Managing a Custom Harvesting Business Sarah Roth Sr. Extension Assoc. Penn State University Penn State is committed to affirmative action, equal opportunity,

Managing a Custom Harvesting Business

Sarah RothSr. Extension Assoc.Penn State University

Penn State is committed to affirmative action, equal opportunity, and the diversity of its workforce

A little bit about me…

• Sr. Extension Associate in the Dept. of Agricultural Economics & Rural Sociology

• 4 years at Penn State

• Farm Business Management– Custom Work– Business Planning– Marketing Planning

A little bit more about me…

• Main audiences– Dairy producers– Custom Operators in PA, OH, NY, MD

Agenda

• Advantages of Hiring Custom Operators

• Building a Successful Custom Operator/Client Working Relationship

• Pricing

• How do Changing Costs Affect the Bottom Line

• Questions

Producer issues

Should I Have My Forage Custom Harvested?

• Is labor availability/experience an issue?

• Is timeliness a problem with current equipment?

• Are repair costs high?• How many acres of

forages need to be harvested?

Labor inexperience can be costly

• Machinery could get broken

• Harvest efficiency can be compromised– Field efficiency– Overall timeliness– Storage quality

Poor harvest timeliness can ruin quality forage

• Crops become too mature

• Proper storage is compromised

Repair costs impact production costs

• Heavier usage of machinery increases repair & maintenance expenses

• Frequent breakdowns prevent machinery from being fully utilized– Fewer acreage covered

Accumulated Repair Costs for Newer vs. Older Forage Harvesters

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Forage Harvester Comparisons:

• 2-row self-propelled ($159,900)



Prices from Univ. of MN, “Minnesota Farm Machinery Economic Cost Estimates for 2001”

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6-row SP

Acreage & machinery need to be matched

• Excess capacity is simply money out of you pocket in terms of ownership costs

Forage Harvester Field Capacity (acres/hour)

Harvester Width Speed Field Efficiency Field Capacity

2-row SP 5 ft 3.5 mph 70%

(Range: 1.5 - 6.0) (Range: 65 - 80%) 1.80

3-row SP 7.5 ft 3.5 mph 70%

(Range: 1.5 - 6.0) (Range: 65 - 80%) 2.54

6-row SP 15 ft 3.5 mph 70%

(Range: 1.5 - 6.0) (Range: 65 - 80%) 5.41

10-row SP 25 ft 3.5 70% 7.27

Field capacity (A/hr) = [width (ft) * ground speed (mph) * field efficiency (%)]/8.25

Forage Harvester Capacity Needed

Area to cover 10,000 acres

Probability of a working day 40 %

Hours for this work 18 h/day

Window of opportunity 150 days

Capacity needed 9.3 acres/h

vs.






SP Combine Field Capacity (acres/hour)

Combine Width Speed Field Efficiency Field Capacity

#1 5 ft 3.0 mph 80%

(Range: 1.5 - 6.0) (Range: 65 - 80%) 1.45

#2 7.5 ft 3.0 mph 80%

(Range: 1.5 - 6.0) (Range: 65 - 80%) 2.18

#3 15 ft 3.0 mph 80%

(Range: 1.5 - 6.0) (Range: 65 - 80%) 4.36

#4 25 ft 3.0 80% 7.27

Field capacity (A/hr) = [width (ft) * ground speed (mph) * field efficiency (%)]/8.25

SP Combine Capacity Needed

vs.











Solutions to these issues

• Purchase higher capacity forage harvester

• Change crop rotation

• Custom hire

Solutions to these issues

• Purchase higher capacity forage harvester

• Change crop rotation

•Custom hire

The Producer’s Custom Harvesting Goal

Acquire quality forage/feed

(same or better) for lower cost of

harvest

Advantages of Hiring Custom Operators

6 Advantages

Free up labor for remaining enterprises Free up management for remaining

enterprises Concentrate efforts in fewer enterprises

(specialization) Obtain higher quality products Cut input and/or production costs Increased production

Free up labor

This allows producers to:

• Time to attend to details in other parts of the business

• Develop specialized knowledge instead of being jack-of-all trades

• Don’t have unqualified employees driving equipment

# 1

Free up management

• Time to analyze data and make more informed decisions

• Take advantage of educational opportunities

# 2

Concentrate efforts

• Specialization– Focus on fewer

(one or two) enterprises

– Dairy (milk production), heifers, hogs, beef, etc.

