June 16, 2015

As farmland rental rates continue to climb, and commodity price volatility and yield fluctuation risks threaten margins under typical cash rental contracts, one answer that can be beneficial to both the landowner and farm operator is a custom farming agreement.

Under a typical custom farming agreement, the landowner is considered the ‘material participant’, paying for all seed, fertilizer, crop insurance, chemicals, and other inputs necessary for production, while the farm operator performs all machine operations on the land including tilling, planting, spraying, and harvesting for a fixed rate or fee. The landowner then receives all grain produced on the land, and all farm program payments associated with the land.

Under such an agreement, the landowner can make all of the crop production and grain marketing decisions without having to invest capital in a full line of farm machinery, while also not having to worry about negotiating rental rates or collecting lease payments – although the landowner does have to pay their custom operator a contracted per-acre fee by specified dates.

For a custom operator, such agreements provide a fixed extra income with the need for little additional operating capital or farm machinery investment, outside of fuel and repair expenses. While in a good year, it is true that profits under a custom farming agreement will be lower than under a cash rental agreement, this is offset by the elimination in price and yield risks.

When entering into such an agreement, there are things to keep in mind, however. A custom farming agreement is more along the lines of a production-in-partnership agreement. Open lines of communication between the landowner and operator are key. The timing of planting, tilling and harvesting need to be negotiated between the two parties prior to the beginning of the season, but this can become a challenge in the event of adverse weather. Any additional replanting of acreage due to weather, or additional spraying of herbicides or pesticides due to exceptional weeds or pests are usually charged to the landowner at an additional custom rate above the original custom farming rate agreed to prior to the season.

In addition, usually all grain harvested from the land is delivered to a storage facility either owned or rented by the landowner or to a pre-agreed upon grain elevator. However, if at the end of the season, grain needs to be delivered outside of an agreed upon local area, the landowner is usually responsible for extra grain hauling charges.

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