We all want to know how we compare to the neighbors.
When it comes to comparing your farm's profitability, the Internet allows you to benchmark your financial figures beyond the neighbors to your state or region. State averages are available from many state farm management associations.
Four years ago, economies of scale were the fastest route to improved profitability if costs were under control, according to a University of Illinois study then by Gary Schnitkey and Dale Lattz. Today, both managing land and input costs are influential, Schnitkey says. “We are in a new ballgame today, and I would first make sure that all of your costs are competitive at these new higher levels,” he says.
“The more profitable operations generally do most things a little better,” concludes Lattz, farm management Extension specialist, University of Illinois, Champaign-Urbana. “There is not one major factor that year after year separates the better producers. “For example, the more profitable producers generally have lower costs year after year, and in most cost categories. They usually will produce better yields if the weather cooperates, but that won't happen every year, so it is being good in the areas they can control, like costs.”
Kent Vickre, state coordinator of the Iowa Farm Business Association, sees land prices having more influence in farm profitability than ever before. “Today's cash rents can vary by more than $100/acre,” he says. “The variances are larger than we've ever seen. The uncertainty of what we can pay and remain profitable has increased many-fold in this new era. We used to have a good idea of what the market would be. But with today's crop price volatility, everyone is guessing what he can afford to pay for inputs and rent and still be profitable. Knowing your production numbers is essential in these changing times.
“Those variables are too great to just follow the herd and do what the neighbor does when you don't know what he pays for inputs and rent,” Vickre says.
Highly variable land rents make comparisons difficult these days. But even so, your rate of return on assets still tells you how much profit you're earning for every dollar tied up in assets, says Dale Nord-quist, associate director, University of Minnesota Center for Farm Financial and Extension economist, farm management.
Bill Butler, a corn and soybean grower from northern Illinois, thinks that “the bigger question is not how much can I afford to pay for land or rent, but rather, what is the most profitable level of any input? If funds are restricted, then we need to look at the greatest return for the money available, but this will put a producer at a decided disadvantage to his competitors.
“Farmers have always needed to maximize net income per acre, but now, the difference between those doing it right and those doing it wrong is huge.”
Another major barometer of your farm's long-term solvency is the ratio of debt to farm assets, says Lattz.
Working capital should exceed 15% of revenue or expenses, advises David Kohl, professor emeritus at Virginia Tech and Corn & Soybean Digest's trends editor. Subtract current liabilities from current assets to get working capital, then divide the result by your revenue or expenses.
“In today's volatile times, maintain 15% as a guideline,” he says. “To be on the safe side, maintain 15-33%. If you are conservative or desire flexibility, maintain levels above 33%. Grain producers' working capital metrics need to be increasing in the current environment.”
Expenses, less interest and depreciation, divided by total revenue, is another benchmark to check, Kohl says. “If you have 75¢ of expenses for every $1 of income generated, you are average. Less than 68¢ of expenses per $1 of income places you in the top 20% of profit managers. If your business is a corporation, also subtract corporate salary in forming the ratio.”
What are the best uses for record farm earnings? He reminds growers to earmark funds for 2008 tax liabilities before considering fully funding retirement plans, paying down debt and replacing machinery.
For more information:
Your state's farm business management association statistics can provide more localized data to truly see how your farm measures up.
is the National Association of Farm Business Analysis Specialists Web site, showing other states with farm management associations.