Measuring cost efficiencies of your farm

By Gary Sliworsky
OMAFRA Rep.

This is part 2 of an article on the Towards Increased Profits (TIP) report sent to many CAIS participants. It is adapted from John Molenhuis, Business Analysis and Cost of Production Program Lead, OMAFRA.
TIP measures cost efficiency using a ‘per $100 of income’ indicator. It compares your costs with the level of income you are generating. It shows how effectively your cost outlays are able to produce gross income, or put another way, the percent of gross farming income needed to pay the farm’s input costs. For example, if machinery repairs equal $4.05, then for every $100.00 of gross farming income $4.05 goes to pay this expense.
Average, low and high groups were identified for each expense within each farm type/income range combination. This allows reflection on questions like ‘Are larger farms more profitable and are they making better use of their assets?’ or ‘Is there more variability within an income range or across the income ranges?’ or ‘Where are the different farm types spending their money?’
In general, larger farms appear to be more profitable. They are better able to spread their costs over more production. This is not to say small farms were not capable of achieving the same margins as larger farms. In almost all farm types there were farms in the smaller income ranges that out performed the average larger farm. Some smaller farms did achieve the same margin levels of bigger farms but they had to be better than average to do it.
Economies of scale were evident in how larger farms were able to more effectively use their assets to make income. With very few exceptions large farms spent less of their income on land and machinery related costs than their smaller counterparts.
There were bigger swings within income ranges than across the ranges. This variation between the low profit and high profit farms within the range did tighten as the income ranges increased. The top income range of sales of over 1 million dollars had a range of only 10 percent from the low and the high farms. Farms with under $100,000 in sales saw differences of around 35 percent.
Labour was one area where larger farms tended to spend more percent of their income on than smaller farms. This could be that due to their size they could not rely as much on unpaid family labour.
Profit in the context of TIP is net cash income before any adjustments for inventory or outstanding payables or receivables since it is using information submitted for tax purposes. This reporting method may cause the analysis to highlight weaknesses that are primarily a result of income tax or cash flow decisions, not a reflection of the farm management performance.

Dates to Remember
Mar. 31 – Agri-Corp Info Night, Morley Municipal Bldg, 7:00 p.m. Reg Kaus and Barry Roberts. Update on Crop Insurance and Risk Management Programs. Call Reg at 852-3967 for more info.