Cow Hire Agreement - Dairy Development Centre

Improving the Welsh Dairy Supply Chain
Cow Hire Agreement
www.ddc-wales.co.uk

Dairy Development Centre
Gelli Aur
Carmarthen
Carmarthenshire
SA32 8NJ
Telephone: 01554 748570
E-mail: ddc@colegsirgar.ac.uk
www.ddc-wales.co.uk
July 2012
The Dairy Development Centre (DDC) acknowledges the contribution made by
The Andersons Centre to the technical content of this booklet.
This project has received funding through the Rural Development Plan for Wales 2007-2013 which
is funded by the Welsh Government and the European Agricultural Fund for Rural Development.
No part of this publication may be reproduced or transmitted in any form by any means without the prior
written consent of the Dairy Development Centre.
Whilst all reasonable care has been taken in its preparation, no warranty is given as to its accuracy, no liability
accepted for any loss or damage caused by reliance upon any statement in or omission from this publication.

Contents
Introduction to Collaborative Farm Ventures 4
Collaborative Farm Ventures Decision Tree 5
Cow Hire 6
Background 6
What is it? 7
Objectives 8
Suitability in the Welsh Dairy Industry 8
Cow owner perspective 8
Strengths 9
Weaknesses 9
Cow hirer perspective 9
Strengths 9
Weaknesses 9
Other Points to Consider 10
Animal health 10
Insurance 10
Taxation 11
Legal 11
The contract 12
Providing an Economic Return; Calculating the Fee 13
Cow Hire Calculation Example 14
Case Studies – Cow Hire 15
Case Study 1 15
Case Study 2 16
Heads of terms 17
Cow Hire Agreement 3

Introduction to Collaborative Ventures
Put simply, farmer collaboration consists of two or more farm businesses or persons
getting together, sharing resources to reduce cost and or increase profitability. They
are relatively common throughout other sectors of UK agriculture, however they are
relatively new to dairying.
There are a number of reasons for collaboration, these include:
• Improving profitability
• Economies of scale and synergies – cost control
• Personal benefits – quality of life
• Allows succession
• Efficient use of capital
It is essential that a budget is always considered before any agreement commences
to ensure viability and delivery of all parties’ expectations. It is important that each
individual partner that is considering a collaborative venture seeks professional
advice. There is a shortage of such persons who have adequate knowledge of the
subject. Consequently, a farming business could suffer unnecessary delay and cost
in the establishment of their agreement, hence the use of checklists and templates
provided via the Dairy Development Centre (DDC).
The following information can be used by farming businesses and/or their professional
advisors to assist in highlighting potential solutions and provide guidance regarding the
points to consider in preparation of a venture being entered into.
This is one booklet in a series and is specific to one type of collaborative venture.
To view the Collaborative Ventures report or the other information booklets go to the
website www.ddc-wales.co.uk or contact the DDC.
For a copy of DairyCo’s Joint Venture templates that provide guidance to dairy
farmers who are considering a joint venture with other dairy businesses, or bringing
others into the business structure, contact DairyCo publications on 02476 478702.
4 Cow Hire Agreement

Collaborative Farm Ventures Decision Tree
START
Do I need others to grow my
business?
Yes
No
Grow by purchasing or renting
additional land and facilities
Do I need to be in total control of
all aspects of my business?
Yes
No
Do I want to
access more
resources than I
can justify?
Seek
Forage Growing Agreement/
Contract Rearing Agreement
Consider a Partnership
or Company
Yes
Yes
Do I want limited liability?
Yes
No
Is it machinery or labour?
Ltd
Company
Limited
Liability
Partnership
Partnership
Machinery
Labour
Join
Machinery
Ring
Arrange to join
a labour sharing
“club”
Cow Hire Agreement 5

