Pressures affecting profitability in the agriculture industry are on the rise, from weather to trade issues to diseases. In this world of constant change, it's more important than ever for Canadian farmers to know their own farm's financial health and understand how they can react to mitigate risks.
Financial benchmarking helps farmers make better business decisions by highlighting operational performance trends and showing them how they compare to other Canadian farms. Our report, Farm Profitability: Benchmarking for better decisions, examines these benchmarks and how they can be applied to financial management. The sectors independently examined in the report are grains and oilseeds, dairy, beef feedlots, and poultry.
However, these benchmarks can also be used to analyze performance of other farm sectors. The major consideration is to understand how the nature of the production process for another commodity relates to those with established benchmarks. Below are some insights on other subsectors that can benefit from this management tool, adapted from our report.
Annual horticultural operations
Horticulture operations typically have relatively low cost of goods sold because they tend to be high-value crops, so they produce relatively large amounts of revenue from the inputs of seed, fertilizer and crop protection material. These farms usually have very high labor requirements, so their direct operating expenses are likely to be higher than most other farm types. Based on experience, we would expect cost of goods sold for these farms to be in the 15 to 25% range and direct operating expenses to be 30 to 35%. Cost of capital is less clear, but likely no higher than grain/oilseed and dairy farms.
Perennial horticultural farms
These operations farm trees, shrubs and vines. They present an interesting case because of the lag between planting and the first crop. Further, they have relatively low expenses compared to establishment costs. Vineyard, tree fruit, and berry farms don't treat seed stock as capital costs, so they're included in cost of goods sold. While the same arguments stand about the other components of cost of goods sold and direct operating expenses as for annual crops, the seed stock situation adds complexity. If orchards are in a steady state, the benchmark ratios would be similar to those of annual horticulture. If expansion is taking place with significant establishment expenses for trees not yet in production, cost of goods sold could be much higher.
This complex industry is segregated with some producers buying weaner pigs and finishing them. This is similar to the beef feedlot industry, which can provide the starting point for ratios. Others are farrow to finish operations, as in the dairy industry. This is another potential starting point for developing appropriate benchmarks. However, this data is not currently separated out.
Whatever benchmarks you use, remember operating income is the most significant source of payment for debt and new investment. So, a healthy operating income/revenue ratio is really important. Even with a healthy operating income, farms can get into financial trouble if they overinvest in equipment and other assets that don't generate enough income.
If you'd like to continue this discussion on how to optimize your farm's profitability, please reach out to our team.
Orchards, greenhouses & Wineries
Mike Cowan, Partner, CPA, CA | email@example.com
Francois Bourgeois, Partner, National Crop & Livestock Leader, CPA, CA | firstname.lastname@example.org