# 3

Obtain higher quality products

• Custom operators provide:– Specialized

knowledge in the services they perform

– Timely service– Consistent quality

# 4

Cut input/production costs

• No need to own machinery only used for a short period of time

• Depreciation• Interest• Repairs• Oil, Fuel• Taxes, Insurance, Housing

• Don’t have to hire part-time summer help

# 5

Increase production

• Higher quality forages can increase milk production

• Increased production or better milk component levels generate more gross revenue

# 6

The Custom Operator’s Role in Building a Successful Relationship

with Producer Clients

Strategies for the following

Marketing Your Services

Making the Deal

Before Work Starts

During Work

When the Work is Completed


Attracting Potential Clients

Present a professional image both when working and while out in the community

Attend professional meetings/conferences

Use services such as the Custom Operators Directory, regional extension directories, professional association directories


Providing Service Information

Brochures and/or Website Services provided Cost tables Types of equipment used

Have a knowledgeable contact person who can answer questions

Making the Deal

Have a Contract !

Types of Contracts Written Verbal

Making the Deal

Contract items to include or discuss

Methods of payment Payment schedule Responsibility for providing supplies such as

baler twine, ag bags, inoculants, etc. Responsibility for providing labor and equipment Anticipated schedule of work How delays will be handled

Before Work Starts

Have all equipment and machinery in good working condition

Have a supply of commonly needed parts Make sure all supplies such as inoculants

or other chemicals are ready Make sure all labor is available

During Your Work

Avoiding disputes

Review the contract

Ask and/or answer any questions that may have come up since the last time you spoke with the producer

During Your Work

Resolving disputes

Keep disputes private

Use a mediator if necessary

During Your Work

Work Schedule

Keep producers informed

Let producers know when you expect to arrive at their farm – both day and time

Inform producers if you must make an adjustment to your schedule

Don’t make promises you can’t keep

During Your Work

Provide information

If harvesting, provide information such as tons per acre, dry matter, length of chop, bushels per acres, etc.

Provide relevant information for other activities performed

During Your Work

Delays

Let producers know quickly

Weather Adjust work schedule if possible

Equipment/Labor Find/have replacement labor available if needed Quickly repair equipment or obtain replacement

equipment while broken equipment is being fixed

When The Work is Completed

Getting Paid

Work with the producer to find a payment schedule that is acceptable to both of you


Contracting for next season

Offer early contracting

Possible incentives for contracting early


Seek ideas for improvement

Ask how your services could be more valuable to the client

Ask what other services the client could use

10 Minute Break

How to price services?

What we’ll cover

• Cost of production

• Choosing a price

Before you can price your services…

You MUST know your

COST OF PRODUCTION !

Cost of production

• Will not cover how to calculate cost of production in detail

• Will discuss what affects cost of production– Examples to demonstrate specific points

Cost of Production

• Plenty of resources that can help you determine YOUR cost of production– Local extension specialists– Spreadsheets online– Fact sheets

What affects cost of production?

• Machinery costs – Ownership expenses– Operating expenses– Must balance repair costs with efficiency

factors when choosing machinery

• Extent of services offered

• Number of clients/acreage

Managing Machinery Costs

These are fixed costs which result from owning the machinery – Depreciation– Interest– Taxes– Insurance– Housing

Ownership expenses

Managing Machinery Costs

These are variable costs which are incurred from operating the machinery – Repairs– Labor– Fuel– Lubrication (oil)– Materials/supplies

Operating Expenses

Extent of services offered

Will you be offering services beyond basic harvesting?

– Transportation to silo, bunker, bags, etc.– Ensiling (upright or bags) or packing (bunker)– Application of silage additives?– Grain drying– Other

Number of clients

• Spread out fixed costs– ↑ # of clients…↓ fixed costs per unit

• Location– Machinery & equipment transportation costs

• Acreage– More clients w/ fewer acreage– Fewer clients w/ greater acreage

Why acreage is important

• Spreading fixed costs over more acres lowers cost of production

• Increases return on investment

Other business expenses that need to be covered in your price

• Office operations

• Taxes

• Non-machinery Insurance

• Unemployment

• Benefits– Health insurance, 401K/retirement,

paid vacation

What else should influence your price?

• Basis for fees– Per acre– Per hour– Per ton

• Profit margin– Must cover living &

business reinvestment

Fee basis

Will fees be charged on a per ton, per acre, or hourly basis?

• Per ton basis will make revenue more variable– Increased yield…increased revenue– Poor yield…lesser revenue

Fee Basis

• Per acre basis will result in a more stable, predictable income

– Assuming you know exactly how many acres you will be harvesting

Fee Basis

• Hourly basis– Higher yield…increased time to harvest =

increased revenue

– Lower yield…less time needed to harvest = decreased revenue

– Must balance with acreage being harvested

Profit Margin

• Many operators forget to factor this into their pricing calculations

• How much do you want and/or need for the following?– Family living expenses (if not

included in labor wages)– Reinvestment into the

business

Other Pricing Methods

• What is your neighbor/competition charging?