Background
Increasing herd sizes in order to achieve economies of scale and production
efficiencies has been a constant trend on dairy farms throughout the UK and indeed
internationally for many years. However, having sufficient capital/cash available to
purchase cows and invest in infrastructure (at the same time)
when looking to expand can be a challenge, and is often a
limiting factor especially for tenants without a strong
balance sheet. It may also be that there are
sufficient numbers youngstock to come through
but they may not be ready to produce for a
further two years after the infrastructure
capital investment. Either way there may be
a demand for cows (short or medium
term).
Alternatively, whilst many dairy farmers
are looking to expand, others may be
looking to give up ‘active’ milk
production but may wish to keep their
dairy herd in order to provide an income
stream (via a realistic return on capital of
at least 10%), maintain tax advantages
and ensure flexibility in the future.
Surplus cows can also be available from
farms that have sustainable low replacement
rates and their owner(s) may wish to retain them
as assets to receive a Return On Capital (ROC)
rather than sell them and invest elsewhere.
Farmers are familiar with the practice of renting/hiring/leasing
in order to gain control of resources such as land, buildings and
machinery, thus cow hire may also be a mutually beneficial solution.
The cow hire agreements can be a method by which a herdsman or new entrant can
grow their balance sheet before they commence farming in their own right, without
the need for a large amount of capital. Cow hire can enable the dairy farming
business to start and then over time the farmer (hirer) can build equity by purchasing
cows in the medium and long-term to replace those that have been hired.
6 Cow Hire Agreement

What is it?
Cow hire agreements allows a dairy farmer who wishes to obtain additional cows
to 'hire' them.
For the purpose of this booklet from now on the person wishing to hire extra
cows will be referred to as the ‘hirer’ and the owner of cows who wishes to hire
them out to somebody else will be referred to as the ‘owner’.
The owner retains ownership of the cows, receives an annual hire fee and also
receives the cull and calf income, but pays the cost of semen for breeding. The
owner is also responsible for providing a replacement should a ‘hired’ cow need
to be culled or dies.
The hirer is able to increase herd size rapidly without a big initial outlay, or the
need to breed/rear additional youngstock. The hirer covers all the costs of
keeping the cow (minus those outlined above) plus the annual hire fee, but
retains all the milk income.
Cow Hire Agreement 7

Objectives
• Provides the cow owner with a reliable/sustainable income, beneficial tax status,
future flexibility, personal interest/satisfaction and maintaining ownership of the
herd as opposed to herd dispersal. Enables the hirer to obtain additional cows
without further investment in stock and allows a degree of risk management for
budgeting and business planning/growth.
• If the agreement is to succeed it is essential to match the ‘right cow’ (owner) with
the ‘right operator’ (hirer) as the two effectively become ‘partners’ in business and
thus need to be chosen wisely.
8 Cow Hire Agreement

