SIX YEARS AGO, corn and soybean farmers Jim Dobson and his nephew T.J. Dobson were made an offer they couldn't refuse. They were asked to custom farm 1,500 acres for Lynn Clarkson, a local farm manager and president of Clarkson Grain Company of Cerro Gordo, IL.
“The operator he had on his farm decided to quit,” says Jim Dobson, who owns and runs his own farm in partnership with his nephew. “So he approached us to do farming on a custom basis.”
Under the arrangement, the farmers are paid a per-acre rate to do all of the farming operations. But they get none of the profits from the crop. As an incentive to do well, they are paid a per-bushel bonus for production.
“We decided it was a good opportunity,” Dobson says. “It was a way to use our existing machinery lineup over more acres and get a steady cash flow.”
Dobson knows of several other farmers in his area who are hiring out their services. And although the number of farmers doing custom work is still small, experts say we can expect to see more of it.
“It's a trend that is growing across the Midwest,” says Jerry Warner, chief management officer for Farmers National Company, Omaha, NE. He says his farm management company is hiring more custom farmers each year.
Sign of the times
Having a second enterprise is not new to farming. According to John Baker, an agricultural attorney with Iowa State University, farmers 100 years ago did harness making, cabinet making or blacksmithing to increase their income. “Farmers today are doing the same thing, only in a modern era,” Baker says.
Several factors are pushing this new arrangement. One is landowners. “There is a new generation of landowners who are focused on the financial side of the business,” Warner says. “These clients are willing to take on all the production risks to obtain a bit better return because farm leasing is just like anything else — the more risk, the more reward.”
Custom farming gives them that opportunity. Unlike traditional 50-50 crop share arrangements, custom farming entitles landowners to all the profits from the crop. But they foot all the bills for seed, chemicals and other inputs. They also take on all the risks, such as poor yields or low crop prices.
However, they are risks that more and more landowners are willing to take. A case in point is Dobson's employer Lynn Clarkson. “I am quite comfortable taking on all the production risk myself,” Clarkson says.
Clarkson switched from the traditional 50-50 arrangement to custom farming 10 years ago because the 50-50 split was not returning a reasonable return to his capital investment in the land. “The 50-50 blend comes from another era where the values of contributions were significantly different than they are today,” Clarkson says. “So it worked then, but it doesn't work today.”
Technology a driver
A second factor pushing the trend is advancements in technology on the farm. Bigger and better equipment is allowing farmers to farm more acres in less time than before. And the advent of no-till and pesticide-resistant crops has reduced the number of trips across the field, thereby saving time.
“We now have things like Roundup Ready soybeans that you don't have to cultivate,” Warner explains. “You just spray the crop for weeds and harvest it. And then there's Bt corn and rootworm-resistant Bt corn that don't require pesticide applications.”
These technologies are eliminating much of the work farmers had to do in the past, freeing them up to do more work for someone else.
Pros and cons
Doing custom work can offer farmers a number of benefits. One benefit is a guaranteed income. Cash is paid shortly after each operation is performed, and the income can be used to pay expenses throughout the year. “So bankers typically are very encouraging to farm operators considering doing some custom work because it helps their cash flow,” Warner says.
A second advantage is that custom farmers have no risk in growing or marketing the crop. They are paid a fixed rate no matter what, and landowners take all the risk.
Third, because a custom farmer runs his machinery over more acres, his per-acre machinery cost is lowered.
And finally, a farmer needs little or no additional operating capital to do custom work. According to William Edwards, agricultural extension economist with Iowa State University, fuel, lubrication, and repairs to machinery are usually the only added costs.
On the downside, custom farmers tend to supply some management free to the farm even though the owner is gaining all the potential benefits, according to William Harryman, extension educator with the University of Illinois. In addition, custom farmers get none of the profits from the crop. Finally, a custom farmer's machinery repair costs may be greater, and custom rates may not be high enough to allow him to purchase a higher-priced replacement machine.
However, for a growing number of farmers like Dobson, the advantages of custom farming exceed the disadvantages. The biggest benefit Dobson sees is that he doesn't have to battle high cash rents, which are as high as $200/acre in his area.