Benchmarking Best Practices

If everyone is facing the same prices, aren’t all farmers in the same economic position?  The short answer is “no.” Differences in operational management and financial position might result in one producer struggling to break even, while their neighbor has another successful year.

How you are assessing your financial health?  Your strengths and areas that need improvement? The answers to these questions may lie in benchmarking or peer data.  

At Compeer, we conduct annual benchmarking studies of our clients, which helps us identify which factors enable the top producers to be successful.

There are several key areas in which many top producers excel, including:

• Land Cost / Acre: Does your cash flow support the cost of the land needed for your operation? A high land cost can pressure expenses in other areas or decrease your profit margin. 
• Machinery Cost / Acre:  Are your machinery and vehicle costs appropriate for the number of acres you operate? Investing in an equipment line appropriately sized for your business can propel it to great achievements, but too much debt can tip a business over. 
• Working Capital / Acre:   Having adequate working capital in relation to the size of your business allows you to make management decisions that positions you to adapt to changing conditions.

Cashflow Drivers 

Once you identify financial strengths and opportunities how should that affect your decisions?  Staying on top of cashflow drivers is another way top producers manage their operation. 

1. Commodity Prices – Develop, update and execute your written marketing plans, comprehensive risk management practices, and proper level of crop insurance.  
2. Yields – Strong production is key to driving down the break-even price.
3. Land Rent Levels – Are rents appropriate in the current environment?  Should you reduce or adjust the ground you are renting?
4. Other Operating Costs – Look for opportunities to reduce costs without harming the bottom line. 
5. Living Draws – Many producers dramatically underestimate this number.  Make sure you know your actual living cost by going through the detailed calculations.  
6. New Income Sources – Consider changes that allow new income sources either from business operations or off-farm employment. 
7. Income Taxes – Analyze and develop the most appropriate approach in managing your income tax liability.
8. Capital Spending – Assess if there are non-essential or non-earning assets that should be liquidated to free up cash. Evaluate the return on investment for new capital purchases 
9. Know your Cost of Production – Develop a “manage by the numbers” approach to steering your business decisions and investments.
10. Finance Structure – Debt servicing requirements are driven by finance structure and terms. This is typically the last component of developing a plan to ensure that your cash flow break-even price is competitive.

The real value in benchmarking is understanding key areas where you can create efficiencies and maximize opportunities for profitability. Minor adjustments can have substantial effects, including putting your operation into the top 25% of earners.  

Talk to your financial officer at Compeer about how to review your operation’s financial performance and how we can compare your business to our benchmark data. This article was originally printed in the Winter 2022 edition of Compeer Financials' Cultivate magazine.