Suitability in the Welsh Dairy Industry
Cow owner perspective
Cow hirer perspective
Strengths
• Retain the ownership of a dairy herd without the
requirement to provide labour and resources to
operate a dairy farm.
• Allows resources to be exploited for alternative
means/enterprises i.e. 60 dairy cow cubicles could
be adjusted to house 90 Heifers.
• Releases fixed capital not needed for a milking unit
i.e. feeder wagon, bulk tank.
• Provides a reliable return on capital which has been
invested in the cows.
• May provide a temporary solution for specific
situations/transition e.g. owner growing their herd
size in order to obtain additional land/move farm in
future. Succession planning/career break etc.
• Facilitates partnership agreements; sharing the
practicalities of milking, contract arrangements and
incorporating a successor into the business.
• May provide an opportunity to exploit appreciation
in dairy cow values in the future rather than
dispersing the herd at the current time.
• Avoid increased tax liabilities that could arise in the
case of herd dispersal, whilst maintaining farm
income for inheritance/income tax purposes.
• Maintain personal satisfaction and interest in owning/
breeding of dairy cows, whilst providing the
opportunity to utilise progeny for alternative purposes.
Weaknesses
• Responsibility for care/health/welfare of cows is
entrusted to others.
• Reliance on good business performance capability
of the hirer.
• Risk of financial loss if dairy cow values fall both in
opportunity cost of dispersal and reduced return on
capital (hire fee).
• Inability to immediately access the capital (within
the term of the agreement) tied up in the cows
should circumstances change.
• Cows may be some distance away from owner which
make monitoring cow health and condition difficult.
Strengths
• Can allocate potentially limited capital
that would be used to purchase dairy
cows to alternative uses (land/milking
facilities etc.).
• Gain access to dairy cows which may
otherwise be unaffordable, with the
opportunity to select suitable genetics/
cow type, which would otherwise take
time to breed.
• Facilitates easier access for new
entrants to the industry due to reduced
capital demands.
• Manage timing of cow hire fees to suit
cash flow.
• Avoid the need to use credit/borrowing
to finance the purchase of dairy cows.
• Mitigate some financial loss that may
occur if the market price of dairy cows
falls.
• An element of ‘production risk sharing’.
• Cow hire fees accounted as ‘operating
expenditure’ rather than depreciating
cost of purchased cows.
Weaknesses
• Uncertainty beyond the term of the hire
agreement as to the availability of cows.
• Unpredictability with regard to the cost
of leasing dairy cows in the future
(although this can be agreed) -
normally reviewed every three years.
• Limitations on how the cows may be
managed/ appropriateness for the
system (e.g. calving date).
• Short term biosecurity risk by ‘bringing
in’ cows, particularly if cows are from
multiple sources.
• Opportunity cost of appreciation, if
dairy cow values rise compared with
outright purchasing.
Cow Hire Agreement 9

Other Points
Animal health
Where any movement of different stock between holdings take place whether it is
through purchase, hire or other means there is an inherent biosecurity and animal
health risk. Good communication at an early stage is vital to minimise the risks. The
veterinary surgeons of both parties' (owner and hirer) should be involved in drawing
up a plan which identifies differences in each parties’ disease status and documents
how each health issue will be managed (vaccination protocol, disease monitoring
etc.).
Clearly, in situations where the hirer is bringing in stock from multiple sources
(whether it be through hire or purchase) the disease risk is increased and needs to
be very carefully managed. Correspondingly, where the hirer maintains effectively a
‘closed’ herd and only hires from one source the potential risk can be lowered.
Where cows are culled under bovine tuberculosis (bTB) control measures, the
compensation is paid to the owner of the cows. The owner then replaces that animal
as he/she would under the cow hire fee for any normal herd replacement.
Insurance
It is normally the responsibility of the cow hirer to insure the cows whilst they are on
hire to an agreed (with the owner) value. Such cover should include the following
perils:
• Malicious attack
• Fire
• Aircraft
• Electrocution
• Drowning
• Damage from falling objects
• Straying
Seeking advice from your insurance advisor is recommended.
10 Cow Hire Agreement

Taxation & Legal
Taxation
The cow owner will receive three parts of income from the cow hire fee as follows:
(For further explanation of the income received by the cow owner
please see Cow Hire Calculation Example on page 14)
1. The proceeds of all calf and cull cow sales less all
breeding costs (e.g. natural service bull, AI and
insemination fees).
2. The difference between the “new heifer”
price (i.e. between £1000 and £1200) and
the above net figure divided by the annual
replacement rate.
3. The agreed rate of return (i.e. ROC) for the
capital value.
Income for all the above forms part of the normal
trading receipts and all expenses of rearing can
be offset against this before profits are calculated.
The cow hirer can offset the hire charge against the
normal dairy farm trading income before taxes are
calculated.
It is understood that currently no VAT should be charged on the cow hire fee but this
should be reviewed when a Cow Hire Agreement is established.
Legal
The establishment of the cow hire agreement will be legally binding when both the
owner and the hirer have signed the documentation under the Law of Contract. It is
essential that such an agreement is documented and signed to protect both parties.
A good cow hire agreement ensures an economic return for both parties. There may
be occasional problems whether it is due to fertility, cow performance, stock
husbandry, either on the part of the cow hirer or the owner, which may result in
reference to the official document to provide clarity to the issue whilst minimising the
risk of conflict or confusion.
Cow Hire Agreement 11

