R.O.A. – for Aug. 30, 2010

Farmers live poor and die rich. That’s what the old adage says, and as the average age of Canadian farmers continues to creep up, it certainly seems true. According to Statistics Canada, the average Canadian farm in 2008 had assets valued at about $1.5 million and a net worth of $1.28 million.

More important, though, is how productive we are with those assets during our career. What is our rate of return on our farm assets (ROA), and how does it compare with our neighbours, our colleagues across the country, and our city cousins?

ROA is a crucial measure of how well a company uses its resources or assets. Calculated by dividing annual operating income by total assets, ROA is also a reflection of the company’s profitability and efficiency. In fact, business analysts routinely turn to ROA as a quick way to compare companies of different sizes, types and risk exposures. Businesses also use ROA to benchmark performance, especially during expansions or acquisitions.

Not surprisingly, ROA varies widely across different industries. Capital-heavy industries such as farming generally yield a lower rate of return on assets since they need expensive infrastructure to do business. Servicebased operations such as consulting firms have high ROAs since they require minimal hard assets to operate.

Last year, Loblaws had a 12 per cent return on average net assets. However, you have to be careful comparing. The ROAs for these large companies are calculated without interest payments and they are based on the book value of assets — what an investor paid for an asset.

So what is Canadian agriculture’s ROA?

Using net farm income divided by total assets from the Statistics Canada’s Farm Financial Survey, Canada’s farmers had an average ROA of about 2.5 per cent in 2008.

“Overall, Canadian farms’ ROA are comparable to other industries,” says Dale Kaliel, senior economist in the production economics and competitiveness division of Alberta Agriculture and Rural Development. However, the assets in the Farm Financial Survey are based on market value, not book value, and interest payments are considered an expense.

To get a better grasp of what’s been happening at farm level, Kaliel suggests we look at average ROA for each farming sector over five years.

First, it’s important to recognize that although in theory ROA isn’t scale dependent, farms with larger gross revenues generally have lower costs per unit of production and this in turn affects net cash farm income. Some sectors have a higher proportion of smaller or larger farms, which makes comparisons between sectors open to some interpretation. (The Farm Financial Survey doesn’t screen for size or seriousness, except for a cut-off at $25,000 gross revenues.)

Fortunately, the survey does break farm performance into categories based on primary revenue sources, with sectors including cattle, dairy, poultry and crops and oilseeds, vegetables and fruits and others for 2004 to 2008 (although different types of crop or livestock operations aren’t separated out. For example, the category “beef cattle” includes feedlots, cow-calf and stocker operations.)

Also, cash flow is often THE limiting factor — our families need to eat and banks really like to be paid. In some sectors, price is cyclical in nature and that’s manageable if you aren’t struggling for cash flow during those low phases.

Seeing how your own farm’s ROA compared to the industry or sector average might spark some questions. More importantly, benchmarking against your own ROA year to year may help establish goals for your business plan and it may also red flag some kinds of problems.

“By defining what you do well and analysing the future opportunities and threats, you are directing what you want to do with your business and you choose that investment,” Kaliel says.

However, combining farming with statistics and economics is never perfect and variables are constantly changing. With ROA you should also look at the long-term financials, says Mary Lou McCutcheon, consultant with Synthesis Agri-food Consulting in Guelph, Ont.

“The question comes down to, can I do something else with that asset?” says McCutcheon. “ROA is all about the ability to use the resources you’ve got.”

COUNTRY GUIDE asked some of Canada’s leading-edge number crunchers to explain the factors behind the average ROA from 2004 to 2008 for the major sectors — cattle, hogs, dairy and grain and oilseeds. Kaliel and McCutcheon were joined by Derek Brewin from University of Manitoba, Bill Grexton from CanWest DHI, John Groenewegen owner of JRG Consulting Group and Ken McEwan from the Ridgetown Campus of the University of Guelph to reflect on ROA.

Following are their ROA insights… and a little foresight to consider when you’re setting goals.

About the author

Senior Business Editor

Maggie Van Camp

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