Managing a Custom Harvesting Business 
Managing a Custom Harvesting BusinessSarah RothSr. Extension Assoc.Penn State UniversityPenn State is committed to affirmative action, equal opportunity, and the diversity of its workforceA 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 PlanningA little bit more about me…•Main audiences–Dairy producers–Custom Operators in PA, OH, NY, MDAgenda•Advantages of Hiring Custom Operators•Building a Successful Custom Operator/Client Working Relationship•Pricing•How do Changing Costs Affect the Bottom Line•QuestionsProducer issuesShould 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 qualityPoor harvest timeliness can ruin quality forage•Crops become too mature•Proper storage is compromisedRepair costs impact production costs•Heavier usage of machinery increases repair & maintenance expenses•Frequent breakdowns prevent machinery from being fully utilized–Fewer acreage coveredAccumulated Repair Costs for Newer vs. Older Forage Harvesters$0$100$200$300$400$500$600$70002004006008001000120014001600180020002200240026002800300032003400360038004000Harvester age (hours)Total repair cost per $1,000 of purchase pricenew SPold SPHourly Repair Costs for Newer vs. Older Forage Harvesters $0.00$0.05$0.10$0.15$0.20$0.25$0.30$0.35$0.40$0.45$0.5002004006008001000120014001600180020002200240026002800300032003400360038004000Harvester age (hours)Hourly repair cost per $1,000 of purchase pricenew SPold SPForage 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$0$20,000$40,000$60,000$80,000$100,000$120,00002004006008001000120014001600180020002200240026002800300032003400360038004000Harvester age (hours)Total repair cost2-row SP3-row SP6-row SPAcreage & machinery need to be matched•Excess capacity is simply money out of you pocket in terms of ownership costsForage Harvester Field Capacity (acres/hour)HarvesterWidthSpeedField EfficiencyField Capacity2-row SP5 ft3.5 mph70%(Range: 1.5 -6.0)(Range: 65 -80%)1.803-row SP7.5 ft3.5 mph70%(Range: 1.5 -6.0)(Range: 65 -80%)2.546-row SP15 ft3.5 mph70%(Range: 1.5 -6.0)(Range: 65 -80%)5.4110-row SP25 ft3.570%7.27Field capacity (A/hr) = [width (ft) * ground speed (mph) * field efficiency (%)]/8.25Forage Harvester Capacity NeededArea to cover10,000acresProbability of a working day40%Hours for this work18h/dayWindow of opportunity150daysCapacity needed9.3acres/hvs.Area to cover5,000acresProbability of a working day40%Hours for this work18h/dayWindow of opportunity150daysCapacity needed4.6acres/hSP Combine Field Capacity (acres/hour)CombineWidthSpeedField EfficiencyField Capacity#15 ft3.0 mph80%(Range: 1.5 -6.0)(Range: 65 -80%)1.45#27.5 ft3.0 mph80%(Range: 1.5 -6.0)(Range: 65 -80%)2.18#315 ft3.0 mph80%(Range: 1.5 -6.0)(Range: 65 -80%)4.36#425 ft3.080%7.27Field capacity (A/hr) = [width (ft) * ground speed (mph) * field efficiency (%)]/8.25SP Combine Capacity Neededvs.Area to cover5,000acresProbability of a working day40%Hours for this work18h/dayWindow of opportunity150daysCapacity needed4.6acres/hArea to cover12,000acresProbability of a working day40%Hours for this work18h/dayWindow of opportunity150daysCapacity needed11.1acres/hSolutions to these issues•Purchase higher capacity forage harvester•Change crop rotation •Custom hireSolutions to these issues•Purchase higher capacity forage harvester•Change crop rotation •Custom hireThe Producer’s Custom Harvesting GoalAcquire quality forage/feed (same or better)for lower cost of harvestAdvantages of Hiring Custom Operators6AdvantagesFree up labor for remaining enterprisesFree up management for remaining enterprisesConcentrate efforts in fewer enterprises (specialization)Obtain higher quality productsCut input and/or production costsIncreased productionFree up laborThis 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# 1Free up management•Time to analyze data and make more informed decisions•Take advantage of educational opportunities# 2Concentrate efforts•Specialization–Focus on fewer (one or two) enterprises–Dairy (milk production), heifers, hogs, beef, etc.