Thinking about buying dairy stock? Why not lease some instead?

When dairy farms are expanding, or if someone is embarking on a dairy conversion, it can be a very expensive process, especially when the cost of the stock is factored into the equation.

The cost of buying dairy stock, or rearing such stock, can often be underestimated and farmers can run into cash-flow problems in those early, cash-hungry years.

This is particularly the case when you consider that you’re into a heifer’s second lactation before she returns a positive net cash balance on your farm.

However, purchasing animals is not the only option; another option is to lease them.

Leasing dairy stock has a number of benefits:
  • For the person leasing out the animals, it allows that owner to get a return on these animals;
  • For the lessee (especially a new start-up), it provides an opportunity to increase numbers without the great outlay at the start (of buying them outright).

The agreement

Like any leasing arrangement, the written contract between the two parties is critical. The lease agreement can be long term or short term – with short term being from one to two years in length.

Usually in a short-term lease the same animals are returned after the agreement ends; but this is not always the case.

Where it is the case, the same animals return to the owner – less any that didn’t go in-calf. However, those that did not go in-calf must be replaced with a similar animal.

AgriLand has learned of another scenario whereby 40 heifers were leased out for a period of two years. The agreement stipulated that, in two years’ time, the leaser (owner) would get back 40 similar heifers (not the same actual animals) from the lessee.

In this scenario, the lessee wanted to grow his herd size and the leaser hoped to gain more land during the period that the heifers were gone.

For the leaser, this scenario had the added advantage that the lessee’s herd had a higher EBI than the leaser’s; so the heifers that he got back would have had a greater impact on the genetic gain of his herd.

The criteria for the replacement stock should be agreed upon and outlined in the agreement at the start. This is critical.

In a long-term leasing arrangement the same cows generally don’t return to the owner. They are replaced with a similar group at the end of the agreement.

Again, the profile of the leased cows should be outlined at the start of the agreement. The returned cows should then meet these criteria.

The criteria should include: 
  • Age;
  • Lactation number;
  • In-calf or not in-calf – depending on the status before they left;
  • Disease status;
  • Of a higher EBI.

Calves that are born are the property of the lessee; this allows him or her to build up a stock of replacements for his or her own herd.

Costs

At the beginning of the arrangement an average value per cow must be decided upon – which should then be included in the agreement.

In the scenario referred to above, an average value per cow was decided upon and, then, the leaser received 10% of the total value of the group of animals – per year – over the two years.

Whatever the leasing cost and the payment schedule is, they should also be outlined in the written agreement.

Tax and VAT

According to Teagasc, the Revenue Commissioners have clarified the following in relation to income tax and VAT.

  • Income earned from the leasing out of surplus cows will be treated as farm income;
  • The lessor (leaser) can claim stock relief on the leased cows, provided that the cows have not been purchased with a view to leasing them out;
  • The farmer leasing in the stock can claim the cost of leasing as a tax-deductible expense, but he or she cannot claim stock relief as he or she does not own the animals;
  • The cost of replacement animals is also an allowable expense;
  • Cow leasing is liable to VAT at the standard rate of 23% and is not regarded as an agricultural production activity for VAT purposes;
  • If leasing income is greater than €37,500 in a continuous period of 12 months then the lessor (leaser) is obliged to register and account for VAT on all farm income.