Kansas State MF2583

Kansas State MF2583 - Custom Rates and the Total Cost to...

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1 Farm machinery is a vital part of most farming operations, from the physical work it performs in the production process to the enjoyment provided from its operation. For producers, landowners, or farm man- agers who do not have the capital, time, or desire to perform machinery operations themselves, hiring a custom operator to perform machinery operations is an alternative method of obtaining machinery services. For others, custom farming may be a method to spread ±xed costs of machinery over more acres, reducing per unit costs and increasing cash ²ow. Regardless, whether a business is a user or provider of machinery services, determining a rate to charge for machinery services can be dif±cult due to the various costs of farm machinery. One alternative to calculating ownership and operation costs to help determine charges for machin- ery services is to simply use custom rates, for example, those published annually in Kansas Custom Rates (Kansas Agricultural Statistics). However, research of farms in Illinois indicates published custom rates do not represent the full cost to own and operate machin- ery (Schnitkey). This publication discusses the following issues regarding machinery costs and custom rates: (1) to what degree do custom rates cover all ownership and operating costs of farm machinery? (2) why don't custom rates cover the total cost to own and operate machinery? (3) what are the total costs to own and operate machinery on average? (4) how can a farmer apply these results to his or her operation? and (5) how can a producer benchmark machinery costs? This research does not question that the Kansas Agricultural Statistics (KAS) custom rates published in Kansas Custom Rates are truly what are charged and paid for custom-provided machinery services. Rather, it questions whether the published custom rates cover all costs an individual or entity incurs to own and operate farm machinery. The competitive market of custom machinery operations will ultimately deter- mine the price of custom rates. However, discussion of the issues surrounding custom farming, and determin- ing average rates that cover all ownership and operat- ing costs will aid custom operators and individuals hiring the service of custom operators. Do published custom rates cover all costs? Based on Illinois data, Schnitkey concluded that, on average, it costs Illinois farmers $90.60 per acre annu- ally to perform machinery operations. Alternatively, if the operations would have been hired at the state average custom rate, he estimated that it would cost approxi- mately $70 per acre annually. Thus, he estimated that actual costs are almost 30 percent higher than custom rates. Using KAS-reported custom rates along with ±nancial and ±eld-operation data from the Kansas Farm Management Association (KFMA), a “Relative Custom Rate Ratio” was developed. This ratio mea- sures what it actually costs Kansas farmers to perform machinery operations relative to the statewide average
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Kansas State MF2583 - Custom Rates and the Total Cost to...

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