No matter how much hard work you put into your operation, dairy farmers are facing new obstacles that can be just as unpredictable as the weather. Inflation continues to rise, interest rates are higher than ever, and operating costs have been fluctuating with changing prices and unanticipated expenses.

The good news is that there are tools available to help you optimize the profitability of your dairy farm. Benchmarking and projection can help you overcome the unpredictable nature of the Agriculture economy.

Challenges for today’s farmers

Farmers already operate on low margins, so the unreliability of your operating costs undermines your farm’s full potential. A tumultuous economy is presenting dairy farmers with new challenges that require new solutions.

Rising Interest Rates — Skyrocketing interest rates have a wide impact, raising the cost of feed, fertilizer, and equipment repair, impacting any debt you take on for your operation.

Changing production costs — Unexpected expenses and shifting processes across the board make it challenging to pin down your actual production costs.

Limited perspective — The size of your operation doesn’t have as big of an impact as your overall resource management. Focusing on the wrong things makes it difficult to find the right solutions.

Benchmarking and projection — financial forecasting tools to stabilize your operation

Financial forecasting helps dairy farmers make better, informed business decisions by providing you with reliable information about your operation and where it stands with the industry year after year.

Benchmarking

Benchmarking tools provide a snapshot of your farm’s financial health compared to your peers in the industry. For example, benchmarking can provide an analysis on whether your dairy operation is more profitable per kilogram than your neighbours. However, benchmarking is more than just a comparison tool — it also provides you with data to understand your cost of production so you can make informed decisions about your farming operation.

This data can reveal the areas where you excel and identify aspects where you may be losing revenue — such as whether you are spending more for feed on a per unit basis compared to other operations in the area. Benchmarking gives you the insight you need to see what you are doing right and where you could improve.

Agriculture is a trends-based industry. While it may not always feel like it, your dairy farm is different this year than it was last year. Additionally, current cost structures are very different from what they were ten years ago — but so are your price expectations due to their unreliable nature. A benchmark shows your revenue, cost, and profitability trends, in per unit format, so you can compare similar farms to your own.

Throughout the benchmarking process, an advisor will guide you through the key financial performance metrics of your business to help you determine what’s working well, where you could focus more attention, and what benefits you may gain from further in-depth analysis or consultation.

Projection

Data is the answer to many of the challenges farmers are currently facing. Projection tools help you make informed decisions that support the profitability of your farm.

Tools like MNP’s Farm Builder  give you the real-time data you need to make informed, proactive decisions for your farming operation. Farm Builder breaks down your income statement to determine your exact cost of production and predicts the revenue your farm will generate throughout the year.

No quarter is the same, but MNP’s Farm Builder tool removes the guesswork from your decisions. It is a management system designed to help keep you informed about the performance of your farm, enabling your management team to focus on key business metrics, keep an eye on the big picture, and improve communication with your business partners.

MNP’s Farm Management consultants can help you make the most of the insights provided by our Farm Builder tool so that you can make proactive decisions to save money, increase the efficiency of your farm, utilize your excess capital, manage debt, and expand your farming operation in a way that minimizes risks.

The benefits of financial forecasting

The benefits of benchmarking can be broken down into three main areas — profit, trend, and focus.

Profit

It’s important to understand your profits in comparison to other farms in the region. This knowledge can uncover more opportunities as they emerge — for example, if you are more profitable than your neighbour, you may be able to purchase a piece of their land and expand your farm operation.

A benchmark can take unpredictable variables out of the equation to show the impact of effort and management on a per unit basis. It allows you to evaluate if your farm is generating a reasonable profit on a per unit basis. If not, it provides you with the insight to determine the reasons why.

Benchmarking can also help you assess if you are making good use of your time over the long run, even if your efforts are not currently generating a return. It’s okay to give up some profits to devote your time elsewhere — but you need to know what you are giving up before you can make an informed decision.

Trend

Benchmarking allows you to see where you fit in with year-on-year trends in the industry, instead of comparing your dairy farm to historical averages or targets. A truly effective benchmark should look at more than just production parameters — it should also include items like financing, machinery expenses, and profits.

Long-term thinking is necessary to make improvements in these areas, which requires you to understand where you fit in with the rest of the industry, as well as what’s happening in your farm operation each year. A solid understanding of year-on-year trends can motivate you to make improvements in the right areas.

For example, if the data reveals your labour costs are higher than those in the top third of the benchmark, you can start to evaluate the reasons behind that. Higher labour costs may be okay because that is how your farm is built, or there may be improvements you can make to lower those costs over time — increasing your profitability.

Focus

A farm financial statement can be overwhelming, and it can be difficult to know where you should focus your attention. Benchmarking allows you to go back to see where potential problems may arise if you aren’t hitting your profit targets. The data provided can help you answer questions such as if you are short on revenue if your farm operation spends too much on inputs versus what you receive in return, or if you are paying too much in operating or overhead costs.

While these questions may not have easy answers, the insights from benchmarking can help you identify which areas of your farm operation could benefit from more focus.

The next steps to grow your dairy farm

While dairy farmers are currently facing many challenges in the current marketplace, tools such as benchmarking or the Farm Builder projection tool can provide you with the real-time data you need to analyze your farm’s financial health, make informed decisions for your business, and remain competitive in your industry.

Speak with an advisor for recommendations on how to utilize benchmarking data on your farm. Together you can explore areas where you can save costs and make your farming business more profitable.

Greg Simpson
Sr. Manager, Farm Management Consulting
519.993.1385
greg.simpson@mnp.ca

Amanda Hammell
Sr. Manager, Farm Management Consulting
519.375.1743
amanda.hammell@mnp.ca