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Transcript of Managing a Custom Harvesting Business Sarah Roth Sr. Extension Assoc. Penn State University Penn...
Managing a Custom Harvesting Business
Sarah RothSr. 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
Agenda
• Advantages of Hiring Custom Operators
• Building a Successful Custom Operator/Client Working Relationship
• Pricing
• How do Changing Costs Affect the Bottom Line
• Questions
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
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Hourly Repair Costs for Newer vs. Older Forage Harvesters
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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”
Accumulated Repair Costs for Three Forage Harvesters
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6-row SP
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 Width Speed Field Efficiency Field Capacity
2-row SP 5 ft 3.5 mph 70%
(Range: 1.5 - 6.0) (Range: 65 - 80%) 1.80
3-row SP 7.5 ft 3.5 mph 70%
(Range: 1.5 - 6.0) (Range: 65 - 80%) 2.54
6-row SP 15 ft 3.5 mph 70%
(Range: 1.5 - 6.0) (Range: 65 - 80%) 5.41
10-row SP 25 ft 3.5 70% 7.27
Field capacity (A/hr) = [width (ft) * ground speed (mph) * field efficiency (%)]/8.25
Forage Harvester Capacity Needed
Area to cover 10,000 acres
Probability of a working day 40 %
Hours for this work 18 h/day
Window of opportunity 150 days
Capacity needed 9.3 acres/h
vs.
Area to cover 5,000 acres
Probability of a working day 40 %
Hours for this work 18 h/day
Window of opportunity 150 days
Capacity needed 4.6 acres/h
SP Combine Field Capacity (acres/hour)
Combine Width Speed Field Efficiency Field Capacity
#1 5 ft 3.0 mph 80%
(Range: 1.5 - 6.0) (Range: 65 - 80%) 1.45
#2 7.5 ft 3.0 mph 80%
(Range: 1.5 - 6.0) (Range: 65 - 80%) 2.18
#3 15 ft 3.0 mph 80%
(Range: 1.5 - 6.0) (Range: 65 - 80%) 4.36
#4 25 ft 3.0 80% 7.27
Field capacity (A/hr) = [width (ft) * ground speed (mph) * field efficiency (%)]/8.25
SP Combine Capacity Needed
vs.
Area to cover 5,000 acres
Probability of a working day 40 %
Hours for this work 18 h/day
Window of opportunity 150 days
Capacity needed 4.6 acres/h
Area to cover 12,000 acres
Probability of a working day 40 %
Hours for this work 18 h/day
Window of opportunity 150 days
Capacity needed 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
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
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
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
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
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 ExampleYearly 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 $ 1,340.28
Labor $ 228,000.00
General Business Expenses
Taxes $ 8,000.00
Non-machinery Insurance $ 20,000.00
Unemployment contributions $ 6,840.00
Benefits $ 36,000.00
Miscellaneous
Business Operating Supplies $ 5,000.00
Other $ 20,000.00
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 ExampleYearly Expenses
Scenario 1 Amount
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
Machinery Operating
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
General Business Expenses
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
Miscellaneous
Business Operating Supplies $ 5,000.00 $ 5,000.00
Other $ 20,000.00 $ 20,000.00
Total $ 849,062.52 $ 927,142.52
Additional Information
Acres harvested (2 harvesters) 20,000 20,000
Cutterhead hours (2 harvesters) 1,500 1,500
Yield per acre (tons) 8 8
Fuel Price Change ExampleYearly Expenses
Scenario 1 Amount
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
Machinery Operating
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
General Business Expenses
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
Miscellaneous
Business Operating Supplies $ 5,000.00 $ 5,000.00
Other $ 20,000.00 $ 20,000.00
Total $ 849,062.52 $ 927,142.52
Additional Information
Acres harvested (2 harvesters) 20,000 20,000
Cutterhead hours (2 harvesters) 1,500 1,500
Yield per acre (tons) 8 8
Increase of $78,080
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
Income needed to receive 5% profit above costs
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
Income needed to receive 10% profit above costs
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
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
Income needed to receive 5% profit above costs
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
Income needed to receive 10% profit above costs
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 $52.06/cutterhead hour more just to breakeven
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
Income needed to receive 5% profit above costs
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
Income needed to receive 10% profit above costs
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
Prices @ 10% profit enough to cover a $1 increase in fuel price
20% Operating Increase Example20% 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 $ 1,340.28 $ 1,608.34
Labor $ 228,000.00 $ 273,600.00
General Business Expenses
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
Miscellaneous
Business Operating Supplies $ 5,000.00 $ 5,000.00
Other $ 20,000.00 $ 20,000.00
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
Yield per acre (tons) 8 8
20% Operating Increase Example20% 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 $ 1,340.28 $ 1,608.34
Labor $ 228,000.00 $ 273,600.00
General Business Expenses
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
Miscellaneous
Business Operating Supplies $ 5,000.00 $ 5,000.00
Other $ 20,000.00 $ 20,000.00
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
Yield per acre (tons) 8 8
Increase of $122,900.06
20% Operating Increase ExampleIncome 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 ExampleIncome 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
Need $6.15/acre, $0.76/ton, or $81.94/cutterhead hour more just to breakeven
20% Operating Increase ExampleIncome 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
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– 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
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