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 Hyde Dept. 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.

What is Custom Work? Think of it as “Out-sourcing”

What is Custom Work? Examples related to Animals Heifer raising Dry/transition cow housing & mgmt. Hoof trimming Artificial insemination Heat Detection Mating/genetics

What is Custom Work? Examples Related to Crops Tillage & cultivating Planting/drilling Spraying/fertilization Harvesting Wrapping round bales Filling ag bags Grinding & shredding TMR/feed sales

What is Custom Work? 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

Does it Make Sense For You? Partial Budgeting Worksheet Let’s work through an example partial budgeting problem to analyze the decision to have heifers custom raised.

Does it Make Sense For You? Partial Budgeting Worksheet 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.

Does it Make Sense For You? Partial Budgeting Worksheet Positive Impacts Added returns: having heifers custom raised does not increase revenues.

Does it Make Sense For You? Partial Budgeting Worksheet Positive Impacts Reduced costs: Look at the costs that are reduced when the farmer doesn’t raise his own heifers.

Does it Make Sense For You? Partial Budgeting Worksheet Reduced Operating Costs CostAmount Feed$ Labor$ AI Breeding$45.00 Bedding$20.00 Vet & Med$15.00 Total$943.07

Does it Make Sense For You? Partial Budgeting Worksheet Reduced Ownership Costs CostAmount Buildings$60.02 Equipment$63.88 Total$123.90

Does it Make Sense For You? Partial Budgeting Worksheet Reduced Animal Ownership Costs CostAmount Mortality$1.25 Miscellaneous$40.00 Interest$74.69 Total$115.94

Does it Make Sense For You? Partial Budgeting Worksheet Total Reduced Costs CostAmount Operating$ Ownership$ Animal Ownership $ Total$

Does it Make Sense For You? Partial Budgeting Worksheet Negative Impacts Reduced Returns: Having heifers custom raised does not reduce the farm’s revenues.

Does it Make Sense For You? Partial Budgeting Worksheet Negative Impacts Increased Costs: Look at how much the grower will charge for the services.

Does it Make Sense For You? Partial Budgeting Worksheet Total Added Costs CostAmount Grower’s fee$ Refund for calf death$1.00 Transport to grower$10.00 Transport to dairy$20.00 Interest$71.16 Total$

Does it Make Sense For You? Partial Budgeting Worksheet Net Effect ImpactAmount Reduced Costs$ Added Costs$ Net Reduced Costs$95.25

Does it Make Sense For You? Partial Budgeting Worksheet Net Effect Each heifer raised by the custom grower increases farm profit by $95.25 For 75 heifers, this amounts to $

Does it Make Sense For You? Partial Budgeting Worksheet 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

What Else Should You Know? Be sure that the contract is advantageous to you! John Becker lays out some questions to consider when developing a contract:

What Else Should You Know? Do both parties clearly understand the obligations of the contract?

What Else Should You Know? Does the contract account for the possibility that something may arise to prohibit the supplier from providing service in a timely manner?

What Else Should You Know? What are allowable excuses for failure to perform the custom services?

What Else Should You Know? Can either party transfer their rights and obligations under the contract?

What Else Should You Know? Who provides insurance against damages or losses that may occur while the contract is in effect?

What Else Should You Know? Have the important dates and times been clearly spelled out in the contract?

What Else Should You Know? Are there any implied or expressed warranties or guarantees in the contract?

What Else Should You Know? 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.

Should You Do Custom Work? Advantages: Good way to supplement income Make more efficient use of owned equipment

Should You Do Custom Work? 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