Cropland and Livestock Leasing in Montana

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Cropland and Livestock Leasing in Montana

• George Haynes, Ph.D.
• MSU Bozeman Agricultural Policy Specialist

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Presentation Contents

• Cropland Leases
• Crop share lease principles
• Cash lease principles
• Example
• Livestock Leases
• Livestock lease considerations
• Example
• Summary

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Rules of Thumb

• Crop-share lease
• 1/3 landlord ---------------2/3 tenant
• Livestock lease
• 40 cow owner ----------- 60 - caretaker

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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?

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Cropland Leases
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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.

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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

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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

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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

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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

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Crop Share Disadvantages

• Variable landowner income
• More records
• Landowner may participate in marketing and
  management
• Need to keep reviewing lease arrangements for
  equity

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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

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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

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Example

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

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Crop Share Lease
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Livestock Leases Cows on shares
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Livestock Leases If You Are Going to RunCows on
Shares
RUN THE NUMBERS!!! DO NOT COUNT ON TRADITION
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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

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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

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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 ?????

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Example

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

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Livestock Shares
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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

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Leasing

• ?