# 3Obtain higher quality products•Custom operators provide:–Specialized knowledge in the services they perform–Timely service–Consistent quality# 4Cut 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# 5Increase production•Higher quality forages can increase milk production •Increased production or better milk component levels generate more gross revenue# 6Questions?The Custom Operator’s Role in Building a Successful Relationship with Producer ClientsStrategies for the followingMarketing Your ServicesMaking the DealBefore Work StartsDuring WorkWhen the Work is CompletedMarketing Your ServicesAttracting Potential ClientsPresent a professional image both when working and while out in the communityAttend professional meetings/conferencesUse services such as the Custom Operators Directory, regional extension directories, professional association directoriesMarketing Your ServicesProviding Service InformationBrochures and/or WebsiteServices providedCost tablesTypes of equipment usedHave a knowledgeable contact person who can answer questionsMaking the DealHave a Contract !Types of ContractsWritten VerbalMaking the DealContract items to include or discussMethods of paymentPayment scheduleResponsibility for providing supplies such as baler twine, ag bags, inoculants, etc.Responsibility for providing labor and equipmentAnticipated schedule of workHow delays will be handledBefore Work StartsHave all equipment and machinery in good working conditionHave a supply of commonly needed partsMake sure all supplies such as inoculants or other chemicals are readyMake sure all labor is availableDuring Your WorkAvoiding disputesReview the contractAsk and/or answer any questions that may have come up since the last time you spoke with the producerDuring Your WorkResolving disputesKeep disputes privateUse a mediator if necessaryDuring Your WorkWork ScheduleKeep producers informedLet producers know when you expect to arrive at their farm –both day and timeInform producers if you must make an adjustment to your schedule Don’t make promises you can’t keepDuring Your WorkProvide informationIf harvesting, provide information such as tons per acre, dry matter, length of chop, bushels per acres, etc.Provide relevant information for other activities performedDuring Your WorkDelaysLet producers know quicklyWeatherAdjust work schedule if possibleEquipment/LaborFind/have replacement labor available if neededQuickly repair equipment or obtain replacement equipment while broken equipment is being fixedWhen The Work is CompletedGetting PaidWork with the producer to find a payment schedule that is acceptable to both of youWhen The Work is CompletedContracting for next seasonOffer early contractingPossible incentives for contracting earlyWhen The Work is CompletedSeek ideas for improvementAsk how your services could be more valuable to the clientAsk what other services the client could useQuestions?10 Minute BreakHow to price services?What we’ll cover•Cost of production•Choosing a priceBefore you can price your services…You MUSTknow yourCOST 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 pointsCost of Production•Plenty of resources that can help you determine YOURcost of production–Local extension specialists–Spreadsheets online–Fact sheetsWhat 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/acreageManaging Machinery CostsThese are fixed costs which result from owning the machinery –Depreciation–Interest–Taxes–Insurance–HousingOwnership expensesManaging Machinery CostsThese are variable costs which are incurred from operating the machinery–Repairs–Labor–Fuel–Lubrication (oil)–Materials/suppliesOperating ExpensesExtent of services offeredWill 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–OtherNumber 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 acreageWhy acreage is important•Spreading fixed costs over more acres lowers cost of production•Increases return on investmentOther business expenses that need to be covered in your price•Office operations•Taxes•Non-machinery Insurance•Unemployment•Benefits–Health insurance, 401K/retirement, paid vacationWhat else should influence your price?•Basis for fees–Per acre–Per hour–Per ton•Profit margin–Must cover living & business reinvestmentFee basisWill 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 revenueFee Basis•Per acre basis will result in a more stable, predictable income–Assuming you know exactly how many acres you will be harvestingFee 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 harvestedProfit 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 businessOther Pricing Methods•What is your neighbor/competition charging?