Cow and calf pairs on irrigated pasture. | Photo by Heather Smith Thomas.
Screenshot from 09/26/2022 at 13:08:57
Feed costs, including grazing leases, are the largest costs in raising cattle. The problem for many growers is that rent rates don’t adjust as quickly as market prices, leaving them with tight margins, in the red, or forced to destock when livestock prices fall.
Market volatility has become a bigger problem in recent years as cash rental rates paid by cow calf and stocker producers have tended to increase over the past 15 years. The University of Nebraska-Lincoln Department of Agricultural Economics has tracked rental prices annually since 1981, based on a price per cow-calf pair per month.
According to Jim Jansen, agricultural economist, Department of Agricultural Economics, University of Nebraska, a cow and calf pair is typically considered to be 1.25 to 1.30 animal units (an animal unit is a 1,000 pound animal). However, this can vary depending on the weight of the cow and the age of the calf. Averaged across Nebraska agricultural statistics districts, the rental price for a month of summer pasture is $57.64 per cow and calf pair. As an example, with a herd of 300 pairs of cows and calves and a 5-month grazing season, the total cost of grazing would conservatively be $86,460, not including mineral supplements or additional feed.
A problem with pasture rental rates is that they are relatively fixed within a given year and have trended upwards over time. This benefits the landlord as it provides a steady stream of income, but is detrimental to the rancher whose income varies with cattle market cycles and weather conditions.
Creating flexible pasture leases is an alternative that is becoming increasingly popular with growers and landlords. In these agreements, the monthly rental rates for a cow and calf pair are allowed to vary within a predetermined range depending on one or more market factors, which may include animal performance, market conditions and/or pasture productivity.
“Flexible cash leases in the crop industry typically focus on risk elements such as crop yields, crop prices, or a combination of both. On grassland we generally have no way of measuring yield or a direct price for weed. The elements of risk and price associated with renting out the property must be related to the animals that graze on it,” said Jansen.
If you are a heifer calf producer and concerned about fall calf prices, you are interested in what that calf is worth in the spring compared to what it brings in the fall.
Another example could be calf weight. “In our area people usually haul cattle out to pasture and transport cows and calves separately for safety reasons. You could weigh calves before they walk on grass and weigh them after they’re off the grass. A person might have a historical benchmark for the typical win rate. This could be viewed as a ‘yield’ on the property,” said Jansen.
Another problem could be rain. Knowing the typical rainfall amounts in the area can help, but it’s a bit more difficult to measure.
It needs to be determined what is typical of the area, whether it is rainfall, rate of gain, cattle prices, etc. “A person needs a baseline expectation, although we may not know what is typical in terms of prices. However, if you look at the futures markets in the spring, you might get a sense of what’s typical of building a flexible lease,” he explains.
“An example is looking at the percentage of change. If you put calves out to pasture in May, look at the forward price. Let’s say feedstock futures suggest calves are worth $150 a hundredweight if you take them off the grass to sell in October or November. When fall comes we sell the calves and maybe the price won’t be $150. It might end up being $165. That’s 10 percent more than we expected,” said Jansen.
“In Nebraska, a shared pasture lease would be $250 per couple for 5 months of pasture. In some western states this can be $200 per couple for 5 months. If your calf prices are 10 percent higher than you predicted, you would end up adding another 10 percent (or $20) to the final cash rent — so you’d be paying $220 per pair,” he says.
If fall prices aren’t as good as we hoped, the bar rent would go down. “Let’s say the price of veal falls from $150 to $135 (down 10 percent — or $15 a hundredweight down). If you subtract 10 percent from $200, the final rental price would be $180,” he said.
“As part of a true flex lease, we need a ceiling and a floor to have a maximum and a minimum. The landowner might not want to lease grazing land if there’s a chance of getting zero dollars for some reason, and the rancher might not want to lease if the grazing price goes up too much. The lease has to protect both parties, so set a range.” If the base cash rent per couple is $200, you might set the maximum at $230 and the minimum at $170.
If you’re concerned about the number of days you can browse, that could be another variable. In some situations – including drought – the grazing season can be shorter than average. “Let’s say the price per pair is $200 for 5 months (150 days) and you end up browsing only 120 days, or 80 percent of what you were hoping for. They would discount the bar rent. And if you graze longer than 150 days, you would increase the bar rent to reflect the proportion of time,” said Jansen.
There are two strategies for dealing with drought. “You can keep the same number of cattle as you normally would, but you can shorten the period. Or you reduce the number of cattle and still graze the typical time,” says Jansen. With a flexible lease, a seasonal rate could be converted to a daily rate; the cattle farmer only pays for the actual number of grazing days.
The boost rate is a slightly trickier setting. “People who keep good records may have some of that information. Basically, it just comes down to what the two parties agree on,” he said.
Elliott Dennis, Assistant Professor, Livestock Marketing, Department of Agricultural Economics (University of Nebraska-Lincoln), says some of the risks are insurable to mitigate some of the risks to the grower. “We are essentially paying someone to take that risk for us; it’s not that the risk has gone away; someone else took the risk,” he said.
“Basically, we’re shifting the risk onto someone else. A classic example would be if you have a mortgage on a house, you would buy home contents insurance. The bank transfers the potential loss of the asset to the insurance company, and they guarantee that if your home is destroyed, the payout will go to the bank,” he explains.
“For animal products, we generally look at futures and options. In this case, it would be livestock risk insurance, essentially setting a floor price. If people take into account the Feeder Cattle Index and that index goes down 7 percent, the grower would pay 7 percent less lease. The upside is that we can offset some of that 7 percent through compensation payments,” Dennis said.
“In bad years we pay less because we get less money due to the low markets. We don’t want times when we have high costs and low revenues. That’s the beauty of directing it towards our revenue instead of our costs.”
An advantage of linking rents to market conditions is that most of these market risks are insurable. The grazing season may be unpredictable, but there are ways to lock in profits for producers who watch the markets and have a good idea of their cost of profit. Longer term, some growers could benefit from establishing flexible pasture leases that are tied to market conditions and insurable with a market-based product such as CME (Chicago Mercantile Exchange) futures options, USDA LRP (Livestock Risk Protection), or other pasture and pasture lease rain insurance that are offered by the USDA. The tenant could use the USDA-RMA (Risk Management Agency) subsidized Livestock Risk Protection product on the day the cattle are put on grass to insure against a price drop.
“One of the benefits for the person renting out the pasture is that they can defer some of those higher costs to a later day when they have more income. The advantage for the landlord is that it helps to have a long-term tenant who does not go out of business. Renting pasture is usually site specific; There’s usually a limited number of people who could potentially lease this land,” Dennis said. If you have a good tenant, you would probably prefer to stay with that person, even if you earn less income some years.
The two parties can decide what the limits would be – with a floor and a ceiling; The pasture rental price cannot exceed or fall below certain amounts. “It’s helpful for both sides – cost control for the cattle farmer and income protection for the landlord.”
Communication beforehand is important. “The rental agreement always begins with a conversation. There are benefits to both the landlord and the person leasing the pasture, but they need to start that conversation to see the possibilities and see what they would like to agree on that would be mutually satisfying,” he said.
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