It’s the crudest question in agriculture. Increasingly, however, it’s the one question that we mustn’t avoid. How much money did you make last year?
Yes, it’s important to know how much product you sold, what price you got per unit, and whether those numbers are higher or lower than previous years. But that doesn’t really answer the question: How much money did you actually make, say on a per-bushel or per-head basis after you’ve subtracted all your fixed and variable input costs?
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Not totally sure?
Your neighbours may actually have a better idea of your net financials than you do. At least, they may have a pretty clear idea whether they’re doing better than you are, and whether they can afford to bid more for the next farm when it comes up, or negotiate more aggressively on the price of rented land.
Yes, it may be true that you work longer hours, and harder to boot. But again, that isn’t really the question. Is your farm actually doing better than your neighbours’ farm?
Specifically, is your farm more profitable, efficient and liquid, and less weighed down by debt than the farms of producers you compete with?
If you think the answer is probably yes, based on gut feel, but you’re not positive, there’s some good news and some bad news for you. And then some news that falls into the really bad category too.
The good news is that you’re hardly alone in not knowing exactly how your farm is doing financially, either in relation to itself or in relation to the rest of your industry. A minority of producers — some experts say it’s a small minority — of farmers actually measure and analyze their farm performance beyond what the taxman demands.
In fact, Robert Saik, CEO of Agri-Trend Group of Companies, one of Canada’s largest agricultural consulting firms, guesses that fewer than 15 per cent of farmers do enough to measure their business results and production numbers.
As he says, when they’re asked directly about their unit cost of production, most producers are unable to provide a number beyond a very rough guesstimate. Even fewer analyze industry benchmarks to calculate their profitability and efficiency versus norms.
Instead, they believe that the farmer’s most important measure is whether they can coax the maximum number of bushels or pounds of meat out of the bare soil.
The bad news is that the really profitable producers, both individual and corporate, believe that farming is about much more than growing a product. Rather than seeing themselves primarily as producers, they consider themselves first and foremost as business owners.
Unlike many farmers, who make management decisions based on the previous year’s marketing climate, highly successful producers focus exclusively on forward-thinking profitability. They measure, calculate and adjust in order to increase efficiency, decrease variable and fixed input costs per unit, and maximize revenues. They know where they stand in terms of the rest of the industry, and they calculate every last metric to ensure their position remains at the peak of profitability.
The really bad news is that those same, very profitable producers are quietly buying up land at record rates, and your (comparatively less profitable?) farm may be next in their sights. Between 1956 and 2006, average farm sizes across almost all of Canada more than doubled, and the population of active farmers correspondingly dropped.
In the last five years, the trendline has been get- ting even steeper. Simply put, if you’re not measuring, you may not be measuring up.
Just over a year ago, Sprott Resource Group in Toronto announced an initial investment of $27.5 million towards establishing a super-size farm called One Earth Farms Corp. Leasing farmland from 17 western Canadian First Nations bands, One Earth Farms aims to raise cattle, grains and oilseeds on about 400,000 hectares. Given that Canada’s biggest farms are in the range of 20,000 hectares, One Earth Farms is poised to almost immediately become the major player in Canadian agriculture.
One Earth Farms isn’t shy about its aspirations. Its stated goal is to become Canada’s largest, most efficient farming operation. According to a corporate statement, “One Earth Farms believes that through professional farm management, geographic and crop diversification and improved purchasing power and pricing power, it will be able to achieve higher rates of profitability than those realized by smaller farms.” Given that One Earth Farms has bankers, grain industry experts and agrologists on staff, they are clearly planning on running this farmland as a carefully managed business.
Regardless of how you feel about the rise of corporate farms, you have to admit that the fact an investment firm like Sprott Resource Group believes agriculture is a worthwhile investment suggests that some of the best business minds know there is serious money to be made from the soil.
That said, One Earth Farms is very clear that its focus is on business management and operational efficiency first. Production is simply the means to profitability, not an end goal unto itself.
So, where to start in order to compete with the likes of corporate farms? The advice from business experts is to think of your operation like any other type of business. If you made and sold widgets, you’d analyze the marketplace, tweak input costs to maximize revenues, and focus on maximizing production to maximize profitability. All the while, you’d keep a very firm eye on your results in relation to your competition, and analyze your operational and financial strengths and weakness in relation to industry benchmarks.
Lance Johnson, the founder of Drive Solutions, a business consulting firm oriented primarily towards agriculture, says that agricultural producers are notorious for making the mistake of working harder rather than smarter.
According to Johnson, the only way to work smarter is to have more information and to analyze that information appropriately.
His team coaches a focus on business planning to first understand and then improve bottom-line results. “If you don’t measure it and understand it,” Johnson preaches, “you can’t change it.
“It’s hard to really know how well you’re doing if you don’t have something to compare yourself against,” Johnson says. In fact, he believes that the business mindset, whereby producers focus first on strategic planning and then on executing that plan, is what separates successful businesses from their unsuccessful counterparts across all industries.
Comparing your results both against your own previous years’ results and against your counterparts is vital. Comparing your own farming statistics year over year allows you to create trendlines that indicate whether your management decisions are moving your business in a positive or negative direction.
