Are changes paying for themselves – benchmarking has the answer
March 8, 2021
Benchmarking is an “effective and efficient approach to bring about improvements” according to the European Innovation Partnerships in agriculture and forestry. It will also help identify if changes made have been of benefit to a farm. Ruth Moore, CAFRE Beef and Sheep Adviser County Fermanagh, recently held a business development group meeting focusing on the benefits.
“Benchmarking is a useful management tool that farmers can use to assess business performance.” One of the key features of benchmarking is that information on the benchmarking report is presented per head, per kilogram and per hectare basis. The performance information produced allows for more informed decision making regarding the farm business. Another key element of benchmarking is how it allows farmers to monitor their farm business performance year on year, see how changes they have made have impacted the business and finally how their farm compares to other similar farms.
Any benchmark has five basic components; output, variable costs, gross margin, fixed costs and net margin. Enterprise output is comprised of the value of livestock sales less replacement costs/ livestock purchases but also includes any increase or decrease in the value of stock on the ground between the opening valuation of the herd/flock and the closing valuation. So if calves born in this benchmarking year aren’t sold until the next benchmarking year, those calves will have costs against them. So from a management account point of view, we use nominal stock valuations to take into account the increase in the value of those calves over the year, therefore contributing to the output that year. Variable costs relate directly to a particular enterprise and vary in direct proportion to enterprise size. They include costs such as feed, fertiliser, veterinary and medicines. Gross margin is what is left from the output after variable costs are removed. Fixed costs cannot be easily allocated to a specific enterprise and do not vary in proportion to the size of the business. They include costs for machinery, buildings, electricity, water and insurance.
As stated, benchmarking has the added benefit of comparing your own performance against similar farms. Allen Hall, CAFRE Business Technologist, joined the meeting to highlight some of the main differences between the bottom and top 25% of suckler to beef producers who recently benchmarked with CAFRE.
“We can see that the difference in total output was approximately £250 per cow between the bottom & top 25%.” The top 25% also had lower variable costs (£90 per cow) and fixed costs (£300 per cow). In short, it cost the bottom 25% more money to achieve a lower output. This culminated in a difference in net margin of £650 per cow.
Drilling down into the variable costs, the top 25% were generally lower on all costs, not just one in particular. Concentrates was the largest variable cost, followed by forage costs, which was mostly made up of fertiliser.
Fixed costs tend to account for the largest difference between the top and bottom 25%. The main fixed costs are mechanisation and building depreciation. Allen Hall commented, “Every farmer’s situation is different. For example, if investment has been made in new housing, yards or facilities on the farm, then building depreciation will be high for a number of years, however, it is an investment for the future.” On average, mechanisation costs account for 60% of total fixed costs.
When looking at physical performance, liveweight produced per hectare and stocking rate are positively related to profit. It may not be possible for every farm to increase their stocking rate, due to the diversity of soil types in Northern Ireland, but they should instead aim to optimise stocking rate. The top 25% had larger herds, which helped to dilute the fixed costs on a per head basis. Top 25% were feeding less concentrates; in the region of 135kg less on a per cow basis, compared to the bottom 25%. Allen continued, “Illustrating this on a 30 cow herd, this equates to 4000kg over one year.” Obviously silage quality will also be contributing factor.
Data from a recent report by the Food Chain Centre (FCC) confirmed that 34% of farmers surveyed who benchmarked, reported increased financial returns. Those farmers in CAFRE Business Development Groups are urged to complete benchmarking early in the year to enable them to make use of the report when making business decisions.
The Business Development Groups scheme is managed by the College of Agriculture, Food and Rural Enterprise (CAFRE) and is part-funded by the EU through the NI Rural Development Programme 2014-2020.