Dairy expansion with tight access to cash requires a careful plan

The key to milk producers and cow owners negotiating a “fair” rent on dairy cows is having both parties understand the aim of a rent — it is an economic return that compensates an owner for investing capital in dairy cows.

New entrants to dairying, and dairy farmers who wish to expand their enterprises, are likely to have a limited amount of money for investment to achieve target numbers of cows quickly.

One way for farm operators to acquire more cows, with limited capital, is leasing.

While the leasing market for dairy cows is not as established as the market for land, many of the same benefits can be realised.

Anyone exploring cow-leasing might find it useful to focus on the advantages and disadvantages of leasing arrangements for both operators and the owners of dairy cows.

For a milk producer, it provides access to high-quality dairy cows that might otherwise be unaffordable.

Scarce capital that would be used to purchase dairy cows can go to other uses, such as construction of a milking parlour and other essential buildings.

Depending on how the cow-lease agreement is worded, financial losses that could occur if the market price of dairy cows falls can be avoided.

The farmer can match cow-lease payments to the cash-flow pattern of the farm. He can deduct the cow-lease payments as an ordinary expense, rather than depreciating the cost of purchased cows.

However, stock relief is not available, because the cows are owned by the lessor. Also, there is no guarantee that dairy cows will be made available beyond the term of the lease, and there may be limitations on how the dairy cows can be used or managed.

Uncertainty about the cost of leasing dairy cows in the future, and missing out on financial gains that could occur if the market price of dairy cows rises, are other disadvantages.

Meanwhile, the lessor can retain, and maintain, a dairy herd without having to provide the labour, and other resources, needed to operate a dairy farm.

It’s a way to maintain an active interest in farming, while phasing into retirement, and while earning a certain return, or rent, on the capital invested in dairy cows.

He can avoid extra tax liability that could arise if dairy cows were sold all at once, and stock relief may be available — along with the gains created if the market price of dairy cows rises.

The lessor has to trust others to care for his dairy cows, and has no guarantees of receiving rental payments promptly.

He may lose out on opportunities to sell dairy cows, when a willing buyer makes an acceptable offer to purchase cows, and cannot wait until the lease expires. Singing a lease also means capital invested in dairy cows cannot be quickly shifted to other investments.

The key to milk producers and cow owners negotiating a ‘fair’ rent on dairy cows is having both parties understand the purpose of a rent. A rent is not some charge that the owners of assets (such as dairy cows) set arbitrarily. Rather, it is an economic return that compensates an owner for investing capital in dairy cows.

The rent or return an owner receives on a dairy cow is not all profit. Rather, it is the return that allows the owner to cover the ‘costs’ of owning the cows.

These ownership costs include depreciation, interest on capital, and mortality and insurance.

Establishment of these costs will help to determine what rent an owner should expect to receive in rental income.

If both parties agree that it is to their mutual advantage to enter into a cow-leasing agreement, they should work through the management decisions that are going to arise.

Time spent preparing a written contract will help avoid misunderstandings during the life of the agreement.

Teagasc has specimen legal agreements for cow leasing. One is for long-term leasing and the second is for short-term leasing (one to two years).

The documents are available from your local Teagasc office, or on the website at www.teagasc.ie.


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