Guide To Custom Farmwork and Short-Term Equipment Rental

Agdex#:	825
Publication Date:	March 2007
Order#:	07-019
Last Reviewed:	May 2007
History:	Replaces OMAFRA Factsheet 05-071
Written by:	Carl Fletcher - Strategic Planning & Business Development Program Lead/OMAFRA

Table of Contents

1. Introduction
2. Equipment Use Options
3. Survey of Custom Farmwork and Short-term Equipment Rental Rates Charged in 2006
4. Survey Areas
5. Table 1. Custom Farmwork Rate Calculator
6. Table 2. Short-term Equipment Rental Rate Calculator
7. Example 1. Custom Farmwork Rate Calculation
8. Table 3. Cost per Acre Comparison
9. Example 2. Short-term Equipment Rental Rate Calculation
10. Table 4. Trade-In Values as a Percent of Purchase Cost
11. Table 5. Accumulated Repair Costs as a Percent of Purchase Price
12. Example 3. Accumulated Repair Cost Calculation
13. Table 6. Performance, Horsepower and Fuel Requirements of Selected Farm Equipment
14. Sample Custom Farmwork Agreement
15. Summary
16. References

Introduction

This Factsheet provides the following decision-making tools for farm managers and custom farmwork operators to manage the use of equipment and work time to meet production and profit goals:

• Survey of Custom Farmwork and Short-term Equipment Rental Rates charged in 2006
• Guide to Calculating Custom Farmwork Rates and Short-term Equipment Rental Rates
• Factors to Consider in a Custom Farmwork Agreement
• Sample Custom Farmwork Agreement.

Hiring custom farmwork provides an option for farm managers to purchase fieldwork and other services instead of owning the equipment and doing the work. In this Factsheet, a multi-year equipment lease is considered to give the farm manager the same day-to-day control as ownership. For more information on multi-year lease agreements see the OMAFRA Factsheet Leasing Farm Equipment, Order No. 01-003.

For equipment owners, providing custom farmwork services can be the focus of a business, a sideline farming enterprise that spreads equipment ownership costs over more acres, or a marketing tool to complement the sale of other farm inputs.

Equipment Use Options

Option

Farm with owned equipment or multi-year equipment lease

Advantages

• Equipment and operator is ready and available when needed, especially for weather-sensitive operations such as planting, spraying, and harvesting. Timeliness of operation impacts directly on yield, product quality, and farm revenue.
• Farm manager has direct control of operating decisions.
• Farm manager develops and maintains hands-on knowledge of operation.
• Limited risk of weed transfer or biosecurity concerns.

Disadvantages

• Size of the farm business may not be large enough to cover the equipment's ownership and operating costs.
• Equipment replacement rate may not keep pace with new technology.
• The farm may not be able to supply the labour at the time the operation is required.
• Farmer is required to master an additional management skill set.
• Responsible for repairs beyond warranty when owned or as per lease agreement.

Option

Hire custom farmwork

Advantages

• Farm manager gains use of newer and more efficient equipment without full cost of ownership/operating expenses.
• Custom operator provides expertise gained from a wider experience.
• Custom operator maintains required regulatory certification.
• Farmer can be busy elsewhere while custom operator provides service.
• No direct repairs and maintenance costs.

Disadvantages

• Custom operator may not be available at the most optimum time resulting in reduced yield, product quality and revenue.
• Farm manager loses direct control of operation.
• Farm manager is dependent on the availability of custom operators.
• Increased risk of weed transfer and other biosecurity concerns.

Option

Short-term equipment rental

Advantages

• If equipment is available, farm manager controls the operation and the timeliness of the work.
• Farm manager gains the use of equipment without the full cost of ownership and operating expenses.
• Repairs and maintenance as per agreement.

Disadvantages

• Availability of equipment affects timeliness of operation.
• Rental equipment may not be available due to lack of year round demand, or over demand during a short season of use.

Survey Of Custom Farmwork And Short - Term Equipment Rental Rates Charged In 2006

The Survey of Custom Farmwork and Short-term Equipment Rental Rates Charged in 2006, (see related links at the end of the Factsheet) reports on a survey of the rates charged in 2006 by 300 Ontario custom farmwork operators. The survey included:

• full time custom operators
• farmers who provided custom farmwork as a significant sideline business
• farmers who provided limited custom farmwork to neighbours and
• farm input suppliers who provided custom application as a service.

The custom rate charged included the equipment, fuel, and operator cost but excluded the cost of material applied.

The survey shows what rates were charged in 2006 across Ontario. The rates shown should be used as a guide in making management decisions. There is no assurance that using the "average" rates reported here will cover the cost of providing the service. Custom operators should carefully calculate all costs and returns before setting prices. See Guide to Calculate Custom Farmwork and Short-term Rental Equipment Rate Charges.

Ranges are given for the rates, as there are many factors that can cause variations in the rates charged. Rates are influenced by:

• the type, size, age of equipment
• the amount of use (number of acres covered or hours used)
• availability of the equipment in the local area
• field shape, size and topography
• soil conditions
• local tradition.

The Survey of Short-term Equipment Rental Rates Charged in 2006, summarizes two sources of short-term tractor rental rates. The first source is seventeen reports from custom operators. The second source, used with permission, is taken from Iron Solutions' Eastern Canada Winter 2006 Official Guide. These rates are from a survey of tractor rental rates charged by Eastern Canadian machinery dealers in 2006.

Survey Details

Results are summarized on a provincial basis and also by 6 smaller regional areas. Where available the provincial average 2003 rates are also listed. The 2003 survey is the previous survey to the 2006 survey.

Average Rates

An average rate is given when there are at least 3 reports. The greater the number of reports, the greater the summary reflects the market rates.

