custom work can be profitable for your dairy farm! penn state is committed to affirmative action,...

Custom Work Can Be Profitable For Your Dairy Farm!

Penn State is committed to affirmative action, equal opportunity, and the diversity of its workforce

Sarah Roth and Jeffrey HydeDept. of Agricultural Economics and Rural Sociology

Penn State University

Presentation Overview

• What is Custom Work?• What Are the Advantages?• What Are the Disadvantages?• Does it Make Sense For You?• Where Can You Find Custom Workers?• What Else Should You Know?• Should You Do Custom Work?

What is Custom Work?

When a person/business outside of the farm operation is hired to perform one

or more activities necessary for the function of the farm as a whole.


Think of it as

“Out-sourcing”


Examples related to Animals

•Heifer raising•Dry/transition cow housing & mgmt.•Hoof trimming•Artificial insemination•Heat Detection•Mating/genetics


Examples Related to Crops

•Tillage & cultivating•Planting/drilling•Spraying/fertilization•Harvesting•Wrapping round bales•Filling ag bags•Grinding & shredding•TMR/feed sales


Miscellaneous Examples

•Brush hogging•Fencing•Hauling•Manure pumping & hauling•Skid Loading•Motor repair•Sharpening

What Are the Advantages?

• Free up management & labor for

remaining enterprises

• Concentrate efforts in fewer enterprises

- Specialization

• Obtain higher quality product

• Cut input and/or production costs

What Are the Disadvantages?

• Different type of control over tasks

• Tasks may not be completed on the

same time-table

• Must be able to cash flow for payments

Does it Make Sense For You?

To determine if hiring custom work will be profitable, you can use

tools such as:

• Enterprise accounting• Partial Budgeting


Partial Budgeting Worksheet

Let’s work through an example partial budgeting problem to analyze the decision to have

heifers custom raised.



Objective

Farmer is comparing the positive and negative impacts

of raising one heifer on the farm versus having that heifer

raised by a custom grower.



Positive Impacts

Added returns: having heifers custom raised does not increase revenues.



Positive Impacts

Reduced costs: Look at the costs that are reduced when the farmer doesn’t raise his own heifers.



Reduced Operating Costs

Cost Amount

Feed $703.07

Labor $160.00

AI Breeding $45.00

Bedding $20.00

Vet & Med $15.00

Total $943.07



Reduced Ownership Costs

Cost Amount

Buildings $60.02

Equipment $63.88

Total $123.90



Reduced Animal Ownership CostsCost Amount

Mortality $1.25

Miscellaneous $40.00

Interest $74.69

Total $115.94



Total Reduced CostsCost Amount

Operating $943.07

Ownership $123.90

Animal

Ownership

$115.94

Total $1182.91



Negative Impacts

Reduced Returns: Having heifers custom raised does not reduce the farm’s revenues.



Negative Impacts

Increased Costs: Look at how much the grower will charge for the services.



Total Added CostsCost Amount

Grower’s fee $985.50

Refund for calf death $1.00

Transport to grower $10.00

Transport to dairy $20.00

Interest $71.16

Total $1087.66



Net Effect

Impact Amount

Reduced Costs $1182.91

Added Costs $1087.66

Net Reduced Costs $95.25


Partial Budgeting WorksheetNet Effect

Each heifer raised by the custom grower increases farm profit by $95.25

For 75 heifers, this amounts to $7143.75



Other considerations

Value of additional time

Health of animals

Biosecurity

Increased/decreased production

Where Can You Find Custom Workers?

You can find information about custom workers in your area from

these sources:

• Extension • Input Suppliers• Business Consultants• The Internet

What Else Should You Know?

Learn more about the individual or business you are interested in hiring!

Ask for a few clients to contact as references

Talk with the operator’s suppliers


Be sure that the contract is advantageous to you!

John Becker lays out some questions to consider when developing a contract:


Do both parties clearly understand the

obligations of the contract?


Does the contract account for the possibility that something may

arise to prohibit the supplier from

providing service in a timely manner?


What are allowable excuses for failure

to perform the custom services?


Can either party transfer their rights

and obligations under the contract?


Who provides insurance against damages or losses

that may occur while the contract is

in effect?


Have the important dates and times

been clearly spelled out in the contract?


Are there any implied or expressed warranties or

guarantees in the contract?


Does the contract specify how

disputes between the buyer and seller are to be handled?

Should You Do Custom Work?

Relevant question for:

1. Those interested in expanding their operations,

2. Those with excess machinery capacity (combines, planters, etc.), or

3. Those looking to exit production but wanting to remain in the dairy industry.


Advantages:• Good way to

supplement income• Make more efficient

use of owned equipment


Disadvantages:• May spread yourself

thin (not enough time)

• Essentially working for someone else

Summary

Custom hiring is an opportunity,

however not a necessity

Analyze the situation to make sure that

a change will be profitable

Every option has their respective

advantages and disadvantages…know

what they are

custom work can be profitable for your dairy farm! penn state is committed to affirmative action,...

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