April 24, 2023
As we move into another crop year, it is prudent to review custom rates and their components.
Expense items typically incorporated into custom rate charges include fuel, lubrication, repairs, insurance, labor, depreciation and interest. The largest component of custom rate charges is typically depreciation and interest. Depreciation results from wear, obsolescence and machine age. Economic depreciation rather than tax depreciation should be used. Depreciation for tax purposes is often accelerated compared to economic depreciation.
To compute economic depreciation, information pertaining to economic useful life, list price and salvage value are needed. Economic useful life is not necessarily the same as service life. Many farms trade machines before they are completely worn out. Salvage value is an estimate of the sale value of the machine at the end of the useful life.
Interest should be included in expense items, regardless of whether debt is incurred when purchasing the tractor or machine. Interest represents the opportunity cost associated with using scarce funds to purchase a tractor or machine. Expense items used to compute custom charges are typically recorded on an hourly basis and then converted to a per-acre basis using the number of acres that can be covered per hour, such as how many acres of corn you could plant per hour or how many acres of land you could disk per hour.
Adjusting custom rates
If any of the expense items discussed here are excluded from a custom charge, these items would need to be subtracted from the custom charge that includes all items to obtain a custom charge that excludes particular expense items. For example, let’s assume that the custom charge for planting corn is $22 per acre. If an operator provides the tractor and labor, the expenses related to these items would need to be subtracted from this amount to obtain a custom charge that excludes tractor expenses for repairs, fuel, lubricants, insurance, depreciation and interest.
The latest custom rates available for Indiana can be found online. This publication contains information on land preparation operations, fertilizer and chemical application, planting operations, and harvesting operations.
In summary, custom rates include fuel, lubrication, repairs, insurance, labor, depreciation and interest on the tractor and machinery used in the operation. If any of these items are not included in the operation, they would need to be subtracted from the published custom rate. More information pertaining to related topics can be found on the website for the Purdue Center for Commercial Agriculture.
Langemeier is a Purdue Extension agricultural economist and associate director of the Purdue Center for Commercial Agriculture.
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