Leasing arrangements may be considered in several situations. 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 cowherds 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 cowherds could examine leasing as an alternative to raising or purchasing cows.
Lease or Own Cows and Bulls?
The decision whether to own or lease cows and bulls involves several factors in addition to cost comparison. Cost comparisons for an operator deciding whether to own (by purchasing or raising) or to lease, can usually ignore all costs for the cows except ownership and lease costs, provided that the cows to be leased are of similar size and quality to those to be raised or purchased. Comparing costs of raising cattle to leasing requires estimating the cost to raise a replacement heifer/bull to breeding, calving or other age depending on when she/he would enter the herd. Depending on feed costs and replacement purchase prices, raised replacements may cost more or less than purchased replacements.
To compare the costs of owning or leasing a cow, complete these three steps.
- Estimate ownership costs per year for purchased or raised cattle.
- Estimate bull ownership cost per year on a per cow basis.
- Compare the ownership costs of the cow (including bull if appropriate) with the lease cost.
Detail for each of these steps follows.
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.
- Cash lease. 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 straight forward.
- Share leases may be a way to obtain the use of capital in the form of cows and/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.