BE AWARE THAT AVERAGE CUSTOM RATES MAY NOT COVER ALL YOUR COSTS.

As a graduate student in ag economics, Scott City, KS, farmer Aaron Beaton looked at whether typical custom rates “truly covered all costs.” He and his family do quite a bit of custom farming, and he wanted to be sure “we were making money on it, rather than giving away our time and depreciation for free.”

His 2003 study found that average published custom rates in Kansas were actually about 30% lower than the full economic cost of owning and operating machinery. A 2001 study by University of Illinois Ag Economist Gary Schnitkey found similar results.

There are many reasons why average custom rates may be lower than farmers' actual machinery costs, says Kevin Dhuyvetter, Kansas State University Extension economist. For example, neighbor-to-neighbor work may be less timely, lowering its value. Farmers doing custom work on the side may charge only for time and fuel, considering their fixed costs to be sunk costs.

Custom farmers often use their machinery over more acres, thereby cutting their per-acre costs. Custom fertilizer and herbicide applicators may bundle prices, taking more markup on chemicals than on machinery operations.

BASE YOUR RATES ON FULL COST ACCOUNTING.

A full accounting of crop machinery costs should include the following fixed and variable costs, Dhuyvetter says: machinery repairs; gas, fuel, oil; pickup expense allocated to crop production; machinery depreciation; machinery hire; machinery insurance; machinery shelter; opportunity interest on machinery investment; and machinery labor.

Many state Extension services offer online spreadsheets to help you calculate your machinery costs.

ALLOW FOR DEPRECIATION AND OPPORTUNITY COST.

When calculating machinery ownership costs, use market depreciation rather than IRS depreciation. Aaron Beaton, the Kansas custom farmer, scours classified ads and auction results to estimate the market value of his machinery inventory. “I try to be fair and accurate, otherwise I'm just shooting myself in the foot. If I don't allow enough depreciation, I might not be coming out on my rates.”

Opportunity interest — the revenue foregone had your machinery capital been invested in the next best enterprise — is usually calculated as a percentage of machinery market value. Dhuyvetter suggests allowing 6-8% for opportunity interest.

FACTOR IN REPAIR TIME ON OLDER MACHINERY.

Well maintained farm machinery “can last just about forever,” Minnesota's Carlson says, but there's usually a trade-off between equipment depreciation and repairs. So if you run older machinery, consider “your time spent keeping the machine repaired and maintained.” Often, “that may be about the same as depreciation on a newer machine,” he says.

PUT A FAIR VALUE ON YOUR LABOR.

You may love your work, but that doesn't make it worth less, Carlson says. Minnesota custom strip-tiller Dan Morgan values his labor at “close to $20/hr.” Despite tools like auto-steer, Carlson adds, “you still need an experienced operator with knowledge and skill.”

PENCIL IN A PROFIT.

If you build a labor charge into your custom rates, as well as depreciation, opportunity interest and other non-cash costs, should you also build in profit?

“You need to decide that for yourself,” Carlson says, “but many would like to see at least a 5%return on investment.”

HOLD DOWN COSTS.

Another profit strategy is “to get your costs down so that you can charge the going rate,” Carlson says.

Per-acre machinery costs vary widely from farm to farm, Dhuyvetter notes, even among similar-sized operations. For example, about a quarter of farms enrolled in the Kansas Farm Business Management Program performed machinery operations for less than average custom rates, according to a 2003 report. So if you expect to offer competitive custom rates and still make a profit, “you'd better make sure your costs are in the bottom 25%,” he says.

FOCUS ON FUEL.

When diesel fuel costs soared in 2008, Dhuyvetter received calls from farmers asking how much they should adjust their custom rates for higher fuel prices. “That told me they didn't know how much fuel they were burning per acre.” Fuel expense is one of the easier components of machinery cost to figure, so make it a point to do the math, he says. And if you don't have a good idea of your tractor's fuel economy, “you should consider measuring it,” Carlson adds.

ACCOUNT FOR TIMELINESS.

Before you line up custom work, think about how many days you are likely to have available, Carlson says. In Minnesota, for example, you have about 10 working days to complete timely planting.

Dan Morgan, who does custom strip-tillage in southeast Minnesota, figures he gets about 20 fall days to strip-till and band nutrients. Last fall, he and his brother Dennis strip-tilled 3,000 acres. Because of the delayed harvest, they didn't get to another 500 acres they had lined up. Those fields will have to wait until spring, a less desirable time to strip-till.

If you are doing custom work as a sideline, ask yourself if timeliness on your own farm will suffer, Dhuyvetter says. If so, that cost must be factored into your rate. On the other hand, “don't expect to be able to charge top rates if you are coming a week late.”

ADJUST RATES FOR SPECIAL CIRCUMSTANCES.

The 2009 harvest had custom operators puzzling over what to charge for the “mud factor,” Dhuyvetter says. Harvesting in muddy conditions cuts productivity, raises fuel use and increases combine wear and tear. Dhuyvetter estimates that custom operators “probably need to increase rates by about 25% because of fighting mud,” although he adds that conditions will vary a lot from one situation to another.