Managing a Custom Harvesting Business

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					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

Accumulated Repair Costs for Newer vs. Older Forage Harvesters
$700

Total repair cost per $1,000 of purchase price

$600 $500 $400 $300 $200 $100 $0
0 200 400 600 800 1000 1200 1400 1600 1800 2000 2200 2400 2600 2800 3000 3200 3400 3600 3800 4000

new SP old SP

Harvester age (hours)

Hourly Repair Costs for Newer vs. Older Forage Harvesters
$0.50 $0.45 $0.40 $0.35 $0.30 $0.25 $0.20 $0.15 $0.10 $0.05 $0.00
0 200 400 600 800 1000 1200 1400 1600 1800 2000 2200 2400 2600 2800 3000 3200 3400 3600 3800 4000

Hourly repair cost per $1,000 of purchase price

new SP old SP

Harvester age (hours)

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”

Accumulated Repair Costs for Three Forage Harvesters
$120,000

$100,000

Total repair cost

$80,000 2-row SP $60,000 3-row SP 6-row SP $40,000

$20,000

$0
0 200 400 600 800 1000 1200 1400 1600 1800 2000 2200 2400 2600 2800 3000 3200 3400 3600 3800 4000

Harvester age (hours)

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 2-row SP Width 5 ft Speed 3.5 mph
(Range: 1.5 - 6.0) 3-row SP 7.5 ft 3.5 mph (Range: 1.5 - 6.0) 6-row SP 15 ft 3.5 mph (Range: 1.5 - 6.0) 10-row SP 25 ft 3.5

Field Efficiency 70%
(Range: 65 - 80%) 70% (Range: 65 - 80%) 70% (Range: 65 - 80%) 70%

Field Capacity

1.80

2.54

5.41 7.27

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

Forage Harvester Capacity Needed

Area to cover Area to cover 10,000 acres Probability of a working day

5,000

acres

Probability of a working day

40

%

40

%

vs.
Hours for this work 18 h/day

Hours for this work

18

h/day

Window of opportunity

150

days

Window of opportunity

150

days

Capacity needed

9.3 acres/h

Capacity needed

4.6 acres/h

SP Combine Field Capacity (acres/hour)
Combine #1 Width 5 ft Speed 3.0 mph
(Range: 1.5 - 6.0) #2 7.5 ft 3.0 mph (Range: 1.5 - 6.0) #3 15 ft 3.0 mph (Range: 1.5 - 6.0) #4 25 ft 3.0

Field Efficiency 80%
(Range: 65 - 80%) 80% (Range: 65 - 80%) 80% (Range: 65 - 80%) 80%

Field Capacity

1.45

2.18

4.36 7.27

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

SP Combine Capacity Needed

Area to cover

12,000

acres

Area to cover

5,000

acres

Probability of a working day

40

%

Probability of a working day

40

%

vs.
Hours for this work 18 h/day Hours for this work 18 h/day

Window of opportunity

150

days

Window of opportunity

150

days

Capacity needed

11.1 acres/h

Capacity needed

4.6 acres/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


#1

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

#2

Free up management

• Time to analyze data and make more informed decisions • Take advantage of educational opportunities

#3

Concentrate efforts
• Specialization
– Focus on fewer (one or two) enterprises – Dairy (milk production), heifers, hogs, beef, etc.

#4

Obtain higher quality products
• Custom operators provide:
– Specialized knowledge in the services they perform – Timely service – Consistent quality

# 5 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

#6

Increase production

• Higher quality forages can increase milk production • Increased production or better milk component levels generate more gross revenue

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

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

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 Expenses
Machinery Ownership

Amount

Depreciation
Interest Taxes, Insurance, Housing Machinery Operating Repairs & Maintenance Fuel Lubrication

$ 198,333.33
$ $ 40,788.91 19,600.00

$ 169,000.00 $ 116,160.00 $ 1,340.28

Labor
General Business Expenses

$ 228,000.00

Taxes
Non-machinery Insurance

$
$

8,000.00
20,000.00

Unemployment contributions
Benefits Miscellaneous Business Operating Supplies Other

