lb'?
Digitized by tine Internet Archive
in 2015
https ://arch i ve . org/detai Is/negotiati ngcowleOOvai I
Negotiating
Cow Lease Arrangements
Farm Business Management Branch
Alberta Agriculture, Food and Rural Development
Published by:
Albeita Agriculaire. Food and Rural De\"elopment
Publishing Branch
7000 - 113 Street. Edmonton. Albeita
Canada T6H 5T6
Editor: Gerard \"aillancouit. P.Ag.
Typesetter: Carolyn Boechler
Graphic Design: John Gillmore
Copyright © 1994. All rights resen ed by her Majest\' the
Queen in the right of .\lberta.
No pan of this publication may be reproduced, stored in
a retrie\'al system, or transmitted in any form or by any
means, electronic, mechanical photocopying, recording,
or othemise without wTitten permission from the
Publishing Branch. Alberta Agriculture. Food and Rural
Development.
ISBN 0-7732-6068-4
Printed March 1994
Contents
Introduction 1
Advantages and Disadvantages of Leasing 1
Defining an Equitable Lease 1
Risk and Returns 2
Types of Leasing Arrangements 2
• Cash Lease 3
• Fixed Number of Calves Lease 3
• Percentage Share Lease 3
• Flexible Share Lease 3
Designing a Lease Arrangement 5
"VCliat is the Best Lease Arrangement For Me? 5
Some Management Issues in Leasing Cows 6
Calculating the Revenue Allocations 6
Using the Worksheet 7
• Production Values 7
• Formulas 7
• Contributions '. 7
• Revenue 7
• Lease Payment Calculations 8
Summary 13
Appendix I Example Case Study 14
Appendix n Sample Cow Leasing Agreement l6
Appendix HI Blank Cow Lease Worksheets 23
Acknowledgement
This publication was prepared by Lome Erickson, Merle Good and
Bill Heidecker, with the assistance of Donna Fleury and Beth Moritz
of the Farm Business Management Branch of Alberta Agriculture, Food
and Rural Development.
Negotiating Cow Lease Arrangements
Introduction
Leasing can be a viable alternative to debt financing
when starting or expanding a beef cow herd. For cow
owners wanting to reduce their daily responsibilities,
leasing is an option to immediate sale. This book
presents four lypes of beef cow leases and discusses
some important issues involved in developing an
equitable and long lasting lease. A worksheet is pro\-ided
for assisting in the calculation of lease rates or calf share
percentages. As well, a case study and a sample lease
contract are included as examples of how a lease
agreement could be structured. This book is intended to
be a decision-making tool. It does not attempt to suggest
what lease arrangement is best for any situation. The tax
implications of a cow lease are also important to consider
before entering into an agreement. The reader is
encouraged to seek professional advice before finalizing
any agreement.
Advantages and
Disadvantages of Leasing
Leasing cows has advantages and disadvantages for both
the herd owner (the owner) and the renter (the operator).
Advantages of Leasing
For the Owner
• Reducing the herd to a more manageable level
without selling immediately.
• Increasing herd size beyond the capacit\^ of currently
a\'ailable labor, management and facilities.
• As a method of transferring herd ov^ nership o\'er
time that may offer some tax sa\'ings.
• Ov^ nership of producti\-e assets v^ ithout day-to-day
management responsibility-.
For the Operator
• Creating income and cash flow.
• An alternative to ownership when entering or
expanding a beef cow enterprise.
• An effective way to use surplus feed and idle
facilities.
• An opportunity- to test a beef cow enterprise when
diversif\-ing the farm.
• A way to gain control of assets.
Disadvantages of Leasing
For the Owner
• Not understanding the legal, financial and
operational implications of the lease.
• Possible lower returns and loss of herd value due to
poor management.
• Limits liquidation options.
For the Operator
• Not understanding the legal, financial and
operational implications of the lease.
• Less planning security^ than ov^ nership of cows.
Defining an
Equitable Lease
A lasting lease arrangement should use a balanced, or
equitable approach to sharing income. It is probably best
to base the division of income on contributions to total
costs. For example, if the cow owner pays for 30 per cent
of total costs, including a charge for interest and
depreciation on his investment, then he would be
entitled to 30 per cent of total income from calf sales. The
operator could contribute the remaining ^0 per cent of
costs and receive ""0 per cent of calf sale income.
An equitable lease will also distribute income according
to the acceptance of risk. The choice of lease type will
affect hovv" income is shared relati\-e to risk.
1
Risk and Returns
Cow-calf producers face two basic types of risk:
production risk and market risk. Production risks are
comprised of variables such as pregnancy rate and
calving percentage, which affect the total number,
weight and general health of calves on marketing day.
Some production risks can be controlled through
effective management; others are generally beyond the
control of the manager.
Market risks are the effects that variables like calf type,
calf condition, and sale timing and location have on the
total price received. Market risk cannot be completely
eliminated, but actions such as hedging, contracting and
timely marketing may reduce exposure to market risk.
The expected income from an alternate investment is the
investor's opportunity cost. For example, a cow owner
could consider a term deposit interest rate as an
opportunity cost of owning cows. However, adjustments
for risk and taxes would need to be considered. Owning
cows is certainly more risky than a bank term deposit, so
a higher expected return may be justified. The tax
payable if the cow herd is sold would reduce the amount
available for the term deposit and lower the opportunity
cost.
Example of opportunity cost calculation for a cow
owner:
Sell 100 cows @ $1,000 each = $100,000
Deposit $100,000 in term deposit @ 8% = $8,000 annual
interest
but
Taxes on $100,000 @ 30% leaves only $70,000
The extra risk of cow ownership may justify an additional
2% over the term deposit rate so:
Opportunity cost = $70,000 @ 10% = $7,000 annual
interest or 7% of the $100,000 value of the herd
The operator would calculate his opportunity cost in a
similar way, except the investment value would reflect
the value of his cattle facilities (including the portion of
equipment devoted to the cow enterprise). Rates of
return on investments are usually relative to the level of
risk accepted by the investor. If unmanageable risk
(production or market) is high or not controlled by the
investor, then he will expect a higher rate of return.
When risk is low, the expected rate of return will also be
lower. In this way, markets distribute risk, at the
appropriate price, to those individuals who are willing to
accept it.
In an equitable lease, returns should be distributed in
relation to the acceptance of risk, and risk should be
distributed to those who control the underlying
production and marketing variables. Production risk is
allotted to the individual who controls production
variables and is rewarded for increased production or
penalized for poor management. Market risk is borne by
the individual who controls marketing variables and
benefits from effective marketing.
Further consideration should be given to an individual's
ability to carry risk. Some owners or operators may
prefer a fixed and known return with limited risk. These
individuals will prefer that most risk is allocated to the
other paity, along with a larger share of the revenues. In
this way, returns from the cow lease will be shared on
the basis of risk acceptance.
