As we see agricultural input costs grow and subsidies diminish, understanding and analysing farm performance becomes more important. What are the measures and what should farms be measuring to mitigate risk, find efficiencies, drive growth, or simply have a better knowledge of the long-term performance of the farm?
The simplest measure is yield. Be that at an overall crop level, variety, or field level yield. It’s a useful measure to understand total production and know which are the most productive fields but doesn’t go as far as helping answer why those yields are being achieved.
When it comes to measuring the performance of a farm, we see the cost of production as more important than yield. This is because the cost of production reflects the efficiency with which a farm can produce its goods, while yield is simply a measure of the quantity of crops produced.
One of the reasons is that this allows farms to better understand their expenses and make more informed decisions about how to run their operations. By knowing how much it costs to produce a certain quantity of a crop, farms can determine whether they can make a profit from their sales and whether they need to cut costs to remain profitable.
Another reason why the cost of production is important is that it helps farmers to compare or benchmark their performance with that of other farmers. By knowing how much it costs to produce a certain quantity of goods, farmers can compare their costs with other farms and determine whether they are operating at a similar level or if they can learn from and share knowledge with their peers. This can help farmers to identify areas where they can improve their operations and become more efficient.
In addition to the cost of production, another key measure of performance is gross margin. Gross margin being the difference between a farm's revenue and its variable costs, and it is a measure of the profitability of a farm's operations.
One reason why gross margin is important is that it provides a more comprehensive picture of a farm's performance over the cost of production. Gross margin takes into account both the cost of production and the farm's sales performance, providing a more complete picture of the farm's financial performance.
By comparing gross margins with other similar businesses, farms can understand whether it is their variable or sales strategy which is affecting performance. Farmers can also determine which of their crops are the most profitable and focus their efforts on these to maximize profit.
Net margin is the measure our engineers are working towards by adding in a Labour and Machinery element to our platform. It is a measure of a farm's overall profitability, representing the amount of profit a farm generates after subtracting all its costs from its crop sales and other income. It provides a clear indication of the farm's financial performance and whether it is generating enough profit to sustain itself and potentially grow if that is a business goal. Changes to labour or machinery elements of a business don’t happen overnight, making this a more long-term measure vs cost of production.
It's worth noting that cost of production, gross margin and net margin are just a few measures of a farm's performance, and other factors such as the farm's sustainability, environmental impact, and social responsibility, all will undoubtedly have an impact on overall business goals.