Solid information comparing your farm with operations like it can put you on the road to greater profitability
Buying a used car can be tough. There are lots and they come in all shapes and sizes. However, you can find plenty of information to help you make a good decision on which one to buy. Price, the manufacturer's reputation, the vehicle's age, independent model reviews and maintenance history can come into play. Evaluating your final decision after you purchase the car is straightforward too - you soon find out whether you got a good deal or bought a lemon.
Making production and economic decisions for your farm is even more challenging. Having solid information can help you determine a decision you need to make. After you've implemented a change, you can usually determine whether it was a good one - much like finding out whether you bought a good car.
Among the information you can use in making these decisions is benchmarking. This term describes the collection, analysis and comparison of production and economic information among comparable farms.
Benchmarking in its simplest form looks to evaluate efficiencies - a given level of output based on a given level of input. Milk production per cow is a good example. At more detailed levels, you can use benchmarking to evaluate a broad range of inputs, such as labour, land or capital, and determine a variety of efficiency comparisons.
Benchmarking lets you document your current situation. It's also a good way to figure out how to improve it.
A benchmarking analysis study done on Pennsylvania dairy farms recently provided insight into the use of benchmarking as a practical tool. The Penn State researchers used data from the Pennsylvania Farm Bureau tax records from 2001 for their study. After controlling for reported factors such as breed, milking system and milking barn setup, they had 34 similar sets of farm data available for the study. These 34 datasets were Holstein herds using stanchion barns and a milking pipeline. Average milk production was 8,260 kilogram per cow.
Six of the 34 farms were identified as being on the frontier of efficiency. They used available inputs most efficiently to produce their products milk and butterfat. Inefficient farms, by comparison, had much higher input levels.
Benchmarking pinpointed deficiencies for the least efficient farms, revealing the input levels they needed to reduce to become more efficient. In most cases, these farms needed to use less labour and land to achieve efficient milk and butterfat production, the researchers suggest. See table Benchmarking results from Penn State study.
When doing a benchmarking analysis, you need meaningful comparisons of production and business management abilities. The Penn State researchers conclude benchmark comparison groups should use the same on-farm technologies. Don't compare freestall to tiestall, or large farms to small farms. Otherwise, efficiency differences are related to technology and not necessarily management decisions.
Benchmarking results from Penn State study
Economic data, too
Including economic data in a benchmark analysis can also yield important information, the researchers note. Inefficient farms from a production standpoint can be more favourably efficient from an economic perspective.
Studying the efficiency of debt capital provides useful information for future planning purposes, and can reveal comparisons of important information related to net income and enterprise profitability. In the Penn State study, several farms showed good profitability but reduced net income because of interest costs.
An important benchmarking benefit is giving you a picture of the whole operation, how a change in one area of the business can affect other areas, and how you compare with a true peer group and not just an average.
Canadian dairy farmers have access to a confidential benchmarking tool through Can West DHI's program known as Profit Profiler. It compares individual enterprise data on a close peer-enterprise basis. Ontario benchmark information can be found in Ontario Dairy Farm Accounting Project reports, available on the Dairy Farmers of Ontario website under publications.
The combination of multiple inputs by dairy farmers - labour, land, cows, feed, management and capital investment - to produce milk makes planning and reviewing decisions a challenge. It's much more difficult than buying a used car, with much more at stake. However, benchmarking gives you a practical tool to tackle the decision-making challenge to improve your operation.
References: Stokes, J.R., PR. Tozer and J. Hyde. 2007. Identifying efficient dairy producers using data envelope analysis. J. Dairy Sci. 90: 2555-2562.
This article appeared in the November, 2009 ruminations column of the Milk Producer magazine.
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