  28. Bermuda Pasture Rental Rates Source: OSU CR-230, November 2010

  29. Source: USDA NASS

  30. 2010 Rental Rates for Pastureland ($/a) CIMARRON TEXAS HARPER BEAVER WOODS NOWATA GRANT KAY OTTAWA ALFALFA WASHINGTON CRAIG OSAGE DELAWARE • WOODWARD NOBLE ROGERS • GARFIELD MAJOR PAWNEE ELLIS MAYES TULSA PAYNE • DEWEY KINGFISHER WAGONER CREEK CHEROKEE • BLAINE LOGAN ROGER ADAIR LINCOLN • MILLS • OKMULGEE MUSKOGEE < 8 CANADIAN • CUSTER SEQUOYAH OKLAHOMA OKFUSKEE WASHITA MCINTOSH 8 to 11 BECKHAM CADDO HASKELL POTTAWATOME SEMINOLE HUGHES CLEVELAND PITTSBURG GRADY GREER 12 to 15 KIOWA LATIMER MCCLAIN HARMON PONTOTOC 16 + GARVIN LE FLORE COMANCHE • * JACKSON COAL STEPHENS TILLMAN MURRAY PUSHMATAHA COTTON • * ATOKA Average = $11 JOHNSTON CARTER MARSHALL JEFFERSON MCCURTAIN CHOCTAW LOVE BRYAN Source: USDA NASS, 2010 * Indicates rate for Other (Combined) Counties

  31. Pasture Land Average Rent per Acre, 2010 Change from 2009 National average = 0.0% KS = 0.0%; NE = 0.0% OK = +4.8%; MO = -4.0% Source: USDA NASS Land Values and Cash Rents 2010 Summary and Dhuyvetter (KSU), August 2010 * Corresponding changes in crop land rents were US=+3.0%; KS=0.0%; NE=+6.2%; OK=0.0%; and MO=+4.4%.

  32. Determining a Fair Cash Rent • Landlord’s ownership costs plus return to equity • Property taxes on land $2 • Improvements • Repairs and maintenance • Property taxes • Insurance • Depreciation • Desired return on equity $1,400 @ 2%

  33. Determining a Fair Cash Rent • Residual income method • Returns • Grain, government payments, other • Variable costs • Seed, fertilizer, chemicals, fuel, harvest costs, labor, etc. • Fixed costs • Machinery and equipment depreciation, interest on investment, taxes, insurance • Management fee (e.g., 5-8% of gross receipts)

  34. Coming to Agreement.... • Both tenants and landlords should estimate their contributions to production • Use of area standards or traditions may not be in the best interest of either party • Worksheets and spreadsheets are available to summarize contributions and analyze alternatives • Equitable agreements are negotiated

  35. Terms That Should Be Specified in All Agreements • Parties (no partnership) • Premises • Length of lease, conditions of termination of lease • Rental arrangements – who pays for what inputs, how income is shared, who makes decisions • Payment arrangements and assurance • Financing assurance • What will be provided by each party (machinery, equipment, labor, other inputs)

  36. Terms That Should Be Specified in All Agreements • Willingness to sign security agreement • Plan to pay property taxes, repairs, insurance on improvements • Use of premises: farming/ranching practices including how property will be maintained (soil pH and fertility, stocking rate, etc.) • Compliance with FSA, NRCS, other agency requirements • Other environmental clauses • Terms for reimbursing tenant for capital improvements

  37. Terms That Should Be Specified in All Agreements • Records to be kept • Insurance (or hold harmless clause) • Repercussions of failure to pay rent • Damages • Retained rights: entry, hunting and fishing, harvesting pecans • Subletting • Mineral rights • Crop insurance • Arbitration

  38. What Is Fair? What Is Not Fair? • Fair does not equal legal. • Legal does not equal fair. Everything is negotiable up front. Legal is what you agreed to or if not addressed, what the law substitutes.

  39. Put Your Agreement in Writing! • Encourages understanding by both parties • Serves as a reminder of terms agreed upon • Legal resource and guide for heirs Consult with a lawyer.

  40. References http://pods.dasnr.okstate.edu/ • Oklahoma Pasture Rental Rates, CR-216 • Oklahoma Cropland Rental Rates, CR-230 • Developing Cash Lease Agreements, AGEC-214 • Developing Share Lease Agreements, AGEC-215 • Tax Aspects of Leasing, AGEC-940 • Tax Consequences: Cash vs. Crop Share Leases, AGEC-941 • Breeding Livestock Lease Agreements, AGEC-571 • Stocker Lease Agreements, AGEC-572 Free lease agreement forms at MidWest Plan Service website: http://www.mwps.org/

  41. References Agricultural land value data • Current issue of AAEA’s Choices online magazine: www.choicesmagazine.org • OSU ag land value website: www.agecon.okstate.edu/oklandvalues • Kansas City Federal Reserve Bank • USDA NASS • http://www.nass.usda.gov/Charts_and_Maps/Land_Values_and_Cash_Rents/index.asp • http://usda.mannlib.cornell.edu/MannUsda/viewDocumentInfo.do?documentID=1446

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