Profit Tips: Finance - Lease or own cows and bulls?

In several situations, ranchers might want to consider leasing arrangements for establishing or expanding a beef herd. University of Nebraska Extension specialists offer tips on how to evaluate their options. Producers can use leases — calf share, in particular — to transfer ownership of cows to others over time with possibly less income tax consequences compared to an outright sale. Individuals who are forced to liquidate cow herds may use leases as a means for re-establishing a herd without needing to borrow money for capital purchase. Producers who wish to establish new or expand existing cow herds could examine leasing as an alternative to raising or purchasing cows.

To compare the costs of owning or leasing a cow, complete these three steps:

Step 1. Estimate ownership costs per year for purchased or raised cows or bulls.

Economic depreciation (D) is an expense claimed by the owner of a capital asset to compensate for the asset wearing out over some limited useful life. Economic depreciation may differ from depreciation taken for tax purposes, as depreciation allowed by the Internal Revenue Service may differ from values used for management purposes. Interest on investment (I) is usually an opportunity cost on funds tied up in cow or bull ownership. Interest on investment in a cow or bull is the interest rate times the average value of the animal. Death loss (DL) is another cost of cow ownership. Death loss should be calculated on average value. Property tax (PT) may be assessed against cow and bull values in some states. In such cases these taxes should be added to the ownership cost. Total ownership costs (TO) = D + I + DL + PT. Higher cow or bull values or interest rates, or a shorter depreciation period will increase the cow and bull ownership costs.

Step 2. Estimate bull ownership costs per year per cow.

Step 3. Compare the cost of owning the cow with the cost of leasing a cow. In situations where the bull is provided as part of the lease, add the bull ownership cost per cow to the ownership cost of the cow for comparison.

A cash lease for a cow is the easiest to compare to owning. The conditions of the cash lease are important to the comparison of shared leases. If the cow owner stands death loss and is willing to replace infirm and open cows for reasonable reasons, then the comparison can be made straightforward.

Share leases may be a way to obtain the use of capital in the form of cows or bulls in situations where cash or credit is limited. These leases also permit the sharing of risk between the lessee and lessor. Just which risks are shared depends on how the lease is written. Comparing ownership to share leasing is more difficult than comparing to cash leasing. While all leases depend on negotiation between both parties, equitable lease arrangements usually share revenues in the same proportion as each party contributes to costs.

For more information on topics related to herd expansion, visit MoreCowsNow.com.

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