Benchmarking process

1. Define the objective

Are you looking to maximise return on investment, increase profit (overall or per unit area), minimise costs relative to output? All can provide valuable insight and action points but defining the objective will help guide your choice of comparison data.

2. Select the data source for comparison

Do you want to benchmark against national, regional or local performance e.g. Agriculture, Horticulture and Dairy Board (AHDB) Farmbench, or perhaps there are local benchmarking groups? Are you looking for total farm performance or for enterprise specific comparisons? Or perhaps you are operating in a global market and benchmarking against international data (such as United States Department of Agriculture (USDA) and Australian Bureau of Agricultural and Resource Economics and Sciences (ABARES).

3. Understand the data and its relevance

Is the data you have chosen as a benchmark relevant to your farm? If the data source is not relevant to your farm business model it will not give an accurate gauge of your performance.

4. Compare

Where do you sit against the benchmark? What are you doing differently to the businesses behind the benchmark data? 

5. Implement change

Once you have identified areas for improvement, work with your team to create specific, measurable and achievable routes to resolve issues and bring about positive change.

What to compare against?

• Aspirational comparisons

The leading business may have a very different combination of costs from the average, or even the top 25% of producers. Therefore, it is sometimes worth comparing with just the best producer in the sample. Analysis carried out by the University of Cambridge showed that the very top performers were often not at the top the following year. Risk may also be high.

• The last may be first

Some of the technically best farmers operate on the most challenging soil types or have the least favourable weather conditions. They must be good to survive and are less likely to target personal quality of life over profit maximisation. A farmers ‘ranking’ amongst their peers may mask some of these factors, so any given ranking needs to be considered with those in mind.

• Misleading targets

Some benchmarks examine cost per tonne or litre of produce. This can be useful in determining marketing strategy, providing insight when comparing similar farms or may be a warning to do something else if historic prices look unlikely to result in a profit. However, a low cost per tonne or litre of production and high profit per unit can be eclipsed by a farmer with a higher unit production cost (and therefore lower profit per unit) but more output from a bigger operation.

• Incorrect cost allocation

The labour and machinery costs must be allocated accurately to derive the actual cost per tonne of crop or the cost associated with a single enterprise. It is, in theory, possible to record labour and machinery hours and apply the total cost proportionately according to the record of hours. However, on farms with multiple enterprises and multiple employees it is easy to misallocate and understate the cost associated with one enterprise and overstate the cost related to another. Some enterprises naturally fit well together as their seasonal labour and machinery requirements are opposite. Others do not.

• Correlation is not (necessarily) causation

It is easy to link two unrelated data points and assume there is a correlation. For example, larger more profitable businesses will have higher accountancy fees, but that doesn’t mean you should pay your accountant more to achieve increase to profit.

The way forward?

A modern benchmarking system shouldn’t just compare costs per unit area or against output but show the relationship between all recorded components. Which costs are positively related, negatively related or independent of each other. In our recent blog on fuel use, we looked at the relevance of switching from a cost per hectare or unit of output to a litres per hectare or unit of output method of benchmarking to eliminate the fluctuations of price volatility.

Benchmarking is valuable; however, a starting point could be for businesses to undertake a trend analysis – what is happening year on year within the business and why. Using a business profit and loss account as a base, trends can be identified and drilled into. 

Whether a trend analysis or benchmarking exercise, our Food and Farming consultants have the experience to support a review to ensure businesses remain fit for the future. 

Further information

Contact Robert Knight