Managing a Custom Harvesting Business Sarah Roth Sr. 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

Forage Harvester Comparisons: 2-row self-propelled ($159,900) 3-row self-propelled ($165,600) 6-row self-propelled ($236,600) Prices from Univ. of MN, “Minnesota Farm Machinery Economic Cost Estimates for 2001”

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) HarvesterWidthSpeedField EfficiencyField Capacity 2-row SP5 ft3.5 mph70% (Range: )(Range: %) row SP7.5 ft3.5 mph70% (Range: )(Range: %) row SP15 ft3.5 mph70% (Range: )(Range: %) row SP 25 ft3.5 70% 7.27 Field capacity (A/hr) = [width (ft) * ground speed (mph) * field efficiency (%)]/8.25

Forage Harvester Capacity Needed Area to cover10,000acres Probability of a working day40% Hours for this work18h/day Window of opportunity150days Capacity needed9.3acres/h vs. Area to cover5,000acres Probability of a working day40% Hours for this work18h/day Window of opportunity150days Capacity needed4.6acres/h

SP Combine Field Capacity (acres/hour) CombineWidthSpeedField EfficiencyField Capacity #15 ft3.0 mph80% (Range: )(Range: %)1.45 #27.5 ft3.0 mph80% (Range: )(Range: %)2.18 #315 ft3.0 mph80% (Range: )(Range: %)4.36 #4 25 ft3.080% 7.27 Field capacity (A/hr) = [width (ft) * ground speed (mph) * field efficiency (%)]/8.25

SP Combine Capacity Needed vs. Area to cover5,000acres Probability of a working day40% Hours for this work18h/day Window of opportunity150days Capacity needed4.6acres/h Area to cover12,000acres Probability of a working day40% Hours for this work18h/day Window of opportunity150days Capacity needed11.1acres/h

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

Marketing Your Services 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

Marketing Your Services 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

When The Work is Completed Contracting for next season  Offer early contracting  Possible incentives for contracting early

When The Work is Completed 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 Example Yearly ExpensesAmount Machinery Ownership Depreciation $ 198, Interest $ 40, Taxes, Insurance, Housing $ 19, Machinery Operating Repairs & Maintenance $ 169, Fuel $ 116, Lubrication $ 1, Labor $ 228, General Business Expenses Taxes $ 8, Non-machinery Insurance $ 20, Unemployment contributions $ 6, Benefits $ 36, Miscellaneous Business Operating Supplies $ 5, Other $ 20, Total $ 849, 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, $ per acre $ $ per ton $ 5.31 $ per cutterhead hour $ Income needed to receive 5% profit above costs Per year $ 891, $ per acre $ $ per ton $ 5.57 $ per cutterhead hour $ Income needed to receive 10% profit above costs Per year $ 933, $ per acre $ $ per ton $ 5.84 $ per cutterhead hour $

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 Example Yearly Expenses Scenario 1 Amount Scenario 2 Amount Machinery Ownership Depreciation $ 198, Interest $ 40, Taxes, Insurance, Housing $ 19, Machinery Operating Repairs & Maintenance $ 169, Fuel $ 116, $ 174, Lubrication $ 1, Labor $ 228, General Business Expenses Taxes $ 8, Non-machinery Insurance $ 20, Unemployment contributions $ 6, Benefits $ 36, Miscellaneous Business Operating Supplies $ 5, Other $ 20, Total $ 849, $ 927, Additional Information Acres harvested (2 harvesters)20,000 Cutterhead hours (2 harvesters)1,500 Yield per acre (tons)88

Fuel Price Change Example Yearly Expenses Scenario 1 Amount Scenario 2 Amount Machinery Ownership Depreciation $ 198, Interest $ 40, Taxes, Insurance, Housing $ 19, Machinery Operating Repairs & Maintenance $ 169, Fuel $ 116, $ 174, Lubrication $ 1, Labor $ 228, General Business Expenses Taxes $ 8, Non-machinery Insurance $ 20, Unemployment contributions $ 6, Benefits $ 36, Miscellaneous Business Operating Supplies $ 5, Other $ 20, Total $ 849, $ 927, Additional Information Acres harvested (2 harvesters)20,000 Cutterhead hours (2 harvesters)1,500 Yield per acre (tons)88 Increase of $78,080

Fuel Example Cont. Income needed to cover expenses Per year $ 849, $ 927, $ per acre $ $ $ per ton $ 5.31 $ 5.79 $ per cutterhead hour $ $ Income needed to receive 5% profit above costs Per year $ 891, $ 973, $ per acre $ $ $ per ton $ 5.57 $ 6.08 $ per cutterhead hour $ $ Income needed to receive 10% profit above costs Per year $ 933, $ 1,019, $ per acre $ $ $ per ton $ 5.84 $ 6.37 $ per cutterhead hour $ $

