Leasing cattle and machinery is becoming more and more popular in today’s market environment. Young producers starting out may find it impossible to borrow enough capital to purchase land, machinery, and breeding stock. On the other hand, an established producer may be looking to retire or reduce their involvement in the operation but doesn’t want to sell the farm assets. One reason for this may be the income tax liability of such a large sale of land, machinery and breeding stock. A lease agreement may be an opportunity to achieve the goal of both individuals. But as with any contract, careful consideration should be taken to ensure all the details are clearly defined to prevent problems and conflicts later on.
Cows and/or machinery can be leased in a variety of ways but one common method is called a shared lease agreement. A shared lease agreement is where both parties (the owner and the operator) contribute a portion of the inputs and the calf crop is shared based upon the portion of total costs each party contributes. The first step is to calculate all the input costs that will go into the operation and decide who will be contributing each item. It is very important to include all the inputs including the main items such as land, breeding stock, machinery, labor, vet supplies, supplements, but also the smaller ones such as management, fuel, repairs on machinery, maintenance of fences, record keeping, etc. A value must be placed on each item to determine it’s portion of contribution to the total costs. It becomes very important to discuss items such as who will be responsible for providing breeding stock replacements? Who’s responsible for machinery repairs or replacement if it’s damaged? Who provides the bull expense? There are many items that are often initially overlooked. That’s one reason it’s extremely important to complete a written lease to incorporate as many of these “hidden” items as possible ahead of time.
Although the process may sound complicated, it’s actually very simple. The most difficult part is creating the budget of total expenses. Past farm records can be a good resource for starting the process. Collecting current budgets from places like the University of Missouri Extension can also be helpful. Once the budget is created, simply calculate the split. If the owner is providing 75 percent of the inputs and the operator is contributing 25 percent, then the owner will receive 75 percent of the calf crop and the operator 25 percent.
Often with father-son partnerships the individuals will struggle with what is an equitable agreement. Often when they begin planning they expect it will be a 50-50 split. By using a lease agreement form to add up all the inputs they can calculate what each party is truly contributing. In reality, if the owner is providing the land, breeding stock, and machinery, a 75-25 split will probably be more equitable. However, sometimes to help pass the farm to the next generation the owner may agree to a split that favors the operator.