The Contract
The main terms that should be covered within the contract include the following:
• Length of hire agreement: This will depend on specific circumstances but is
typically 3 – 5 years and is normally determined by the hirer replacing cows owned
by him, if the dairy business size remains static. Cow hire could continue if the
business grows.
• Payment rate: This should include a full breakdown of the cow hire fee
calculation.
• Timing of payments: This is usually monthly, calculated by the number of days
each cow is on the farm or alternatively a forecast is made annually of monthly cow
numbers with a full reconciliation at the end of the business year.
• Rights and obligation of the owner: This would consist of permission to check
the cows, which could be once a month or quarterly, but so as to not cause
inconvenience to the hirer.
• Rights and obligations of hirer: Feeding, management etc.
• Health protocol: Any vaccines and/or veterinary/medical treatments to be
detailed and agreed beforehand if applicable.
• Animal identification and record keeping: The hirer is responsible for
ensuring that the hired cows have the appropriate identification tags and the hirer
should pay for any replacement tags required. In terms of cross-compliance, it is
the responsibility of the ‘keeper’ (defined as the person with responsibility for dayto-day
management of the animals) to ensure all animal identification (ear tags)
are in place - this is the hirer.
• Insurance: It is usually the responsibility of the hirer to insure the cows. With this
in place the losses/deaths would be determined as covered insurance.
• Terms of buy-out options, if any: It is possible, if agreeable between the cow
owner and the cow hirer, to structure a method by which the hirer could purchase
the cows over a period of time.
• Procedure for settling disputes / arbitration
• Conditions for termination of an agreement
12 Cow Hire Agreement

Providing an Economic Return - Calculating the Cow Hire Fee
Both the owner and hirer must appreciate
there may be conflicting financial goals
when negotiating a cow hire fee. The hirer
may desire to pay as little as possible in
order to maximise the potential for profit,
whilst conversely the owner wants to gain
as high a fee as possible to maximise
the return.
For this reason it is important that
both parties understand the
purpose of a ‘fair’ cow hire fee;
it is an economic return that
compensates an owner for
investing capital in dairy
cows. As well as providing a
return on capital, the fee
should take into account
replacement rate, cull and
calf value and breeding
costs. The following table
shows an example of a cow
hire fee calculation based on a
replacement rate of 25% and a
return on capital (ROC) of 10%.
A ROC rate of 10% is chosen as
this represents the opportunity cost
of that investment, for example the
owner of the cows could choose to invest
his/her capital elsewhere in other business
opportunities if not investing in dairy cows.
Cow Hire Agreement 13