$
$

6,840.00
36,000.00

$ $

5,000.00 20,000.00

Total
Additional Information

$ 849,062.52
20,000
1,500 8

Acres harvested (2 harvesters)
Cutterhead hours (2 harvesters) Yield per acre (tons)

Pricing Example Cont.
Income needed to cover expenses Per year $ per acre $ 849,062.52 $ 42.45

$ per ton
$ per cutterhead hour

$
$

5.31
566.04

Income needed to receive 5% profit above costs
Per year $ 891,515.65

$ per acre
$ per ton $ per cutterhead hour

$
$ $

44.58
5.57 594.34

Income needed to receive 10% profit above costs Per year $ per acre $ per ton $ 933,968.77 $ $ 46.70 5.84

$ per cutterhead hour

$

622.65

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 Machinery Ownership Scenario 1 Amount Scenario 2 Amount

Depreciation
Interest

$ 198,333.33
$ 40,788.91

$
$

198,333.33
40,788.91

Taxes, Insurance, Housing
Machinery Operating

$

19,600.00

$

19,600.00

Repairs & Maintenance
Fuel Lubrication Labor General Business Expenses Taxes Non-machinery Insurance

$ 169,000.00
$ 116,160.00 $ 1,340.28

$
$ $ $

169,000.00
174,240.00 1,340.28 228,000.00

$ 228,000.00

$ $

8,000.00 20,000.00

$ $

8,000.00 20,000.00

Unemployment contributions
Benefits

$
$

6,840.00
36,000.00

$
$

6,840.00
36,000.00

Miscellaneous
Business Operating Supplies $ 5,000.00 $ 5,000.00

Other

$

20,000.00

$

20,000.00

Total
Additional Information Acres harvested (2 harvesters) Cutterhead hours (2 harvesters) Yield per acre (tons)

$ 849,062.52
20,000 1,500 8

$

927,142.52
20,000 1,500 8

Fuel Price Change Example
Yearly Expenses Machinery Ownership Scenario 1 Amount Scenario 2 Amount

Depreciation
Interest

$ 198,333.33
$ 40,788.91

$
$

198,333.33
40,788.91

Taxes, Insurance, Housing
Machinery Operating

$

19,600.00

$

19,600.00

Repairs & Maintenance
Fuel Lubrication Labor General Business Expenses Taxes Non-machinery Insurance

$ 169,000.00
$ 116,160.00 $ 1,340.28

$
$ $ $

169,000.00
174,240.00 1,340.28 228,000.00

Increase of $78,080

$ 228,000.00

$ $

8,000.00 20,000.00

$ $

8,000.00 20,000.00

Unemployment contributions
Benefits

$
$

6,840.00
36,000.00

$
$

6,840.00
36,000.00

Miscellaneous
Business Operating Supplies $ 5,000.00 $ 5,000.00

Other

$

20,000.00

$

20,000.00

Total
Additional Information Acres harvested (2 harvesters) Cutterhead hours (2 harvesters) Yield per acre (tons)

$ 849,062.52
20,000 1,500 8

$

927,142.52
20,000 1,500 8

Fuel Example Cont.
Income needed to cover expenses

Per year
$ per acre $ per ton

$ 849,062.52
$ $ 42.45 5.31

$
$ $

927,142.52
46.36 5.79

$ per cutterhead hour

$

566.04

$

618.10

Income needed to receive 5% profit above costs Per year $ per acre $ 891,515.65 $ 44.58 $ $ 973,499.65 48.67

$ per ton
$ per cutterhead hour

$
$

5.57
594.34

$
$

6.08
649.00

Income needed to receive 10% profit above costs
Per year $ 933,968.77 $ 1,019,856.77

