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Benchmarking for Your Grain Operation

Sean Mulcahey
Educational Opportunities: 
Home > Education & Events > August 2019 > Benchmarking for Your Grain Operation

It is clear that the economy of the agriculture industry has never been more complex, volatile and fast moving. Business decisions have become more complicated and time sensitive. How do you stay on top of the numbers and make sense of it all? The top three ways to achieve your business goals are: having access to reliable information, understanding your business and managing by the numbers.

Does your financial services partner provide you with an annual financial performance report? One of the features of these reports is using that data to create benchmark reports. They allow you to see how they stack up against your peers on many different financial metrics. When working with clients, I have always found that they are extremely interested in this information.

Compeer Financial completed a benchmark report in 2018, with data compiled from 171 clients, primarily with cash grain operations in southern Minnesota. Here are some key metrics from that report.

Working Capital. One of the most important financial measurements for a farm operation is their working capital. It’s the difference in value between current assets and current liabilities. On the benchmark report we like to compare your working capital to the number of acres you farm.  In 2018, our benchmark data shows the average working capital/acre was $223/acre, a $23/acre decrease from the 2017 average of $246/acre.  Keep in mind that the $223/acre is an average.  Within the data set there is a high of $850/acre and a low of -$150/acre.  We have seen the working capital/acre trend downward over the last five years as the grain industry has experienced depressed margins.  Compeer’s working capital/acre target is $200/acre or more.  This level of working capital makes it more comfortable to cashflow your farm through the year. It also provides a buffer against a down year.

Machinery. Another important financial measurement is machinery cost/acre and machinery investment/acre.  Machinery cost/acre includes your principal, interest and lease payments on machinery divided by the total acres your machinery operates on, including custom acres. 2018 benchmark data shows the average was $58/acre compared to $64/acre in 2017. Compeer’s target for this metric is under $65/acre. Within the data for machinery cost/acre there is a high of $140/acre and a low of $0/acre.

Machinery investment/acre is the total value of your machinery line divided by the total acres your machinery operates, including custom acres. 2018 average was $624/acre compared to $672/acre in 2017. Compeer’s target for this metric is under $575/acre. We have seen both of these measurements trend down in recent years. This is likely because farmers are not replacing machinery as quickly due to depressed margins.  Within the data for machinery investment/acre there is a high of $1,200/acre and a low of $200/acre. The data shows that on average your machinery cost/acre and machinery investment/acre trends down as you operate more acres.  However, this is not always the case.  Low machinery cost/acre and investment/acre can be a competitive advantage for your farm operation compared to others.

Capital Debt Repayment Capacity. Capital Debt Repayment Capacity (CDRC) is a measurement of your operation’s ability to meet all debt service demands. This ratio provides insight into your ability to service your current debt level. It also indicates how well you are staged to take on any more debt to grow your business. In 2018 the average CDRC was 106% compared to the 2017 average of 90%.  A CDRC level above 100% means that you can meet your debt service obligations and have excess margin to build working capital or invest in other capital needs.  A CDRC level below 100% means that you can’t meet your debt service obligations and you would have to service any shortfall with working capital.  A solid level of CDRC would be 115% which gives you some extra margin.  Within the data, the high 25% of earners had an average CDRC of 217% and the low 25% of earners averaged 4%.  As you can see, there is a lot of variation within the averages.  However, overall averages point out the depressed margins that clients have been dealing with in recent years.

Another great resource for benchmark data is the University of Minnesota Center for Farm Financial Management FINBIN site.  FINBIN is one of the largest and most accessible sources of farm financials and production benchmark information in the world.  FINBIN places detailed reports on whole farm, crop, and livestock financials at your fingertips. Farm management association programs provide the data. Put this benchmark information to work for you in managing your farm operation. Work with your trusted financial services partner to calculate these metrics and see how you stack up.
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