Types of
Leasing Arrangements
Four common types of cow leasing arrangements will be
presented:
• Cash Lease
• Fixed Number of Calves
• Percentage Share
• Flexible Percentage Share
Each arrangement distributes risk and returns differently
and is therefore suited to different situations.
In each case, it is assumed:
• that the revenue from sales of cull cows will belong
to the cow owner.
• that the care of replacement heifers from weaning
until pregnant is the owner's responsibility.
Figure 1 shows the distribution of risk for owner and
operator for the leasing arrangements presented.
2
Owner Operator
Cash Lease Low Risk High Risk
Fixed Number of Calves
Percentage Share
Flexible Percentage Share High Risk Low Risk
Figure 1. Distribution of risk.
Cash Lease
In the cash lease agreement, the owner receives a rental
payment per cow per annum and the operator receives
all revenue from the sale of calves. The rent can be
negotiated each year or set for the term of the lease. The
operator accepts all production and market risk. The
operator's returns will vary with weaning percentage,
weaning weight, calf price and feed costs, while the
owner's return is not affected by production or price.
Although cash rent is simple, it may not always be
appropriate for the operator to carry all production and
market risk. All changes in market value and operation
costs solely affect the operator. The owner s risk is
limited to changes in the value of his investment. The
operator's higher risk level is offset by not having to
share any increases in revenue. The owner s revenue
remains constant.
Cash rent is best suited to owners who want limited
involvement and for operators who feel comfortable
managing a higher degree of risk.
Fixed Number of Calves Lease
In the fixed number of calves lease, the owner receives a
predetermined number of calves as rent. This number
does not vary according to the number of calves born,
weaned or sold. An appropriate number of calves is
negotiated using the expected market value. A
description of the calves for payment should be specified
in the agreement because the size, type and gender of
calves will affect the revenue distribution.
The fixed calf arrangement requires that the operator
accept almost all production risk and a portion of the
market risk. The owner's risks are limited to variations in
weaning weight and market price on the number of
calves received as lease payment. The operator is
exposed to risk through variations in weaning
percentage, weaning weight, market price and feed costs.
A fixed calf agreement is best suited to owners who are
willing to accept some market risk with very little
production risk and to operators who are comfortable
with most of the production and market risk.
Percentage Share Lease
With the percentage share arrangement, each part>"
receives a predetermined percentage of revenues from
calf sales. Percentages are determined according to the
contributions each party makes to total costs associated
with the cow herd.
Each party's share of revenue varies with market price
and production, thus both are exposed to market and
production risk. The owner may be disadvantaged
because he is exposed to production and market risk
outside of his control. This arrangement is best suited to
owners who are willing to share the risk with limited
management involvement.
Flexible Share Lease
The flexible share lease arrangement is similar to the
percentage share method because it allocates revenues
based on contributions to costs. It recognizes that direct
costs, such as feed and vet costs are paid first, followed
by fixed costs, such as depreciation and replacement
allowance for cows or bulls. Then opportunity costs,
such as interest on investment and returns to
management are paid. This is accomplished by using
different percentage shares for each cost category.
As with any other enterprise, the cow-calf operator
cannot continue producing for long if revenue is not
covering direct costs. A standard percentage share lease
does not protect the operator's direct cost contributions.
When revenues are low and the operator cannot recover
his direct costs, the agreement may be in jeopardy or the
cows may not be properly cared for.
The initial revenue split is based on contributions to
direct costs. When all direct costs are covered, the
percentage changes to reflect contributions to fixed costs.
Once fixed costs are covered, it changes to reflect
contributions to opportunity costs.
Once opportunity costs are met, all contributions have
been recovered. Sharing of any additional revenue will
not be based on costs, but negotiated by the owner and
operator. Table 1 shows an example of a flexible
percentage share when total revenues are less than total
costs.
Owner Operator Total
Total Revenue per Cow
$450
Direct Costs
Contribution to costs
Revenue allocation
Remaining calf value
$ 0 0%
$ 0
$300 1 00%
$300
$300
$150
Fixed Costs
Contribution to costs
Revenue allocation
Remaining calf value
$ 50 50%
$ 50
$ 50 50%
$ 50
$100
$ 50
Opportunity Costs
Contribution to costs
Revenue allocation
Remaining calf value
$ 80 80%
$ 40
$ 20 20%
$ 10
$ 50
$ 0
Total Contribution to Costs
Total Revenue Allocation
$130
$ 90
$370
$360
$500
$450
Table 1. Example of flexible percentage share lease.
With a flexible percentage share lease, the operator will
give up profit potential in higher markets for security in
lower markets and the owner will give up revenue when
prices drop. When revenue exceeds contributions, the
owner may receive a larger percentage of the excess
revenue than in a typical percentage share, depending
on how the surplus revenue is allocated. This
arrangement is best suited for situations where the
operator has limited risk bearing ability and the owner is
willing and able to sacrifice revenue in poor years and
recover those losses in good years. If longevity of the
lease is important, a flexible percentage share
arrangement should be considered.
4
Designing a Lease Arrangement
Choosing the best type of lease will depend on the
preferences and circumstances of the owner and the
operator. Careful examination of objecti^'es and
expectations at this stage will reduce the chance of
difficulties later on. Figure 2 is an example of the
decision process.
What is the Best Lease Arrangement For Me?
Owner
Do I want to share the risk,
revenue and responsibility
of my beef herd?
Operator
Can I afford to buy more
cows?
YES
■
1
■
Can I accept some
market and production risk?
Sell Cows
Buy Cows
■
NO
■
1
Can I accept all of the risks
of leasing cows?
YES
■
1
■
Cash Lease
of Cows
Do I prefer market risk
over production risk?
Can I accept all the
production risks but not all
of the marketing risks?
Fixed Number of
Calves Lease
Do I need a fixed percentage
of revenues?
Can I share calf revenues
even when my costs exceed
my share?
NO 1
1
■
■
Percentage Share
Flexible Percentage Share
Figure 2. How to choose the best lease arrangement.
5
Some Management Issues in Leasing Cows
A properly functioning lease v^'ill require that procedures
are in place to handle \'arious management decisions that
will arise. A wTitten contract -^ill help to a\'oid
misunderstandings during the life of the agreement.
Some management issues that may be considered
include:
Who are the parties to the agreement and when
does it commence?
Description of the Cattle
• date of arri\'al;
• the rs'pe. number and condition of the cattle to be
deli\"ered:
• the minimum and maximum number of cattle that
will be pro\ided by the ov^'ner each year:
• how the COVE'S and cah'es \\'ill be identified for
ownership (branding, tattooing, etc.).
Location of the Cattle
• where the cattle will be kept:
• under what circumstances they can be relocated:
• at what times the owner is able to inspect the cattle.
