Economics of Owning vs. Share-Leasing of Beef Cows
in
East-Central North Dakota

 

Steve Metzger

Carrington Area Farm Business Management Program

NDSU Carrington Research Extension Center

 

 

Introduction

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 of capturing economic returns while holding down the total dollars of investment in capital items, including breeding stock.In order for beef producers toreally understand any possible share arrangement they must know their actual costs of production and be able to compare those numbers to the estimated numbers from a possible share arrangement.

 

Procedure

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 14 programs in the state wide North Dakota program.The data for this study was confined to that collected from program members and summarized through the Carrington Area Program during the 1999-2002 time frame.

 

The minimum number of producers involved in the study, in any one year was nineteen with a maximum of twenty-seven.The total number of owned cows involved over the four year period was 11,352 head while the total share-lease cows numbered 1,188 head as measured on a twelve month basis.The average owned herd consisted of 124.7 cows while the share lease herds averaged one-half of that number at 62.5 head.In all instances where there was a share-lease herd located 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.

 

While all costs were gathered on a 12-month basis, the income side of the enterprise, except for the sale of cull animals or breeding stock, was terminated at weaning when the calves were physically separated and sold or transferred to a backgrounding or feeding enterprise.While producers were encouraged to weigh all calves at weaning, it must be acknowledged that some producers did not weigh all calves when they were weaned and transferred to other enterprises.For these calves weights were estimated using the sale weights of herd mates or similar type calves.All replacement stock were held in separate enterprises and their costs and returns are not included with the beef cow-calf data contained within this study.

 

The share arrangements varied from 70-30 to 50-50 for the operator and breeding stock owners respectively.The simplest arrangement was a 70-30 split with the operator supplying all feed and breeding bulls while the owner was responsible for supplying the replacement cows.Other arrangements varied the split of the weaned calves and also brought such items as pasture, other feeds, and breeding bulls into the equation.

 

Results and Discussion

The cows in the owned herds weaned calves with an average weight of 548 pounds, as shown in Table 1, or fifty pounds more that the average for the share-lease cows.A key item that of pounds weaned per exposed female was recorded at 495 pounds for the owned herds while the share-lease herds averaged 48 pounds less at 447 pounds.Calving, weaning, and calf death loss percentages were very similar for the two types of herds but the share-lease herds had a 5.5% greater culling rate, averaging 19.8% versus 14.3% for the owned herds.

 

 

The total value produced per cow showed a distinct advantage of $27.54 for the owned herds 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 tend to have a higher per pound value.A key item for producers to understand is that of net inventory change which is listed at -$35.71 per cow for the owned herds.This is the average annual drop in the value of each cow due to such items as cull sales and the non-reimbursed share of death loss in the breeding herd.With the share lease herd the farm operator would typically experience no loss in value as this cost would be borne by the breeding stock owner.Thus gross return, after net inventory change, favors the share-lease herd by $16.76 with a total of $442.93.

Direct operator expenses including feed costs totaled $140.92 for the share-lease herds or $58.22 less than the owned herds.This was due to the owners, under some share arrangements, providing a share of the feed or pasture for the share-lease herds.Vet and livestock supplies were combined under one heading to reflect the mingling of these costs by producers.Lease costs per cow, at $173.36 for the share-lease herds, reflect the value of the calves returned to the owners as their share of the calf crop.This amounted to an average of 39.1% of the total calf crop value.

 

Overhead costs were the highest for the owned herds at $69.57 per cow or an increase of $26.24 over the share-lease herds.Interest on the breeding stock is included under the heading non-operating interest costs and this reflects an increase of $13.49 per cow for the owned herds when compared to the share-lease herds.Even without this additional interest cost, owned herds reflected a higher overhead cost amounting to an additional $12.75 per head.

 

The operatorís share of net income per cow favored the owned herds at $90.64 versus $11.46 for the share-lease cows.When considering the lease costs per cow, this would equate to a 61% share lease for the operator and a 39% share for the breeding stock owner and would include a portion of the feed and breeding bulls being supplied by the breeding stock owner.In both scenarios the net income generated would be the consideration for the operatorís labor and management and would also be available for any principal payments associated with the particular enterprise.

 

Summary

In considering the implications of a share-lease arrangement a producer must be very aware of where the industry is in relation to the 10-12 year cattle cycle.The years 1999-2002 would certainly be considered to be leading into the upper end of the current cattle cycle.Producers need to be keenly aware of their level of production and of the price structure they are most likely to be operating in when they are weaning share-lease calves.If a planned share-lease arrangement is only moderately profitable at the high end of the cycle an individual producer needs to look at what the implications are as prices retreat on the downside of the cycle.

 

It should be noted that share-lease arrangements can be a method of marketing excess forages and range that might otherwise be under utilized.Again, knowing the cost of producing forages and maintaining rangelands is critical to accessing the potential profitability of any share-lease arrangement.A general statement often made about share-lease arrangements is that the breeding stock owner and the cow-calf operator should share profits in proportion to their investment and risk in the enterprise.There is no single share-lease arrangement that will fit all producers in all circumstances.Each producer is challenged to know his costs of production and to then relate that information to the potential outcome and profitability of a particular share-lease arrangement.

 

References

Metzger, S.S. 2002. Carrington Area Farm Financial and Enterprise Analysis Report for 2002.

††††††††††† Carrington Area Farm Business Management Program, Carrington, ND and Carrington

††††††††††† Research Extension Center, NDSU.

Metzger, S.S. 2001. Carrington Area Farm Financial and Enterprise Analysis Report for 2001.

††††††††††† Carrington Area Farm Business Management Program, Carrington, ND and Carrington

††††††††††† Research Extension Center, NDSU.

Metzger, S.S. 2000. Carrington Area Farm Financial and Enterprise Analysis Report for 2000.

††††††††††† Carrington Area Farm Business Management Program, Carrington, ND and Carrington

††††††††††† Research Extension Center, NDSU.

Metzger, S.S. 1999. Carrington Area Farm Financial and Enterprise Analysis Report for 1999.

††††††††††† Carrington Area Farm Business Management Program, Carrington, ND and Carrington

††††††††††† Research Extension Center, NDSU.