Custom Farming: An
Alternative to Leasing
FM-1823 Updated September 2009
Ag Decision Maker
Do you have the labor and machinery capacity to
farm more acres, but do not want to lease more
land? Would you like to reduce the fi nancial risk
exposure that you are carrying on leased crop land? Have
you reached the payment limitation on one or more types
of USDA commodity payments?
Are you a farm owner who does not want to invest in
a full line of machinery? Are you fully employed away
from the farm or retired?
An alternative to leasing farmland is custom farming. The
custom operator agrees to perform all the machine opera-
tions on the owner’s land in exchange for a set fee or rate.
The landowner pays for all seed, chemicals, and other in-
puts, and keeps all of the crop and commodity payments.
One obvious advantage to the custom operator is that little
or no additional operating capital is needed. Fuel, lubri-
cation, and repairs are usually the only added costs. In
addition, custom farming offers a fi xed return. Although
the possibility of higher repair bills poses some risk, this
is minor compared with the price and yield risks faced by
a tenant. In a good year, of course, profi ts from custom
farming will be smaller than under a conventional lease,
but this is a common trade-off for reducing risk.
Landowners fi nd advantages to custom farming as well.
Owners with small acreages can make most of the produc-
tion and marketing decisions without investing in a full
line of machinery. There are no lease payments to collect,
since the owner receives all of the crop. The owner would
usually be considered a material participant for tax pur-
poses, and would be entitled to all government payments.
Although the concept of a custom farming agreement
is simple, close communication between operator and
owner is essential. First, an accurate count of the number
of acres to be farmed and their location should be agreed
upon and recorded. Soil maps and fi eld measurement