Published: April 11, 2008 10:07 am            

Farm Programs: Expected custom rate increases seen in 2008 survey

Originally published in the April 4, 2008, print edition.

Due to the high cost of investment in farm machinery, an ever-increasing number of farmers are hiring other farmers to provide some or all of their operation’s machinery resources. This is especially true with new and younger farmers, and with children who decide to start farming with their parents.

Also, some land investors are choosing to operate the farm themselves rather than cash renting the land to another farmer. In that case, the landowner is generally hiring a farmer to provide necessary tillage, planting and harvesting crop operations under a custom farming agreement.

Some farmers also hire specific farm operations through a custom arrangement with another farmer, such as combining or hay baling. Many farmers negotiate these type of custom rate and custom farming arrangements in the spring.

Custom rates increasing

As would be expected with increasing fuel costs, average 2008 custom rates for farm work have also risen, compared to 2007 and 2006 custom rates. Most custom rates for farm work in 2008 are listed at 5 to 10 percent above the rates of a year earlier, with an average increase of about 7 percent. Increasing costs for new and used machinery is also a factor in the higher custom rates.

These results are based on the annual “Iowa Farm Custom Rate Survey” that is coordinated and analyzed by Iowa State University. The survey sampled 185 custom operators, farm managers and ag lenders on what they expected 2008 custom farm rates to be for various farm operations. The survey summary lists the average custom rate and the range for various tillage, planting, fertilizer and chemical application, grain harvesting and forage harvesting functions on the farm. The survey includes many miscellaneous farming practices, lists average machine rental rates for some equipment and includes a formula for estimating average machinery rental rates. The survey also lists average custom farming rates for corn, soybeans and wheat. Over the years, the average custom rates for farms in southern Minnesota have been close to the average Iowa custom rates.

2008 custom rates

Average 2008 farm custom rates for some typical tillage, planting and harvesting practices, as well as custom farming rates, are listed in the table that accompanies this column. The complete 2008 “Iowa Farm Custom Rate Survey” is available online at www.extension.iastate.edu/agdm/crops/pdf/a3-10.pdf.

All listed custom rates in the survey results include fuel and labor, unless listed as rental rates or otherwise specified. These average rates are only meant to be a guide for custom rates, as actual custom rates charged may vary depending on continued increase in fuel costs, availability of custom operators, timeliness, field size, etc.

Custom farming agreements

An alternative to leasing farmland is a “custom farming agreement.” In such an agreement, the custom operator agrees to perform all the machine operations on the owner’s land in exchange for a set fee or rate. (Note: Average custom farming rates for 2008 are listed in the 2008 custom rate survey table.) The landowner pays for all seed, fertilizer, chemicals, crop insurance and other input costs, receives all grain produced and all eligible farm program payments on the land, and is responsible for storing and marketing the grain.

One obvious advantage to the custom operator is that a custom farming agreement provides some extra farm income, with little or no additional operating capital or farm machinery investment. Fuel, lubrication and repairs are usually the only added costs. In addition, custom farming offers a fixed return per acre to the custom operator, and although there is some possibility of higher repair bills, this is minor compared with the price and yield risks typically faced by a farmer in a normal cash rental contract.

Of course, in a good year, profits from a custom farming agreement will be lower than under most cash rental leases; however, in this era of much-higher land rental rates there is much more risk to the farmer with a cash lease as compared to a custom agreement with a landowner.

Landowners also find several advantages to a custom farming agreement. Landowners with small acreages can make most of the crop production and grain marketing decisions without the investment into a full line of farm machinery. The landowner does not have to negotiate land rental rates or worry about collecting lease payments, since the owner receives all of the crop. The landowner does have to pay the farmer an agreed upon per-acre fee for the custom farming services by specified dates. The landowner is considered to be the material participant for income tax purposes, and the landowner is typically entitled to all government farm program payments.

Key issues with custom farming agreements

Although the concept of a custom farming agreement is simple, close communication between the custom operator and the landowner is essential. A written contract for the custom farming agreement should definitely be prepared that specifies the amount of payment by the landowner to the custom operator, and all other pertinent details. The following are some points to consider for custom farming agreement.

• The custom farming agreement should specify the payment amount per acre that the landowner will pay the custom operator, and should list the payment dates.

• There needs to be an accurate count on the number of acres that will be under the custom farming agreement for payment purposes, and so that the farmer can accurately plan tillage, planting and harvesting schedules.

• The normal field practices to be included under the custom farming agreement should be listed — tillage, planting, weed control, harvesting, etc. Typically, these agreed upon practices are part of the per-acre custom farming payment for the year that is negotiated between the custom operator and the landowner.

• Additional tillage trips or replanting due to weather conditions, or added spraying applications of pesticides to control weeds, insects or diseases, which are provided by the custom operator, are usually charged to the landowner at a custom rate per acre that is over and above the base custom farming rate.

• Timing of planting and harvesting operations should be discussed and negotiated between the custom operator and the landowner prior to the growing season. This can become a tenuous issue, especially in years with challenging weather conditions.

• The custom operator may be asked for advice by the landowner regarding the seed corn hybrid or soybean variety to plant, fertilizer rates, chemical applications, levels of crop insurance coverage or grain marketing decisions. However, the final decisions on these items lie with the landowner, and the custom operator needs to be careful not to take responsibility for the final authority on those decisions.

• Typically, the harvested grain of the landowner is delivered by the custom operator to a farm storage facility owned or rented by the landowner, or to an agreed upon area grain elevator, as part of the custom farming agreement. Any grain deliveries beyond the local area usually result in the landowner paying an extra custom rate charge for grain hauling. Also, if the landowner uses the custom operators’ grain drying and handling facilities, there is typically an added charge for these services.

For more details on Custom Farming Agreements and other farm machinery information, refer to the Iowa State University “Ag Decision Maker” website, www.extension.iastate.edu/agdm.

        

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