Breeding Policy
• wiiich pam- ^ill pro^ide the bull(s):
• who has the authority' to select breed of bull and the
individual bulls:
• the ratio of cow s per bull:
• the stait and length of the breeding season.
Herd Health Policy
• describe the practices that will be followed in
pre\-enting disease and maintaining the health of the
herd:
• specif\- who is responsible for the cost of herd health
activities.
Veterinary Expenses
• what constitutes a x eterinaiy expense (for example:
antibiotics, veterinaiy senices):
• who is responsible for \'eterinaiy expenses:
• which \'eterinarian will be used.
Feed, Water and Pasture Care
• who will provide feed, water and bedding:
• the a\"erage condition in which the cows will be
maintained.
Culling and Replacement Policy
• under what circumstances a cow will be culled:
• wiio recei\"es the proceeds of cull sales:
• how replacements will be pro\ ided.
Death Loss and Strays
• w ho is responsible for cows that die or stray.
Division of Income
• how the re\-enue from calf sales will be di^ ided
between the owner and the operator.
Disputes
• how disputes regarding management practices will
be handled.
Termination of the Lease
• w hen the agreement will expire:
• under wiiat circumstances the agreement can be
terminated at an earlier date.
The case study in Appendix I and the sample lease
agreement in Appendix II pro\ide examples of how
these issues can be handled.
Calculating the Revenue Allocations
Detemiining how revenues will be allocated betT\-een the
owner and operator requires a detailed analysis of each
pam's cost stmcture. A worksheet has been pro^ided to
make this task easier. The example worksheets on pages
through include estimates of re\-enues and expenses.
These estimates, wiiich refer to the case stud)' in
Appendix I. are for illustration purposes only and may
not be representati\"e of actual \ alues. Each beef herd is
unique and the real revenue and cost expectations
should be used to determine the lease arrangement. It is
important to use your own cost figures
A blank copy of the worksheet is contained in Appendix
III. This worksheet is also a^■ailable in Loais 1-2-3- format
for computer-assisted calculation of cow leases.
6
Using the Worksheet
Production Values (Page 9)
Enter production and market information specific to the
herd considered in the lease. These figures will be a
combination of the owner's history of herd performance
and of the operator's management history. Additional
market projections may be obtained from an
independent advisor if necessary.
Choosing an appropriate interest rate is important as it
will determine the owner's return on his cow herd
investment. A long-term bank savings rate can be used as
a starting point. If the owner feels that he has additional
risk in cow ownership compared to a savings account, a
risk premium can be added to the savings rate. Points to
consider in setting this rate are:
• the death loss projections for the herd and who is
responsible.
• the projected market value of the herd.
• costs that could be incurred in liquidating the herd
(taxes and commissions).
Calculating an Interest Rate
Long Term Savings Rate
(net of taxes and commissions) %
+
Risk Premium
(considering death losses
and projected market values) %
= Interest Rate %
Direct Expenses — Pasture, feed, and bedding should
be priced at market value, not at cost of production. In
most cases, the operator will provide most or all of these
items and market value will give the best measure of his
contribution. Care must be taken to not include the cost
of producing feed or maintaining pastures in other
expense categories on the worksheet, machinery and
building operation expense, utilities, and hired labor
should only be the portion that is attributed to the
feeding and care of the cow herd.
Fixed Expenses — Depreciation and insurance on
buildings and equipment must be for feeding and care of
the cows only.
The cow and bull replacement allowances are amounts
that the owner can set aside each year to compensate for
the aging of the herd. These amounts are calculated from
formulas 2 and 4 on page 9. The projected amounts for
cow and bull death loss are as calculated from formulas 5
and 6. The worksheet makes provision for sharing of
cow and bull death loss costs between owner and
operator. If this approach is taken, the terms of death loss
responsibility should be well documented.
Opportunity Costs - Interest on buildings and
equipment and return to labour and management will
generally be contributed by the operator and should only
be the portion attributed to the feeding and care of the
herd.
Interest on cow and bull investment are as determined by
formulas 7 and 8 on page 9.
Formulas (Page 9)
Using the values listed in the production values section,
calculate the values of items 1 through 9 with the
formulas provided. These amounts will be required for
the cost contributions section on page 10.
Revenue (Page 11)
Calf revenue is determined from expected market weight
(adjusted for shrinkage), price and weaning percentage
as determined from formula 9 on page 9.
Contributions (Page 9)
This section requires projections of contributions that
each party will make to the operation and maintenance
of the herd. To simplify the calculation of each of the
four leases, contributions are divided into three cost
categories: direct expenses, fixed expenses, and
opportunity costs. In most cases, only one party will be
contributing to a particular expense item, however, both
parties will need to agree that the projection is
reasonable, since it can affect the outcome of the lease.
Lease Payment Calculations
Cash Lease (page 11) - The owner's desired cash rent
is the sum of his contributions to fixed expenses and
oppoitunits" costs, in this lease, owner's risk is limited to
changes in the value of the herd. This \-ariable is
addressed through the replacement allowance and death
loss categories on page 9 of the worksheet. If the owner
wishes an additional return to im^estment as
compensation for risk, the interest rate can be adjusted
upvv'ard.
Fixed Number of Calves Lease (page 11) — For ease
of calculation and flexibilit\-. the payment is expressed as
calves per 100 bred cows. The cash rent value for 100
cows is divided by the expected average value of a calf at
w"eaning to determine a minimum number of cah es
required as payment. Because the owner accepts some
additional market risk when taking cah'es as payment, a
market risk adjustment can be added.
Percentage Share Lease (page 11) - Total revenue is
divided in the same percentages as total contributions are
made.
Flexible Percentage Share Lease (page 12) - The
percentage of contributions to each cost category- (direct
expenses, fixed expenses, and opportunity^ costs) are
calculated and applied to total revenue in sequence until
all re^'enue is allocated. Direct costs are allocated first. If
all revenue is not used, a split is made according to
contributions to fixed costs. The remainder is then
allocated by contributions to opportunity costs. The
owner and operator need to decide how surplus
re\-enue, after all costs are recovered, will be split.
Q
Cow Lease Worksheet
SECTION I PRODUCTION VALUES
Replacement Cow Value
$
Years of Use - Cows
yrs
Cull Cow Value
$ 7Ss>
Years of Use - Bulls
'4 yrs
Average Cow Value (formula 1 )
%97^
Average Calf Price $/cwt
Replacement Bull Value
$^<:%*?
