Sharing in cow-calf enterprise
We have a cow-calf operation and are interested in starting to include our daughter and son-in-law. What would be a fair percent of the calf crop to compensate them if we provide pasture and feed? They would just check the cattle when we are gone. Another option: What would be a fair percent if we take our cows and calves to their farm, and they provide all feed and labor?
Duffy: The best way to start into a discussion like this is to determine the relative contributions to the operation. You can find an average division of costs on the Iowa State University Ag Decision Maker website. Go under “Livestock costs and returns” and then under “Budgets.” Labor for a cow-calf enterprise where the calves are sold is about 15% of the total costs. In a situation where the calves are fed, labor is about 12% of the total costs.
But in the first situation you outlined, your daughter and son-in-law would only provide labor to check the animals. So the percent would be less. In a situation where they provide all the feed and labor, they would be contributing about 64% of the total cost if the calves were sold and about 70% of the total costs if the calves are fed out. The division of the calves should be in proportion to the total costs incurred.
Swanson: Perhaps the easiest way to determine a fair percentage would be to establish the value of the contribution by each party to the venture and then base the percentage on that. If all your daughter and son-in-law are going to do is check the cattle when you are gone, it might be simpler to just pay them for their time involved. With the other option, it sounds a lot like a livestock share lease where the standard percentage is 50-50.
Gassett: The basic principle of a cow share agreement is that the income from the sale of calves should be shared in the same proportion as the contribution to production costs. A broad guideline would be if someone only contributes labor to care for the herd on someone else’s property, they would earn about 20% to 25% of the revenue or calf crop. If an investor provides only the livestock, they would earn about 15% of the revenue. A more specific decision aid spreadsheet to evaluate the contributions of each party can be found at the Farm Economics Current Issues website at www.extension.iastate.edu/feci/cow-share.
What is the role of your lender?
I view my lender almost as a partner in managing my farm. My neighbor says I’m putting too much stock in my lender. He views his lender as a supplier on the same level as his feed and fertilizer dealers. He says if push came to shove, my lender would look out for its interests ahead of mine. Is my neighbor right?
Duffy: I do think that lenders would look out for their own best interest, but we all do. It surely isn’t in your lender’s best interest to see you fail or make mistakes that will cause you a loss in income. A lender is a partner in your operation to the extent it supplies you credit. You still have to take full responsibility for decisions that are made because you will be the one who bears the consequences.
Swanson: A successful farm operation is built on long-term relationships, whether it is with the lender, feed man, fertilizer dealer or others. This will probably become even more critical in the future as the economic volatility in agriculture escalates. Hopefully, the relationship you have established with your lender is strong enough to make adjustments if needed in order to avoid a financial situation that could become confrontational.
Gassett: Realistically, businesspeople will look out for their own interests. However, the lender’s interest is related to the customers in that it is in the best interest of the lender for the customer to succeed. A successful borrowing customer provides income for the bank, and if they no longer borrow, they provide deposits for the bank to lend. That said, your friend indicates he believes the bank services are strictly a commodity and many feel that way. On the other hand, many customers feel an informed lender can be a resource to be tapped, not so much for advice but for an additional view that can be used by customers to help in arriving at their own management decisions.
Timely Tips Panel
William Edwards, Michael Duffy Extension economists, Iowa State University
Gary Gassett, Cresco Union Savings Bank, Cresco
Ron Swanson, Master Farmer, Galt
This article published in the March, 2011 edition of WALLACES FARMER.