Guide to Custom Farmwork and Short-Term Equipment Rental
Table of Contents
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:
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
Own or lease (long-term) equipment
Hire custom farmwork
Rent equipment, short-term
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:
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:
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.
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.)
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.
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
* 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
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
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.
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.
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.
Write into the agreement the exact operations to be performed by each party and the machine, materials and labour to be supplied by each.
the rate for each operation to be performed on the basis of acreage, time (hour,
day, week) or total operation performed.
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.
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.
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.
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.
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.
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.
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.
For more information:
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