2. Livestock agreements cash lease and share

3. Market Trends, rates, production
Historical cycle of cattle production.
Decline in the cattle supply has had an inverse affect on the value of beef.
Number of livestock is not expected to increase any time soon.
Livestock leases become extremely important for those looking to expand their current herd, start a herd, or maintain a current herd without the risk.
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4. Cash lease vs. share: what is best for your client?
Owner of a cow herd and possibly the bull(s) to service the cows rents the herd to an operator for a specific term.
Equitable Share Lease
Owner leases the cow herd to the operator for a share of the calf crop.
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5. Cash Lease advantages and disadvantages
Advantages for the operator
Operator has full control and responsibility of managing the herd.
Allows the operator the full benefit of the current high prices for calves produced.
Advantage for the owner
Fixed and guaranteed income without incurring the operating costs or incurring the risk.
Avoids the self-employment tax.
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6. Disadvantages for the operator Operator takes on all the risk
Disadvantages for the owner
Owner gives up complete control of his/her herd for the term of the lease.
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7. Equitable share lease advantages and disadvantages
Advantages for the operator
Operator shares the risk in producing a calf crop with the owner.
Allows for expansion of the operation and more efficient use of labor.
Efficient and cost effective way for beginning rancher to get started in the livestock industry.
Advantages for the owner
Maintain a herd without providing the labor along with a source of rental income while maintaining some management of the herd.
Avenue for an owner to transfer the herd to another over a period of time.
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8. Disadvantage for the operator
Sharing the calf crop when market prices are favorable.
Generally gives up some management control of the herd.
Disadvantage for the owner
Sharing in the risk of a poor calf crop.
May incur a self-employment tax.
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9. Price, production and quality projections
Parties have to decide that sharing the calf crop is worth the potential risks.
Before entering a lease the owner and operator should put together separate budgets.
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12. Calculating equitable agreements with sample worksheets
No one way to calculate an Equitable Share Lease
“The devil is in the details.”
Objective of any equitable agreement is to split the calf crop in proportion to the parties’ respective production costs.
“Keep it Simple”
Leases are rarely so simple and even the simplest breakdown of inputs can get complicated.
Parties need to include all inputs that go into producing a calf crop.
Values of these costs, along with others, may fluctuate throughout the term.
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13. Major input costs in Equitable Share Agreements
Cow Herd
“Whole Herd” or “Cow Unit”
“whole herd”: value of the herd is valued as one price.
“cow unit” is the cow, the calf, the cow’s share of the bull and the cow’s share of the replacement heifer.
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14. Annual depreciation of cow herd and equipment
The difference between the market value of the cows and bull(s) when placed in the herd and the salvage or cull value of the livestock.
The operators may consider the depreciation of his/her machinery and equipment.
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15. Operator may consider the interest on his/her machinery and buildings.
Annual interest
Owner may want to consider the annual interest rate on the value of his/her cows.
Operator may consider the interest on his/her machinery and buildings.
Annual insurance
Cost of insurance is credited as contribution to whoever provides the insurance for the herd.
Some leases allow for the owner and operator to split the insurance cost or death loss if the operator guarantees a maximum number of deaths per the lease term.
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16. Cost of Machinery, Equipment and Buildings
Annual Taxes
Owners and operators must consider their respective taxes on the livestock, buildings and equipment.
Annual Cost of Bull
Contribution should be considered the value of the bull divided by the number of cows served each year.
Cost of Machinery, Equipment and Buildings
Operator may use the rental rate for machinery, equipment and buildings.
Otherwise, operator may consider the annual interest rate, depreciation and taxes.
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17. Pasture Value
Simplest figure for the contribution of pasture is the fair cash rental rate.
Feed and other expense
Contribution is calculated at the current market value for one year leases.
In multiple year leases, the operator may use the long-run market price.
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18. A number that has been used is 5 to 10% of the production value.
Labor and Management
Operator normally figures out the rate of labor at the hired rate in the market.
General figure of annual labor is 6 hour per cow per year although smaller herds require more hours per cow.
Additional labor value must be included where replacements are raised within the herd.
In some rare occurrences the operator and owner determine the value of their respective roles in managing the herd.
A number that has been used is 5 to 10% of the production value.
A management value is usually a zero sum gain.
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19. Selection of replacements and procedures
Replacements are purchased by owner
If owner purchases the replacements the proceeds from the calf crop are split by the percentage of the parties’ respective contributions.
The owner is entitled to the cull cow sales.
Replacements are kept but raised in separate operation
Market value is placed on replacement heifers as if sold.
Parties then split their respective share of rest of the calves sold and the owner purchases the operators share of the replacement heifers or the operator receives a higher percentage of the cash sales.
Owner retains all cull cow income.
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20. Share value of production of calves (sold and replacements)
Owners share of the contribution and receipts would be smaller.
Owners cost is also lower because the cost of growing replacements is included in the contributions of the operator.
Owner would own all replacement heifers and cull cow sales.
Share all sales
Owner and operator would share all sales including cull cow sales based on the respective percentages of each party.
Cow sales are substituted for the value of the replacements.
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21. Key agreement clauses Condition of livestock, breeding, vet services, insurance, etc.
Lease must be in writing.
“Exit strategy”; provide a termination process.
# of cows and bulls; generally in one-year leases the owner provides the bull(s); in a multi-year leases the operator may want to provide the bull.
Multi-year leases must provide whether replacement cows will be provided out of the calves produced.
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22. Agreement on when and how culling occurs.
Condition and overall health of the herd.
Special management programs.
Responsibility for veterinarian bills.
Acceptable amount of death loss.
Insurance: the level of the insurance and who is responsible for insuring.
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23. Establish expected stocking rates and maintenance responsibilities.
Provision for settling disputes.
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24. Tax considerations
Owner may be subject to self-employment taxes under an Equitable Share Agreement if she or he materially participates in the management of the cow herd.
The IRS has defined material participation accordingly:
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25. (1) The owner does any of the following three:
Inspect production activities (calving or feeding) (inspecting property or improvements does not count).
Consult with caretaker about production of the cow enterprise.
Furnish at least half (maybe less depending on circumstances) of tools, equipment and livestock used in enterprise.
Share at least half (maybe less depending on circumstances) of production expenses.
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26. The owner regularly and frequently makes decisions that significantly affect the farm operation.
The owner works at least 100 hours spread over five or more weeks on activities connected to the cow herd.
The owner’s activities when considered in their totality constitute material participation even if not specific to items (1), (2), or (3).
Owner’s have to be wary of the IRS’ subjective analysis regarding material participation if the owner desires to avoid the self employment tax.
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27. conclusion
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