Average Calf Weight
lb
Cull Bull Value
Marketing Shrinkage
6 %
Average Bull Value (formula 3)
Weaning % (calves/bred cow)
9o %
Cows per Bull
Death Loss (Breeding Stock)
_J_%
Interest Rate (Risk Free Rate + Risk
Premium)
%
SECTION II FORMULAS
1 . Average Cow Value ($)
f y£<^ +
>^ 1
^ 2 = ^y^^
Replacement Cow Value
Cull Cow Value
2. Cow Replacement Allowance ($ per cow per year)
]
Replacement Cow Value
Cull Cow Value
Years of Use (Cows)
3. Average Bull Value ($)
f +
2 = /^SS
Replacement Bull Value
Cull Bull Value
4. Bull Replacement Allowance ($ per cow per year)
f ^<xxp /^^^ 1 [ 4 X 1 = Z5<^
Replacement Bull Value Cull Bull Value Years of Use (Bulls) Cows per Bull
5. Cow Death Loss ($ per cow)
Average Cow Value (Formula 1) Death Rate
6. Bull Death Loss ($ per cow)
Average Bull Value (Formula 3) Death Rate Cows per Bull
7. Interest on Cow Investment ($ per cow)
X y^^Z = ^ZS
Average Cow Value (Formula 1) Interest Rate
8. Interest on Bull Investment ($ per cow)
r y^2:^ ^ 1 X = ^.^
Average Bull Value (Formula 3) Cows per Bull Interest Rate
9. Calf Sale Value ($ per cow)
[ X X y./i^ X 1 - 100 = ^32
Average Calf Sale Wt. Marketing Shrinkage Average Calf Price Weaning %
Cow Lease Worksheet
SECTION III COST CONTRIBUTIONS
DIRECT EXPENSES
— Owner Operator—
—Total-
$/cow
$/cow
s/cow
Pasture @ market value
$
$ 7^
$
Feed and Bedding @ market value
$
Salt & Minerals
$
$ 6
$ S
Herd Health Expense
$
$
$
Veterinary Expense
$
$ ^
Marketing & Transportation
$
$ /O
$
Miscellaneous Cow Herd Costs
$
$ o
*Machinery & Building Operation Expense
$
$
*Utilities
$
%^<^
$
*Hired Labour
$
$ -
$
$
$
Total Direct Expenses
A1
$ ^ A2
A3 %^S<P
FIXED EXPENSES
*Depreciation & Insurance on Buildings & Machinery
$
Cow Replacement Allowance** (refer to formula 2)
$
Bull Replacement Allowance** (refer to formula 4)
$
%7S^
Cow Death Loss** (refer to formula 5)
%
/aa %
$
Bull Death Loss** (refer to formula 6)
_z_%
%
/ao %
$
$,^^
$
$
$
Total Fixed Expenses
B1
B2
tr^ —
B3 %779<:>
Total Expenses
OPPORTUNITY COSTS
*lnterest on Buildings & Equipment
$
*Labour & Management
$
Interest on Cow Investment** (refer to formula 7)
$
%97S<!:f
Interest on Bull Investment** (refer to formula 8)
$^.^
$
$
$
$
Total Opportunity Costs
CI
02
03 %^<S>'^
Total Contribution
D1
%7^^.9^> D2
D3 %^6y.9c^
* Ensure that these amounts only include those costs directly related to the beef cow enterprise.
When market values for pasture and feed have been used, do not include any ownership or
operational costs incurred in developing and maintaining pastures or in the making of feed.
** Refer to Section II - Formulas (previous page) for information on calculating amounts.
10
Cow Lease Worksheet
SECTION IV EXPECTED REVENUE
(on a cow/year basis)
Calf Sales (refer to formula 9)
Total
$/cow
El %dB2
SECTION V LEASE PAYMENT CALCULATIONS
(on a cow/year basis)
CASH LEASE
plus:
equals:
Total Fixed Expenses
Total Opportunity Costs
Annual Cash Lease
-Owner-
$/cow
B1 %^Z9<9
CI
FIXED NUMBER OF CALVES
Annual Cash Rent per 100 cows
= [81 + CI] X 100
Minimum Number of Calves per 100 bred cows
= ([81 + CI] X 100) -i- (El H- Weaning %)
plus:
Market Risk Adjustment
additional calves
—Owner—
$/cow
23.^ calves
A2 calves
Total Payment in Calves per 1 00 Cows
^5-
{^32^ .9 )]
100
[Payment in calves per 100 cows x (E1 Weaning %)] 100
calves
= %/7SS^ $/cow
PERCENTAGE SHARE
-Owner-
$/cow
-Operator-
-Total-
$/cow
Total Revenue
Total Direct Expenses
Total Rxed Expenses
Total Opportunity Costs
Total Contribution
Percentage Share (D1 or D2
Allocated Revenues
D3) X 100
A1 $ A2 $20^>
81 82
CI 82
D1 $y^.^D2
%
E1
A3 $,^^
83 % 77.9a
C3
D3 $^^^^>
11
Cow Lease Worksheet
SECTION V (continued)
FLEXIBLE PERCENTAGE SHARE
Level 1 L/iroci wosis
OwnGr
Onorfltor
Total
$/cow
$/cow
$/cow
Calf Value = El
El = %^32
Direct Cost Contributions
A1
= $ X?
A2 =
A3 = %ZSo
% Contribution
A1
-r A3 X 100 =
= ^ % A2
^ A3 X 1 00 =yaa %
1 00%
Revenue Allocation
Lessor of El or A3 x % Contribution
F1 = %ZSO
Level 2 Fixed Costs
Owner
Operator
Total
$/cow
$/cow
Remaining Calf Value = El - A3 = E2
E2 =
Opportunity Cost Contributions
81
B2 = $/^
B3 = $77,-?^?
/O V../VJI III IWUIIUI 1
B1
-i- B3 X 100
- % Q2
— B3 X 100 = ✓'^%
100%
Revenue Allocation
Lessor of E3 or C3 x %
F2 = $7/rf'^
Level 3 Opportunity Costs
Owner
Operator
■
Total 1
$/cow
$/cow
$/cow
Remaining Calf Value = E2 - B3 = E3
E3 = %^z^,/a
Opportunity Cost Contributions
Cl
=
02 = %jaa
C3 =
% Contribution
CI
^ 03 X 100
= ^/ % 02
03 X 100 =<^?%
100%
Revenue Allocation
Lessor of E3 or C3 x %
F3 = $2W
Level 4 Surplus Over Ail Costs
Owner
Operator
Total
$/cow
$/cow
$/cow
Remaining Calf Value = E3 - 03 = E4
E4 = $ 7a./a
% Share (negotiated)
100%
Revenue Allocation
E4 X % share
F4 = %7a,/o
Allocated Revenues
17
Summary
Cow-calf lease arrangements can be profitable and
rewarding for both parties if carefully planned. Each
party to the agreement must make clear their objectives
and expectations so that future misunderstandings can be
minimized. An equitable lease can be achieved if
revenues are distributed relative to the acceptance of risk
and risk is carried by the party that controls the variables
which affect that risk.
