Benchmarking is an important measure of how you are doing in comparison to others.
For instance, when people visit a doctor’s office for a wellness check and get their blood pressure and blood sugar tested, they are checking their health metrics against a general standard.
Ben Spitlzey
The same applies to businesses going through the benchmarking process. Businesses gather information, compare themselves against the industry standards, and make management decisions based on the data.
While benchmarking applies to all organizations, farmers in the dairy industry have specific factors that affect the amount of money it takes to produce milk.
Information gathering
The first step to benchmarking is gathering the financial data for your financial advisor offering the service. The farm management team shares extensive information, from their financial statements and production data like yearly feed costs, labor costs, and average milk price paid, to total debt.
While it may initially be difficult to gather the yearly numbers, ask most anyone who has gone through the process and they’ll admit the benefits outweigh the effort.
Comparisons
The financial advisor takes information from all the farms, scrubs it of any identifying information, and checks the validity of any numbers that seem too far from the average. The next step is inputting all the data into spreadsheets and pulls together the meaningful comparisons.
For instance, GreenStone’s benchmarking program includes data from 80 farms and 290,000 cows for farms milking over 1000 cows, and 46 farms and 29,000 cows for farms milking under 1000.
As the advisors go over the benchmarking data with farmers, they often concentrate on revenue and net income. By showing farmers how they compare to their peers, they can see in what areas they are excelling and where they need to achieve better levels.
GreenStone’s benchmarking report also focuses on the owner’s equity, capital debt repayment capacity, total cow performance, and the break-even milk price. It is important to understand how each ratio is calculated when evaluating results.
For instance, in annual benchmarking numbers for farms milking more than 1,000 cows, the historical comparison of milk prices on the average farm shows what results fall into the 25th, 50th, and 75th percentiles. In evaluating this data, farmers can see where their farm lies.
Likewise, since every farm needs to know the break-even milk price, benchmarking can show people where their financials are in comparison to similar farms.
Management decisions
Making changes based on benchmarking is driven by the management, not the advisor. The advisor will review the numbers with management, and then the farm management team uses that knowledge to look at the data and set their goals.
For instance, if they have a weakness in one area, like the costs are too high compared to others, is there an offsetting strength in another area? If there is a strength in another area, is it being leveraged to the fullest advantage?
By evaluating the information, farmers can make more informed management decisions and set clear financial targets. By continuing the benchmarking process over a series of years, trends can be established and evaluated to see where their changes made a difference.
The current downturn in dairy, especially in Michigan due to oversupply, limited processing capacity, and Covid-19 market disruptions means farmers must evaluate where they can lower costs and increase revenue.
Using tools like benchmarking is a way to start gathering, comparing, and making decisions that will make a difference in overall production costs. It’s not limited to the dairy industry; GreenStone has benchmarking data available to assist producers in the many sectors of agriculture.
After a doctor’s appointment, a patient can take the new information and use it to improve the quality of life. Likewise, farmers can use the data to make their farms a financially healthier — and happier — place to live and work.
If you’re interested in benchmarking, please reach out to your local GreenStone financial services officer.
*Written for the Michigan Farm News Dollars and Sense Column
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