The Farm CPA
Paul is now part of the fourth generation in America that is involved in farming and hopes the next generation will be involved also. Through his blog he provides analysis and insight to farmer tax questions.
The Perils of Benchmarking
Jul 31, 2013
The next two sessions at FFSC dealt with the perils of benchmarking. As farmers try to benchmark themselves against other comparable farm operations, it becomes readily apparent that many perils or issues can arise.
In many cases farmers (since they are human) really like using benchmarking when they are above average. In they are below average, many times they will try to make excuses as to why they are not above average, when they should key in on how to get above average.
We then had a panel discussion with three members that are actively involved with benchmarking. Much of the required benchmarking appears to come from financial institutiions requiring it for their ag clients. This applies to dairy, livestock and higher income crops such as orchards, vineyards and other related farm operations. It had not yet migrated to the corn belt crop production enterprises.
The key to benchmarking is:
- Make sure to know your benchmarking trends for your own operation first. It is more important to know your own trends, then to simply compare yourself to others
- Understand that the data you are benchmarking to may not be fully comparable, standardized or relevent.
- Make sure you have enough years of data. One idea is to use five years under the Olympic method where you throw out the highest and lowest numbers for each ratio. This may give a better measurement.
One of the most difficult parts of benchmarking is where to draw the line on the type of farm operation to benchmark to. For example, on a dairy operation, do they only milk cows, do they raise all of their feed and replacement heifers or somewhere in between.
Benchmarking is great, but if you do not use it as a tool, it becomes worthless.
Don't let that happen.