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Benchmark your farm to improve your profitability and financial position

Quick facts

  • Benchmarking is a process that makes it possible to research your farming business to find opportunities to improve your financial position, efficiency and profitability.
  • Having comparable, quality data is key to making decisions and as a result, begin to take specific actions that are crucial to long-term success.

Benchmarking is the practice of measuring the financial health and performance of your farming business compared to the performance of your business in the past and to similar or peer farms.

Without some standard to benchmark to, or compare, you have little idea if a measurement is good, bad or makes any difference at all.

There are many production benchmarks commonly used such as yield per acre or pounds of gain per pound of feed fed. Financial benchmarks focus on how effective annual expenditures on inputs and long term investments in farming assets are.

Whole farm financial benchmarks indicate the profitability, financial efficiency and risk-bearing ability of the entire operation. Individual enterprise benchmarks compare how effective expenditures on specific inputs are in producing income, for example seed and chemical for crops or feed for livestock.

Types of benchmarks and data required

There are two types of data or benchmarks to compare to. Each type first requires sound financial records or data from your business. Without collecting and organizing data on your income, expenditures, inventories of assets and liabilities into a readily retrievable form, you cannot easily study your business or make benchmark measurements.

The first type, internal to your business is to benchmark your own measurements to your historical data. This establishes your own internal trends. A current number may not look so good but, if it has been improving the last few years, that is positive.

The second type is to compare your business externally to peer farms of your type and in your area. This tells you how you are doing in relation to the competition in your industry. Most importantly, external comparisons allow you to learn from others. External, peer group comparisons allow you to see what benchmarks of less profitable and more profitable farms tend to be, in a confidential manner.

Comparison to peer farms

To truly benefit from financial benchmarking internally and externally to peer farms, membership in an organization committed to this concept can yield the most benefits.

You, your lender or accountant can certainly do the math to calculate a financial ratio or other benchmark for you. But, without being affiliated with an organization committed to the process — with people and resources dedicated to it — you sometimes do not know if you are comparing "apples to apples or oranges to apples." 

To be comparable, data has to be prepared in a consistent manner across several farms with the same methods. Examples of methods that need to be consistent are inventory valuation, asset valuation, net income calculations and depreciation just to name a few.

If differences in key benchmarks are identified by comparison, you want the differences to be real and not due to variability in methods or process.

With this goal in mind, in such an organization, analyses of records are completed at the same point in time, typically the end or beginning of each year. The data is summarized across all participating farms and reported to all farms.

Typically, an average farm is first reported, and then differences are noted by enterprise type, size, profitability levels, stage of career of proprietor, and many other categories if the data is sufficient.

As each individual's identity in the database is protected, there is no incentive to submit anything other than factual data. Members also have an incentive to keep a significant number of farms in the group to maintain a strong level of comparable data.

Peer farm groups: a Minnesota example

Farm management associations — traditionally affiliated with university extension in many states, or farm management programs and classes affiliated with Minnesota State Colleges and Universities here in Minnesota or community colleges in other states — also offer the opportunity to be a part of a peer benchmarking group. They offer:

  • Training
  • Analysis of your farm records
  • Reports comparing your benchmarks to your internal history and to peer farms
  • On-farm consultations

Participants pay a fee to cover the costs of the program.

Southwest Minnesota Farm Business Management Association

The Southwest Minnesota Farm Business Management Association (SWMFBMA) is part of University of Minnesota Extension. The annual report for SWMFBMA includes the latest financial and enterprise benchmarking data from Southwest Minnesota. It also shows the data contrasted with past trends and economic conditions, and a reference section that explains various financial ratios used as benchmarks.

Additionally, benchmarking data can be explored and compared beyond the SWMFBMA throughout Minnesota and with other states by using FINBIN, also operated and maintained by CFFM.

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Benchmarking is promoted widely as a "best management practice" by non-agricultural businesses but, is probably even more important to agricultural producers where there is significant difference among producers. Effective use of benchmarking is probably one of the most important tools and skills.

Don Nitchie, Extension educator

Reviewed in 2018

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