Fuel Example Cont. Income needed to cover expenses Per year $ 849, $ 927, $ per acre $ $ $ per ton $ 5.31 $ 5.79 $ per cutterhead hour $ $ Income needed to receive 5% profit above costs Per year $ 891, $ 973, $ per acre $ $ $ per ton $ 5.57 $ 6.08 $ per cutterhead hour $ $ Income needed to receive 10% profit above costs Per year $ 933, $ 1,019, $ per acre $ $ $ per ton $ 5.84 $ 6.37 $ per cutterhead hour $ $ Need $3.91/acre, $0.48/ton, or $52.06/cutterhead hour more just to breakeven

Fuel Example Cont. Income needed to cover expenses Per year $ 849, $ 927, $ per acre $ $ $ per ton $ 5.31 $ 5.79 $ per cutterhead hour $ $ Income needed to receive 5% profit above costs Per year $ 891, $ 973, $ per acre $ $ $ per ton $ 5.57 $ 6.08 $ per cutterhead hour $ $ Income needed to receive 10% profit above costs Per year $ 933, $ 1,019, $ per acre $ $ $ per ton $ 5.84 $ 6.37 $ per cutterhead hour $ $ % profit enough to cover a $1 increase in fuel price

20% Operating Increase Example 20% increase in operating costs Yearly ExpensesAmount Machinery Ownership Depreciation $ 198, Interest $ 40, Taxes, Insurance, Housing $ 19, Machinery Operating Repairs & Maintenance $ 169, $ 202, Fuel $ 116, $ 139, Lubrication $ 1, $ 1, Labor $ 228, $ 273, General Business Expenses Taxes $ 8, Non-machinery Insurance $ 20, Unemployment contributions $ 6, Benefits $ 36, Miscellaneous Business Operating Supplies $ 5, Other $ 20, Total $ 849, $ 971, Additional Information Acres harvested (2 harvesters)20,000 Cutterhead hours (2 harvesters)1,500 Yield per acre (tons)88

20% Operating Increase Example 20% increase in operating costs Yearly ExpensesAmount Machinery Ownership Depreciation $ 198, Interest $ 40, Taxes, Insurance, Housing $ 19, Machinery Operating Repairs & Maintenance $ 169, $ 202, Fuel $ 116, $ 139, Lubrication $ 1, $ 1, Labor $ 228, $ 273, General Business Expenses Taxes $ 8, Non-machinery Insurance $ 20, Unemployment contributions $ 6, Benefits $ 36, Miscellaneous Business Operating Supplies $ 5, Other $ 20, Total $ 849, $ 971, Additional Information Acres harvested (2 harvesters)20,000 Cutterhead hours (2 harvesters)1,500 Yield per acre (tons)88 Increase of $122,900.06

20% Operating Increase Example Income needed to cover expenses Per year $ 849, $ 971, $ per acre $ $ $ per ton $ 5.31 $ 6.07 $ per cutterhead hour $ $ Income needed to receive 5% profit above costs Per year $ 891, $1,020, $ per acre $ $ $ per ton $ 5.57 $ 6.38 $ per cutterhead hour $ $ Income needed to receive 10% profit above costs Per year $ 933, $1,069, $ per acre $ $ $ per ton $ 5.84 $ 6.68 $ per cutterhead hour $ $

20% Operating Increase Example Income needed to cover expenses Per year $ 849, $ 971, $ per acre $ $ $ per ton $ 5.31 $ 6.07 $ per cutterhead hour $ $ Income needed to receive 5% profit above costs Per year $ 891, $1,020, $ per acre $ $ $ per ton $ 5.57 $ 6.38 $ per cutterhead hour $ $ Income needed to receive 10% profit above costs Per year $ 933, $1,069, $ per acre $ $ $ per ton $ 5.84 $ 6.68 $ per cutterhead hour $ $ Need $6.15/acre, $0.76/ton, or $81.94/cutterhead hour more just to breakeven

20% Operating Increase Example Income needed to cover expenses Per year $ 849, $ 971, $ per acre $ $ $ per ton $ 5.31 $ 6.07 $ per cutterhead hour $ $ Income needed to receive 5% profit above costs Per year $ 891, $1,020, $ per acre $ $ $ per ton $ 5.57 $ 6.38 $ per cutterhead hour $ $ Income needed to receive 10% profit above costs Per year $ 933, $1,069, $ per acre $ $ $ per ton $ 5.84 $ 6.68 $ per cutterhead hour $ $ 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 – – University of Wisconsin – _soft.htm

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