Transcript 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.

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
$600
$500
$400
new SP
old SP
$300
$200
$100
Harvester age (hours)
4000
3800
3600
3400
3200
3000
2800
2600
2400
2200
2000
1800
1600
1400
1200
1000
800
600
400
200
$0
0
Total repair cost per $1,000 of
purchase price
$700
Hourly Repair Costs for
Newer vs. Older Forage Harvesters
$0.45
$0.40
$0.35
$0.30
new SP
$0.25
old SP
$0.20
$0.15
$0.10
$0.05
Harvester age (hours)
4000
3800
3600
3400
3200
3000
2800
2600
2400
2200
2000
1800
1600
1400
1200
1000
800
600
400
200
$0.00
0
Hourly repair cost per
$1,000 of purchase price
$0.50
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
$80,000
2-row SP
$60,000
3-row SP
6-row SP
$40,000
$20,000
Harvester age (hours)
4000
3800
3600
3400
3200
3000
2800
2600
2400
2200
2000
1800
1600
1400
1200
1000
800
600
400
200
$0
0
Total repair cost
$100,000
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
3-row SP
6-row SP
10-row SP
Width
Speed
Field Efficiency
5 ft
3.5 mph
70%
(Range: 1.5 - 6.0)
(Range: 65 - 80%)
3.5 mph
70%
(Range: 1.5 - 6.0)
(Range: 65 - 80%)
3.5 mph
70%
(Range: 1.5 - 6.0)
(Range: 65 - 80%)
5.41
3.5
70%
7.27
7.5 ft
15 ft
25 ft
Field Capacity
1.80
2.54
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
5,000
acres
acres
Probability of a working day
40
%
h/day
Hours for this work
18
h/day
days
Window of opportunity
150
days
Capacity needed
4.6 acres/h
Probability of a working day
40
%
Hours for this work
18
Window of opportunity
150
Capacity needed
9.3 acres/h
vs.
SP Combine Field Capacity
(acres/hour)
Combine
Width
Speed
Field Efficiency
#1
5 ft
3.0 mph
80%
(Range: 1.5 - 6.0)
(Range: 65 - 80%)
3.0 mph
80%
(Range: 1.5 - 6.0)
(Range: 65 - 80%)
3.0 mph
80%
(Range: 1.5 - 6.0)
(Range: 65 - 80%)
4.36
3.0
80%
7.27
#2
#3
#4
7.5 ft
15 ft
25 ft
Field Capacity
1.45
2.18
Field capacity (A/hr) = [width (ft) * ground speed (mph) * field efficiency (%)]/8.25
SP Combine Capacity Needed
Area to cover
Probability of a working day
12,000
40
acres
Area to cover
5,000
acres
%
Probability of a working day
40
%
18
h/day
days
vs.
Hours for this work
Window of opportunity
Capacity needed
18
h/day
Hours for this work
150
days
Window of opportunity
150
Capacity needed
4.6 acres/h
11.1 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
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
$
Labor
$ 228,000.00
1,340.28
General Business Expenses
Taxes
$
8,000.00
Non-machinery Insurance
$
20,000.00
Unemployment contributions
$
6,840.00
Benefits
$
36,000.00
Business Operating Supplies
$
5,000.00
Other
$
20,000.00
Miscellaneous
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 cutterhead hour
$
594.34
Income needed to receive 10% profit above costs
Per year
$ 933,968.77
$ per acre
$
46.70
$ per ton
$
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
Scenario 1
Amount
Yearly Expenses
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
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
Business Operating Supplies
$
5,000.00
$
5,000.00
Other
$
20,000.00
$
20,000.00
$ 849,062.52
$
927,142.52
Machinery Operating
General Business Expenses
Miscellaneous
Total
Additional Information
Acres harvested (2 harvesters)
20,000
20,000
Cutterhead hours (2 harvesters)
1,500
1,500
8
8
Yield per acre (tons)
Fuel Price Change Example
Scenario 1
Amount
Yearly Expenses
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
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
$
8,000.00
$
8,000.00
$
20,000.00
$
20,000.00
Unemployment contributions
$
6,840.00
$
6,840.00
Benefits
$
36,000.00
$
36,000.00
Business Operating Supplies
$
5,000.00
$
5,000.00
Other
$
20,000.00
$
20,000.00
$ 849,062.52
$
927,142.52
Machinery Operating
General Business Expenses
Taxes
Non-machinery Insurance
Increase of
$78,080
Miscellaneous
Total
Additional Information
Acres harvested (2 harvesters)
20,000
20,000
Cutterhead hours (2 harvesters)
1,500
1,500
8
8
Yield per acre (tons)
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 cutterhead hour
$
594.34
$
649.00
Per 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
Income needed to receive 5% profit above costs
Income needed to receive 10% profit above costs
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
$
566.04
$
618.10
$ 891,515.65
$
973,499.65
$
44.58
$
48.67
$ per ton
$
5.57
$
6.08
$ per cutterhead hour
$
594.34
$
649.00
Per 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
Income needed to$52.06/cutterhead
receive 5% profit above costs
Per year
hour more just to
$ per acre
breakeven
$ per cutterhead hour
Income needed to receive 10% profit above costs
Fuel Example Cont.
