The Sharper Pencil

A study of 205 dairy farms in 2001 shows a large range in the actual operating expenses. Total farm expenses, excluding labour, interest, and depreciation, were calculated as a percentage of farm revenue for each farm.

The 205 farms averaged just under 53 cents for these modified expenses per dollar of revenue. 71% of the farms were between 40 cents and 60 cents.

A range of 20 cents per dollar of modified expenses represents represents more than $60,000 farms to the average farm with total revenues of over $300,000.

But there was an even larger range in individual farms. The best 6% of the farms were under 40 cents of expenses per dollar of revenues. On the other hand, 7% of farms had that were over 70 cents.

Figure 1 shows the average expenses, excluding labour, interest, and depreciation, per dollar of revenue.

Figure 1: Costs Excluding Interest, Depreciation and Labour per Dollar of Revenue 2001 - Ontario Dairy Farms (205 Farms)

Follow this link for a text description of the above image

From the residual balance, the operators must cover labour costs, principal and interest payments, new capital purchases, and family withdrawals for living expenses.

The $60,000 represents a huge advantage for the lower cost operation.

There is more room for family withdrawals. While family withdrawals are not considered an "expense" in business statements, they are important for the lifestyle considerations of the family and are an important outflow from the business.

Or for the business operation, if it wants, the cost advantage provides more financial flexibility to make new equipment and quota purchases to maintain the current operation or for expansion.

Labour was excluded from the expenses to bring a balanced comparison with different business structures. Corporations have the tax option to record payments to owners for labour as an expense. Partnerships and proprietorships do not have the option. Their withdrawals must come from the bottom line.

Interest was excluded to allow a more equal comparison of farms with different amounts of debt. Depreciation is a "paper" expense reflecting the reduced value of past capital purchases.

Producers need to aim for a target of 50 cents or less. Anything over 55 cents of farm expenses, excluding labour interest and depreciation, per dollar of farm revenue puts the farm at a long term disadvantage.