The type of lease chosen will depend on the parties'
abilities and objectives. A cash lease works well where
the operator can accept most of the risk and where
simplicity is desired. The fixed number of calves lease
places most of the production risk on the operator and
primarily limits the owner to market risk on his share of
the calves. A percentage share agreement distributes all
risk to both parties without regard to management
control. Finally, the flexible percentage share is based on
the premise that cash costs must be paid before any
profit can be split. This approach further protects the
operator against higher input costs and/or lower calf
prices and is well suited to situations where a
long-lasting lease is desired.
These are only four general types of leases which could
be used. For each situation, the implications of adopting
any one of these approaches must be carefully
considered. For further information or assistance in
working with this material, contact your local district
agriculture office or the Farm Business Management
Branch of Alberta Agriculture, Food and Rural
Development.
1^
Appendix I Example Case Study
(Refer to example worksheet, pages 9-12)
Ron has a herd of 100 cows and 4 bulls. He wants to
retire, but is not ready to sell the herd. He wants to find
an operator who is responsible and experienced.
Barney is a young man who would like to enter the
cow-calf business but does not want a large debt load.
He grew up on a cov^'-calf ranch that his family still
operates. He is cautious about who he is going to lease
cattle from because he wants managerial independence
and a cooperati\'e owner.
Ned. a farm management specialist, suggested that Ron
and Barney meet to discuss a possible deal. After the
meeting, Ron seemed satisfied with Barney's abilities and
Barney was satisfied with Ron's commitment. W^orking
with Ned, and with the aid of Cow Calf Leasing
Ajrangements, they agreed on the following points:
a) Ron. the ov^-ner. v^ill supply all of the cows and all of
the bulls. Both Ron and Barney must agree on the
choice of bulls.
b) The number of cows will not be less than 90 and not
more than 110. The maximum number of cows per
bull during breeding will not be more than 25.
c) Barney will supply all facilities, feed, pasaire, labor and
management.
d) Cash costs (mineral, salt, tmcking. etc.) will be paid by
Barney.
e) Herd health expenses will be shared equally between
Ron and Barney. Barney will pay all \^eterinar\^ costs.
f) Ron and Barney ha\-e agreed that the Body Condition
Score of the cows will be maintained betw^een 2.5
and 3.5. In the case of dispute, the herd health
veterinarian will detemiine the cows" condition.
g) Ron accepts the first 1% of death loss. Barney is
responsible for any death loss abo^'e 1%.
h) Ron is responsible for all cov,- and bull death losses for
the period of thirty days immediately following the
deliver}' of the animals.
i) If Ron wishes to keep cull cows longer than two weeks
after culling, or if he wishes to keep any open cows
to be bred the following summer, Barney will be
compensated for carrying these animals at
$1.25/head/day for the winter feeding period and
$0.75/ head/day for the grazing season.
j) Ron will recei\"e all cull co^' and cull bull receipts.
k) Ron will supply replacement females through whate\'er
means he wishes. If Ron wishes to ha\'e Barney raise
the replacements from within the herd, the costs will
be calculated at SI. 00 head day for the winter
feeding period and S0.~5 head day for the grazing
season from v^-eaning until being confimied pregnant
at approximately 18 months of age.
1) Bulls will be semen tested prior to the breeding season
of each year.
m) The breeding season will be 60 days, commencing
May 15 each year.
n) Females will be pregnancy checked on or before
November 30 of each year.
o) Barney will co\-er the cost of pregnancy checking and
semen testing.
p) Ron can inspect his herd at any reasonable time.
q) Any disputes relating to health, culling or condition of
animals shall be settled by the herd health
veterinarian and each pany shall pay one-half of the
inspection fee.
r) Ron and Barney v. ill analyze a^-ailable go\-ernment
programs before entering into them. The pam* or
parties which benefit from the program will be
responsible for any costs in the ratio in which each
p2inv benefits.
s) This agreement w ill commence No\'ember 1. 1993 and
will conclude after three years on October 31. 1996.
The cattle will be delivered on No\-ember 1. 1993
and must be removed by October 31. 1996.
t) If one pany- wishes to terminate, they must gi\-e a
minimum of tliree months notice.
u) Ron can terminate and remo^-e the cove's vv ithout three
months notice if he has the suppoit of the herd
health \-eterinarian that the cattle are not being
properly cared for. or if Barney has not lived up to
other terms of the contract. In such a case. Barney
will be reimbursed at S1.25 head day for the winter
feeding period and S0.~5 head day for the grazing
season.
14
v) In the event of Ron's death, the lease will be
terminated on October 31 of the current year. In the
event of the death of Barney, the herd will be
immediately returned to Ron. Barney's estate will be
reimbursed at $1.25/head/day for the winter feeding
period and $0.75/head/day for the grazing season.
w) This is not a joint venture or a partnership. It is not the
intent to transfer ownership from Ron to Barney.
x) An annual review will occur within two weeks after
calves are sold.
y) The cows and calves will carry Ron's brand. Ron will
sign a brand release for Barney's share of the calves.
After discussing these points, they consulted with Ned
who has experience in cattle leasing. Ned explained four
lease arrangements that they could consider, cash lease,
fixed number of calves, percentage share, or flexible
percentage share. With the help of Negotiating a Cow
Leasing Arrangement diWd the accompanying computer
worksheet they determined the following:
a) If a cash lease is used, Ron will receive approximately
$l67/head. They were reminded that Barney would
be accepting all price and production risks.
b) If they choose a fixed number of calves lease, a
number of calves totalling 25% of the bred cows
supplied in the fall would be reasonable. In the first
year, this would be 25 calves since Ron is supplying
100 bred cows. Ron would be accepting price risk on
the calves he receives but little production risk.
c) If they use a percentage share lease, Ron will receive
30% and Barney will receive 70% of revenues.
d) If they choose a flexible percentage share lease, Ron
will receive 0%, Barney 100% up to $280 of revenue.
Ron will receive 81%, Barney 19% from $280 - $356
of revenue. Ron will receive 51%, Barney 49% from
$356 - $562 of revenue. The sharing of any revenues
over $562 will be negotiated.
Figure 3 compares the net margins of Ron and Barney for
each type of lease at high, medium and low market
revenues. Net margin is revenue less total costs. A zero
net margin indicates a break-even position. The solid
portions of the bars show Barney's net margin and the
white portions show Ron's margin. Cash lease margins as
represented by the first three columns provide no
positive or negative margins for Ron. The cash lease is
calculated to only cover Ron's cost contributions. Barney
carries all of the risk of low revenues and receives all the
benefits of high revenues. Moving across to the right, risk
and returns are progressively shifted from Barney to Ron
in each type of lease. The fixed number of calves lease
provides a positive return to Ron except at the low calf
price. This is because a market risk adjustment of one
calf was added to the cash lease value, when measured
in number of calves. The flexible percentage share lease,
represented by the last three columns, reduces Barney's
exposure to low markets when compared to the
percentage share lease, but also provides Ron with an
equal share of any profits.