Income needed to cover expenses
Per year
$
927,142.52
42.45
$
46.36
5.31
$
5.79
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 cutterhead hour
$
594.34
$
649.00
Per 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
$ per acre
$ per ton
$ per cutterhead hour
$ 849,062.52
Prices @ 10% profit$
$
enough to cover a $1
$
increase in fuel price
Income needed to receive 5% profit above costs
Income needed to receive 10% profit above costs
20% Operating Increase Example
20% increase in
operating costs
Yearly Expenses
Amount
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
$ 202,800.00
Fuel
$ 116,160.00
$ 139,392.00
Lubrication
$
$
Labor
$ 228,000.00
$ 273,600.00
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
Business Operating Supplies
$
5,000.00
$
5,000.00
Other
$
20,000.00
$
20,000.00
1,340.28
1,608.34
General Business Expenses
Miscellaneous
Total
$ 849,062.52
$ 971,962.58
Additional Information
Acres harvested (2 harvesters)
20,000
20,000
Cutterhead hours (2 harvesters)
1,500
1,500
8
8
Yield per acre (tons)
20% Operating Increase Example
20% increase in
operating costs
Yearly Expenses
Amount
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
$ 202,800.00
Fuel
$ 116,160.00
$ 139,392.00
Lubrication
$
$
Labor
Increase of
$122,900.06
1,340.28
1,608.34
$ 228,000.00
$ 273,600.00
$
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
Business Operating Supplies
$
5,000.00
$
5,000.00
Other
$
20,000.00
$
20,000.00
General Business Expenses
Taxes
Miscellaneous
Total
$ 849,062.52
$ 971,962.58
Additional Information
Acres harvested (2 harvesters)
20,000
20,000
Cutterhead hours (2 harvesters)
1,500
1,500
8
8
Yield per acre (tons)
20% Operating Increase Example
Income 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 cutterhead hour
$
566.04
$
647.98
Income needed to receive 5% profit above costs
Per 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 costs
Per 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 Example
Income needed to cover expenses
Per year
$ 849,062.52
$ 971,962.58
$ per acre
$
42.45
$
48.60
$ per ton
$
5.31
$
6.07
$
566.04
$
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
$1,020,560.70
$
44.58
$
51.03
$
5.57
$
6.38
$
594.34
$
680.37
Income needed to receive 10% profit above costs
Per 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 Example
Income needed to cover expenses
Per year
$ 849,062.52
$ 971,962.58
$ per acre
$
42.45
$
48.60
Prices not enough to$
$ per cutterhead hour
$
cover a 20% increase
in operating
Income needed to receive 5% profit above costs
expenses
Per year
$
5.31
$
6.07
566.04
$
647.98
$ per ton
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 costs
Per 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
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
Hourly Repair Costs for Three Forage Harvesters
$60
$40
2-row SP
$30
3-row SP
6-row SP
$20
$10
Harvester age (hours)
4000
3800
3600
3400
3200
3000
2800
2600
2400
2200
2000
1800
1600
1400
1200
1000
800
600
400
200
$0
0
Hourly repair cost
$50
Hourly Repair, Fuel, and Labor Costs
for Three Forage Harvesters
$90
$80
$60
2-row SP
$50
3-row SP
$40
6-row SP
$30
$20
$10
Harvester Age (hours)
4000
3800
3600
3400
3200
3000
2800
2600
2400
2200
2000
1800
1600
1400
1200
1000
800
600
400
200
$0
0
Hourly cost
$70
Repair, Fuel, and Labor Costs per Acre
for Three Forage Harvesters
$40
$35
$25
2-row SP
$20
3-row SP
6-row SP
$15
$10
$5
Harvester age (hours)
4000
3800
3600
3400
3200
3000
2800
2600
2400
2200
2000
1800
1600
1400
1200
1000
800
600
400
200
$0
0
Cost per acre
$30
Total Cost per Acre for Three Forage
Harvesters, 10-year life
400
300
250
2-row SP
200
3-row SP
6-row SP
150
100
$54
50
$42
$30
Acres/year
1800
1700
1600
1500
1400
1300
1200
1100
1000
900
800
700
600
500
450
400
350
300
250
200
175
150
125
0
100
Total Cost per Acre
350