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The pressures affecting farm profitability are growing, especially with recent developments such as rising inflation, high interest rates and unanticipated costs. While you can’t predict the future, financial benchmarking is a way dairy farmers can review concrete information about their operations – and how they compare to others in the industry – year after year.
A benchmark is not as much a ranking tool as it is a method to help evaluate and direct business decisions. Let’s discuss how benchmarking works and how you can use this tool to optimize profitability and reduce financial risks to your farm.
Why benchmarking is more than just a ranking tool
Beyond ranking your operations with other farms, benchmarking gives you the insight you need to see what you’re doing right and where you could improve. It is the first and most important step on the path to better understanding your business and focusing your efforts to ensure its long-term success.
Even if what you have been doing has been working to date, taking a deeper look at your operation in relation to others throughout the industry and across the country will enable you to capitalize on opportunities to maximize profitability, increase performance and optimize efficiency.
What are the basic elements of benchmarking?
Agriculture is a trends-based industry. While it may not always feel like it, your dairy farm is different this year than it was last year. Additionally, your current cost structure is very different from what it was 10 years ago – but so are your price expectations.
It can be difficult to know where you stand and if you are maintaining profitability trends relative to your peers with all the changing elements and moving pieces of your business. A benchmark shows your current financial snapshot as well as the revenue, cost and profitability trends, in per-unit format, so you can compare similar farms to your own.
Throughout the benchmarking process, an adviser will guide you through the key financial performance metrics of your business to help you determine what is working well, where you could focus more attention and what benefits you may gain from further in-depth analysis or consultation.
How benchmarking benefits your dairy farm
Benchmarking can be broken down into three main areas: profit, trend and focus. Let’s review each of these key areas to identify the benefits that benchmarking can bring to your dairy farm.
Profit
It is never all about the money, but it is important to understand your profits in comparison to other farms in the region. It may expose more opportunities to access resources – for example, if you are more profitable than your neighbour, you may be able to purchase a piece of their land and expand your farm operation.
A benchmark can take unpredictable variables out of the equation to show the impact of effort and management on a per-unit basis. It allows you to evaluate if your farm is generating a reasonable profit on a per-unit basis. If not, it provides you with the insight to determine the reasons why.
Benchmarking can also help you assess if you are making good use of your time over the long run, even if your efforts are not currently generating a return. It is OK to give up some profits to devote your time elsewhere – but you need to know what you are giving up before you can make an informed decision.
Trends
Benchmarking allows you to see where you fit in with year-on-year trends in the industry, instead of comparing your dairy farm to historical averages or targets. A truly effective benchmark should look at more than just production parameters – it should also include items like financing, machinery expenses and profits.
Long-term thinking is necessary to make improvements in these areas – which requires you to understand where you fit in with the rest of the industry, as well as what is happening in your farm operation each year. A solid understanding of year-on-year trends can motivate you to make improvements in the right areas.
For example, if the data reveals your labour costs are higher than those in the top third of the benchmark, you can start to evaluate the reasons behind that. Higher labour costs may be OK because that is how your farm is built, or there may be improvements you can make to lower those costs over time – increasing your profitability.
Focus
A farm financial statement is full of numbers – and it can be difficult to know where you should focus your attention. Benchmarking allows you to go back to see where potential problems may lie if you aren’t hitting your profit targets. The data it provides can help you identify if you are short on revenue, if your farm operation spends too much on inputs versus what you receive in return, or if you are paying too much in operating or overhead costs.
The insights from benchmarking can help you uncover which areas of your farm operation could benefit from more focus.
Conclusion
Dairy farmers face many of the same challenges – including rampant inflation, high interest rates and unanticipated costs. However, while dairy farmers are all playing the same game, ultimately no two dairy farms or farmers are exactly alike.
Benchmarking can help to identify the unique factors that make your farm successful, determine how you can continue to achieve success in the future and expose areas where you can implement improvements. It is a valuable tool that empowers you to understand your position in the industry, overcome obstacles and make informed decisions to increase the profitability of your dairy farm.
For more information on benchmarking, visit MNP's website.
