Whether it is sports or business, benchmarking is a critical element in the quest for improvement and success. Let's focus on agriculture and leave sports for another day.
What is benchmarking? It’s comparing your business results to an industry standard or target used to measure performance. Benchmarks can be established for production, marketing, efficiency, profitability, financial and management performance metrics. In our dairy business, specific metrics include milk production, price per hundredweight of milk, cost per hundredweight of milk, net profit per cow, percent equity, working capital to revenue and labor hours per enterprise.
Benchmarking can be conducted on several levels. Business performance metrics can be compared to peer businesses on an international or national level to evaluate competitiveness on a high level. On a regional or state level, many state universities have agricultural record systems that can provide valuable peer benchmarks by commodity type and scale of business, as well as many other factors. There are also private firms that maintain databases of financial information for this purpose. Your ag lender, farm consultant or accountant may also be able to provide summary data on a local level to help see how your business stacks up to those of your peers. It is also valuable to establish some internal metrics for your business that are derived from past performance trends in your own business, so you can judge progress on selected metrics.
One of the most important benefits of benchmarking is identifying strengths and areas for improvement to develop focus in business strategy. The benchmarks can assist in managing for profitability. For example, if our dairy business can lower labor costs by $1/hundredweight of milk, our return on assets will increase by 2%. In our dairy creamery, we were able to decrease wastage costs by 24¢/gal., which improved our bottom line by nearly $5,000.
Benchmarking can be a powerful tool in evaluating opportunities. Recently we made capital expenditures to improve our processing efficiency and capacity at the creamery. This, in turn, reduced production costs from 12% to 9% of revenue. This assisted our management team in ascertaining the payback on this investment to be 18 months in monetary terms. The automation to replace labor was valuable in reducing issues pertaining to the labor force, as well as leveling out stresses pertaining to seasonal demand for the products.
As a final thought, it is critical to have a good set of records in each benchmark area in order to know and trust the data.
Editor’s note: Dave Kohl, Corn & Soybean Digest trends editor, is an ag economist specializing in business management and ag finance. He recently retired from Virginia Tech, but continues to conduct applied research and travel extensively in the U.S. and Canada, teaching ag and banking seminars and speaking to producer and agribusiness groups. He can be reached at [email protected]