$ per acre
$ per ton $ per cutterhead hour

$
$ $

46.70
5.84 622.65

$
$ $

50.99
6.37 679.90

Fuel Example Cont.
Income needed to cover expenses

Per year
$ per acre $ per ton

$ 849,062.52
$ $ 42.45 5.31

$
$ $

927,142.52
46.36 5.79

Need $3.91/acre, $0.48/ton, or Income needed to $52.06/cutterhead receive 5% profit above costs Per year hour more just to $ per acre breakeven
$ per cutterhead hour $ per ton
$ per cutterhead hour

$

566.04

$

618.10

$ 891,515.65 $ 44.58

$ $

973,499.65 48.67

$
$

5.57
594.34

$
$

6.08
649.00

Income needed to receive 10% profit above costs
Per year $ 933,968.77 $ 1,019,856.77

$ per acre
$ per ton $ per cutterhead hour

$
$ $

46.70
5.84 622.65

$
$ $

50.99
6.37 679.90

Fuel Example Cont.
Income needed to cover expenses

Per year
$ per acre $ per ton

$ 849,062.52

$
$ $

927,142.52
46.36 5.79

$ per cutterhead hour

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

42.45 5.31

566.04

$

618.10

Income needed to receive 5% profit above costs Per year $ per acre $ 891,515.65 $ 44.58 $ $ 973,499.65 48.67

$ per ton
$ per cutterhead hour

$
$

5.57
594.34

$
$

6.08
649.00

Income needed to receive 10% profit above costs
Per year $ per acre $ per ton $ per cutterhead hour $ 933,968.77 $ $ $ 46.70 5.84 622.65 $ $ $ $ 1,019,856.77 50.99 6.37 679.90

20% Operating Increase Example
20% increase in operating costs Yearly Expenses Amount Amount

Machinery Ownership
Depreciation $ 198,333.33 $ 198,333.33

Interest
Taxes, Insurance, Housing

$
$

40,788.91
19,600.00

$
$

40,788.91
19,600.00

Machinery Operating
Repairs & Maintenance Fuel Lubrication Labor General Business Expenses Taxes $ 8,000.00 $ 8,000.00 $ 169,000.00 $ 116,160.00 $ 1,340.28 $ 202,800.00 $ 139,392.00 $ 1,608.34

$ 228,000.00

$ 273,600.00

Non-machinery Insurance
Unemployment contributions

$
$

20,000.00
6,840.00

$
$

20,000.00
6,840.00

Benefits
Miscellaneous

$

36,000.00

$

36,000.00

Business Operating Supplies
Other

$
$

5,000.00
20,000.00

$
$

5,000.00
20,000.00

Total
Additional Information Acres harvested (2 harvesters)

$ 849,062.52
20,000

$ 971,962.58
20,000

Cutterhead hours (2 harvesters)
Yield per acre (tons)

1,500
8

1,500
8

20% Operating Increase Example
20% increase in operating costs Yearly Expenses Amount Amount

Machinery Ownership
Depreciation $ 198,333.33 $ 198,333.33

Interest
Taxes, Insurance, Housing

$
$

40,788.91
19,600.00

$
$

40,788.91
19,600.00

Machinery Operating
Repairs & Maintenance Fuel Lubrication Labor General Business Expenses Taxes $ 169,000.00 $ 116,160.00 $ 202,800.00 $ 139,392.00 $ 1,608.34

Increase of $122,900.06

$

1,340.28

$ 228,000.00

$ 273,600.00

$

8,000.00

$

8,000.00

Non-machinery Insurance
Unemployment contributions

$
$

20,000.00
6,840.00

$
$

20,000.00
6,840.00

Benefits
Miscellaneous

$

36,000.00

$

36,000.00

Business Operating Supplies
Other

$
$

5,000.00
20,000.00

$
$

5,000.00
20,000.00

Total
Additional Information Acres harvested (2 harvesters)

$ 849,062.52
20,000

$ 971,962.58
20,000

Cutterhead hours (2 harvesters)
Yield per acre (tons)

