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
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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

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A little bit more about me

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

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Agenda

• Advantages of Hiring Custom Operators
• Building a Successful Custom Operator/Client
  Working Relationship
• Pricing
• How do Changing Costs Affect the Bottom Line
• Questions

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Producer issues
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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?

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Labor inexperience can be costly

• Machinery could get broken
• Harvest efficiency can be compromised
• Field efficiency
• Overall timeliness
• Storage quality

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Poor harvest timeliness can ruin quality forage

• Crops become too mature
• Proper storage is compromised

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Repair costs impact production costs

• Heavier usage of machinery increases repair
  maintenance expenses
• Frequent breakdowns prevent machinery from being
  fully utilized
• Fewer acreage covered

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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
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Acreage machinery need to be matched

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

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Forage Harvester Field Capacity (acres/hour)
Field capacity (A/hr) width (ft) ground
speed (mph) field efficiency ()/8.25
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Forage Harvester Capacity Needed
vs.
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SP Combine Field Capacity (acres/hour)
Field capacity (A/hr) width (ft) ground
speed (mph) field efficiency ()/8.25
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SP Combine Capacity Needed
vs.
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Solutions to these issues

• Purchase higher capacity forage harvester
• Change crop rotation
• Custom hire

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Solutions to these issues

• Purchase higher capacity forage harvester
• Change crop rotation
• Custom hire

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The Producers Custom Harvesting Goal

• Acquire quality forage/feed (same or better) for
  lower cost of harvest

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Advantages of Hiring Custom Operators
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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

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Free up labor
1

• 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
• Dont have unqualified employees driving equipment

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Free up management
2

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

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Concentrate efforts
3

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

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

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Cut input/production costs
5

• No need to own machinery only used for a short
  period of time
• Depreciation
• Interest
• Repairs
• Oil, Fuel
• Taxes, Insurance, Housing
• Dont have to hire part-time summer help

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

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Questions?
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The Custom Operators Role in Building a
Successful Relationship with Producer Clients
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Strategies for the following

• Marketing Your Services
• Making the Deal
• Before Work Starts
• During Work
• When the Work is Completed

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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

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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

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Making the Deal

• Have a Contract !
• Types of Contracts
• Written
• Verbal

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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

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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

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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

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During Your Work

• Resolving disputes
• Keep disputes private
• Use a mediator if necessary

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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
• Dont make promises you cant keep

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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

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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

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When The Work is Completed

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

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When The Work is Completed

• Contracting for next season
• Offer early contracting
• Possible incentives for contracting early

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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

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Questions?
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10 Minute Break
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How to price services?
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What well cover

• Cost of production
• Choosing a price

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• Before you can price your services
• You MUST know your
• COST OF PRODUCTION !

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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

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Cost of Production

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

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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

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Managing Machinery Costs
Ownership expenses

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

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Managing Machinery Costs
Operating Expenses

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

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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

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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

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Why acreage is important

• Spreading fixed costs over more acres lowers cost
  of production
• Increases return on investment

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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

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What else should influence your price?

• Basis for fees
• Per acre
• Per hour
• Per ton
• Profit margin
• Must cover living business reinvestment

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Fee basis

• Will fees be charged on a per ton, per acre, or
  hourly basis?
• Per ton basis will make revenue more variable
• Increased yieldincreased revenue
• Poor yieldlesser revenue

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Fee Basis

• Per acre basis will result in a more stable,
  predictable income
• Assuming you know exactly how many acres you will
  be harvesting

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Fee Basis

• Hourly basis
• Higher yieldincreased time to harvest
  increased revenue
• Lower yieldless time needed to harvest
  decreased revenue
• Must balance with acreage being harvested

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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

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Other Pricing Methods

• What is your neighbor/competition charging?
• State custom rate guides
• What will producers pay?

Use these numbers only for comparison!
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Pricing Example
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Pricing Example Cont.
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Questions?
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Price Risk

• Can come in a variety of forms
• Changes in
• Acres harvested
• Crop Yield
• Operating expenses
• Amount of competition

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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

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Examples

• The following examples have the following
  assumptions
• 2 forage harvester
• Supporting machinery equipment
• Labor wage 9.50/hour

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Fuel Price Change Example
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Fuel Price Change Example
Increase of 78,080
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Fuel Example Cont.
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Fuel Example Cont.
Need 3.91/acre, 0.48/ton, or 52.06/cutterhead
hour more just to breakeven
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Fuel Example Cont.
Prices _at_ 10 profit enough to cover a 1 increase
in fuel price
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20 Operating Increase Example
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20 Operating Increase Example
Increase of 122,900.06
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20 Operating Increase Example
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20 Operating Increase Example
Need 6.15/acre, 0.76/ton, or 81.94/cutterhead
hour more just to breakeven
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20 Operating Increase Example
Prices not enough to cover a 20 increase in
operating expenses
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How can you protect your profits?

• Regularly analyze your business expenses
• Price high enough to cover any expected changes
  in operating expenses

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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

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Questions?
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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.ht
  m

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Thank You!

• Visit online
• http//farmmanagement.aers.psu.edu
• Or
• Contact me at
• Phone [phone]
• Email sarahroth_at_psu.edu

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