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George Haynes, Ph.D. MSU – Bozeman Agricultural Policy Specialist.

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Presentation on theme: "George Haynes, Ph.D. MSU – Bozeman Agricultural Policy Specialist."— Presentation transcript:

1 George Haynes, Ph.D. MSU – Bozeman Agricultural Policy Specialist

2  Cropland Leases ◦ Crop share lease principles ◦ Cash lease principles ◦ Example  Livestock Leases ◦ Livestock lease considerations ◦ Example  Summary

3  Crop-share lease ◦ 1/3 – landlord ---------------2/3 – tenant  Livestock lease ◦ 40% – cow owner ----------- 60% - caretaker

4  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

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6  Variable expenses that are yield increasing should 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  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  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  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  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  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  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  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  See Handout ◦ Methods and Procedures of Estimating Rent for Crop Share and Flexible Cash Leases

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17 17 RUN THE NUMBERS!!! DO NOT COUNT ON TRADITION

18 18  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 19  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 20  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  See handout ◦ Cost of production estimates for commercial cow- calf enterprise

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23  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

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