Cow Hire Calculation Example
Replacement rate 25%
Cow Price £ 1,000.00
Cull Cow £ 350
Loss £ 650 x 0.25 = £162.50
Calf Income
Heifer £ 200 x 0.45 = £90.00
Bull £ £ x 0.55 = £5.50
Beef x £ £
£95.50
Semen Cost £30.00 - Calf income = £65.50
Replacement £162.50
Calf income - £65.50
Plus ROC 0.1 £100.00
Payable £ £197
The replacement rate of the farm that
cows will be hired to.
This is the average value received for
a cull cow, including an allowance for
mortality. With the replacement rate
as above, this shows the depreciation
cost of the cow per year.
This represents the split between
heifer and bull calves. UK statistics
demonstrate this 55%:45% split in
favour of bull calves. If cows were to
be served to beef bred bulls, then the
split would have to account for beef
calves also.
This is the weighted average value of
the calves per cow hired. Calves
belong to the cow owner.
The cow owner pays for the semen
but retains all calves. Semen cost is
therefore deducted from the calf
income to arrive at the net income to
the owner.
Return On Capital (ROC) represents
the return paid to the owner for the
capital tied up in cows. Cows valued
at £1,000 @ 10%.
This is the fee payable per cow for
that year, which includes the
replacement cost.
The example above would require an annual fee of £197 per cow paid by the hirer to
the owner. Through examining the fundamentals of calculating a cow hire fee it is
clear to see how the conflicting financial goals of the two parties above can be
balanced and the importance of joining the right hirer with the right owner. For
example in the case outlined above; if the hirer is able to achieve a lower
replacement rate of 18% and semen cost of £22 through a combination of
management/stockmanship ability and utilising the right type of cow, the annual cow
hire fee could be reduced to £143.50. The owner is still achieving the same level of
‘return’ because his costs (of owning the cow) are lower, whilst the hirer also keeps
costs lower (the hire fee) and therefore has a greater potential for profit. The ROC %
paid to the owner may potentially be increased to reflect this.
14 Cow Hire Agreement

Case Study 1
First time Tenant Farmer (new tenancy opportunity) is a herdsman and has limited
capital available and limited borrowing capacity due to security.
The farm being rented is 210 acres and funding is required for 130 cows. In goings
include the existing bulk tank and parlour along with other ‘deadstock’ (i.e. silage and
growing crops). The total capital demand for the ingoing tenant is therefore is
approximately £170,000 but available capital (cash and borrowings) is only
£110,000. Therefore, there is a deficit of £60,000 – which equates to 60 cows.
Option 1 for the tenant:
Farm with only 70 cows in milk and try to increase cow numbers from within over the
next 4 – 5 years. Low profitability and free cash will inevitable be an issue due to
high rent and other fixed costs of operating an under-stocked 210 acre farm. Other
options may include using the excess acreage for beef/sheep/arable– but this will
complicate the system and the farmer would not be utilising the existing parlour and
bulk tank facility to their full extent.
Option 2 for the tenant:
Farmer will own 70 cows and hire in 60 cows (effectively using someone else’s
capital).
It is then possible to hire the cows for the term of the tenancy and rear his own
heifers to come into the herd over the next 4 – 5 years. This would result in the cow
owner having to find an alternative cow hirer at the end of the contract.
Cow Hire Agreement 15

Case Study 2
55 – 65 year old dairy farmer (Farmer A) is seeking to retire from milking due to
age/declining health/mobility and age of milking facilities. Located nearby is a
“trusted and respected” active dairy farmer (Farmer B) wishing to keep more cows
and have his heifers contract reared.
Solution:
Farmer A hires his cows to Farmer B whilst in return he contract rears heifers for
Farmer B as well as his own heifers as replacements for Farmer B.
16 Cow Hire Agreement

Heads of Terms
Please find below the minimum requirements that should be included in an agreement.
Cow Hire AGREEMENT
1. Farmer (Cow Owner) Details
1.1 Name of Farmer
1.2 Trading Title of Farmers Business
Please tick
Trading Business Status
Sole Trader
Partnership
Limited Liability Partnership
Company
1.3 Trading Business Address
2. Farmer (Cow Hirer) Details
2.1 Name of Farmer
2.2 Trading Title of Farming Business
2.3 Trading Business Status
2.4 Trading Business Address
Cow Hire Agreement 17

3. Farm Details
3.1 Address of farm on which the hired cows will be kept (if different to Cow
Hirer’s trading address)
3.2 Farmable Area of Land
4. Agreement Length
4.1 Date of Commencement of Agreement
4.2 Year End of Agreement
4.3 Length of Agreement and/or termination date
5. Specific Cow Hire Agreement Details
5.1 Number of Cows to be hired
5.2 Agreed Hire Fee per cow (First three years)
5.3 Fee Payment Frequency
18 Cow Hire Agreement