An alternative to leasing farmland is a custom farming agreement (CFA). In a typical CFA, the custom operator agrees to perform all the machine operations on the owner’s land in exchange for a set fee or rate. The landowner pays for all seed, fertilizer, chemicals, crop insurance and other input costs; receives the all grain produced and all eligible farm program payments on the land; and is responsible to store and market the grain.
Following are the average custom farming rates for 2012, based on the Iowa Farm Custom Rate Survey (includes tillage, planting and harvesting costs):
One obvious advantage to the custom operator is that a CFA provides some extra farm income, with little or no additional operating capital or farm machinery investment. Fuel, lubrication and repairs are usually the only added costs. In addition, custom farming offers a fixed return per acre to the custom operator, and although there is some possibility of higher repair bills, this is minor compared with the price and yield risks typically faced by a farm operator in a normal cash rental contract. Of course, in a good year, profits from a CFA will be lower than under most cash rental leases; however, in this era of much higher land rental rates there is much more risk to the farm operator with a cash lease as compared to a custom agreement with a landowner.
Landowners also find several advantages to a CFA. Landowners with small acreages can make most of the crop production and grain marketing decisions without the investment into a full-line of farm machinery. The landowner does not have to negotiate land rental rates or worry about collecting lease payments, since the owner receives all of the crop. The landowner does have to pay the farm operator an agreed upon per-acre fee for the custom farming services by specified dates. The landowner is considered to be the material participant for income tax purposes, and the landowner is typically entitled to all government farm program payments.
Although the concept of a CFA is simple, close communication between the custom operator and the landowner is essential. A written contract for the CFA should definitely be prepared that specifies the amount of payment by the landowner to the custom operator, and all other pertinent details. Following are some points to consider for CFAs:
For more details on CFAs, the 2012 Farm Custom Rates and other farm machinery information, please refer to the Iowa State University Ag Decision Maker website.
Editor’s note: Kent Thiesse is a former University of Minnesota Extension educator and now is Vice President of MinnStar Bank, Lake Crystal, MN. You can contact him at 507-726-2137 or via e-mail at firstname.lastname@example.org.