PRODUCTION SYSTEMS
PIH-115
pork industry handbook
PURDUE UNIVERSITY COOPERATIVE EXTENSION SERVICE • WEST LAFAYETTE, INDIANA
Financial Leasing of Capital Assets in Pork Production
Authors
Chris Hurt, Purdue University
Allan E. Lines, Ohio State University
Gerry Schwab, Michigan State University
Reviewers
Danny Klinefelter, Texas A&M University
Matt Parsons, Hadley, Massachusetts
James S. Plaxico, Oklahoma State University
Tommy Reff, North Dakota State University
The U.S. pork production industry continues to move rapidly towards fewer farms producing an increasing amount of the nation’s hogs. This movement toward fewer, but larger, producers has been made possible by added capital investments for facilities, equipment, and various production inputs which have replaced, or have been substituted for, manual labor on many farms.

Traditionally, producers needing funds for growth used their own capital (equity) or borrowed capital (debt) to purchase the assets needed. But, with the increased capital needs and the changes in financial markets, producers are exploring leasing as an alternative method to acquire assets. Increased use of debt capital and interest rate variability have increased the financial risk-exposure for some producers. And, leasing may help reduce some financial uncertainties. Another important reason to consider leasing is that, in some cases, it may provide the lowest cost method to acquire certain assets.

Leasing consists of paying a set fee for the use of a durable asset owned by a party other than the user. The owner of the asset is termed the lessor, and the user termed the lessee. Since this arrangement can be viewed as an alternative way to finance the use of an asset, it is called financial leasing.
The Financial Lease
Nearly any kind of asset used in pork production can be leased. Common examples of leased assets include breeding stock, production equipment, and buildings.

A financial lease is a contractual commitment that enables the lessee to acquire the use of an asset in exchange for a stipulated fixed payment to the asset owner, the lessor. The lease is the contractual agreement to which both parties are legally obligated during the lease period.
To clarify the positions of both the lessor and lessee and to help avoid misunderstandings, the lease should be written. A written lease should include:
1.	description of the property by location and a list of exactly what is included;
2.	the expected and permitted use of the property;
3.	provisions for termination of the lease;
4.	timing and amount (or calculation method) of lease payments;
5.	initial maintenance condition of the property;
6.	rights and obligations of the lessor, for example, permission to enter the leased property premises and maintenance obligations;
7.	operating obligations of the lessee. Examples include, who is responsible for repairs, insurance and property taxes;
8.	terms of a buy-out option at end of the lease period or any early buyout agreements; and
9.	an arbitration procedure to settle disagreements that are not resolved by mutual agreement.

Advantages and Disadvantages
Some advantages to the lessee are listed. They may not be valid in all cases, but have the potential to be advantageous in other cases:
1. Leasing may require fewer dollars up front than ownership. Capital assets may be placed in service at an initial cost that may be less than even the minimum 10% down payment commonly associated with ownership.
Cooperative Extension work in Agriculture and Home Economics, state of Indiana, Purdue University and the U. S. Department of Agriculture Cooperating. H. A. Wadsworth, Director, West Lafayette, IN. Issued in furtherance of the acts of May 8 and June 30, 1914. 
The Purdue University Extension Service is an affirmative action/equal opportunity institution.