Cow leasing is a collaborative arrangement where a farmer with cows that are surplus to requirements can lease these cows to another farmer.

When cow numbers are expanding there is a lot of capital tied up in the extra replacement stock and there is also the financial cost associated rearing the extra stock. Leasing out cows is an opportunity for the dairy farmer to get financial return on these retained animals.

It is also an opportunity for the lessee to increase numbers at a lower initial cost than buying them outright. The lease can be short-term for one to two years or for a longer-term arrange of four to five years. In general, cows on a short-term arrangement will return to the owner whereas those on a long-term lease generally do not. Teagasc developed a template agreement for long-term cow leasing some time ago but was awaiting Revenue clarification on the treatment of leasing income for income tax and VAT. The template agreement and the Revenue clarification are available to download here.

Short-term leasing

Cows can be leased out on a short term basis for one to two years. In this case, the same animals would return to the owner less any animals that do not go in-calf over the duration of the arrangement.

For example, 50 cows are leased out in January 2015. Ten cows are not in-calf by November 2015. The lessee can sell the culls and replace them with equivalent cows in terms of Economic Breeding Index (EBI) status and lactation number. At the end of year two, 10 more cows are not in calf. Again, these can again be sold and replaced with equivalent cows in terms of EBI and lactation number.

There is now a group of of 50 cows ready to be returned to the owner after the two-year agreement has come to an end. Only 30 of these are part of the original group of cows and 20 are cows that have been slotted in as replacements.

The criteria for the replacement of animals must be set out and agreed at the start of the arrangement. These include lactation number, age, disease status etc.

Long-term leasing

Cows leased out for four to five years generally do not return to the owner. They are replaced with an equivalent group of cows at the end of the agreement. The profile of the leased cows should be noted at the start of the agreement and the group of cows returned must be, at a minimum, equivalent in terms of age, lactation and disease status and superior in terms of EBI status.

These criteria must be agreed between the parties at the beginning of the agreement and written down. Calves born out of the leased cows are the property of the lessee and this allows him (or her) to build up a stock of replacements for the herd and also to cover the return of the cows as part of the lease agreement.

Benefits to the lessee

There are a number of situations where a farmer might consider leasing in cows. It can be good option for a new entrant to dairy farming. In a startup or conversion farm,capital is required for milking facilities, farm infrastructure, reseeding and buying cows.

Leasing in the cows reduces the financial outlay and can help to make the business more viable in the cash hungry early years. Cow leasing may also be an option for established dairy farmers to increase cow numbers quickly at a lower initial cost outlay.

For young farmers who are considering cow leasing, it is important not to rush into the first opportunity that comes along. There are two things to consider; the lessor farmer as a person and the quality of the stock that is being offered.

The lessor can be an individual who is just in it for the money or someone who takes an interest in the young person and offers mentoring to them. The quality of the stock offered has a big bearing on the profitability of the the enterprise. For example, high-EBI cows with above-average milk solids can deliver a higher milk price.

Costs of leasing

The two parties must agree an average value per cow at the outset of the agreement and this value is included in the written agreement. They must also arrive at a leasing cost that is fair to both parties and document the payment schedule in the written agreement.

Income tax and VAT clarification 

The Revenue Commissioners have clarified that income earned from the leasing out of surplus cows will be treated as farm income. The lessor (owner) can claim stock relief on the leased cows provided that the cows have not been purchased with a view to leasing them out.

The farmers leasing in the stock can claim the cost of leasing as a tax deductible expense but they cannot claim stock relief as they do 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 the leasing income is greater than €37,500 in a continuous period of 12 months then the lessor is obliged to register and account for VAT on all farm income.

By Thomas Curran Farm Structures Specialist, Teagasc Rural Economy and Development Programme