Farmers look to diversify during a time of shrinking profit margins, but at what cost?

By: Brady Gooden

As we enter the sixth year of declining or flat prices, ag producers continue looking for additional ways to increase revenue.  Even with three consecutive years of record or near-record yields for many local producers, operations continue to face shrinking profit margins.  What will happen if prices continue to stay flat and production slips to average or below average yields?  Hoping to combat this reality, many producers have looked to diversify their operation as a  way to increase revenues.  Diversification often involves using the tools and equipment at their immediate disposal.  Custom spraying, custom manure hauling, custom grain hauling, custom planting, custom harvesting, custom tillage, custom livestock feeding…custom, custom, custom. 

What’s the problem then?  If the proper steps are taken, absolutely nothing.  Increasing revenue with a minimal increase to expenses or wear and tear on equipment is a fantastic way to improve the bottom line.  Taking the proper steps is the key to protecting yourself, however.  Sure, it would be great to spray the neighbors’ 500 acres twice per season at $5 or $6 per acre, but what does your farm liability company think of that?  More than likely, they are not automatically providing coverage for overspray or drift while custom applicating.  However, if you contact them, many companies WILL provide the coverage for an additional premium.  You might even be surprised to find out how inexpensive it really is. 

State or federal regulations are another thing to consider.  Do you need your commercial applicators license if you start custom spraying?  Putting your semi-tractor and trailer to work during the slow months is an extremely popular idea among producers, but what needs to be done to haul for others?  This one is usually a bit more complicated and the costs can add up a little faster.  Federal motor filings, commercial truck insurance, cargo insurance, truck authority…all things that need to be considered.  These items can certainly add up, to the point where it may not make sense to pursue custom hauling, unless you’re going to do a lot of it.  But again, some larger ag insurers are willing to take on these risks for an additional premium.  

The cost for additional licensing or insurance may be very reasonable, or may be prohibitive, depending on what you are doing.  However, it pales in comparison to what it might cost a producer that fails to go through the proper steps.  Let’s say Farmer John decides to start custom hauling grain for a couple of his neighbors.  He thinks, “I’ve got $3 million worth of liability coverage between my vehicle policy and my umbrella, I’ll be fine.”  What if Farmer John gets into an accident and seriously injures or kills someone?  Well, if he’s custom hauling and his company doesn’t know about it, there’s a chance his liability coverage is going to be $0 at the time of a claim.  So, then what happens?  If Farmer John doesn’t have the money in the bank to cover the judgements against him, he’s likely going to have to sell the farm.  This is a nightmare scenario, and something that could have been avoided with a call to his insurance agent. 

This is not to say producers should avoid taking on custom work.  As stated before, it’s a FANTASTIC way to increase revenue at what’s usually a small additional cost to the operation or wear and tear on equipment.  But, producers need to make sure they are asking the proper questions beforehand and not leaving themselves and their operations exposed to unnecessary risks.  More than likely, the resources to properly conduct custom operations are readily available to all producers.  If there is a question regarding licensing, filings, or regulations, call your attorney.  If you have insurance related questions, call your agent.  These are key members of your business team and they are in your corner willing to help.