After discussing these options, Ron and Barney chose a
flexible percentage share. They agreed that Ron will
receive 50% and Barney will receive 50%) of any revenue
over $562. They also agreed to review the cost structure
at the end of each period and any major changes in costs
would be applied in the following year. Barney was
attracted to this option because it reduced his risk and
Ron agreed because it would adjust with changing
markets and therefore be stable.
150
Cash Lease Fixed Number Percentage Flexible
of Calves Share Percentage
(100)
HI Med Lo
□
HI Med Lo HI Med Lo
Calf Price
Ron Barney
HI Med Lo
(Owner)
(Operator)
Figure 3. A comparison of the net margin of various lease
arrangements.
15
Appendix II Sample Cow Leasing Agreement
Considerations for a Lease Agreement
Sample Clause
Initial Matters
(a) ttie date;
(b) the parties;
(c) agreed statement as to the reason for the Agreement.
This Agreement is made in duplicate, the day of
. 19_. BETAXTEX:
of
OvN-ner) and
( hereinafter refeixed to as the
of
Oiereinafter refeiTed to as the
Operator).
X^liereas the Owner o^"ns cattle; and Whereas the
Owner and the Operator are desirous of entering into an
Agreement with respect to the leasing by the Operator of
the said cattle.
WITNESS THAT in consideration of the execution of this
Agreement and of the mutual co\"enants and agreements
herein contained ( which the parties acknowledge as
being valuable consideration) the parties covenant and
agree with each other as follows:
2. Description of Cattle
Describe the cattle on a separate schedule to clarify the type and
condition being leased.
Determine the range of cattle numbers that will be maintained through
the lease Agreement.
The Owner of the cattle should indicate the requirement for branding
and the brand release policy.
(a) The Ov^ ner v^ill deli\"er bred cov^^s and or heifers
and bulls on or before . 19
as set out in Schedule A of this Agreement, subject
always to the title and ownership of the said
li\ estock remaining v^ith the Ow ner.
(b) The animals v^ iW arrive in good healthy condition.
Their condition score will be betv.-een and
on arri\'al.
(c) All females shall be certified to be pregnant by a
professional \"eterinarian by the date indicated in
clause 5(c).
(d) Each following fall, for the period of this lease, the
Owner will supply the Operator betv."een and
bred females.
(e) It is understood and agreed that all li\'estock under
this Agreement shall be branded w-iih the Ov^-ner s
brand by the Operator. A brand release will be
signed by the Owner for any cattle that are to be
transferred to the Operator as agreed to under this
lease Agreement.
16
Considerations for a Lease Agreement
Sample Clause
3. Location of Cattle
Describe where the cattle are to be located and the
right of the Owner to inspect his cattle.
(a) The livestock above mentioned shall be located on the
following premises:
Section Township Range
West of the Meridian. Any removal to
another location by the Operator shall require the
approval of the Owner and such approval endorsed
accordingly.
(b) The Owner shall at all times have the right to come
upon the premises and inspect the condition of the
animals and if he shall be of the opinion that the
same are in an unsatisfactory state, he may remove
the same subject to the terms contained in the
termination section of the Agreement.
4. Breeding of Said Animals
Determine the type and number of bulls to be used, the (a) The Owner shall provide and pay for breeding bull(s)
breeding period, and which party is responsible for which meet the standards mutually agreed to by both
these costs. parties. The Owner also agrees to furnish sufficient
bulls for the proper breeding of the said livestock.
The agreed to maximum cow/bull ratio shall not
exceed cows to bulls.
(b) The Operator agrees that the bulls will be turned
in with the cows on 19 , and
removed of each contract year.
5. Herd Health
Determine what costs will constitute herd health and who is
responsible for said costs.
(a) The Operator will supply and pay % of the cost for
vitamins and other medicines or vaccinations not
administered by a veterinarian to said animals and
their offspring that are necessaiy to prevent disease
or malnutrition and to promote growth and well
being of said animals. Such health practices shall be
carried out by the Operator in accordance with
currently accepted and recommended practices in
the Province of Alberta.
(b) Each spring the Owner will ensure that the bulls
are fit for breeding as determined by a semen test
carried out by a veterinarian. The Owner will pay for
this service.
(c) Each fall the cows will be pregnancy tested on or
before . The will
pay for this sei-vice.
17
Considerations for a Lease Agreement
Sample Clause
Costs arising from veterinarian fees, drugs and services should be
dealt witti separate from herd health.
6. Veterinarian Expenses
(a) Costs arising from medicines, dmgs. and senices
administered by a professional veterinarian to the
said animals and their offspring in the case of
treatment of sick animals vvill be shared on a %
by the Owner and % by the Operator
respecti\-ely.
Feed costs represent approximately 70% of the total costs in a
cow-calf operation and therefore must be reviewed carefully by both
parties prior to the signing of the Agreement.
7. Feed, Water, Pasture and Care
(a) The Operator will pro\ide all feed, w-ater. pasture,
necessan- shelter, and all labour for supenision and
care of said animals and their offspring. The cows
will be kept in good physical condition as judged by
using the condition scoring method. The cov^-s must
be kept ber^ een a score of and .
It is important to establish the culling procedure and replacement
strategy. If replacements are to be from the herd, the Operator should
be compensated for the lost revenue and should be paid to raise the
heifer replacement to the next pregnancy testing date. Under this
strategy, the cull receipts belong to the Owner.
This clause determines the value of any heifer calves retained as
replacements by the owner.
This clause will outline the feed and carrying costs to have a
replacement heifer enter the herd as a bred female the following fall.
8. Culls and their Replacements
(a) On or about of each year during
the currency of this Agreement, the Owner and
Operator shall mutually agree upon those cattle
which are to be culled: should the Owner and the
Operator disagree concerning a particular cow, the
question of whether it is to be culled shall be
submitted to a ^-eterinarian and he she shall decide
on the basis of the cow's past performance and
health. Expenses of the \'eterinarian shall be shared
equally by the Owner and the Operator.
(b) The Owner v^ ill recei\'e ° o of the proceeds from
the sale of all cull animals and is responsible for all
trucking and marketing costs.
(c) Upon the culling of these animals, the Ov^ ner Tsill
replace each cull animal ^Ith a bred cow acceptable
to the Operator by of each
contract year.
(d) If the Owner wishes to raise replacements from the
herd, the Operator has no obligation to raise these
animals unless muaially agreed to.
