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farawayguy
Veteran Contributor

Should I Custom Farm?

I have found myself managing rent on family farmland and am considering trying my hand at custom farming, by which I mean hiring out the work (opposite of a previous post I read). I live way out west, but the land is in Illinois. I have about 550 acres (combined) in two parcels 5 miles from each other - all A rated farmland for corn and soybeans. I grew up on a farm, but that was 30 years ago - much has changed! Am I crazy to try this?  I have an MBA in Financial Planning and I'm thinking I'm leaving too much on the table cash renting, and I don't really want to just jack up the cash rent to the current tenant, farmer, so I thought maybe a total change of operations is needed. I'd love to hear opinions.

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62 Replies
gbryce
Frequent Contributor

Re: Should I Custom Farm?

I think you need to talk to RSW Farms. He is quite experienced on this. Smiley Wink

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farmerguy89
Advisor

Re: Should I Custom Farm?

Bad advice
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iowastateisgreat
Contributor

Re: Should I Custom Farm?

I have several farms that are operated by custom farmers and can honestly tell you that it is a lot more work than you think.

 

Frankly, the time to have land custom farmed has past. The fat margins for the operators are in the rear view mirror. I would bet a cash rent auction price would be very close to the returns you would get custom farming over the next three years with a lot less risk.

 

If you were close by it might be worth getting a bigger piece of the action. But with you living out of the area, I  wouldn't consider it.

 

If anything, you might want to consider a flex lease where you share in the good times and get less when yields/prices are lower. That would keep you involved without all of the added stress of figuring out crop insurance, FSA programs, grain marketing, etc.

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tree fmr
Advisor

Re: Should I Custom Farm?

Share crop might be the way to go. I live in Japan and do this with Iowa land. Family operation, we think this is the best way to keep anyone from going broke. Also for sharing in the good times.....and bad.
farawayguy
Veteran Contributor

Re: Should I Custom Farm?

Okay, I really appreciate your advice and think it's very good. But here are some more points:

 

1. Opening the farm up to a lease auction is not an option, for what I'll call realtionship reasons. I agree with you that I could do about as well, but it's not going to happen that way. 

 

2. I'm assuming I'd have to pay maybe $60 - 70k to have these 550 acres custom farmed in 50/50 corn/soybeans. I'm no expert in flex leases, but could I really do better than that over the long run? 

 

3. I do realize it's going to be a fair amount of work. I know I'll have a steep earning curve. I'm assuming I'd go back there in the spring and/or fall for a few weeks, more for peace of mind than anything. I do have a concern about getting the crop in and out in a timely fashion (I'd be last in line no doubt), but being two large parcels within 5 miles seems like it would be pretty efficient that way for a farmer. 

 

4. Point against this - I don't have a storage option right now, other than the local elevator. Is that doable?

 

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BA Deere
Honored Advisor

Re: Should I Custom Farm?

Storing grain commercially is pretty high priced and to store in your own bin isn`t for amateurs, I hate it even more than the marketing itself.  To hire a custom farmer, you have to get a good honest one for it to work.  Around here this season when there was only a narrow planting window, one wonders whose farms that a custom opperator chose to concentrate on and whose he chose to forget about.

 

The past 3 yrs or so a landlord even getting top dollar left "money on the table" but you can`t judge the future by the last 3 yrs.

 

IMO if you have good land, it`s a disadvantage for the landlord to rent it out on shares. 

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rswfarms
Senior Contributor

Re: Should I Custom Farm?/Yes

It sounds like you are at a point in your farmland ownership that I was over 20 years ago. I started out cash renting my land out to the local farmers, but after a few years my analysis of Cash Renting vs Custom Farming showed I was leaving a large amount of money on the table by cashing renting. Although the 2012 crop year was the best/most profitable year I have ever had, if I had just cash rented my farmland out for $475/acre, rather than Custom Farming my land in the 2012 crop year, I would have left over $900,000 on the table. An extra $900,000 in pure profit for just 1 crop year is well worth the risk and extra work that Custom Farming has. Not all years will be as profitable as 2012 was for Custom Farming, but the over 20 year time period I have now Customed Farmed my North-Central Iowa farmland, my overall analysis shows in the long-run you will make more of a profit by Custom Farming vs Cash Renting your land. I too live 160 miles away from all the Iowa farms that I own, but if you are well organized and have a good software computer package you certainly don't need to live on the farms to Custom Farm them. I have a economic degree from the University of Iowa so with that experience and the ability to write my own computer programs, Custom Farming was the way to go with my farm operation. All 9 Iowa farms I own are all within 10 miles of each other and I have had the same Custom Operators for over 20 years now and I trust them and they do a good job.I pay them at a little higher than normal Custom Farm Salary of $150/acre or over $275,000 total for my entire Farm Operation. But as I mentioned, I had a $900,000 higher profit by Custom Farming in 2012, than I would have recieved just Cash Renting my farms out at around $475 to $500/acre. With your MBA Degree you obviously understand the basic Accounting needed to Custom Farm, so I think after you get the learning curve over with you will be glad you switched to Custom Farming over Cash Renting.

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kraft-t
Senior Advisor

Re: The storage option is not cheap.

Your custom operator will want to be paid for filling the bin and empting the bin. And someone has to keep track of the grain condition, whether it is dry enough. Whether you have insect infestation. When to turmn the vent fans on and when to turn them off. All that includes time and effort. Interest and depreciation on the storage and equipment.

 

Remember, when you haul wet grain to the elevator ever bushel is dried perfectly and shrink is calculated accordingly. On farm storage does not always provide that accuracy.

 

The purpose of storage is to capture a better price. Which may mean a combination of market increases and basis improvement. However, there is an opportunity for losses as well and you investment may not produce gains.

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hardnox604008
Advisor

Re: The storage option is not cheap.

I don't think I'd build storage if I wasn't there to manage it.  Period. It doesn't take much grain going out of condition to make it a losing proposition and in that case I'm not sure I'd trust anybody that far away to look after it for minimum wage.

 

Only exception, I suppose, would be if you had a lease tenant who was also willing to pay a strong rental payment on storage. But that would mostly be a game for people with money who are just looking for a modest return on it.

 

PS. Getting docked on $2 corn was painful when it happened but getting docked on $7 corn is even more so.

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