Due to the high cost of investment in farm machinery, an ever-increasing number of farm operators are hiring other farm operators to provide some — or all — of their machinery resources for their farm operation. This is especially true with new and younger farm operators, as well as with children who decide to start farming with their parents. In addition, some land investors are choosing to operate their farm themselves rather than cash renting the land to another farm operator — thus hiring a farm operator under a custom farming agreement.
Some farm operators also hire specific farm operations through a custom arrangement with another farm operator, such as combining, grain hauling or hay baling. Many farm operators negotiate these types of custom rate and custom farming arrangements in the spring of the year, while others wait until harvest is completed.
One of the best resources for average custom rates is the annual “Iowa Farm Custom Rate Survey” coordinated and analyzed by Iowa State University. Earlier this year, 559 custom operators and farm managers were sampled regarding expected 2021 custom farm rates to be for various farm operations. There were 118 useable surveys returned. The survey summary lists the average custom rate, as well as a range, for various tillage, planting, fertilizer and chemical application, grain harvesting, and forage harvesting functions on the farm.
The survey also includes many miscellaneous farming practices, average per hour farm labor rates, some machinery rental rates, including a formula for calculating rental rates. The survey lists the average custom farming rates for corn, soybeans and small grain. The average custom rates for farm operations in most other areas of the upper Midwest tend to be very close to the average Iowa custom rates.
Based on the Iowa State data, average custom rates for tillage, planting and harvest operations in 2021 are expected to decrease by about 3 percent compared to the rates for similar operations in 2020. The custom farming rates for corn and soybean production are expected to decrease by about 1 percent compared to a year earlier. The cost for new and used machinery has increased rapidly in the early months of 2021, which together with increasing fuel costs and higher labor charges, may impact final 2021 custom rates. These factors may result in custom operators trying to more fully cover their increasing expenses for custom operations later in 2021, resulting in steady to slightly higher final average custom rates by year-end.
The complete “2021 Iowa Farm Custom Rate Survey” for all farming practices is available on-line at the Iowa State University web site: https://www.extension.iastate.edu/agdm/crops/html/a3-10.html
Custom Farming Agreements
One alternative to leasing more farmland may be a “Custom Farming Agreement” with a land owner. In a typical custom farming agreement, the custom operator agrees to perform all the machine operations on the owner’s land in exchange for a set fee or rate. (Average custom farming rates for 2021 are listed on the 2021 Custom Rate Survey Table.) In a typical custom farming agreement, the landowner pays for all seed, fertilizer, chemicals, crop insurance, and other input costs; receives the proceeds from all grain that is produced, as well as all eligible farm program payments on the land; and is responsible to store and market the grain. The custom operator provides the machinery and labor for the crop operations.
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 farm operator in a normal cash rental contract. Of course, in a good year, profits from a custom farming agreement will likely be lower than under most cash rental leases. However, in this era of much higher land rental rates and increasing crop input costs, there is a much lower risk to a farm operator with a custom farming agreement, as compared to a cash lease at high rental rates.
Landowners also find several advantages to a well-designed 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 proceeds. The landowner does have to pay the farm operator 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, crop insurance indemnity payments, and other government payments.
Although the concept of a custom farming agreement is simple, close communication between the custom operator and the landowner is essential. It is definitely recommended to have a written contract for the custom farming agreement which specifies the amount of payment by the landowner to the custom operator, and all other pertinent details.
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 under the custom farming agreement for payment purposes. This will enable the farm operator to accurately plan tillage, planting and harvesting schedules.
The normal field practices to be included under a custom farming agreement should be listed (including tillage, planting, weed control, harvesting, hauling grain, etc.). Typically, these agreed-upon practices are part of the per acre custom farming agreement and payment per acre which is negotiated between the custom operator and the farm owner.
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, which is over and above the base custom farming rate. The 2021 Iowa Farm Custom Rate Survey contains appropriate charges per acre for additional farm practices performed.
Timing of planting and harvesting operations should be discussed and negotiated between the custom operator and the landowner prior to the growing season; and possibly included in the written contract. 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, farm program sign-up choice, or grain marketing decisions. However, the final decisions on these type of items does lie with the farm owner/operator. The custom operator needs to be cautious on offering advice and should not take responsibility for the final authority on those decisions. Potential conflicts could arise between the custom operator and farm owner.
Typically, as part of the custom farming agreement, 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. 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 operator’s 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 : http://www.extension.iastate.edu/agdm/
Kent Thiesse is a government farm programs analyst and a vice president at MinnStar Bank in Lake Crystal, Minn. He may be reached at (507) 726-2137 or email@example.com.