How to benchmark your arable business

How do your cropping costs and technical performance compare with other businesses and are you spending too much on cultivations?

These are valuable questions as farmers grapple with narrowing margins resulting from lower wheat and oilseed rape prices and rising input costs.

“If you don’t measure it, you can’t manage it,” explains Nick Blake, director of Andersons Eastern. 

See also: Two farmers explain how benchmarking helped them cut their costs 

That’s the principle behind benchmarking,he says, adding that it’s a process that allows you to compare your business performance to others.

“There’s a great deal of interest in benchmarking and what it has to offer at the moment,” he says.

“And that’s not surprising, given current market uncertainty and the need to build resilience into farming businesses. It certainly helps to identify best practice.”

Ideally, farms that benchmark will compare their performance with that of similar businesses, rather than a mixture of farm types, he notes.

“There’s good reason for that. A sand land root farm, for example, is likely to have a different level of overhead costs to a heavy land farm with combinable crops.

See also: Top tips on cutting arable costs

“So it is more relevant to be able to compare with those that are a close image of your set up.”

As part of the benchmarking process, rather than just comparing overall farm performance on a per hectare basis, it would also be worthwhile assessing your total cost of production on a crop by crop basis, he adds.

“From there, you can set achievable and realistic targets for ongoing performance.”

Mr Blake believes that comparing your figures with to the top quartile, or industry bests, is useful. “It’s good to have aspirations. Many growers are in benchmarking groups, so they can benefit from seeing how others are doing and use this information as the basis of their discussions.”

Starting point

Group successes

  • Average labour cost now one third lower than the HSBC Planner figure
  • Machinery costs at £174.10/ha, compared with HSBC’s £230.50/ha
  • Admin and finance 29% lower than industry average of £48.90/ha
  • Establishment costs come down by £6.35/ha over the last three years
  • Primary cultivation costs fallen from £46/ha to £38/ha

The process all starts with a set of your annual financial accounts, he advises.

“With the overhead costs from these, the variable costs from your crop records and physical information such as areas grown and tonnes sold, you can analyse either on a £/ha basis across the whole farm or £/t by crop.”

There are various ways of processing your information and coming up with the final figures. Tools such as HGCA’s CropBench and Potato Council’s Arable Benchmark Model allow you to enter your data into a specific template, sometimes on-line, before coming up with results and access to other industry data.

“Or there’s an Excel spreadsheet,” says Mr Blake. “It doesn’t really matter which one you use – all of them will do a good job.”

His view is that the best way to get the most from benchmarking is to form a group of like-minded farmers, with similar businesses, and have a facilitator to run and guide the meetings.

“Most important of all is that the methodology is consistent. You must have a system that allows you to make meaningful comparisons, and this is where a facilitator can be very helpful.”

One method is to use pre rent and finance figures. “It means that apart from management and drawings, you have a similar basis to others.”

If being part of a group isn’t possible, a good alternative is to use the Farm Business Survey as the starting point for your comparison, he points out.

“It’s free of charge and the information is available on-line. The only drawback is that it can be historic depending on when you undertake your analysis, so check which harvest year it is referring to.”

An arable farmer should consider analysing their cost of production a couple of times a year, he stresses. “You should do it when you budget, so that you can arrive at your projected cost of production for the year, and then again when all the income and expenditure for the year is known.

“Benchmarking, however, is likely to be just undertaken with the final harvest results, often 9-12 months after harvest.”

Despite recent events on the grain market, not all farmers know what their costs of production are, he comments.

“It is really important to know how much it costs the business to grow a tonne of wheat.”

Benchmarking tends to focus more on variable costs and the labour and power component of fixed costs, as these are where most growers can make positive changes, notes Mr Blake.

“Some of the other costs areas, such as property, can be very particular to individual farms. And they can be easily influenced, depending on business profitability.”

He ends by pointing out that making marginal gains over a period of time can have a considerable impact on business performance. “It isn’t all about making big changes, although they may be necessary on some farms.”

What benchmarking doesn’t do?

Benchmarking won’t necessarily tell you what good performance looks like, as this depends on the types of business you are comparing yourself with, says Mr Blake.

“Being in the top quartile of a small group may not be good enough, especially if those other businesses could do better. It’s important not to get complacent.”

It also doesn’t tell you where you’re going wrong, or the best way of doing things, he adds. “Farmers running machinery for longer will have higher repair costs, but lower depreciation charges,” he says. “A different style of operation isn’t necessarily wrong.”

Loam Farm is the Andersons model farm. Based in the east of the country, it has 600ha of combinable crops, of which 240ha are owned and 360ha are on FBTs. Apart from the owner, there is one full-time employee, with casual labour employed at harvest.

Loam Farm Model – how do you compare?

£/ha                                                  

2012

    2013     

2014  

   2015*

Output      

1273   

1204

1142  

1096

Variable costs                                 

466 

457   

426      

427

Gross margin                                  

807 

747  

716      

 669

Overheads  

394  

404

407 

410

Rent and finance                            

188  

194  

218  

243

Drawings 

72          

73  

75

75

Margin from production             

153

         76

      16        

(59)

 

CAP payments (SPS/BPS and ELS)

240

243

226

217

Business surplus                            

393

     319      

242

158

*budget

Source: Andersons

The Joint Venture Farming Group’s journey

Tracking and measuring field and business performance has been key to the success of the Joint Venture Farming Group and its seven members, which have an average business size of 1,600ha.

Back in 2004, the foundation members decided to analyse and compare labour and machinery costs – both in physical and financial terms – and then to share the results with the other JVFG members.

Their aims were clear: to provide management information on their performance, to help manage costs and to influence machinery purchasing policy.

To this end, each member receives a bespoke “traffic light” report, containing a level of detail that they were unable to access before.

Over time, the group has seen other benefits too. Their benchmarking meetings serve as a forum for exchanging new ideas, challenging the status quo and stimulating discussion on the best way forward.

“It has also boosted management confidence and effectiveness,” notes independent rural business consultant Jamie Gwatkin, who is retained by the group. “These are productive and high performing businesses.”

A look at some of the Joint Venture Farming Group’s 2014 figures shows just how far they have come.

Their average labour cost for 2014 was £55.60/ha – one-third lower than the £75.40/ha figure in the HSBC Planner.

Likewise, machinery costs were £174.10/ha, compared with HSBC’s £230.50/ha. Administration and finance were £34.90/ha for the JVFG, against an industry average of £48.90/ha.

Furthermore, establishment costs have come down by £6.35/ha to £105/ha over the last three years, despite cost increases. Within that, primary cultivation costs are now £38/ha, having fallen from £46/ha.

That’s been achieved by a 7% improvement in work rates, together with a fall in machine and implement costs.

“There are always new areas for investigation,” notes Mr Gwatkin. “In the last few meetings, we’ve compared harvesting and ‘prime mover’ tractor costs.”