COLUMNISTS

Focus on Ag: Finalizing 2022 farm machinery custom rate payments

Kent Thiesse
Farm Management Analyst
Kent Thiesse

Many farm operators provide some type of custom work or use of farm machinery to other farmers during the growing season, and payment is usually made following the completion of the harvest season. Sometimes, it can be difficult to arrive a fair custom rate for the certain farming practices, or for the use of various pieces of machinery. This could be the case in a year such as 2022, when the cost of machinery operation for diesel fuel, repairs, and labor have increased substantially from the beginning of the year until year-end.

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 the needed machinery resources for their farm operation. This is especially true with new and younger farm operators, as well as with children that decide to start farming with their parents. In addition, some land investors are choosing to operate a farm themselves rather than cash renting the land to another farm operator, and thus they are hiring a farm operator under a custom farming agreement.

One of the best resources for average custom rates is the annual “Iowa Farm Custom Rate Survey” that is coordinated and analyzed by Iowa State University. Each year in January, custom operators and farm managers are sampled regarding the expected farm custom rates for various farm operations. The custom rate summary, which is usually released in late February, lists the average custom rate, as well as a range in custom rates, for various tillage, planting, fertilizer and chemical application, grain harvesting, and forage harvesting functions on the farm. The Iowa Custom Rate Survey, which also includes many miscellaneous farming practices and a formula for calculating rental rates. is probably the most widely used custom rate information that is available in the Upper Midwest. The complete 2022 “Iowa Farm Custom Rate Survey” for all farming practices is available on-line at the following Iowa State University web site: https://www.extension.iastate.edu/agdm/crops/html/a3-10.html

The average custom rates for farm operations in most areas of the Upper Midwest tend to be very close to the average Iowa custom rates. All listed custom rates in the Iowa survey results include fuel and labor, unless listed as rental rates or otherwise specified. These average rates are only meant to be a guide for custom rates, as actual custom rates charged may vary depending on increases in fuel costs, availability of custom operators, timeliness, field size, etc. In a year such as 2022 that has featured significant increases in operation costs for farm machinery, it may be justified and necessary to adjust some of those custom rates above the median or average rates.

Based on the Iowa State data, average custom rates for tillage, planting, and harvest operations in 2022 were expected to increase by about 7 percent, compared to the rates for similar operations in 2021. The cost for new and used machinery increased rapidly in the past 12 months, which together with increasing fuel costs and higher labor charges, accounts for the increases in 2022 custom rates. It should be noted that many of these factors have continued to increase during 2022, which may result in custom operators increasing their final custom rates to even higher levels by year-end to fully cover the increasing expenses for custom operations. Good communications between the custom operators and farmer are very important in finalizing custom rates.

All listed custom rates in the Iowa Survey results include fuel, labor, repairs, depreciation, insurance, and interest, unless listed as rental rates or otherwise specified. The average price for diesel fuel in the survey was assumed to be $3.33 per gallon; however current prices for diesel fuel are considerably higher than that price. A fuel price increase of $.50 per gallon would cause most custom rates to increase by approximately five percent. These average rates are only meant to be a guide for custom rates, as actual custom rates charged may vary depending on continued increase in fuel costs, availability of custom operators, timeliness, field size, etc. and could be adjusted later in the year due to changes in economic factors.

Custom farming agreements

Some farm operators hire custom work for specific farm operations with another farm operator, such as planting or combining, while other operators hire the typical crop field work through a custom farming agreement. The Iowa State Custom Rate Survey includes the average custom farming rates for corn, soybeans, and small grain. Custom farming agreements usually include tillage, planting, some weed control, harvesting, and delivering grain to a specified location. Usually, any other additional or necessary farm practices that are performed during the year are paid outside of the custom farming agreement. Many farm operators negotiate these types of custom farming arrangements in the Spring of the year, while others wait until harvest is completed.

Although the concept of a custom farming agreement seems simple, close communication between the custom operator and the landowner is essential to a solid plan. It is recommended that a custom farming agreement include a written contract that specifies the typical cropping practices to be performed and the amount of payment per acre to be paid to the custom operator by the landowner, and all other pertinent details for the custom farming arrangement. The custom farming rates for corn and soybean production were expected to increase by about 1.5 percent compared to a year earlier; however, similar to the other custom rates, larger increases may be justified to cover increased costs of fuel, labor, etc. For more details on custom farming agreements, please refer to the Iowa State University “Ag Decision Maker” Web Site at: http://www.extension.iastate.edu/agdm/

Calculating farm machinery costs

The University of Minnesota periodically releases a publication titled: “Machinery Cost Estimates”, which was last updated in April of 2022. This summary looks at the use-related (operating) cost of farm machinery, as well as the overhead (ownership) costs of the machinery. The use-related expenses include fuel, repairs and maintenance, labor, and depreciation. Overhead costs include interest, insurance, and housing, which are calculated based on pre-set formulas. This publication can help serve as a good guide to help farm operators estimate their “true cost” of farm machinery ownership.

The U of M machinery cost publication and other resources available on the costs of farm machinery ownership are available at: https://wlazarus.cfans.umn.edu/william-f-lazarus-farm-machinery-management. Another good resource for estimating the costs of farm machinery ownership is a publication from Iowa State University titled: “Estimating Farm Machinery Costs”, which includes a worksheet to calculate farm machinery costs. This publication is available at: https://www.extension.iastate.edu/agdm/crops/pdf/a3-29.pdf

Check grain bins

Most corn and soybean producers across the Midwest completed the 2022 harvest season quite early and may now need to pay close attention to grain that is stored in on-farm grain bins for potential storage problems. Due to deferred grain sales and the potential for higher corn and soybean prices in the coming months, a large amount of corn and soybeans is likely being stored on the farm following harvest in 2022. Most of the crop was placed into grain bins at a variety of outside temperatures, some grain at fairly warm temperatures and other grain at much cooler temperatures. This grain temperature difference, along with fluctuations in recent outside temperatures, can result in wide temperature variations in the final grain temperature within grain bins. This can lead to moisture migration in the bin, which could potentially result in significant grain spoilage if the situation is not properly addressed. There have already been reports of grain going out of condition in some areas.

Farm operators should run aeration fans periodically to equalize the grain bin temperatures, which will help prevent this situation from occurring. It is also very important to check grain bins on a regular basis for any potential storage issues, and to address those issues promptly. Otherwise, there can be considerable damage to grain that is in storage, which can result in a significant financial loss to the farm operator.

For additional information contact Kent Thiesse, farm management analyst and senior vice president, MinnStar Bank, Lake Crystal, Minn., at 507-381-7960 or kent.thiesse@minnstarbank.com.