By Rick Hamilton CPA CA MNP
Partner MNP LLP
The pressures affecting dairy farm profitability are growing, especially with recent developments surrounding the COVID-19 pandemic and concessions made in trade agreements. Financial benchmarking is a tool that helps dairy farmers make better business decisions by giving them concrete information about their operations — and how they compare to others in the industry — year after year.
A benchmark is not as much a ranking tool as it is a method to help evaluate and direct business decisions. I like to break the benefits down into three main areas — profit, trend and focus.
Profit: It’s never all about the money but in business, profit is generally a good place to start. Dairy farmers don’t compete with each other, but they do compete for resources. Being more profitable than your neighbour may mean, for example, that you have the opportunity to buy additional land and grow your operation.
A benchmark can take out unpredictable variables and show the impact of effort and management on a per-unit basis. Are you generating a reasonable profit for the size of your operation on a per-unit basis? If not, why? And secondly, does it matter? The only two things you must give are time and money. If your efforts do not generate a return, then over the long run, are you making good use of your time? It is okay to give up some profits to devote your time elsewhere, but how can you make an informed decision if you don’t know what you are giving up?
Trend: One of the greatest benefits of using benchmark data versus historical averages or targets is that you can watch for trends. To be truly effective, benchmarking should look at more than just production parameters. You need to include items like machinery expenses, financing, and that profit line at the bottom of the income statement. This is important because you can’t make improvements in these areas over the short term; you have to think long term, which requires understanding where you fit in with regard to the rest of the industry, as well as what’s happening in your operation each year.
Understanding year-on-year trends can motivate dairy farmers to make improvements in the right areas. For example, if you discover your labour costs are higher than those in the top third of the benchmark, you can start exploring the reasons behind that. Maybe higher labour costs are okay because that’s just the way your farm is built, or maybe there are improvements you can make to lower labour costs over time, which will increase profitability.
Focus: Focus is the final piece, after you understand how you compare from a profit standpoint and the trends you are on. A farm financial statement is full of numbers—it’s easy to get caught up focusing on something
that isn’t important. With benchmarking, if you aren’t hitting the profit target, then you can go back to see where the problem might lie. Are you short on revenue? Do you spend too much on inputs versus what you get in return? Is it costing you too much in operating costs or overhead?
It might not lead to an easy solution, but at minimum it will give you more certainty in how you deploy your management skills. If you are one of the most profitable dairy farmers, does it change your perspective on how you approach growth?
Dairy farmers are all trying to play the same game but, ultimately, no two dairy farms or farmers are exactly alike. By utilizing benchmark information, you can see what things make your farm successful, how you can continue to achieve that in the future and the areas in which you can implement improvements to create even more success.
About the author
Rick Hamilton has provided accounting and consulting services to businesses in SW Ontario for more than 25 years, with a focus on the agriculture sector. He can be reached at 519-286-2821 or Rick.Hamilton@mnp.ca
This article was written for the Spring 2022 Dairy Grist. To read the whole Dairy Grist, click the button below.