March 08, 2005

LINCOLN, Neb. — Farmers who hire other people to do field work may find that price tag a littler higher this season, a University of Nebraska agricultural economist said.

Increased steel and fuel costs have pushed up the prices custom farmers charge for their services. Custom farming is when a producer hires someone with necessary equipment to do one or more operations from tillage and planting to harvest and haying.

Custom farming rates in Nebraska went up an average of 10 percent from 2000 to 2004, said Doug Jose, farm management specialist in the university's Institute of Agriculture and Natural Resources who conducted a biennial agricultural economics department survey of custom rates in 2004.

Higher costs for new machinery are partly to blame.

"On average steel comprises about 20 percent of the price of farm equipment," Jose said. "China's hungry demand for steel has pushed steel prices up by as much as 100 percent or double a year ago prices. This has pushed machinery prices up by 3 to 10 percent and another 5 percent increase could occur this year."

Fuel costs for this season will be up dramatically from 2004, Jose said.

Diesel fuel averaged about $1.20 per gallon last year, but the current farm price average across the state is about $1.76.

For a 160 power-take-off horsepower tractor consuming .044 gallons of fuel per horsepower-hour, the consumption is 7 gallons per hour. The 56-cent per gallon increase in fuel costs means a $3.92 per hour increase to operate the tractor. If this tractor accomplishes a field operation at a rate of 10 acres per hour, the increased fuel costs will be 39 cents per acre. With lubrication costs at 15 percent of fuel costs, the total fuel costs increase would be 45 cents per acre compared with last year.

It's important to calculate increases in machinery costs to help with cash flow and business planning whether you're doing custom work or hiring it done, Jose said.

People who offer custom work or other tasks need to know their costs before setting their rates.

Other costs to consider are repairs and labor. Depreciation costs make up about 10 percent of total machinery costs while taxes, housing, interest and insurance can be calculated at 6.5 percent. Calculating these changes in expected machinery costs will help maintain control of this expense, Jose said.

"Its important to keep in mind the portion of a custom rate that represents your own time and labor as well," Jose said.

Custom rates should cover full operating costs, overhead costs such as vehicle costs associated with doing custom work, depreciation and the value of operator's time.

"When setting rates for 2005 work, work through how the expected changes in costs will affect the cost of the services you provide," he said. "If you are a farm operator, calculate these changes to help with cash flow and business planning to identify how you can maintain control of this critical cost in your operation."

Depending on how many acres a farmer has, availability of labor and the efficiency of equipment, custom hiring still can be a bargain compared to owning your own machinery, Jose said. One such example would be hiring a custom farmer to do planting operations because they are only done once a year.

For more information about custom rates in Nebraska, consult Nebraska Cooperative Extension Circular EC04-823-A, 2004 Nebraska Farm Custom Rates – Part I, and EC04-826-A, 2004 Nebraska Farm Custom Rates – Part II, both available from a local Cooperative Extension office or on the Web.

3/8/05-SAK

Doug Jose - Ph.D.
Agricultural Economics
Professor
(402) 472-1749

Sandi Alswager Karstens
IANR News and Photography
(402) 472-3030

Department: Agricultural Economics