18
Considerations for a Lease Agreement
Sample Clause
9. Replacement Heifer Agreement
(a) The value of the replacement heifer shall be
determined by:
i) Actual weight of replacement heifer calf x
market price
or
ii) $ premium plus average value of heifers
sold
or
iii) $ premium plus average value of steer
sold.
(b) The Owner agrees to pay the Operator $ per
head for the winter feeding period and $ per
month for the pasture season, plus all related costs of
raising the heifer until she enters the herd as a bred
female the following fall.
Death loss on mature cattle are usually borne by the Owner for a
period of thirty days after delivery and losses up to 2 - 5% of the
mature cow herd.
Insurance proceeds for fire or liability on non-specified individual
animals can be purchased at a reasonable cost.
10. Death Loss, Strays,
Breeding Animals
Forced Sale and Insurance of
(a) The Owner shall accept the loss for said animals
which die or are recommended to be sold or
destroyed by a professional veterinarian for a period
of thirty (30) days immediately following their
delivery to the said lands and any losses or strays up
to % of the mature cow herd.
(b) Income or compensation from such forced sales
accrue to the Owner.
(c) The Operator, after the thiity (30) day period
mentioned above, shall replace said animals which
die or are permanently lost that exceed the %
allowance.
(d) The Operator or Owner may, at their expense, carry
fire and liability^ insurance on the cattle and are
^ entitled to all insurance proceeds.
19
Considerations for a Lease Agreement
Sample Clause
11. Division of Income (Select only one]
Select the type of income sharing agreement that is to be in force
during the lease period.
Cash lease
(a) The Operator agrees to pay to the Owner the sum of
S per cow that are detemiined to be pregnant
as per paragraph 5Cc).
Fixed calf lease
(b) The Owner agrees to receive cah"es equating to
0 of the total number of bred females that are
detemiined to be pregnant as per paragraph 5(c).
The Operator receives the remainder of the cah es.
Percentage share lease
Percentage split to be determined using the worksheets provided in
Appendix III.
(c) The Owner shall be entitled to % and the
Operator ^ o of the re\"enue or offspring by the
of each vear.
Flexible share lease
Flexible share split to be determined using the worksheets provided in
Appendix III.
(d) The Owner shall be entitled to % and the Operator
% of the re\"enue or offspring by the
of each year as prescribed each year by Schedule 1
of this Agreement.
As in any Agreement, disputes may arise and must be dealt with in an
expedient and agreeable process to both the Owner and Operator.
Check with your veterinarian to determine their willingness to act as a
mediator under this lease, before contractually agreeing to use their
services.
12.Dispute Clause
Ca ) Any dispute relating to health, feeding, culling or
condition of animals shall be settled by a
professional \-eterinarian with each parr\- sharing
equally for the cost of this serx ice. Any costs arising
from the settling of the dispute shall be borne b\' the
indix'idual responsible for the \ arious duties and
obligations contained in this Agreement.
For disagreements that may arise where a veterinarian is unwilling to
provide mediation, an arbitration process shall be agreed to.
13.Provision for Arbitration
(a) Any disagreement T\ hich may arise betv^ een the
contracting parties with respect to the rights and
obligations of the parties as proxided under the
terms of this Agreement, shall. ^Iien a mutually
satisfactor\- settlement cannot othem ise be reached,
be submitted to arbitration. The arbitration authority-
may either be a single person mutually satisfacton" to
both panics or a board of three, one member to be
named by each paity and a third pam" selected by
the tv^-o so chosen.
The decision of the arbitrator or arbitration board
shall be accepted as final.
20
Considerations for a Lease Agreement
Sample Clause
The parties involved enter into such lease agreements based on the
contidence and trust in each other. It may be wise to state in the lease
that it cannot be assigned.
Early termination in a cov\/-calf lease is usually due to the health
and/or condition of the livestock, and subsequently the Owner will
usually reserve the right for immediate termination.
The agreement must contain a clause to specify the course of action to
follow upon the death of either the owner or operator.
14. Terms, Termination and Assignment of this
Agreement
(a) This agreement w ill commence on
(b) Each party agrees not to assign their interest of this
lease to another person or entity without the written
consent of the other paity.
(c) The Owner has the right to immediately terminate
this Agreement if the Operator breaches any term of
this Agreement subject to the Dispute Clause in 11(a)
and/or the arbitration provision in 11(b).
(d) Either the Owner or the Operator may terminate this
Agreement by providing written notice to the other
on or before in any year during the
currency of this Agreement; said termination shall be
effective as of in the year during which it
was given.
(e) Upon termination of this Agreement, the Operator
shall deliver to the Owner the original cattle or their
replacements at a place as directed by the Owner.
The Owner shall pay costs incurred by the Operator
in transporting the cattle.
(f) Upon the death of the Owner, the Agreement will
terminate at the end of that current year. Upon the
death of the Operator, the Agreement will terminate
immediately and the herd will be returned to the
Owner. The Operators estate will be compensated
for cash costs plus $ /head/day for feed costs and
labor incurred since the division of income as
outlined in Section 10.
(g) This Agreement will terminate on
19
IN WITNESS WHEREOF the parties have set their hands
and seals this day of ,
19 .
SIGNED, SEALED AND DELIVERED
in the presence of:
Owner
Witness
Operator
21
Schedule I
FLEXIBLE PERCENTAGE SHARE
Level 1 Direct Costs
Owner
$/cow
Operator
$/cow
Total
$/cow
Calf Value = E1
El =
$
Direct Cost Contributions
A1
A2 = $
A3 =
$
% Contribution
M 1
-:- A*? V 1 on -
— Mo X 1 UU -
- /o
A'5 V 1 on — 0/.
~ MO A 1 UU — /o
1 UU /o
nevenue Miiocaiion
Lessor of E1 or A3 x % Contribution
9
r 1 —
Level 2 Fixed Costs
Owner
$/cow
Operator
$/cow
Total
$/cow
Remaining Calf Value = E1 - A3 = E2
E2 =
$
vjpporiuniiy wosi ooniriDuiions
R1
D 1
-
DO —
% Contribution
81
^ 83 X 1 00
%
82
H- 83 X 100 = %
1 00%
Revenue Allocation
Lessor of E3 or C3 x %
$
$
F2 =
$
Level 3 Opportunity Costs
Owner
$/cow
Operator
$/cow
Total
$/cow
Remaining Calf Value = E2 - 83 = E3
E3 =
$
Opportunity Cost Contributions
L/1
= ?