• State custom rate guides

• What will producers pay?

Use these numbers only for comparison!

Pricing ExampleYearly Expenses Amount

Machinery Ownership

Depreciation $ 198,333.33

Interest $ 40,788.91

Taxes, Insurance, Housing $ 19,600.00

Machinery Operating

Repairs & Maintenance $ 169,000.00

Fuel $ 116,160.00

Lubrication $ 1,340.28

Labor $ 228,000.00

General Business Expenses

Taxes $ 8,000.00

Non-machinery Insurance $ 20,000.00

Unemployment contributions $ 6,840.00

Benefits $ 36,000.00

Miscellaneous

Business Operating Supplies $ 5,000.00

Other $ 20,000.00

Total $ 849,062.52

Additional Information

Acres harvested (2 harvesters) 20,000

Cutterhead hours (2 harvesters) 1,500

Yield per acre (tons) 8

Pricing Example Cont.Income needed to cover expenses

Per year $ 849,062.52

$ per acre $ 42.45

$ per ton $ 5.31

$ per cutterhead hour $ 566.04

Income needed to receive 5% profit above costs

Per year $ 891,515.65

$ per acre $ 44.58

$ per ton $ 5.57



Per year $ 933,968.77

$ per acre $ 46.70

$ per ton $ 5.84


Price Risk

• Can come in a variety of forms

• Changes in – Acres harvested– Crop Yield– Operating expenses– Amount of competition

How do changing costs affect the bottom line?

• Increasing operating expenses decrease your profit margin

• Need to know the range of variability in input/operating prices that you can afford with given rates

Examples

• The following examples have the following assumptions:– 2 forage harvester– Supporting machinery & equipment– Labor wage = $9.50/hour

