Variations in debt load and per-acre profitability highlight vulnerabilities in Ontario’s dairy and crop sectors, according to the latest benchmarking report from BDO Canada.
However, representatives from the financial firm say the data also gives farmers an opportunity to improve risk management, as well as their cost-to-profit ratio.
Why it matters: Understanding your farm’s profitability in relation to other farms can help improve business planning.
Significant profitability gap in grain sector
Lisa Kemp, an accountant and BDO partner based in Lindsay, says the report highlights significant differences between the most and least profitable grain and oilseed farms.
The former spend more on direct costs like seed, fertilizer and plant protection, while maintaining lower overhead and operating expenses – operating expenses being defined as the price of keeping the farm running (such as machinery costs), but separate from debt.
Direct expenses like machinery costs and labour, she says, is where significant differences in efficiency manifest.
Although profitability results in part from cost control, says Kemp, it’s also important to generate revenue from those costs (e.g. from the capital investment). In total, the most profitable farms show a 12 per cent advantage for cost of goods sold, a 19 per cent advantage for direct operating expenses, and a 35 per cent advantage in total operating costs.
“A farm with $1 million of revenue in the most profitable group would have $450,000 left after paying all operating costs, while a similar farm in the least profitable group would only have $100,000 to contribute to capital costs and profits,” she says.
“You have to look at the costs and the revenues to see the whole story. “The most profitable grain and oilseed farmers are not necessarily the largest.”
Debt-carrying capacity critical in dairy sector
The report looked at solvency and financial risk by analyzing total debt over operating income, as well as bank debt over operating income. Overall, Kemp says the vulnerability of the least profitable farms is exposed by looking at their ability to carry their debt.
“A negative-earnings before interest, taxes, and amortization means they need to find other sources of money to pay these costs. This is what we found with Ontario dairy farms,” she says.
“Since it’s not just from the size of their debt, it means this is something individual farms can fix. They can look into their costs per kilogram, compared to the most profitable farms, and think about what improvements they can make.”
Kemp adds operators can also see whether they need to improve production per cow. The data show there are dairy farms with 80 kilograms of quota making as much profit as farms with 112 kilograms – a direct result of efficiency and good management.
“You can make as much with 80 kilograms of quota and in the top 25 per cent of farms as you would with average numbers and 112 kilograms, the message being that bigger isn’t always better,” she says.
Good data crucial in stressful times
BDO delayed the release of its latest benchmark report to account for the emerging COVID-19 crisis. However, Kemp says the decision to publish the report in April was made so farmers could read it before the coming planting season.
“Although we knew it wasn’t the best marketing time, we hope that this report will encourage Canadian farmers to better understand their own businesses and have long-term impacts on decision making,” she says.
Kemp also reiterates understanding the unique strengths and weaknesses of one’s business is particularly important in times of stress – such as during the current pandemic.
“You can make decisions based on information and not react emotionally. Farming requires long-term strategies. You can’t manage what you don’t measure. Knowing your financial position, your five-year trend analysis, and how you compare to others can be the starting point to making decisions, whether that’s improvements, expansion, downsizing or staying the course.”
BDO’s Spring 2020 Benchmark report breakdown
This latest benchmark report was developed using 4000 standardizing financial statements from farms across Canada between 2012 and 2018. These statements come predominantly from Ontario and Manitoba farms.
BDO report highlights differences between high, low-income farms
- There is more variation within a sector than between sectors, including within price-fixed supply managed sectors.
- The most profitable dairy farms generate about 74 cents more profit per dollar of operating costs than the least profitable.
- The most profitable grain and oilseed farms show a 12 per cent advantage for cost of goods sold, a 19 per cent advantage for direct operating expenses, and a 35 per cent advantage in total operating costs.
- The most profitable farms, regardless of type, do not necessarily carry the least debt. However, those farms appear to use borrowed money more effectively.