Leasing Arrangements in the Beef Cattle Operation Damona

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

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

Lease Agreements n What portion of the income is received? n What portion of the costs do I contribute? n What portion of the risk do I bear? n What management practices will be followed? n What will be the condition of the assets at the end of the lease?

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

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

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

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

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

Alternative Cow/Calf Share Arrangements Input Caretaker Owner Cows/bulls 100% Land/pasture 100% Labor Management 100% 50% Buildings 100% Machinery, equipment 100% Feed 100% Other cash costs 100% Calf crop Receipts 50% 10 -20%

Alternative Cow/Calf Share Arrangements Input Caretaker Owner Cows/bulls 100% Land/pasture 100% Labor 100% Management 100% Buildings 100% Machinery, equipment 100% Feed 100% Other cash costs Calf crop Receipts 100% 25% 75%

Alternative Cow/Calf Share Arrangements Input Caretaker Owner Cows/bulls 100% Land/pasture 100% Labor 100% Management 100% Buildings 100% Machinery, equipment 100% Feed 100% Other cash costs 100% Calf crop Receipts 75% 25%

Alternative Cow/Calf Share Arrangements Input Caretaker Owner Cows/bulls Land/pasture 100% 50% Labor 100% Management 100% Buildings Machinery, equipment 50% 50% 100% Feed 50% Other cash costs 50% 50% Calf crop Receipts

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

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

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

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

Cow Herd Expected Receipts n Steers n Heifers n Cull cows n Cull bulls n Replacement heifers

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

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

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

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

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

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

Northcentral Northwest East Southwest Oklahoma Farmland Leasing Regions

Average Annual Pasture Cash Rental Rates ($/acre) NW SW NC E State 10. 07 3 -22 11. 04 3 -25 13. 04 5 -24 12. 76 3 -28 11. 61 3 -28 Bermuda 13. 95 5 -30 19. 42 10 -40 16. 80 6 -40 16. 61 5 -40 Other Pasture 12. 60 9 -18 25. 31 13 -45 16. 10 5 -45 Native Pasture Source: OSU CR-216, November 2010

Average Annual Pasture Cash Rental Rates ($) State Small Grain Pasture: Winter grazing (Nov. – March) 0. 39/lb of gain 0. 35 -0. 50 25. 28/acre/season 10 -38. 44 Small Grain Pasture: Winter grazing and grazeout (Nov. – May) 0. 48/lb of gain 0. 40 -0. 65 31. 64/acre/season 8 -120 Source: OSU CR-216, November 2010

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

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

• 12. 00 • 0. 00 • 1961 • 1962 • 1963 • 1964 • 1965 • 1966 • 1967 • 1968 • 1969 • 1970 • 1971 • 1972 • 1973 • 1974 • 1975 • 1976 • 1977 • 1978 • 1979 • 1980 • 1981 • 1982 • 1983 • 1984 • 1985 • 1986 • 1987 • 1988 • 1989 • 1990 • 1991 • 1992 • 1993 • 1994 • 1995 • 1996 • 1997 • 1998 • 1999 • 2000 • 2001 • 2002 • 2003 • 2004 • 2005 • 2006 • 2007 • 2008 • 2009 • 2010 • 14. 00 • Oklahoma Pasture Rental Rate ($/acre) • 10. 00 • 8. 00 • 6. 00 • 4. 00 • 2. 00 Source: USDA NASS

D COMANCHE JACKSON AN HARMON EL GRADY KIOWA MCCLAIN GARVIN STEPHENS TILLMAN COTTON JEFFERSON OKFUSKEE LOVE MUSKOGEE A DELAWARE MAYES ADAIR SEQUOYAH MCINTOSH HASKEL HUGHESPITTSBURG L LATIMER LE FLORE • * COAL MURRAY CARTER CRAIG PONTOTOC PUSHMATAHA JOHNSTON LL Average = $11 A EV CADDO GREER M SEMINOLE LA HO WASHITA BECKHAM LINCOLN OK W WAGONER • OKMULGEE NG CANADIAN ATO • CUSTER CREEK LOGAN KI • BLAINE TULSA ER PAYNE CL <8 8 to 11 12 to 15 16 + PAWNEE FIS H • DEWEY ROGER • MILLS NOBLE • GARFIELD MAJOR OT TA CHEROKEE OSAGE • WOODWARD ELLIS KAY ROGERS NOWATA GRANT ME WOODS • MARSHA HARPER TAW BEAVER POT TEXAS ALFALFA CIMARRON WASHINGTON 2010 Rental Rates for Pastureland ($/a) Source: USDA NASS, 2010 * Indicates rate for Other (Combined) Counties ATOKA • * CHOCTAW BRYAN MCCURTAIN

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%.

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

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

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

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

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

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

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

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

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

References Agricultural land value data n Current issue of AAEA’s Choices online magazine: www. choicesmagazine. org n OSU ag land value website: www. agecon. okstate. edu/oklandvalues n Kansas City Federal Reserve Bank n USDA NASS q http: //www. nass. usda. gov/Charts_and_Maps/Land_Values_and_ Cash_Rents/index. asp q http: //usda. mannlib. cornell. edu/Mann. Usda/view. Document. Info. do ? document. ID=1446