Dairy Cow Leasing
Farm Business Management Update, April 1998
By Jack Dunford of the Department of Agricultural and Applied Economics, Virginia Tech
Ownership is the most straightforward way of gaining access to dairy cows. In this uncertain dairy economy, with generally lower milk prices and more unpredictable operating costs, many farmers are finding themselves in the position of not being able to accumulate the cash or qualify for a loan to expand dairy cow numbers on their farm. Leasing may be an option for some dairy farmers who have cash flow problems.
Dr. Bruce L. Jones, Extension Farm Management Specialist at the University of Wisconsin, has prepared a publication, Dairy Cow Leasing, that discusses cow leasing from several aspects. He lists a whole host of advantages and disadvantages to the owner and renter of dairy cows in his unbiased approach to cow leasing. This discussion, however, will be limited to some economic considerations of leasing.
According to Jones, the key in negotiating a "fair" rent on dairy cows is having both parties understand the purpose of a rent. Rent is an economic return that compensates the owner for investing capital in dairy cows. Rent is not all profit to the owner. Rent is the return that allows the owner to cover cow ownership costs including (1) depreciation, (2) interest on capital, (3) taxes (in jurisdictions where a personal property tax on livestock exists), and (4) insurance and death losses. These costs will determine the rent that the owner would like to receive for his dairy cows.
The following worksheet can be used as a guideline in estimating the total annual ownership costs of a dairy cow.
|(1a) Beginning Value of Cow||$1,100||$ _______|
|(1b) Salvage Value of Cow||$ 540||$ _______|
|(1c) Depreciation (1a - 1b)||$ 560||$ _______|
|(1d) Years of Life||3 yr.||___ yr.|
|Annual Depreciation (1c/1d)||(1) $ 186||$ _______|
|(2a) Average Cow Value (1a + 1b)/2||$ 820||$ _______|
|(2b) Interest Rate||6%||___ %|
|Annual Interest (2a x 2b)||(2) $ 49||$ _______|
|(Not a concern in most Virginia jurisdictions)Taxes||(3) $ 0||$ _______|
|(4a) Average Cow Value (1a + 1b)/2||$ 820||$ _______|
|(4b) Insurance Rate||2.5% *||___ %|
|Annual Insurance (4a x 4b)||(4) $ 21||$ _______|
|TOTAL OWNERSHIP COSTS (1+2+3+4)||$ 256||$ _______|
In this example the owner would like to recover $256 per year or about $21 per month cow rent. This rate could vary widely depending on the initial value and salvage value of the cow, the interest rate the owner uses the length of the lease and, most importantly, the current competitive cow rental rates in the community. Adjustments may need to be made after completing this computation. For instance, if the owner gets, in addition to the rent, all the calves valued at, say, $100 per head, then the rent should be adjusted downward to $156 in this example or $13 per month.
The economic considerations are important issues to evaluate when contemplating leasing dairy cows but numerous other points including length of lease, death losses, acquiring replacements, and procedures for settling leasing disputes must be covered. Additionally, as cash flows become tighter, the farmer should compare projected net returns of increasing cow production with the current herd compared to adding more cows. In almost every instance, overall herd production will be temporarily (or not so temporarily) reduced when a significant number of new cows are added to the lactating herd.
To investigate borrowing the funds to purchase cows prior to making the decision to lease cows is also wise. In many cases, it may be financially advantageous to purchase rather than rent cows since the annual debt repayment could be less than the annual rent, and when the debt is paid, the cows are owned. Also, a sound business practice and common courtesy is to inform current creditors of the intention to lease cows, or any other asset for that matter, since lease payments could have an impact on one's current debt repayment schedule.
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