January 11, 2005
TIRED OF TAKING on increasingly high cash rents? If so, consider the possibility of selling your services as a custom farmer.
Custom farming can be a good way for established farmers to increase their income. According to John Baker, agricultural attorney with Iowa State University, it is ideal for farmers who have excess machinery capacity but don't have additional ground to farm. “If you are thinking about what you can do to add income, custom farming would be as good a way as I can think of if you have the machinery and time to do it,” Baker says.
If that description fits you, here are the steps you need to take to get into the business and build your customer base.
FACTOR IN TIME.
First you need to determine whether you have the time to take on additional acres. You can determine this by looking at the number of suitable fieldwork days that can be expected at different times of the year.
“In the Midwest, we estimate 60% of the days in the fall from about mid-September to about mid-November are suitable for harvest,” says William Edwards, agricultural extension economist with Iowa State University. “So as a rule of thumb, you would need to get all your harvesting done in around 30 to 35 working days.”
Planting and tillage have shorter windows. Both of these operations need to be completed in 20 to 25 working days. If you spend less than the number of allowable days farming the land you currently own or lease, then you should be able to handle more acres. However, you also need to factor in travel time and access to additional labor when needed. And you will need reliable machinery that doesn't break down.
IDENTIFY YOUR MARKET.
Next you need to determine if there is a market for your services. According to Jerry Warner, chief management officer for Farmers National Company, Omaha, NE, there are several different audiences for custom farming. One is professional farm managers. “We are always seeking to work with the best operators,” Warner says. “So if you are looking at a relationship there, farm managers could be a good connection.”
He advises farmers to research who the farm managers are in their area, send them a resume and follow up with a phone call.
Retiring farmers are another potential market, Warner says. Many of these landowners want to stay involved in the production side of the business but don't want to do all of the work themselves. They may hire custom farmers to do some of the operations.
A third audience is other landowners who have recently purchased land.
KNOW YOUR COSTS.
Once you have established a market, the next step is to determine whether the venture is feasible. Iowa State's Baker says potential custom farmers should talk with someone from a small business development center to establish cost and income statements. “If you are looking for extra income and it turns out that all you are doing is covering your costs, then you are just doing recreational tillage,” he says.
Other sources of business information include the U.S. Department of Economic Development, the U.S. Department of Commerce and the U.S. Department of Agriculture. Your local farm business management center, available through most land grant universities, also can provide help.
Most agricultural extension offices publish farm machinery cost estimates, which can be used to determine costs.
SET YOUR RATE.
The farm machinery cost estimates used to establish your costs also can be used to determine your rates. However, the cost estimates do not include profit or funds to cover other expenses such as the truck to bring fuel to the tractor while it is in the field, according to William Harryman, extension educator, University of Illinois. As a result, actual custom rates may need to be higher than the direct machine costs in order to cover all costs and management time.
Many custom farmers rely on custom rate surveys published by their local land grant universities to establish rates. The surveys show the average rates charged for custom farming on individual farming operations in the state.
Rates can be either a single blanket fee or a separate fee for each operation. Some extension experts recommend charging a separate fee for each service.
According to Iowa State's Edwards, most contacts for obtaining custom work come about informally. “Simply let people know you are looking for work,” Edwards says. “Professional farm managers can help match up owners and operators.”
Some custom operators find all the work they need just by word of mouth. But if you are aggressively looking for more work, Edward says you need to get your name out. “I know one custom operator who puts his farm name on trucks used to haul grain so people see it going up and down the road,” he says. “It is kind of a moving billboard.”
Web sites and classified ads in newspapers and farm publications are other ways to advertise your services. Or you can print cards or flyers describing your services and post them in places frequented by farm owners.
SEAL THE DEAL.
Once you have lined up your customers, you need to work out a written contract that outlines what will be done and when. Such a contract can prevent misunderstandings and provide evidence of the nature of the agreement for income and other tax purposes.
“Someone once said, and it is true, oral agreements aren't worth the paper they are written on,” says Iowa State's Baker. “How are you going to prove what you agreed to? You want to have in writing what it is you are going to do.”
You should prepare the contract with the landowner. A sample contract is available at Iowa State University's extension publications Web site, www.extension.iastate.edu/Publications/FM1823.pdf. In general, the contract should outline the following points:
Number of acres to be farmed and their location.
Field operations to be performed.
Circumstances under which the plan may be altered to allow for such tasks as replanting, extra pesticide applications, or rotary hoeing.
Person responsible for purchasing supplies and having them delivered, and the procedure for reimbursement.
Time and date of harvesting.
Location of storage or point of sale.
Person responsible for drying and handling grain into storage.
When payment will be made, which is typically so many days after a written itemized statement of work is completed.
Other provisions, such as bonus or incentive payments, contractor's right to subcontract, or owner's right to hire a different contractor.
MAKE IT LEGAL.
Getting into custom farming also entails a number of legal requirements. “This is a business just like any other business,” Baker says. “So the first thing you need to do is establish a business entity that will shield you from personal liability.”
Such entities include a limited liability company such as an S or C corporation. This type of entity should be set up by an attorney who specializes in agricultural business.
In addition, custom farmers who apply pesticides need to have a pesticide application certificate.
Finally, you need adequate farm insurance that covers against insurable risks while doing work on another person's farm. Types of coverage advised include liability insurance that covers damage to machinery or property.
Principle to practice
HOW ONE FARM FAMILY MAKES CUSTOM FARMING WORK
Petry Farms of Rochelle, IL, began custom farming for a farm management company after cash renting with the same company. “They asked us if we wanted to custom farm 120 acres for one of their tenants,” Erik Petry recalls. Since then the operation has grown to more than 400 acres.
The Petrys, who already were farming 3,000 acres of their own (Erik is in partnership with his father, Terry), knew they had the machinery capacity to handle the extra ground. So after viewing the land, they decided to take it on.
Their custom farming business, in certain years, has included more than 2,000 acres. “It works out nice,” Petry says. At that volume, they can still use their existing line of equipment and get by with just a few seasonal employees during planting and harvest.
“At some point you have to start thinking about equipment upgrades and how many additional employees you want to hire,” Petry says. “And more ground means increasing my workload which in turn means time away from my family.”
This year the Petrys are down to custom farming 400 acres, requiring only three additional part-time employees for the entire operation at planting and harvest.
When charging for services, they use the rates published by the University of Illinois.
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