Whether you’re a custom farmer or someone in the market for custom farm work, rising fuel prices may have something to say about the price charged for your next custom farming job. Custom farming rates have changed very little in the last several years as tradition seems to govern many long-term custom rate arrangements. Well, we’ve charged Johnny Farmer $21/acre to harvest his corn for the last 3 years, so that’s what it’ll be this year. Times may be changing. Diesel fuel price increases the last several months have caused many to rethink their custom farming rates.
Diesel fuel prices have increased significantly over the last 24 months at the farm gate. Survey work has shown diesel prices in the spring of 2003 averaged around $1.10/gallon while today’s diesel prices for farm usage are in the $1.85/gallon range.
If we look only at fuel price increases as they relate to in-field operation of the farm equipment we see a significant increase in the cost of many farm operations. (And this assumes we ignore the effects of fuel price increases to the manufacturing and cost of the implements, cost of oil and lube, and cost of driving or transporting the equipment to the field.) The following list highlights the fuel requirements of farm equipment operations and increase in fuel cost from April 2003 to April 2005.
Implement Gal./Ac. Fuel Cost/Ac. Fuel Cost/Ac. Increase
Diesel 1 2003 2 2005 3 03 to `05
Combine Corn-6 Row 1.93 $2.12 $3.57 $1.45
Combine Soybeans-25 ft.hd. 2.02 $2.22 $3.74 $1.52
Chisel Plow-23 ft. 0.64 $0.70 $1.18 $0.48
Disk/V-Ripper-17.5 ft. 1.69 $1.86 $3.13 $1.27
Planting Corn -12 Row 0.34 $0.37 $0.63 $0.26
Round Bale-1000 lb. 0.77 $0.85 $1.42 $0.57
So what now? You may decide that changing custom rates will change other relationships with your customer that you may not want to forfeit. So you swallow the price increase and continue to spread your fixed costs over more acres. Or, you may decide that it’s time to rachet your custom rates up a little to avoid a lower return to your time and management.
If you are having second thoughts about raising those rates you might want to consider adding a “fuel surcharge” to your existing custom rate to offset the rise in fuel prices. This method may make it more palatable for your customer. Fuel surcharges have been used in the trucking industry and may be an option for custom farm operators. A base custom rate and a base fuel price are parts of this equation. As fuel prices increase from the base price, clients pay the difference between the base fuel price and the spot fuel price. This is a simple example that doesn’t take into account higher machinery, fuel, lube or transport costs.
Whatever you decide, understand that these cost increases are real and will impact the custom farming business, whichever side of the transaction you are on.
1 Gallons per acre diesel fuel values are estimates borrowed from the “Farm Machinery Cost Estimates for 2005” publication. See the full publication and estimates for diesel fuel use per acre for other implements at: http://www.extension.umn.edu/distribution/businessmanagement/DF6696.pdf
2 Diesel Fuel Price used for 2003 is assumed to be $1.10/gallon.
3 Diesel Fuel Price used for 2005 is assumed to be $1.85/gallon.