One of the top economic indicators for agriculture is the data from approximately 50,000 farms and ranches enrolled in farm record databases throughout the U.S. These databases include state systems, university and college systems, and commercial record systems. The information is transparent and perfect for benchmarking. In a recent seminar, one producer participant asked me to outline some of the trends and practices among those who are generally in the top half of profitability in the various farm record systems. Of course, producers who participate in these database programs normally keep financial records that are reviewed by outside advisors such as lenders, consultants, or farm management instructors.
In addition to good records, these producers and managers tend to use accrual adjusted income statements, which allows them to measure true profitability.This includes year-to-year adjustments in inventories, accounts receivable and payable, crops in the field, and other accrued expenses. And when talking about accrual adjusted accounting, it is also interesting to note that more young producers are adopting this approach.
Next, those managers with businesses in the top-half of profitability conduct three to five year trend analysis This, of course, assists in determining the specific impact of economic cycles and management practices (good and bad).
Another observable trend is the wide gap between those farms in the top one-third of profitability, and those in the bottom one-third. When economic cycles and commodity prices are strong, even the businesses in the bottom one-third will make money. Yet, this commonly leads to surpluses and overpaying for marginal assets, which is normally followed by a fall in prices two to three years later.
One strong practice among the more profitable farms and managers is benchmarking financials. These producers may benchmark their business to a trend analysis, or to their own past performance or projections. Next, many of the best managers benchmark their farm against others in the database. Of course, every farm and ranch is different, but if one focuses on financial ratios in the farm financial standards, this type of comparison works regardless of farm enterprise, location, or size.
This list is an ample start in examining one’s own business as compared to those producers and businesses in the top percentages of farm profitability. Next time we will continue our analysis of those in the farm record databases and the practices that got them where they are.
P.S. Before the 1980s farm crisis, there was no standardization in farm financial records.Then, in 1989 the U.S. Farm Financial Standards Task Force (FFSTF) convened to develop key ratios and methodologies for completing farm financial statements. Of course, this is one of the lasting benefits from the 1980s economic downturn that is still useful today.