Farmers should not shy away from benchmarking

Whenever I bring up benchmarking with grain-farming clients, I generally get two reactions.

The first is from producers who immediately buy into the idea and want to know how they compare to other farms.

The other group either think they are already equal to their neighbours or they don’t want to find out. Most farmers will spend all day and night talking, reading and even tweeting about farming to anyone but they are also fiercely independent businesspeople and don’t like to talk about the financial health of their business.

The usefulness of a benchmark is not as much a ranking tool as it is a method to help evaluate and direct business decisions. I like to break it down into three main areas: profit, trend and focus.

Profit

I don’t like to say it’s all about the money but in business it is generally a good place to start. Whenever I look at a financial statement, I always start at the bottom of the income statement with the profit line. A benchmark can take out the markets, weather and size and show the impact of effort and management on a per unit basis (per acre for grain farms). Are we generating a reasonable profit for the size of our operation on a per unit basis. If not, why? And secondly, does it matter? The only two things we must give are time and money. If our efforts do not generate a return, then over the long run, are we making good use of our time? It is OK to give up some profits to devote your time elsewhere, but how can we make an informed decision if we don’t know what we are giving up? There is often a concern among producers that one region can be more profitable than other regions and farms can’t be compared across broad geographical areas. In our Manitoba region, our most recent grain benchmark numbers showed that the top 15 producers were spread over 10 crop insurance risk areas, indicating to me that strong management is just as, if not more valuable, than good land.

Trend

What trend you are on is just as important as where you are. This is one of the greatest benefits of using benchmark data versus historical averages or targets. In Western Canada, producers have maintained profits by not only expanding acres but by continually pushing yields higher. The current trend is adding one bushel per acre per year in wheat yield and more than one-half a bu. per acre in canola. We know that costs are rising along with the increase in yield. If we understand how our trend compares to the benchmark trend, it helps us to see if we are keeping up on a revenue basis and managing our costs. A five-year historical average on machinery costs is useful but you can’t buy a new combine for the same price as in 2013. This needs to be taken into consideration. Trend also gives us hope if some costs are out of line. If we can hold them in the short term, it may bring us back into line with the benchmark over time.

Focus

Focus is the final piece after you understand how you compare from a profit standpoint and the trend you are on. A farm financial statement is full of numbers and it is easy to get caught up focusing on something that isn’t important. If you aren’t hitting the profit target, then you can go back to see where the problem might be. Are we short on revenue? Do we spend too much on inputs versus what we get in return? Is it costing us too much in operating costs or overhead? It might not lead to an easy solution, but at minimum it will give you more certainty in how you deploy your management skills. If you are one of the most profitable producers, does it change your perspective on how you approach growth?

Farmers are all trying to play the same game but ultimately no two farms or farmers are exactly alike. By using benchmark information, you can see what things make your farm successful, how you can continue to achieve that in the future and what areas to focus on to make it happen.

Peter Manness is a farm management consultant with MNP in Brandon. Email him at peter.manness@mnp.ca or follow him on Twitter or LinkedIn.

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