One of the most costly and critical operations in cotton production is harvesting. According to University of Arkansas enterprise budgets, harvesting accounts for up to 17 percent of the variable cost of producing an acre of cotton. Fixed costs of cotton harvest are significant as well.
Decisions related to purchasing harvest equipment typically involve thousands of dollars.
One alternative to outright purchase of a piece of harvest machinery is custom hiring, which addresses both timeliness and cost efficiency of harvest. Custom hiring gives a producer short-term control of harvesting equipment without investing a large amount of capital.
In the case of cotton, the capital investments can be far-reaching. A producer has to secure a cotton picker, a module builder, tarps, a boll buggy, additional tractors (if they are not already available), and above all, labor to operate the equipment. With the planting flexibility current farm legislation provides, cotton equipment is very specialized.
When evaluating whether to custom hire your harvesting operation, there are some key advantages and disadvantages to consider:
- The farmer has no responsibility for operating or maintaining the machinery.
- There is no long-term capital investment in the machinery.
- There is no responsibility for liquidation of the machinery if, for example, cropping practices change.
- Typically, the custom operator's machinery will be recent models and in good condition.
- Availability. Scheduling should be worked out in advance of harvest.
- The hiring farmer gives up some degree of control over the harvesting operation.
Producers should compare costs of owning a machine to the costs of custom hiring. The following formula can be used to determine breakeven acres (the point at which it is as cheap to own or custom hire):
Breakeven acres = Total annual harvest equipment fixed costs/Custom rate/acre - Variable cost/acre
For example, a grower determines that his total annual fixed cost on his cotton picker, module builder, and boll buggy totals $42,668. He also estimates that his variable harvesting costs (labor, repairs, and fuel/oil/grease) will be $22.31 per acre. A custom operator will charge 10 cents per pound of lint harvested. Using an average yield of 812 pounds per acre, hiring the custom harvester will cost an estimated $81.26 per acre.
Under this scenario, if the producer harvests at least 724 acres or more, owning the harvesting equipment would be feasible. In other words, per acre costs associated with owning the equipment would be spread over a sufficient number of acres to be less than the per acre cost of hiring a custom harvester.
724 acres = $42,668/$81.26/acre - $22.31/acre
Most producers prefer to own their equipment. Being able to control timeliness and quality of harvest provides peace of mind. However, custom hiring is an alternative for producers constrained by a lack of labor, multiple enterprises with similar maturity dates, too much acreage for existing machinery inventories, or too little acreage to justify ownership of harvest machinery.
Scott Stiles, Rob Hogan, Kelly Bryant, and James Marshall are University of Arkansas Extension economists. Comments or questions? Call 870-460-1091 or e-mail [email protected].