Guide to Custom Farmwork and Short-Term Equipment Rental

Agdex#:	825
Publication Date:	July 2010
Order#:	10-049
Last Reviewed:	July 2010
History:	(replaces OMAFRA Factsheet, Guide to Custom Farmwork and Short-Term Equipment Rental, Order No. 07-019)
Written by:	J. Molenhuis - Business Analysis and Cost of Production Program Lead/OMAFRA

Table of Contents

• Introduction
• Survey Of Custom Farmwork And Short-Term Equipment Rental Rates Charged In 2009
• Guide To Calculating Custom Farmwork And Short-Term Equipment Rental Rate Charges
• Factors to Consider in a Custom Farmwork Agreement
• Other Considerations
• Summary
• 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 2009
• Guide to Calculating Custom Farmwork Rates and Short-Term Equipment Rental Rates
• Factors to Consider in a 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. 09-035.

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

Own or lease (long-term) equipment

Advantages

• Equipment and operator are 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

• 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.
• Farmer is 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

Rent equipment, short-term

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 are made 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 2009

Table 7, Survey of Custom Farmwork Rates Charged in 2009, shows the results of a survey of the rates charged in 2009 by 275 Ontario custom farmwork operators. The survey included:

• full-time custom operators
• farmers providing custom farmwork as a significant sideline business
• farmers providing limited custom farmwork to neighbours
• farm input suppliers providing 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 2009 across Ontario; use these rates 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 Calculating Custom Farmwork and Short-Term Equipment Rental Rate Charges.

The tables show ranges for the rates, as many factors can cause variations in the rates charged, including:

• 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

Table 8, Survey of Short-Term Equipment Rental Rates Charged in 2009, on page 16, summarizes two sources of short-term tractor rental rates. The first source is 20 reports from custom operators. The second source, used with permission, is taken from Iron Solutions' Eastern Canada Winter 2009 Official Guide, a survey of tractor rental rates charged by Eastern Canadian machinery dealers in 2009.

Survey Details

Results are summarized by province and by six smaller regional areas. Where available, the 2009 provincial average rates are also listed. (The most recent survey before the 2009 survey was taken in 2006.)

Average Rates

An average rate is given when there are at least three reports. The greater the number of reports, the more 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 15th percentile for corn combining with grain buggy is $36/acre and the 85th percentile is $43/acre. This means that 15% of those surveyed charged $36/acre or less and 15% charged more than $43. Seventy per cent (85th-15th percentile) of all those reporting charged between $36 and $43/acre. The average rate charged was $40/acre.

Survey 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

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

Farm managers who use the equipment in their own operations as well as providing custom farmwork to others should calculate costs using the total of own farm and custom acreage and operation hours.

Example calculations are based on market prices and Tables 6, 7 and 8 of this Factsheet. See the OMAFRA Factsheet Budgeting Farm Machinery Costs, Order No. 01-075, for 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 Farm Business Decision Calculators section of the Agricultural Business Management Section of the OMAFRA website: www.ontario.ca/agbusiness.

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

VLife (years) = 5

• Purchase price = $240,000
• VTrade in value = $105,000
• Interest rate = 5.0 %
• Acres/year = 1,600
• Hours per year = 200
• Fuel cost/L = $0.60
• Corn/soy aver. acres/hr = 8
• Average fuel used (L/hr) = 40

* Interest - Interest calculation is the average annual interest cost of the investment (yours and/or the lender's) that is tied up in the machine.

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.

Cash Flow Considerations

The example above 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 from 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 two largest factors affecting price rate, and therefore have the biggest impact on profitability.

Table 4 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.

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

Note: Rental rates may have minimum daily or weekly rates

Table 5, Trade-in values as a percent of purchase cost, and Table 6, Accumulated repair costs as a percent of purchase price, provide information used in the example calculations.

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.

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

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

Factors to Consider in a Custom Farmwork Agreement

Custom hiring is a business arrangement. Write the terms of the arrangement in a formal agreement. If unwritten, the terms are more likely to be misunderstood in the case of a dispute. While written custom hiring agreements have not been common in the past, increased demands for nutrient management plans, quality assurance programs and environmental stewardship records give added incentive beyond the business benefits of written agreements. Consider the following in a custom hiring agreement.

Timeliness

Significant losses can occur if an operation is not started or completed on time. To facilitate planning, include a schedule of operations for both parties in the custom hiring agreement. Such a schedule would be subject to weather conditions and crop maturity.

