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Ask a Margins Expert

RSS By: Chris Barron

Chris BarronHave a margins question? Through this blog, you will gain insight into improving your bottom line, as a margins expert answers questions and provides farm business advice.

 

Does Custom Farming Really Pay?

Apr 11, 2011
Many of us are willing to do some additional custom work as part of our operation in order to spread equipment cost over more acres. It doesn't seem that difficult to custom plant or harvest some additional acres, however, it's important to consider whether the additional income is enough to outweigh the costs of providing the service.
 
There are several factors which some farmers use to justify the need for additional custom work. These justifications include relationships, the need to spread costs over more acres, the desire to farm a larger acre base, and the possibility that custom jobs may lead to land or rental opportunities in the future. These justifications may be enough reason to consider additional custom activities, but they tend to be very difficult to quantify.
 
Analyze the specific reasons to do particular custom jobs. Be sure to fully understand your equipment cost per acre, for your primary operation. If you’re fuzzy on your costs for your operation, how will you determine an appropriate rate for a custom job?
 
One of the most enjoyable parts of farming for all of us is doing the field work. By spending some time calculating costs and structuring a margin plan, we can take an enjoyable opportunity and enhance it with additional profit. Don’t mistake activities for achievement.To just go out and cover more acres without a comprehensive margin plan may limit your ability to be profitable.
 
Here is a list of questions to consider when deciding whether or not custom work is appropriate for your operation.
  1. If I do custom work could it impact the timeliness and consistency of my own operation?
  2. What is the appropriate rate to charge for my services rather than just using the local university custom rate averages?   (Know your own costs!)
  3. How will covering more acres with my machinery affect my equipment replacement plan?
  4. Is there a possibility that my operations productivity, quality, and efficiency could be distracted by custom work?
  5. Do I have the proper insurance coverage for the additional risk exposure while performing custom operations?
  6. Will the custom income be enough to offset profits of equal time spent working on tasks on my own operation?
  7. Can I charge enough to generate an adequate rate of return to meet my profit goals?
 
These are just a few questions to consider when evaluating the benefits and challenges of providing custom work services.
 
When you sit down to calculate your cost in order to determine the appropriate rates, there are several key components to evaluate.
  1. Fuel
  2. Labor
  3. Repairs
  4. Depreciation / Replacement Costs   (An entire topic of its own, blog coming soon.)
  5. Interest
  6. Taxes and Insurance
  7. Trade-off value / Cost of being away from your operation.
 
Every operation has a unique set of opportunities when calculating these expenses. Invest some time calculating the specific expenses for your individual situation. Once you know your specific costs you will be able to structure rates in such a way that provides you with your desired return on investment.
 
If those rates are not acceptable to potential customers, you may be better off keeping your equipment at home. Doing custom work because it's an enjoyable activity could be an expensive hobby. On the other hand, if you know your costs and can team up with other operations, the mutual benefits can pay great dividends to everyone involved.
 

I have several tools available which help to calculate your equipment cost. If you're interested in these tools feel free to contact me. Good luck with your spring work and be safe! 

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