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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 Example Summary.

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cropland and livestock leasing in montana

Cropland and Livestock Leasing in Montana

George Haynes, Ph.D.

MSU – Bozeman Agricultural Policy Specialist

presentation contents
Presentation Contents
  • Cropland Leases
    • Crop share lease principles
    • Cash lease principles
    • Example
  • Livestock Leases
    • Livestock lease considerations
    • Example
  • Summary
rules of thumb
“Rules of Thumb”
  • Crop-share lease
    • 1/3 – landlord ---------------2/3 – tenant
  • Livestock lease
    • 40% – cow owner ----------- 60% - caretaker
test of a good lease
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

crop share lease principles
Crop Share Lease Principles
  • Variable expenses that are yield increasingshould 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 principles1
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
      • Crop inputs
      • Management

O'Brien, D.M. Kansas State Research and Extension

crop share lease principles2
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 principles3
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
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
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
Cash Rent Advantages
  • Landowners
    • 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
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
Example
  • See Handout
    • Methods and Procedures of Estimating Rent for Crop Share and Flexible Cash Leases
livestock leases if you are going to run cows on shares

Livestock LeasesIf You Are Going to RunCows on Shares

RUN THE NUMBERS!!!

DO NOT COUNT ON TRADITION

livestock leases
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
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
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 …?????
example1
Example
  • See handout
    • Cost of production estimates for commercial cow-calf enterprise
how good were our rules of thumb
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