Fuel Price Change ExampleYearly Expenses

Scenario 1 Amount

Scenario 2 Amount

Machinery Ownership

Depreciation $ 198,333.33 $ 198,333.33

Interest $ 40,788.91 $ 40,788.91

Taxes, Insurance, Housing $ 19,600.00 $ 19,600.00

Machinery Operating

Repairs & Maintenance $ 169,000.00 $ 169,000.00

Fuel $ 116,160.00 $ 174,240.00

Lubrication $ 1,340.28 $ 1,340.28

Labor $ 228,000.00 $ 228,000.00


Taxes $ 8,000.00 $ 8,000.00

Non-machinery Insurance $ 20,000.00 $ 20,000.00

Unemployment contributions $ 6,840.00 $ 6,840.00

Benefits $ 36,000.00 $ 36,000.00

Miscellaneous

Business Operating Supplies $ 5,000.00 $ 5,000.00

Other $ 20,000.00 $ 20,000.00

Total $ 849,062.52 $ 927,142.52


Acres harvested (2 harvesters) 20,000 20,000

Cutterhead hours (2 harvesters) 1,500 1,500

Yield per acre (tons) 8 8

Fuel Price Change ExampleYearly Expenses

Scenario 1 Amount

Scenario 2 Amount

Machinery Ownership

Depreciation $ 198,333.33 $ 198,333.33

Interest $ 40,788.91 $ 40,788.91


Machinery Operating


Fuel $ 116,160.00 $ 174,240.00

Lubrication $ 1,340.28 $ 1,340.28

Labor $ 228,000.00 $ 228,000.00


Taxes $ 8,000.00 $ 8,000.00



Benefits $ 36,000.00 $ 36,000.00

Miscellaneous


Other $ 20,000.00 $ 20,000.00

Total $ 849,062.52 $ 927,142.52





Increase of $78,080

Fuel Example Cont.Income needed to cover expenses

Per year $ 849,062.52 $ 927,142.52

$ per acre $ 42.45 $ 46.36

$ per ton $ 5.31 $ 5.79

$ per cutterhead hour $ 566.04 $ 618.10


Per year $ 891,515.65 $ 973,499.65

$ per acre $ 44.58 $ 48.67

$ per ton $ 5.57 $ 6.08



Per year $ 933,968.77 $ 1,019,856.77

$ per acre $ 46.70 $ 50.99

$ per ton $ 5.84 $ 6.37



Per year $ 849,062.52 $ 927,142.52

$ per acre $ 42.45 $ 46.36

$ per ton $ 5.31 $ 5.79



Per year $ 891,515.65 $ 973,499.65

$ per acre $ 44.58 $ 48.67

$ per ton $ 5.57 $ 6.08



Per year $ 933,968.77 $ 1,019,856.77

$ per acre $ 46.70 $ 50.99

$ per ton $ 5.84 $ 6.37


Need $3.91/acre, $0.48/ton, or $52.06/cutterhead hour more just to breakeven


Per year $ 849,062.52 $ 927,142.52

$ per acre $ 42.45 $ 46.36

$ per ton $ 5.31 $ 5.79



Per year $ 891,515.65 $ 973,499.65

$ per acre $ 44.58 $ 48.67

$ per ton $ 5.57 $ 6.08



Per year $ 933,968.77 $ 1,019,856.77

$ per acre $ 46.70 $ 50.99

$ per ton $ 5.84 $ 6.37


Prices @ 10% profit enough to cover a $1 increase in fuel price

20% Operating Increase Example20% increase in

operating costs

Yearly Expenses Amount Amount

Machinery Ownership

Depreciation $ 198,333.33 $ 198,333.33

Interest $ 40,788.91 $ 40,788.91


Machinery Operating


Fuel $ 116,160.00 $ 139,392.00

Lubrication $ 1,340.28 $ 1,608.34

Labor $ 228,000.00 $ 273,600.00


Taxes $ 8,000.00 $ 8,000.00



Benefits $ 36,000.00 $ 36,000.00

Miscellaneous


Other $ 20,000.00 $ 20,000.00

Total $ 849,062.52 $ 971,962.58





20% Operating Increase Example20% increase in

operating costs

Yearly Expenses Amount Amount

Machinery Ownership

Depreciation $ 198,333.33 $ 198,333.33

Interest $ 40,788.91 $ 40,788.91


Machinery Operating


Fuel $ 116,160.00 $ 139,392.00

Lubrication $ 1,340.28 $ 1,608.34

Labor $ 228,000.00 $ 273,600.00


Taxes $ 8,000.00 $ 8,000.00



Benefits $ 36,000.00 $ 36,000.00

Miscellaneous


Other $ 20,000.00 $ 20,000.00

Total $ 849,062.52 $ 971,962.58





Increase of $122,900.06

20% Operating Increase ExampleIncome needed to cover expenses

Per year $ 849,062.52 $ 971,962.58

$ per acre $ 42.45 $ 48.60

$ per ton $ 5.31 $ 6.07



Per year $ 891,515.65 $1,020,560.70

$ per acre $ 44.58 $ 51.03

$ per ton $ 5.57 $ 6.38



Per year $ 933,968.77 $1,069,158.83

$ per acre $ 46.70 $ 53.46

$ per ton $ 5.84 $ 6.68



Per year $ 849,062.52 $ 971,962.58

$ per acre $ 42.45 $ 48.60

$ per ton $ 5.31 $ 6.07



Per year $ 891,515.65 $1,020,560.70

$ per acre $ 44.58 $ 51.03

$ per ton $ 5.57 $ 6.38



Per year $ 933,968.77 $1,069,158.83

$ per acre $ 46.70 $ 53.46

$ per ton $ 5.84 $ 6.68


Need $6.15/acre, $0.76/ton, or $81.94/cutterhead hour more just to breakeven


Per year $ 849,062.52 $ 971,962.58

$ per acre $ 42.45 $ 48.60

$ per ton $ 5.31 $ 6.07



Per year $ 891,515.65 $1,020,560.70

$ per acre $ 44.58 $ 51.03

$ per ton $ 5.57 $ 6.38



Per year $ 933,968.77 $1,069,158.83

$ per acre $ 46.70 $ 53.46

$ per ton $ 5.84 $ 6.68


Prices not enough to cover a 20% increase in operating expenses

How can you protect your profits?

• Regularly analyze your business expenses

• Price high enough to cover any expected changes in operating expenses

How can you protect your profits?

• Add surcharge fees into your contract

• Lock in prices all possible items that may fluctuate in price– Fuel, oil, supplies

Resources

• Penn State– http://www.das.psu.edu/dcn/catforg/– http://farmmanagement.aers.psu.edu

• University of Wisconsin– http://www.uwex.edu/ces/crops/uwforage/

dec_soft.htm

Visit online:http://farmmanagement.aers.psu.edu

Or

Contact me at:Phone: 814-863-8645

Email: [email protected]

Penn State is committed to affirmative action, equal opportunity, and the diversity of its workforce

http://farmmanagement.aers.psu.edu/

mailto:[email protected]

Hourly Repair Costs for Three Forage Harvesters

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Documents

Managing a Custom Harvesting Business Sarah Roth Sr. Extension Assoc. Penn State University Penn State is committed to affirmative action, equal opportunity,