
Do you know that young farmer down the road who just bought four bred cows to kick-start his herd? Maybe he stopped by to ask you for advice, knowing that you’ve got 40 years of experience under your belt. Or perhaps he asked if you’d ever consider selling some of your cattle to him.
If you have not considered a transition plan for your livestock, now is the time to do so. If you do not have children or your children are not interested in keeping the herd, it is key to draw up some sort of succession plan for that 100-head herd that you built from scratch many years ago.
The good news is there are several cattle share or lease arrangements for you to consider. The simplest of these arrangements is a cash lease, says Ron Lemenager, a beef cattle specialist and professor of animal sciences at Purdue University.
“Keep it simple,” Lemenager says. “This is going to make it easier for both parties to uphold the agreement.”
How it works
A cash lease involves the operator leasing bred cows and potentially bulls for a predetermined price. The operator then retains all calves. This arrangement is low risk because the cash value is already set when entering the agreement.
“The cow owner knows what their income will be, regardless of weather, markets, percent calf crop weaned, etc.,” Lemenager explains. In exchange for less risk, the owner also is agreeing to a cash value per cow that would be less than the value in a cow/calf share lease arrangement.
The key to making this work is agreeing to a set number of bred females each year. Then, you must ensure the herd stays that size. This is where both parties need to work together to determine who will provide replacement heifers. If the goal is to transfer the herd, then this would be an opportunity for the operator to retain heifers or purchase replacement heifers to slowly take over ownership of the herd.
There are four areas that impact what is a “fair return” to the owner, Lemenager says: average cow herd value, cow and bull depreciation, replacement rate, and expected rate of return on the investment.
Other options
If the operator is just getting started with farming and does not have the land, facilities or equipment to accommodate cattle, you may consider a cow/calf share agreement. In this arrangement, the owner’s and operator’s contributions are assigned a monetary value that helps determine what portion of the calf crop each party receives, Lemenager says.
Although it may be challenging to assign value to each party’s contributions, there are resources available. Head to cap.unl.edu/livestock/tools to find an Excel spreadsheet that will help you determine value and make decisions.
Lemenager shares several other widely accepted options for leasing and transferring cattle:
Market value. Owners and operators agree on rates based on their costs in this arrangement. Rates will vary based on the services provided and the terms of the agreement. Rather than asking the operator what their going rate is, this arrangement involves taking a closer look at costs to agree on a specific rate.
Flexible share lease. This arrangement is like the cow-calf share lease, where the owner and operator put value on their contributions. However, revenue from calf sales goes toward covering operating costs and then fixed costs. Remaining revenue is divided among the parties based on an established share.
Fixed number of calves. In this arrangement, the owner receives a fixed number of calves each year as the lease payment. The remaining calves are then retained by the operator.
What to include in a cow lease
A firm handshake should not be all that is binding your cow lease arrangement. Lemenager says that these leases need to be recorded in writing.
“Put the lease in writing, and clearly define the terms and expectations,” Lemenager explains. He adds that the written lease should provide clarification for both parties.
While you are drafting the lease, you may consider the following factors:
Who will retain calves?
How will you respond to market changes?
What are the cow/calf care expectations?
Who makes breeding decisions?
Which vet will you use?
Insurance should be part of the plan, too. Lemenager advises adding an insurance policy to the agreement to cover unforeseen losses that might occur to protect both parties.
Another large consideration is who will provide replacement heifers. Lemenager recommends drafting an additional document just for this area.
“If you are in a cow/calf share agreement, you probably need to handle replacement heifers as a separate agreement,” Lemenager adds.
It may also be beneficial to bring a third-party mediator into these discussions. Find someone who is trusted by both parties and can remain impartial while drafting arrangements. Additionally, consider how the arrangement may end or what will happen if things go south.
“If it doesn’t work, how are you going to get out of this?” Lemenager says. He adds that having an exit plan in writing is crucial. Don’t forget to include details of how the arrangement will work in the event of death of one of the parties.
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