Steve Metzger
As economic demands cause beef cow-calf producers to expand their herds
there is continued interest in the economic feasibility of leasing beef cows on
a share arrangement. Beef producers today
are seeking ways to increase their economic returns while holding down the
total dollars of investment required in capital items, including breeding
stock. In order for beef producers to
really understand the potential profitability of any possible share-lease
arrangement they must know their actual costs of production and be able to
compare those numbers to the estimated numbers from a possible share-lease
arrangement.
Data for this study
was compiled through the Carrington Area Farm Business Management Program in
conjunction with the North Dakota Farm Business Management Education
Program. The Carrington program is one
of 13 programs in the state. The data
for the study was confined to that collected from members of the Carrington
Area program during the 1999-2002 time period.
The number of beef
cow-calf producers involved in any one year varied from a low of 19 to a high
of 27. The four-year total of owned beef
cows involved was 11,352 head while the number of share-lease cows totaled
1,188 head, as measured on a 12 month basis.
The average owned herd consisted of 124.7 cows while the share-lease
herds averaged one-half that number at 62.5 head. In all instances where there was a
share-lease herd on the farm or ranch, there was also an owned herd maintained
under the same production practices. In
addition to the 19 share-lease herds there were a total of 91 owned herds in
the four year study.
The share
arrangements found within the share-lease herds varied from 70-30 to 50-50 for
the operator and breeding stock owner, respectively. The simplest arrangement was a 70-30 split
with the operator furnishing all the feeds and pasture while the breeding stock
owner supplied the cows, replacements and bulls. Other arrangements varied the split of the
weaned calves depending upon the contribution of the breeding stock owner
towards such items as feeds, pasture and other expenses.
The cows in the owned
herds weaned calves that averaged 548 pounds or 50 pounds more than those in
the share-lease herds. The key
measurement of pounds weaned per exposed female also favored the owned herds
with a weight of 495 pounds or 48 pounds greater than the 447 pound average of
the share-lease herds. Calving, weaning
and death loss percentages were very similar for the two types of herds but the
share-lease herds did have a 5.5% greater culling rate, averaging 19.8% versus
14.3% for the owned herds.
The total value of
calves produced per cow favored the owned herds by $18.54 with a total of
$456.15 per cow. The change in value
produced is not proportional to the pounds produced per cow because the lighter
weight calves do usually carry a higher value per pound. Additional income from such items as
insurance and the livestock disaster program provided the owned and share-lease
herds an annual average of $5.73 and $5.32 per head, respectively.
The average net
inventory change, or drop in herd value per cow in the owned herds, due to such
things as culling and non-reimbursed death loss was measured to be an average
of $35.71 per cow. This is a key item
for operators to know and understand when determining their true cost of production. For the owned herds which averaged 509 pounds
of production per cow for the 12-month period, this amounted to an annual cost
of $7.02 per hundred-weight (cwt.) of production. The average net income of the owned herds was
calculated to be $90.64 per cow and the four-year cost of production including
the charge for net inventory change averaged $72.94 per cwt. produced. In both the owned and share-lease costs, no
charge is included for the operator’s labor and management.
The share-lease
herds produced 462 pounds per cow and a total value of $442.93 including other
income of $5.32. Total operator expenses
including the average share lease payment of $173.36 totaled $431.47 per
cow. The average breeding stock owner
received a higher share of the income because the average share-lease
arrangement had the breeding stock owner furnishing a share of the feed or
pasture amounting to $58.22 per cow. The
operator’s share of the average net income was $11.46 per cow. With the share-lease payment included, the
cost of production was $93.39 per cwt.
This equated to a 61%-39% share-lease.
A key element to
consider in a share-lease arrangement is that the income should be shared in
the same proportion as the expenses, including the cost of net inventory
change. If an operator calculates his annual
costs, without net-inventory change, to be $280.00 per cow and the breeding
stock owner calculates his annual costs including net inventory change and
interest or opportunity cost, to be $120.00 per cow this would then represent a
70%-30% share lease arrangement. If
production averaged 525 pounds per cow this would represent an annual cost of
production of $76.19 per cwt. to proportionally divide the total costs of
$400.00 per cow. The operator needs to
compare this cost of production to the current and projected future marketing
prices.
A beef cow-calf operator would have to carefully consider the current price structure and the current position of the beef cattle cycle when entering into any share-lease arrangement. While it is vital to know the true cost of production an operator might also consider a share-lease arrangement as a method of marketing excess feed and range. This strategy might be considered if no market exists at a price comparable to the prices used in calculating the cost of production in a potential share-lease arrangement. As protection for both the operator and the breeding stock owner, all details of the arrangement should be in writing and this document signed by both parties. The producer is challenged to know his costs of production and to then relate that information to the potential outcome and profitability of any particular share-lease arrangement.