•State custom rate guides•What will producers pay?Use these numbers only for comparison!Pricing ExampleYearly ExpensesAmountMachinery OwnershipDepreciation$ 198,333.33 Interest$ 40,788.91 Taxes, Insurance, Housing$ 19,600.00 Machinery OperatingRepairs & Maintenance$ 169,000.00 Fuel$ 116,160.00 Lubrication$ 1,340.28 Labor$ 228,000.00 General Business ExpensesTaxes$ 8,000.00 Non-machinery Insurance$ 20,000.00 Unemployment contributions$ 6,840.00 Benefits$ 36,000.00 MiscellaneousBusiness Operating Supplies$ 5,000.00 Other$ 20,000.00 Total$ 849,062.52 Additional InformationAcres harvested (2 harvesters)20,000 Cutterhead hours (2 harvesters)1,500 Yield per acre (tons)8 Pricing Example Cont.Income needed to cover expensesPer year$ 849,062.52 $ per acre$ 42.45 $ per ton$ 5.31 $ per cutterhead hour$ 566.04 Income needed to receive 5% profit above costsPer year$ 891,515.65 $ per acre$ 44.58 $ per ton$ 5.57 $ per cutterhead hour$ 594.34 Income needed to receive 10% profit above costsPer year$ 933,968.77 $ per acre$ 46.70 $ per ton$ 5.84 $ per cutterhead hour$ 622.65 Questions?Price Risk•Can come in a variety of forms•Changes in –Acres harvested–Crop Yield–Operating expenses–Amount of competitionHow 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 ratesExamples•The following examples have the following assumptions:–2 forage harvester–Supporting machinery & equipment–Labor wage = $9.50/hourFuel Price Change ExampleYearly ExpensesScenario 1 AmountScenario 2AmountMachinery OwnershipDepreciation$ 198,333.33 $ 198,333.33 Interest$ 40,788.91 $ 40,788.91 Taxes, Insurance, Housing$ 19,600.00 $ 19,600.00 Machinery OperatingRepairs & 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 General Business ExpensesTaxes$ 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 MiscellaneousBusiness Operating Supplies$ 5,000.00 $ 5,000.00 Other$ 20,000.00 $ 20,000.00 Total$ 849,062.52 $ 927,142.52 Additional InformationAcres harvested (2 harvesters)20,000 20,000Cutterhead hours (2 harvesters)1,500 1,500Yield per acre (tons)8 8Fuel Price Change ExampleYearly ExpensesScenario 1 AmountScenario 2AmountMachinery OwnershipDepreciation$ 198,333.33 $ 198,333.33 Interest$ 40,788.91 $ 40,788.91 Taxes, Insurance, Housing$ 19,600.00 $ 19,600.00 Machinery OperatingRepairs & 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 General Business ExpensesTaxes$ 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 MiscellaneousBusiness Operating Supplies$ 5,000.00 $ 5,000.00 Other$ 20,000.00 $ 20,000.00 Total$ 849,062.52 $ 927,142.52 Additional InformationAcres harvested (2 harvesters)20,000 20,000Cutterhead hours (2 harvesters)1,500 1,500Yield per acre (tons)8 8Increase of $78,080Fuel Example Cont.Income needed to cover expensesPer year$ 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 Income needed to receive 5% profit above costsPer year$ 891,515.65 $ 973,499.65 $ per acre$ 44.58 $ 48.67 $ per ton$ 5.57 $ 6.08 $ per cutterhead hour$ 594.34 $ 649.00 Income needed to receive 10% profit above costsPer year$ 933,968.77 $ 1,019,856.77 $ per acre$ 46.70 $ 50.99 $ per ton$ 5.84 $ 6.37 $ per cutterhead hour$ 622.65 $ 679.90 Fuel Example Cont.Income needed to cover expensesPer 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 Income needed to receive 5% profit above costsPer year$ 891,515.65 $ 973,499.65 $ per acre$ 44.58 $ 48.67 $ per ton$ 5.57 $ 6.08 $ per cutterhead hour$ 594.34 $ 649.00 Income needed to receive 10% profit above costsPer year$ 933,968.77 $ 1,019,856.77 $ per acre$ 46.70 $ 50.99 $ per ton$ 5.84 $ 6.37 $ per cutterhead hour$ 622.65 $ 679.90 Need $3.91/acre, $0.48/ton, or $52.06/cutterhead hour more just to breakeven Fuel Example Cont.Income needed to cover expensesPer year$ 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 Income needed to receive 5% profit above costsPer year$ 891,515.65 $ 973,499.65 $ per acre$ 44.58 $ 48.67 $ per ton$ 5.57 $ 6.08 $ per cutterhead hour$ 594.34 $ 649.00 Income needed to receive 10% profit above costsPer year$ 933,968.77 $ 1,019,856.77 $ per acre$ 46.70 $ 50.99 $ per ton$ 5.84 $ 6.37 $ per cutterhead hour$ 622.65 $ 679.90 Prices @10% profit enough to cover a $1 increase in fuel price20% Operating Increase Example20% increase in operating costsYearly ExpensesAmountAmountMachinery OwnershipDepreciation$ 198,333.33 $ 198,333.33 Interest$ 40,788.91 $ 40,788.91 Taxes, Insurance, Housing$ 19,600.00 $ 19,600.00 Machinery OperatingRepairs & Maintenance$ 169,000.00 $ 202,800.00 Fuel$ 116,160.00 $ 139,392.00 Lubrication$ 1,340.28 $ 1,608.34 Labor$ 228,000.00 $ 273,600.00 General Business ExpensesTaxes$ 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 MiscellaneousBusiness Operating Supplies$ 5,000.00 $ 5,000.00 Other$ 20,000.00 $ 20,000.00 Total$ 849,062.52 $ 971,962.58 Additional InformationAcres harvested (2 harvesters)20,000 20,000 Cutterhead hours (2 harvesters)1,500 1,500 Yield per acre (tons)8 8 20% Operating Increase Example20% increase in operating costsYearly ExpensesAmountAmountMachinery OwnershipDepreciation$ 198,333.33 $ 198,333.33 Interest$ 40,788.91 $ 40,788.91 Taxes, Insurance, Housing$ 19,600.00 $ 19,600.00 Machinery OperatingRepairs & Maintenance$ 169,000.00 $ 202,800.00 Fuel$ 116,160.00 $ 139,392.00 Lubrication$ 1,340.28 $ 1,608.34 Labor$ 228,000.00 $ 273,600.00 General Business ExpensesTaxes$ 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 MiscellaneousBusiness Operating Supplies$ 5,000.00 $ 5,000.00 Other$ 20,000.00 $ 20,000.00 Total$ 849,062.52 $ 971,962.58 Additional InformationAcres harvested (2 harvesters)20,000 20,000 Cutterhead hours (2 harvesters)1,500 1,500 Yield per acre (tons)8 8 Increase of $122,900.0620% Operating Increase ExampleIncome needed to cover expensesPer year$ 849,062.52 $ 971,962.58 $ per acre$ 42.45 $ 48.60 $ per ton$ 5.31 $ 6.07 $ per cutterhead hour$ 566.04 $ 647.98 Income needed to receive 5% profit above costsPer year$ 891,515.65 $1,020,560.70 $ per acre$ 44.58 $ 51.03 $ per ton$ 5.57 $ 6.38 $ per cutterhead hour$ 594.34 $ 680.37 Income needed to receive 10% profit above costsPer year$ 933,968.77 $1,069,158.83 $ per acre$ 46.70 $ 53.46 $ per ton$ 5.84 $ 6.68 $ per cutterhead hour$ 622.65 $ 712.77 20% Operating Increase ExampleIncome needed to cover expensesPer year$ 849,062.52 $ 971,962.58 $ per acre$ 42.45 $ 48.60 $ per ton$ 5.31 $ 6.07 $ per cutterhead hour$ 566.04 $ 647.98 Income needed to receive 5% profit above costsPer year$ 891,515.65 $1,020,560.70 $ per acre$ 44.58 $ 51.03 $ per ton$ 5.57 $ 6.38 $ per cutterhead hour$ 594.34 $ 680.37 Income needed to receive 10% profit above costsPer year$ 933,968.77 $1,069,158.83 $ per acre$ 46.70 $ 53.46 $ per ton$ 5.84 $ 6.68 $ per cutterhead hour$ 622.65 $ 712.77 Need $6.15/acre, $0.76/ton, or $81.94/cutterhead hour more just to breakeven 20% Operating Increase ExampleIncome needed to cover expensesPer year$ 849,062.52 $ 971,962.58 $ per acre$ 42.45 $ 48.60 $ per ton$ 5.31 $ 6.07 $ per cutterhead hour$ 566.04 $ 647.98 Income needed to receive 5% profit above costsPer year$ 891,515.65 $1,020,560.70 $ per acre$ 44.58 $ 51.03 $ per ton$ 5.57 $ 6.38 $ per cutterhead hour$ 594.34 $ 680.37 Income needed to receive 10% profit above costsPer year$ 933,968.77 $1,069,158.83 $ per acre$ 46.70 $ 53.46 $ per ton$ 5.84 $ 6.68 $ per cutterhead hour$ 622.65 $ 712.77 Prices not enough to cover a 20% increase in operating expensesHow can you protect your profits?•Regularly analyze your business expenses•Price high enough to cover any expected changes in operating expensesHow can you protect your profits?•Add surcharge fees into your contract•Lock in prices all possible items that may fluctuate in price–Fuel, oil, suppliesQuestions?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.htmVisit online:http://farmmanagement.aers.psu.eduOrContact me at:Phone:814-863-8645Email: sarahroth@psu.eduPenn State is committed to affirmative action, equal opportunity, and the diversity of its workforceHourly Repair Costs for Three Forage Harvesters$0$10$20$30$40$50$6002004006008001000120014001600180020002200240026002800300032003400360038004000Harvester age (hours)Hourly repair cost2-row SP3-row SP6-row SPHourly Repair, Fuel, and Labor Costsfor Three Forage Harvesters$0$10$20$30$40$50$60$70$80$9002004006008001000120014001600180020002200240026002800300032003400360038004000Harvester Age (hours)Hourly cost2-row SP3-row SP6-row SPRepair, Fuel, and Labor Costs per Acrefor Three Forage Harvesters$0$5$10$15$20$25$30$35$4002004006008001000120014001600180020002200240026002800300032003400360038004000Harvester age (hours)Cost per acre2-row SP3-row SP6-row SPTotal Cost per Acre for Three Forage Harvesters, 10-year life$54$42$30050100150200250300350400100125150175200250300350400450500600700800900100011001200130014001500160017001800Acres/yearTotal Cost per Acre2-row SP3-row SP6-row SP