Operations

Write into the agreement the exact operations to be performed by each party and the machine, materials and labour to be supplied by each.

Rate Schedule

Stipulate the rate for each operation to be performed on the basis of acreage, time (hour, day, week) or total operation performed.
Management

State that both the custom operator and the owner will adhere to appropriate and accepted farming practices in his or her respective part of the farming operations. The contract provides an opportunity to clarify management roles and responsibilities, create mutual understanding and provide a dispute resolution mechanism.

Environment Matters

While the owner is ultimately responsible for activities occurring on the property, regulatory authorities can charge any one of the owner, the tenant farmer or the contract operator for causing environmental damage. It is the responsibility of each party to understand his or her environmental responsibilities. Where the custom farmwork operation carries the risk of an environmental spill, such as in manure or pesticide application, it is important that a contingency plan exists that identifies the containment and clean-up process, which party has the authority to initiate the contingency plan and to which party the clean-up costs are assigned.

Terms of Payment

Stipulate terms of payment for custom operations. Bill the client upon the completion of each custom operation, indicating actual units (hours, acres, etc.) completed, the rate charged per unit, the total charge and the date payment is due.

Termination

Include a minimum period for notice of termination in a custom hiring agreement. State penalties, if any, for termination or for failure to give appropriate notice of termination.

Other Considerations

Insurance

A custom operator may be classified differently from a farmer when insuring equipment. Be clear with the insurance company about which role you are playing if considering doing custom work or renting out equipment.

Workplace Safety and Insurance Board (WSIB)

Custom operators are responsible for carrying appropriate WSIB coverage for their employees. The WSIB issues Clearance Certificates to employers to document this WSIB employee coverage.

WSIB coverage is optional for sole proprietors, partners, independent operators and executive officers of a corporation.

A WSIB Independent Operator Ruling documents that the custom operator is not considered to be an employee of the farmer by the WSIB.

The WSIB deems the operator of the equipment to be an employee of the farmer during the custom farmwork unless the custom equipment operator has either a WSIB Clearance Certificate or a WSIB Independent Operator Ruling.

Farmers should ask the custom operator to see a copy of a WSIB Clearance Certificate or WSIB Independent Operator Ruling prior to the work. If there is no Clearance Certificate or Independent Operator Ruling, custom operators should itemize the labour component of the custom rate charge on the bill so that the farmer can pay the required WSIB premiums on the equipment operator's labour.

For further information regarding WSIB responsibilities, contact the WSIB at 1-888-259-4228.

Licences and Certifications

The custom operator should maintain, as required, any regulated certifications or licences for the equipment and equipment operators involved in the custom work.

Summary

Contracting custom farmwork will continue to provide farm managers with an option to manage machinery costs and technical skills. Developing clear custom farmwork contracts is a benefit to both the farm manager and the custom operator.

This Factsheet is intended as general information, not specific advice concerning individual situations. Individual custom farmwork agreements should be discussed with your lawyer. The Government of Ontario assumes no responsibility for persons using this publication as a basis to draft a custom farmwork agreement or to set custom farmwork and short-term equipment rental rates.
Averages shown in the tables are a simple average of the rates charged in 2009 across Ontario as reported in a survey of Ontario custom farmwork operators. Percentiles show the range of the rates that were charged. There is no assurance that using the average rates reported here will cover the cost of providing the service. Before setting prices, carefully calculate all costs and returns.

References

The author would like to gratefully acknowledge the permission given by the authors of the following publications from which portions of this paper were developed:

Farm Machinery Custom and Rental Rate Guide 2000. Economics and Farm Management Section, Sustainable Production Branch, Saskatchewan Agriculture and Food.

1999 Minnesota Farm Custom Rate Survey. Bill Lazarus, Extension Economist, Department of Applied Economics, University of Minnesota Extension Service.

Acquiring Farm Machinery Services: Ownership, Custom Hire, Rental, Leasing, 2001. William Edwards, extension economist, and Vernon M. Meyer, retired extension agricultural engineer, Iowa State University Extension.

Iron SolutionsTM Eastern Canada Region Winter 2009 Official Guide. Dealer edition.

The author also wishes to thank the custom farm operators who completed the survey of rates charged in 2009.

This Factsheet was updated by John Molenhuis, Business Analysis and Cost of Production Program Lead, Economic Development Division, OMAFRA, Brighton, and originally written by Carl Fletcher, Strategic Business Planning Lead, Economic Development Division, OMAFRA, Guelph.