4. Friday - Ruminant Sessions prof chris wolf michigan state university - key drivers of dairy profitability

1. Dairy Farm
Financial
Benchmarking
Christopher Wolf
Michigan State University

2. Financial Benchmarking
 Comparing business performance with either (1)
similar businesses that are performing well
financially OR (2) industry performance standards
 The goal is to learn how the most successful
businesses perform and emulate that
performance
 Answers: “How should my farm be performing if it
is to be competitive?”

3. Why use Benchmarking?
 To compare performance to examine
differences, strengths and weaknesses
 Survival lies in emulating best and not
lagging behind
 An effective ‘wake-up call’ and helps to
make a strong case for change

4. Objectives of Financial Benchmarking
1. Assess financial health and well-being of
the farm business
2. Assess performance trends relative to
industry and trends
3. Indicate which farm enterprises and
dimensions require management
Benchmarking indicates whether further
analysis and attention is needed—but not
what to do!

5. What to benchmark
 Farm financial measures
Profitability, solvency, and liquidity
 Production efficiency measures
Milk per cow, labor costs, feed costs
Repro and herd health measures
Crop production
 Quality standards
Components, SCC

6. What to benchmark against
 Similar farms: enterprise, size, same time
period (years), same region or state
 Large enough group of farms to be
relevant (i.e., more is better)
 3 to 5 years best to examine trends and
patterns
 Consider reasons why farm may be
unique and have measures outside
recommended levels

7. Farm Financial Performance Dimensions
 Profitability: generating sufficient returns to
all factors of production
Rate of Return on Assets
 Solvency: possessing sufficient assets to
cover liabilities
Debt-to-asset Ratio
 Liquidity: having liquid assets to pay bills as
they come due
Current Ratio and Working Capital per cow
7

8. Measure Definition Standard
Profitability/Profit
Rate of return
on assets
(NFI + interest expense –unpaid labor and
mgt.)/(Average total asset value)
Higher is better
(>7%)
Depends on year
NFI/cow NFI/milk cows
Solvency
Debt to asset
ratio
Total farm liabilities/Total farm assets <=0.50
problems at 0.70
Liquidity
Current ratio Current Assets/Current Liabilities 2.0 or greater
Working
Capital/cow
(CA-CL)/cows Three months of cash
expenses
Farm Financial Measure Defs and Standards
8

9. Measure Michigan New York Wisconsin
Mean*
(St Dev)
Mean*
(St Dev)
Mean*
(St Dev)
(% or $/cwt)
Rate of return
on assets**
5.65
(3.07)
5.10
(4.90)
4.32
(2.47)
NFI/cwt milk
sold
$3.82
(2.17)
$3.45
(1.96)
$3.11
(1.04)
Debt to asset
ratio
29.5
(2.2)
33.0
(3.4)
29.6
(1.7)
Current ratio 2.60* 2.10* 3.70*
Farm Financial Measure Summary Statistics by State
* Current ratio is evaluated using the median rather than the mean value.
** Assets valued at current market value.9

10. Average ROA by Herd Size
10
-5
0
5
10
15
20
%ReturnonAssets
<200 cows 200-499 cows 500+ cows

11. Average Debt to Asset Ratio
by Herd Size
11
20
25
30
35
40
45
50
55
%
<200 cows 200-499 cows 500+ cows

12. Median Current Ratio by Herd Size
12
1
1.5
2
2.5
3
3.5
4
4.5
5
ratio
<200 cows 200-499 cows 500+ cows

13. Comparisons
Measure AU Top 25 AU Ave MI Top 25 MI Ave
cows head 445 300 805 320
milk/cow liters 7415 7132 13991 10746
fat % 3.98 4.01 3.8
protein % 3.39 3.41 3.1
ROA % 7.3 3.4 7.9 3.9
EA % 59 62 67 70
CR ratio 1.33 0.38 3.3 2.6

14. Aside: Credit and Finance
 Up to 1980’s lending in US focused on
balance sheet of farms (solvency)
Massive loss of asset market value during
1980’s recession
 Today US lenders focus on debt
repayment capacity (liquidity)
Volatile markets add risk to loan repayment
Debt Repayment Capacity
14

15. Using Benchmark Results
 Solvency (Debt to Asset) and liquidity
(Current Ratio) are best compared to
industry standards for a farm over time
 Profitability compared to similar firms over
same period
 3-5 years records significantly improves
comparison for profitability

16. Michigan Dairy Farm Profitability
16
Year 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
ROA % 5.5 11.3 7.0 -0.4 7.0 11.2 9.3 6.6 15.0 2.6 -0.1
Milk Price $/cwt 13.44 20.21 19.41 13.31 16.88 20.65 18.67 20.63 24.28 17.06 15.07
Purchase
d Feed
$/cwt 3.74 5.32 5.56 4.56 5.06 6.01 6.14 6.81 6.97 5.89 6.15
Total Feed
Cost
$/cwt 8.29 9.55 12.54 11.35 10.14 12.56 13.02 14.00 12.95 12.20 11.10
IOFC $/cwt 5.15 10.66 6.87 1.96 6.74 8.09 5.65 6.13 11.33 4.86 3.97

17. If Profit Ratio is not “optimal”
 ROA=OPM x ATO
If OPM low then look at cost control or output
price
If ATO low then have too many unproductive
assets
 If CR low, look at retaining current assets
to build cushion
 If DA high, pay down debts

18. MI Profitability
Measure 2012 2013 2014 2015 2016
%
Rate of Returns
on Assets
11.3 9.2 10.3 2.6 3.3
Operating Profit
Margin
35.1 29.6 31.2 10.4 15.1
Asset Turnover 32.2 31.0 33.1 25.2 22.0

19. AU Profitability
Measure 2012 2013 2014 2015 2016
%
Rate of Returns
on Assets
6.9 10.6 8.9 7.7 8.6
Operating Profit
Margin
34.5 34.4 34.6 35.5 31.4
Asset Turnover 19.9 30.8 25.7 21.7 27.4

20. Conclusions
 Benchmarking can assist with farm decision-
making
 Is farm liquidity and solvency position safe?
 Are assets used efficiently?
 What can be done to improve operating profit or asset
efficiency?
 Important to compare to similar farms over similar
time period
 Size, production model, region