The translation of the article that I wrote for www.agrotimes.net. It was published on 20th Dec 2017.

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Making a Meaningful “EBITDA per Hectare” Analysis
Sergiy Bulavin, PhD – 20.12.2017
We often compare ourselves to others. For some
people it’s a way to gratify their self-esteem, for
others – an impetus for development. We
oftentimes boast our achievements and strive to be
better than others. Agricultural producers used to
measure themselves against their yields. At
present, the latest trend or, so to say, a “universal
measuring tool” for an agricultural company’s
performance is EBITDA or EBITDA per hectare.
This is a worldwide tendency. The indicator is used as a way to measure performance
of both agricultural companies and management teams that lead them. In their public
speeches nearly all agricultural top managers claim that their primary goal is to
increase EBITDA per hectare. However, almost no one is thinking through its meaning
or whether it may be applied for comparison at all.
It is true that EBITDA per hectare is characteristic of how effectively an agricultural
company performs. Let’s assume that you decided to use this indicator to compare
your company to other companies or that it was set by the Board of Directors or by the
investor as a strategic target or a personal KPI for you as a СЕО. Thus, you get open
source EBITDA per hectare data of different agricultural companies and are trying to
process the information. What conclusions come to your mind in the first place?
For example, in 2014 Company A’s EBITDA per hectare was USD 70 and in 2015 it
was USD 274. Does it mean that Company А significantly improved its efficiency over
the year as well? Here is another example. In 2012 Company B’s EBITDA per hectare
was USD 1,086, whereas in 2014 it was USD 391. Does it mean that over two years
Company B lost 2/3 of its efficiency? This final example makes it all even more
perplexing. Company C made public four EBITDA indicators for 2011 that were
calculated using four different calculation methods. The difference between the highest
(USD 592) and the lowest (USD 131) EBITDA per hectare rates was fourfold. Which
one of them should be used for analysis?
All of these examples are based on the real open source information. Yet, the
information is heterogeneous. There many factors, which are not directly linked to a
company’s performance, but have a significant impact on its final result. I can name at
least eleven factors that distort “EBITDA per hectare”-based comparison of agricultural
companies. No doubt, every executive may pick up some more factors from their
experience. Here are the eleven factors I outlined:
1) Different accounting policies.
2) Different approaches to EBITDA calculations; different EBITDA Adjustments.
3) Different accounting and reporting systems.
4) Different approaches to biological assets revaluation.

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5) Different levels of vertical integration.
6) Different interseasonal prices for seeds, fertilizers, plant protection agents, and
production of agricultural companies.
7) Different regional specifics of soil and weather conditions.
8) Different labor markets in regions.
9) Different regional specifics of pricing for seeds, fertilizers, plant protection agents,
and production of agricultural companies.
10) Different regional specifics of the land market and land bank maintenance costs.
11) Different regional taxation and tax benefit specifics.
It is obvious that the biggest difference comes from regional specifics, especially if we
compare agricultural companies from different countries (for example, a palm oil
producer that has USD 3000 EBITDA per hectare with a Ukrainian grain producer).
Such factors as different accounting and reporting specifications, level of vertical
integration, and use of different EBITDA Adjustments, have a substantial impact on the
calculation of EBITDA per hectare as well:
• How are tax benefits (grants) reflected? Are they recognized as part of revenues or
not included in the EBITDA calculation?
• What is the calculation of EBITDA per hectare of a vertically integrated agricultural
company? Is additional EBITDA from processing or use of agricultural products
included in the calculation?
• How are additional non-monetary income and expenses (not related to production)
calculated? Are they included in calculation?
• What things are recognized as one-off expenses? Are they included in the
calculation? For example, would partial loss of crops be recognized in expenses and
allocated among other cultures or excluded from expenses of the agricultural
company?
• What is the impact of the biological assets revaluation? How was it calculated?
However, what will be the response of the company’s owner or board of directors when
a top manager states that it is ultimately impossible to use the abovementioned
indicator for comparison? Such owners will probably start looking for another СЕО who
will achieve the set targets instead of looking for reasons why this target makes no
sense. By the way, they will be right in doing so.
Despite its ambiguity, EBITDA per hectare is one of the few indicators that help with
the assessment of an agricultural company’s performance. So, how can we make
EBITDA per hectare meaningful and practically useful for an agricultural company?
First, when planning changes and improvements, top management of an agricultural
company has to assess their impact on EBITDA per hectare. Changes make sense

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and should be introduced in case they boost the indicator. If they don’t, they are not
expedient and the company should not waste its resources on them.
Second, when calculating EBITDA per hectare, one has to exclude impact of all non-
monetary factors triggered by vertical integration. This means that they have to use the
indicator that was calculated solely for plant cultivation. Moreover, in case of vertical
integration, they will have to use market prices and not “internal prices” during the
transfer of products from crops growing farms to other departments for further
processing.
Third, compare your EBITDA per hectare with those agricultural companies that
operate in the same climate and on the same soil.
Fourth, make comparison of EBITDA per hectare year-over-year within your company
or with other companies for the same year, provided that you used the same calculation
approach and EBITDA Adjustments.
Anyway, EBITDA per hectare is an important indicator for agricultural companies. In
particular, it may be used to assess performance of the same agricultural company
over the span of several years, as well as to compare performance of different
companies. However, one has to take into consideration a number of factors to make
such assessment meaningful in practical terms.
Source: http://www.agrotimes.net/opinions/opinion/yak-domogtisya-praktichnoyi-
koristi-vid-analizu-ebitda-na-odin-gektar