That said, Johnson points out, a comparison against only your own previous year’s success offers limited insight. “If I did really badly last year and slightly less badly this year, it’s going to look like I did better and I’ll start celebrating,” he warns.
Instead, comparing your farming statistics to industry benchmarks allows you to compare your operational strengths and weaknesses to your competition. “If I look at my neighbour or other people in my region and they did much better (than me), I know I have way further to go and I know I need to make further adjustments,” Johnson says. Having the benefit of competitor averages allows you to see and focus on specific areas that would provide key benefit to your business, he concludes.
Milking better profits
The one agricultural industry that consistently excels in business self-measurement and analysis is the dairy industry. Most dairy producers track and analyze everything from reproduction details, to daily production components (divided into the salable elements of butterfat, protein, other solids), to dry matter intake, to health statistics. Some producers are able to calculate all of their costs — right down to the cost to spread manure — on a cost-per-litre basis.
Ed Oosterhof, a dairy farmer in Lethbridge, Alta., says he tracks all of his production statistics on a computer program which allows him to monitor daily results against a curve provided by the dairy industry. Numbers are tracked on an annual, year-to-date, and versus previous-year basis.
According to Oosterhof, the monitoring of all variables and the comparison against industry benchmarks allows him to maximize efficiency. “When you’re working with a lot of variables, benchmarking can help make you make sure you’re on track. We make money on a daily basis, so benchmarking is crucial.”
Saik believes that the dairy industry serves as a model for where the crop and livestock industries need to get to in terms of tracking. But he also believes the crop business has a long way to go to catch up to the dairy industry’s level.
Why is dairy ahead of the rest of agriculture when it comes to data management and analysis? It certainly helps that dairy production, by definition, has obvious daily numbers that can be tracked.
Even so, Saik believes there’s more to it than meets the eye. “I think the dairy industry has done a very good job of teaching the value of data to their farmers. The farmers take a great deal of pride in knowing their litre cost of production. A lot of them are very, very good at measuring.”
Saik also believes that data management has been slower to be adopted in the cropping sector because dairy producers are more willing to share their production numbers, allowing greater transparency and more opportunities for benchmarking and best practice development.
How to get started
Agriculture and Agri-Food Canada offers a free “Whole Farm Database” benchmarking tool through the Canadian Farm Business Management Council. Built on more than 150,000 records gathered from Statistics Canada, this tool uses the financial information you enter to calculate whether your farm falls into the top 25 per cent, the middle 50 per cent or the bottom 25 per cent of all Canadian farms in terms of efficiency, liquidity, debt management, asset management and profitability ratios.
While this tool is a good place to start your business analysis, agricultural business consultants remind users that the tool is only as good as the information StatsCanada was able to obtain from producers in order to build the tool: in other words, not great. Additionally, the tool only allows you to compare your operations to averages, though few producers aspire to “average.”
If you’re looking for more in-depth analysis of your results in relation to previous results and to competitor results, consider contacting an agricultural business consultant. The major corporate farms depend on multi-skilled business management teams; perhaps you should follow suit.
Producers tend to pride themselves on independence and self-sufficiency. Combine those character traits with high overhead and often thin operating margins, and it’s easy for most producers to fall into the trap of saying they don’t need and can’t afford to hire a business consultant. However, if you look at the input cost of hiring in strict business terms, simple math suggests that so long as the consulting cost is lower than the gain generated by the service, hiring external is worthwhile. In other words, don’t think in terms of cost, think in terms of gain.
If you genuinely expect your operation to succeed as a business, you must follow best practices of other businesses. Businesses across all other sectors acquire external resources when they don’t have the right expertise in-house.
Johnson points out there are many skills required on a successful operation, some of which a producer may possess and others that have to be hired in. “If they are great mechanics, then they don’t need to hire someone in to work on equipment. But if they aren’t, they definitely need to have that skill-set available to them so that they can plant or harvest the crop,” he says. “It’s the same on the business side, just an element of the overall picture, but an important element.
“In the future,” Johnson quickly adds, “it’s going to be the element that makes the difference between farms competing in the long term.”
If it makes you feel better, you’d hardly be the first producer to hire a business consultant. As the dollars associated with farming have ballooned over the last couple decades, an increasing number of business consultants have opened shop to provide management and financial expertise to farmers.
Small, medium and large consulting firms all offer industry benchmarking support, but make sure to ask where they pull their comparison numbers to ensure the industry benchmarks are large enough and specific enough in terms of farm size, soil type, crops, etc. to be relevant to your business.
Saik agrees that benchmarking is an important component of the business planning process. Agri-Trend has collected business comparables for a decade against which individual producers can evaluate their results. While cash flow requirements may vary by farmer, he says, performance in terms of profitability should be benchmarked against an aggregate of similar size and soil zone farms.
Saik says the industry appetite for business consulting and particularly benchmarking is growing. As farms get more sophisticated, they are asking harder questions about profitability. “Before, a lot of guys could manage their farms with a little notebook in their chest pocket. Those days are gone.
“It’s a very sobering number if you’re in the bottom quartile of farmers that you’re going up against,” says Saik. “(Benchmarking) is particularly important when you’re struggling, when you think you’re doing good but the numbers don’t show it.”CG
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Check out the Whole Farm Database for a quick assessment of your competitiveness