U2 = $
Uo =
9
% Contribution
01
03 X 1 00
%
02
-r 03 X 1 00 = %
1 00%
Revenue Allocation
Lessor of E3 or 03 x %
$
$
F3 =
$
Level 4 Surplus Over All Costs
Owner
$/cow
Operator
$/cow
Total
$/cow
Remaining Calf Value = E3 - C3 = E4
E4 =
% Share (negotiated)
%
%
1 00%
Revenue Allocation
E4 x % share
$
$
F4 =
Allocated Revenues
$
$
22
i
Appendix III Blank Cow Lease Worksheets
SECTION I
PRODUCTION VALUES
Replacement Cow Value $
Cull Cow Value $_
Average Cow Value (formula 1) $
Replacement Bull Value $
Cull Bull Value $_
Average Bull Value (formula 3) $
Cows per Bull
Years of Use - Cows
Years of Use - Bulls
Average Calf Price $/cwt
Average Calf Weight
Marketing Shrinkage
Weaning % (calves/bred cow)
Death Loss (Breeding Stock)
Interest Rate (Risk Free Rate + Risk
Premium)
yrs
yrs
~ib
_%
%
SECTION II FORMULAS
1 . Average Cow Value ($)
[ +
2 =
Replacement Cow Value Cull Cow Value
2. Cow Replacement Allowance ($ per cow per year)
J -
Replacement Cow Value
3. Average Bull Value ($)
[
Cull Cow Value Years of Use (Cows)
1 ^ 2
Replacement Bull Value Cull Bull Value
4. Bull Replacement Allowance ($ per cow per year)
I - ] - L
J =
Replacement Bull Value Cull Bull Value Years of Use (Bulls) Cows per Bull
5. Cow Death Loss ($ per cow)
Average Cow Value (Formula 1 ) Death Rate
6. Bull Death Loss ($ per cow)
[ X
Average Bull Value (Formula 3) Death Rate Cows per Bull
7. Interest on Cow Investment ($ per cow)
Average Cow Value (Formula 1) Interest Rate
8. Interest on Bull Investment ($ per cow)
[ - ]
Average Bull Value (Formula 3) Cows per Bull Interest Rate
9. Calf Sale Value ($ per cow)
Average Calf Sale Wt. Marketing Shrinkage Average Calf Price Weaning %
23
J - 100 =
Cow Lease Worksheet
SECTION III COST CONTRIBUTIONS
(on a cow/year oasis;
DIRECT EXPENSES
— Owner—-
—Operator-
-—Total-
$/cow
s/cow
s/cow
Pasture @ market value
$
$
$
Feed and Bedding @ market value
$
$
$
Salt & Minerals
$
$
$
Herd Health Expense
$
$
$
Veterinary Expense
$
$
$
Marketing & Transportation
$
$
$
Miscellaneous Cow Herd Costs
<t
$
*Machinery & Building Operation Expense
<t
<p
uii lilies
$
*Hired Labour
$
$
'J)
Total Direct Expenses
A1 $
A2 $
A3 $
FIXED EXPENSES
*Depreciation & Insurance on Buildings & Machinery
$
$
$
Cow Replacement Allowance** (refer to formula 2)
$
$
$
Bull Replacement Allowance** (refer to formula 4)
$
$
$
Cow Death Loss** (refer to formula 5)
%
%
%
$
$
$
Bull Death Loss** (refer to formula 6)
%
%
%
$
$
$
$
$
$
Total Fixed Expenses
B1 $
B2 $
B3 $
Total Expenses
$
$
$
OPPORTUNITY COSTS
*lnterest on Buildings & Equipment
$
$
$
*Labour & Management
$
$
$
Interest on Cow Investment** (refer to formula 7)
$
$
$
Interest on Bull Investment** (refer to formula 8)
$
$
$
$
$
$
Total Opportunity Costs
CI $
C2 $
C3 $
Total Contribution D1 $ D2 $ D3 $
* Ensure that these amounts only include those costs directly related to the beef cow enterprise.
When market values for pasture and feed have been used, do not include any ownership or
operational costs incurred in developing and maintaining pastures or in the making of feed.
** Refer to Section II - Formulas (previous page) for information on calculating amounts.
24
Cow Lease Worksheet
SECTION IV EXPECTED REVENUE
(on a cow/year basis) Total
$/cow
Calf Sales (refer to formula 9) E1 $
SECTION V LEASE PAYMENT CALCULATIONS
(on a cow/year basis)
Owner—
$/cow
Total Fixed Expenses B1 $
plus: Total Opportunity Costs C1 $
equals: Annual Cash Lease $
CASH LEASE
FIXED NUMBER OF CALVES —Owner—
$/cow
Annual Cash Rent per 1 00 cows
= [B1 + 01] X 100 $
Minimum Number of Calves per 1 00 bred cows
= ([B1 + 01] X 100) ^ (El ^ Weaning %) calves
plus:
Market Risk Adjustment
additional calves calves
Total Payment in Calves per 1 00 Cows calves
[ X ( )] - 100 = $ $/cow
[Payment in calves per 100 cows x (El Weaning %)] ^ 100
PERCENTAGE SHARE --Owner-- -Operator- -Total-
$/cow $/cow $/cow
Total Revenue El $
Total Direct Expenses
A1
$
A2
$
A3
$
Total Fixed Expenses
B1
$
B2
$
B3
$
Total Opportunity Costs
01
$
B2
$
03
$
Total Contribution
D1
$
D2
$
D3
$
Percentage Share (D1 or D2 ^ D3) x 100
%
%
Allocated Revenues
$
$
$
Cow Lease Worksheet
SECTION V (continued)
FLEXIBLE PERCENTAGE SHARE
Level 1 Direct Costs
Owner
$/cow
Operator
$/cow
Total
$/cow
Calf Value = E1
El
= $
Direct Cost Contributions
A1
A2 = $
A3
% Contribution
A1
-r A3 X 100 =
%
A2
T- A3 X 1 00 = %
100%
Revenue Allocation
Lessor of E1 or A3 x % Contribution
$
F1
= $
Level 2 Fixed Costs
Owner
$/cow
Operator
$/cow
Total
$/cow
Remaining Calf Value = E1 - A3 = E2
E2
= $
Opportunity Cost Contributions
81
= $
82 = $
83
= $
% Contribution
81
83 X 1 00
%
82
^ 83x 100 = %
100%
Revenue Allocation
Lessor of E3 or C3 x %
$
$
F2
= $
Level 3 Opportunity Costs
Owner
$/cow
Operator
$/cow
Total
$/cow
Remaining Calf Value = E2 - 83 = E3
E3
= $
Opportunity Cost Contributions
CI
= $
C2 = $
03
= $
% Contribution
CI
C3 X 1 00
%
C2
^C3x100= %
100%
Revenue Allocation
Lessor OT to or Uo x /o
ro
— <t
- 9
Level 4 Surplus Over All Costs
Owner
$/cow
Operator
$/cow
Total
$/cow
Remaining Calf Value = E3 - C3 = E4
E4
% Share (negotiated)
%
%
100%
Revenue Allocation
E4 X % share
$
$
F4
= $
Allocated Revenues
$
$
26