AgDM newsletter article, April 1997
Don Hofstrand, retired extension value added agriculture specialist, email@example.com
Custom farming is becoming more popular.† This increased popularity has given rise to new ways of developing custom agreements.
Traditionally, a custom farming agreement involves the landowner making a fixed cash payment to the custom operator in return for doing various field operations. This is either contracted for individually on each field operation or in total for all growing and harvesting operations.† Typical custom rates are provided in the Decision File, Custom Rate Guide Survey.† Custom Farming: An Alternative to Leasing provides guidelines for developing a custom agreement.
Custom farming disadvantages
There may be disadvantages to custom farming.† Timeliness, especially during planting and harvesting, is important and landowners often complain that the custom operations are not done when they should be.†
Custom farming involves a high cash outlay by the landowner.† Not only are the seed, fertilizer, and other expenses paid in cash, but all field operations are also converted to fixed cash payments.† The cash outlay per acre, including land payments, can easily reach $300 per acre.
Also, custom farming tends to be high risk for the landowner.† All costs are fixed but the returns (yield and selling price) are extremely variable.
In addition, custom operators often complain that the fixed payments they receive for their efforts are little more than wages, giving them little incentive to do a good job.
Share of the crop
Many of these disadvantages can be corrected if an arrangement is developed where the custom operator receives a share of the crop instead of a fixed cash payment.† With this arrangement, the custom operator has a vested interest in the crop.† In other words, the custom operatorís income is affected by how well he/she does the field operations.† If field operations are done properly and in a timely manner, crop yields are higher which increases the returns of both the landowner and custom operator.†
Giving the operator a share of the crop in lieu of a fixed cash payment reduces the cash outlay of the owner, reducing his/her cash investment in the growing crop.† This method also reduces the risk exposure of the landowner.† If crop yields and/or prices are low, the amount going to the custom operator is reduced.† In addition, this approach gives the custom operator a stake in the outcome rather than just a fixed cash wage.†††
Computing a fair division
The procedure below can be used to compute an equitable division of the crop between the custom operator and the landowner.† An example is shown but space is provided to enter your own figures (see Table 1).†
First, list all of the expenses incurred by the landowner such as seed, fertilizer, etc. A management fee of 10 percent of the cost of seed, fertilizer, etc. is included to cover the cost of selecting, ordering, and delivering production inputs.† A land charge for the year can be based on local cash rental rates.
The custom operatorís cost for machinery and labor for growing and harvesting the crop are estimated by using custom rates for the whole crop (Decision File A3-10).† A hauling charge (custom) is included for delivering the grain to either a near-by market or farm storage.
The custom operatorís share of the crop is computed by dividing his/her share of the costs by the total for all costs.† In the example, the custom operatorís share of the costs of producing an acre of corn following soybeans is $81.† The total cost is $324.† So, the custom operatorís share of the corn crop is 25 percent ($81 / $324).† The landowner receives 75 percent ($243 / $324) of the crop.† Also, the custom operator should receive the same percentage (ie. 25 percent) of the government program PFC (production flexibility contract) payment.
If the division of expenses and costs is different than outlined above, the distribution of the crop between the custom operator and the landowner changes.†
In the example, it is assumed that the landowner does the selecting, ordering, and delivering of the production inputs.† However, in many situations, the custom operator is responsible for these tasks.† So, part or all of the management charge would be listed under the customer operator rather than the landowner.† The custom operatorís costs would be re-figured (e.g. $74 + 7 + 11 = $92) and he/she would receive a larger share of the crop (e.g. $92 / $324 = 28 percent of the corn crop rather than 25 percent).
There may be an advantage of having these management tasks performed by the custom operator.† For example, the landowner may be eligible for volume discounts if the input purchases are combined with the operatorís input purchases on his/her operation.† Also, less coordination is needed between the custom operator and the landowner and the custom operator is assured that the production inputs will be available when he/she is ready to do the field operations.†
The cost of crop insurance is not included in the analysis.† It is assumed that each party will insure their share of the crop separately.
If each party is responsible for drying their own share of the corn crop, the cost of corn drying is not included in the arrangement.† However, in some situations, the corn is dried on the farm.† For example, assume that the corn is dried in the landowner's dryer.† Here the custom operator would pay the landowner (ie. custom charge) for drying his/her share of the crop.† As an alternative, the operator may oversee the drying process in exchange for using the landownerís drying facilities and the dryer fuel and electricity cost is divided in the same proportion as the crop is divided.†† †
Sometime the grain is stored on the farm.† In this situation, the operator may pay the owner a fee (Decision Files Iowa Custom Rate Guide Survey or Building Rental and Contracting Rates) for storing his/her share of the grain.† An additional arrangement for hauling the grain to market may be needed.
If all the grain goes to market, the division of the grain can be done precisely because all of the grain is weighed.† The partyies know the exact amount of production from the farm rather than relying on estimates.