Cropland and Livestock Leasing in Montana

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Presentation transcript:

Cropland and Livestock Leasing in Montana George Haynes, Ph.D. MSU – Bozeman Agricultural Policy Specialist

Presentation Contents Cropland Leases Crop share lease principles Cash lease principles Example Livestock Leases Livestock lease considerations Summary

“Rules of Thumb” Crop-share lease Livestock lease 1/3 – landlord ---------------2/3 – tenant Livestock lease 40% – cow owner ----------- 60% - caretaker

Test of a good lease . . . Is it written? (Montana handshake) Is the crop shared in the same % as resource contributions? Does it encourage proper amounts of yield increasing expenses? Does the tenant have potential for profits? Does it promote conservation? Does it plan for needed improvements? Are lease duration and conditions understood? O'Brien, D.M. Kansas State Research and Extension

Cropland Leases

Crop Share Lease Principles Variable expenses that are yield increasing should be shared in the same proportion as the crop share. Goal – maximize net returns for the operation All crops are shared alike. O'Brien, D.M. Kansas State Research and Extension

Crop Share Lease Principles Both parties should share in total returns in the same proportion as they contribute resources. Landowners: Land Crop inputs Management (perhaps) Tenants Labor Machinery Management O'Brien, D.M. Kansas State Research and Extension

Crop Share Lease Principles When new technologies or crops are adopted, leases often need adjustment. More intensive crop rotations More reliance on herbicides and less on tillage New GMO seed/herbicide O'Brien, D.M. Kansas State Research and Extension

Crop Share Lease Principles Tenants should be compensated at lease termination for the unexhausted portion of long-term investments. Fences, buildings, irrigation, etc. Current (ongoing) communication is essential between the landlord and tenant O'Brien, D.M. Kansas State Research and Extension

Crop Share Advantages Risk & rewards are shared Management may be shared Less operating capital “tied up” for tenant Tax management timing opportunities with crop sales and input purchases Landowners may prove material participation (versus cash rental) Social security implications O'Brien, D.M. Kansas State Research and Extension

Crop Share Disadvantages Variable landowner income More records Landowner may participate in marketing and management Need to keep reviewing lease arrangements for equity O'Brien, D.M. Kansas State Research and Extension

Cash Rent Advantages Landowners Tenants Fewer farm decisions No price or yield risk No crop marketing decisions No material participation Tenants More control of decisions More income for best farmers Benefit of windfall profits O'Brien, D.M. Kansas State Research and Extension

Cash Rent Disadvantages More difficult to renegotiate Landowners No “good year” windfall profits Few income tax management opportunities Risk of tenants “mining” land Harder to establish Social Security base Tenants Have all yield and price risk Higher expenses / higher lending needs O'Brien, D.M. Kansas State Research and Extension

Example See Handout Methods and Procedures of Estimating Rent for Crop Share and Flexible Cash Leases

Crop Share Lease

Livestock Leases: Cows on shares

Livestock Leases If You Are Going to Run Cows on Shares RUN THE NUMBERS!!! DO NOT COUNT ON TRADITION

Livestock Leases . . . Based on cost contributions approach Both parties should share in total returns in the same proportion as they contribute resources. Cow owners (in our example) Livestock ownership Other inputs Tenants Feed Livestock care and handling Facilities and equipment Ownership

Livestock Lease Considerations Length of Lease Long Enough To Provide Continuity in The Livestock Herd (Operation) How Are Replacements Provided How and When Are Cows Culled and Sold How and When Are Calves Sold Death Loss Percentage Allowed Incentives for Lower Death Loss and Higher Calving Percentage Provisions for Drought and Disasters

Depreciation in Livestock Lease If replacement are raised and the tenant (person running the cows) pays for development costs. Do NOT include depreciation for the cow herd in the lease calculations. Individual cows are “wearing out” but the asset (cow herd) is not depreciating Tenant is paying the costs of developing replacements Revenue shared is …?????

Example See handout Cost of production estimates for commercial cow- calf enterprise

Livestock Shares

How good were our “Rules of Thumb” Crop-share lease 1/3 – landlord - - - - - - - - - - 2/3 – tenant Livestock lease 40% – cow owner ----------- 60% - caretaker Volatility in crop/livestock markets makes procrastination in lease reviews very costly

Leasing ?