1,500
8

1,500
8

20% Operating Increase Example
Income needed to cover expenses

Per year
$ per acre $ per ton $ per cutterhead hour

$ 849,062.52
$ $ $ 42.45 5.31 566.04

$ 971,962.58
$ $ $ 48.60 6.07 647.98

Income needed to receive 5% profit above costs
Per year $ per acre $ 891,515.65 $ 44.58 $1,020,560.70 $ 51.03

$ per ton
$ per cutterhead hour

$
$

5.57
594.34

$
$

6.38
680.37

Income needed to receive 10% profit above costs Per year $ 933,968.77 $1,069,158.83

$ per acre
$ per ton $ per cutterhead hour

$
$ $

46.70
5.84 622.65

$
$ $

53.46
6.68 712.77

20% Operating Increase Example
Income needed to cover expenses

Per year
$ per acre $ per ton

$ 849,062.52
$ $ $ 42.45 5.31 566.04

$ 971,962.58
$ $ $ 48.60 6.07 647.98

Need $6.15/acre, $0.76/ton, or Income needed to receive 5% profit above costs $81.94/cutterhead Per year hour more just to $ per acre breakeven $ per ton
$ per cutterhead hour $ per cutterhead hour

$ 891,515.65 $ 44.58

$1,020,560.70 $ 51.03

$
$

5.57
594.34

$
$

6.38
680.37

Income needed to receive 10% profit above costs Per year $ 933,968.77 $1,069,158.83

$ per acre
$ per ton $ per cutterhead hour

$
$ $

46.70
5.84 622.65

$
$ $

53.46
6.68 712.77

20% Operating Increase Example
Income needed to cover expenses

Per year
$ per acre $ per ton

$ 849,062.52
$ 42.45 5.31 566.04

$ 971,962.58
$ $ $ 48.60 6.07 647.98

$ Prices not enough to $ per cutterhead hour $ cover a 20% increase in operating Income needed to receive 5% profit above costs expenses Per year $ $ per acre $

891,515.65 44.58

$1,020,560.70 $ 51.03

$ per ton
$ per cutterhead hour

$
$

5.57
594.34

$
$

6.38
680.37

Income needed to receive 10% profit above costs Per year $ 933,968.77 $1,069,158.83

$ per acre
$ per ton $ per cutterhead hour

$
$ $

46.70
5.84 622.65

$
$ $

53.46
6.68 712.77

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: sarahroth@psu.edu

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

Hourly Repair Costs for Three Forage Harvesters
$60

$50

Hourly repair cost

$40 2-row SP $30 3-row SP 6-row SP $20

$10

$0
0 200 400 600 800 1000 1200 1400 1600 1800 2000 2200 2400 2600 2800 3000 3200 3400 3600 3800 4000

Harvester age (hours)

Hourly Repair, Fuel, and Labor Costs for Three Forage Harvesters
$90 $80 $70

Hourly cost

$60 $50 $40 $30 $20 $10 $0
0 200 400 600 800 1000 1200 1400 1600 1800 2000 2200 2400 2600 2800 3000 3200 3400 3600 3800 4000

2-row SP 3-row SP 6-row SP

Harvester Age (hours)

Repair, Fuel, and Labor Costs per Acre for Three Forage Harvesters
$40 $35 $30

Cost per acre

$25 2-row SP $20 $15 $10 $5 $0
0 200 400 600 800 1000 1200 1400 1600 1800 2000 2200 2400 2600 2800 3000 3200 3400 3600 3800 4000

3-row SP 6-row SP

Harvester age (hours)

Total Cost per Acre for Three Forage Harvesters, 10-year life
400 350

Total Cost per Acre

300 250 2-row SP 200 150 100 50 0 3-row SP 6-row SP

$54

$42
800 900 1000 1100 1200 1300 1400 1500 1600 1700 1800

$30

100

125

150

175

200

250

300

350

400

450

500

600

Acres/year

700


				
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