What are percentiles and how can you use them?
Percentiles have been used to help show the range of the rates that were charged. For example, in the Provincial Summary, the 15^th percentile for corn combining(with grain buggy, no GPS) is $35/acre and the 85^th percentile is $40/acre. This means that 15% of those surveyed charged $35/acre or less and 15% charged more than $40. Seventy percent (85^th -15^th percentile) of all those reporting charged between $35 and $40/acre. The average rate charged was $37/acre.

Survey Areas

Provincial Summary (All Areas)

Area 1
Chatham-Kent, Elgin, Essex, Lambton, Middlesex

Area 2
Brant, Haldimand, Hamilton, Niagara, Norfolk, Oxford

Area 3
Bruce, Dufferin, Grey, Halton, Huron, Peel, Perth, Simcoe, Waterloo, Wellington

Area 4
Durham, Haliburton, Hastings, Kawartha Lakes, Muskoka, Northumberland, Parry Sound, Peterborough, Prince Edward, York

Area 5
Frontenac, Lanark, Leeds-Grenville, Lennox-Addington, Ottawa, Prescott-Russell, Renfrew, Stormont-Dundas-Glengarry

Area 6
Algoma, Cochrane, Kenora, Manitoulin, Nipissing, Rainy River, Sudbury, Thunder Bay, Timiskaming

Figure 1. Survey Areas

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Guide To Calculating Custom Farmwork And Short-term Equipment Rental Rate Charges

Where a farm manager uses the equipment in his or her own operation as well as providing custom farmwork to others, the costs should be calculated using the total of own farm and custom acreage and operation hours.

Example calculations are based on market prices and Tables 4, 5, and 6 found in this Factsheet. The OMAFRA Factsheet Budgeting Farm Machinery Costs, Order No. 01-075, provides additional machinery cost information. Downloadable spreadsheet versions of the Custom Farmwork Rate Calculator and the Short-term Equipment Rental Rate Calculator are available as part of the Computer Management Tools section of the Agricultural Business Management Section of the OMAFRA Web site www.ontario.ca/omafra

Table 1. Custom Farmwork Rate Calculator

Table 2. Short-term Equipment Rental Rate Calculator

Example 1. Custom Farmwork Rate Calculation

The following example calculates a custom farmwork rate for a combine with corn and soybean heads expected to be traded in 5 years.

Life (years) = 5

• Purchase Price = $ 240,000
• Trade in value = $ 105,000
• Interest rate = 5.0 %
• Acres/year = 1600
• Hours per year = 200
• Fuel Cost/L = $ 0.60
• Corn/soy average acres/hr = 8
• Average fuel used (L/hr) = 40

In this example, if the operator combines 1,600 acres at $36/acre, the return to management is $7,000 ($4.38/acre or $35/machine hr.), and the return to labour is $3,910 ($2.44/acre or $19.55/machine hr). The custom farmwork operator also earns a return of 5% interest on the owner's equity in the machinery.

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Cash Flow Considerations

The above example calculates machinery costs and returns to management, labour and investment. The estimated annual depreciation and interest costs total $35,625. From a cash flow point of view the depreciation is not a draw on the bank line. However, in the case of financing, loan payments are a cashflow requirement. Actual loan principal and interest payments will depend on the amount financed and will be different than the figures in the example. It is possible to cash flow actual expenses at a lesser rate than the example but this would come at the cost of lower returns: to management, operator labour, and to the owner's equity tied up in the machine.

The capital cost of the equipment (purchase-trade in values) and the number of acres worked are the 2 largest factors affecting price rate, and therefore have the biggest impact on profitability.

Table 3 shows how volume of acres affects the per acre costs in order to receive total returns equal to the 1,600 acres used in the previous example.

Table 3. Cost per Acre Comparison

Example 2 Short-term Equipment Rental Rate Calculation

The following example calculates a short-term rental rate for the same combine with corn and soybean heads used in Example 1.

Table 4, Trade-in Values as a Percent of Purchase Cost and Table 5, Accumulated Repair Costs as a Percent of Purchase Price provide information used in the example calculations.

Table 4. Trade-in Values as a Percent of Purchase Cost

Source: American Society of Agricultural Engineers Standards, American Society of Agricultural Engineers, 1999

Group 1: Combines, self-propelled forage harvesters.

Group 2: Swathers, mower-conditioners, rotary hay mowers, rotary mower-conditioners.

Group 3: Forage harvesters, balers, bale elevators, tub grinders, augers, grinder-mixers, forage boxes, roller mills.

Group 4: Planters, drills, sprayers.

Group 5: Moldboard plows, chisel plows, cultivators, v-rippers.

Group 6: Disks, harrows, hoes.

Group 7: Manure spreaders, miscellaneous equipment.

Table 5. Accumulated Repair Costs as a Percent of Purchase Price

Source: American Society of Agricultural Engineers Standards, American Society of Agricultural Engineers, 1999

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Example 3. Accumulated Repair Cost Calculation

New Combine Cost

$240,000

Projected use

8,000 acres or 200 hours per year over 5 years

Estimated accumulated repair costs at 1,000 hours

4.2 % of purchase cost (estimated using Table 5)

Repair costs

Approx. $10,000 ($240,000 X 4.2%) over 5 yr for an average of $2,000/yr

Used Machinery

When calculating the depreciation on used machinery, use the actual price paid for the machine minus its expected trade-in or salvage value, divided by the expected life of the machine on your farm. Increase repair rates to levels appropriate for the age or number of hours on the machine. Expect to have higher than normal repair expenses in the first year of ownership of a used machine as you bring it back into top operating shape.

Table 6. Performance, Horsepower and Fuel Requirements of Selected Farm Equipment