How to help improve efficiency and control costs
Oliver McEntyre, our National Agriculture Strategy Director, gives his insight into how benchmarking can help improve UK farm efficiency.
The efficiency of UK farming has fallen behind that of other nations at the forefront of the agricultural sector. But what are the implications for individual farmers? And what does the industry need to do about it?
Benchmarking can help improve efficiency on both an individual and industry level.
Impact on investment
One implication of low productivity – not in terms of yield or physical output but in relation to profit and margin – is that the industry will lack the capital to reinvest in itself, and from a perspective of higher capital investments where borrowing is required, the industry also won’t be able to demonstrate the debt serviceability financial backers need to see when looking to invest on a larger scale.
For example, land purchase is the most capital-intensive investment a farming business can make, and the combination of low productivity and increasing land price means that demonstrating debt serviceability could be more difficult for businesses whose profits are essentially flat-lining. Perhaps this is one of the drivers behind a large proportion of land purchases in recent years being made not by farmers, but investors.
Benchmarking for better business
How does the UK farming industry begin to catch up with other countries? To improve productivity, the industry needs to manage it on a farm-to-farm basis far more clearly and comprehensively. And in order to manage something, you first need to measure it – which is what benchmarking can offer on an individual farm basis.
What is benchmarking?
Benchmarking is the comparison of your farm to others within a group, the size and makeup of which you can select. Both the Agriculture and Horticulture Development Board (AHDB) and Farm Business Survey have large databases that can be easily filtered – from comparing your farm to the national database of all farms, to thinning down the analysis to your own sector and region.
How does it work?
Benchmarking starts with simply inputting your trading accounts into a chosen database system, such as the AHDB’s free benchmarking tool at farmbench.ahdb.org.uk. From this, you’ll be able to see basic information such as the profitability per hectare/acre and the level of individual costs per unit of production. You can then compare these figures with neighbouring, local or national farmers and potentially identify cost saving opportunities. It’s completely anonymous, and the only people who can access your data are those you provide permission to, eg your consultant or adviser.
Putting it into practice
The key to successful benchmarking, however, is to analyse the information produced and take the appropriate action.
For example, if a comparative farm uses family labour and your business is reliant on paid labour, they will always have lower labour charges per unit of production or per hectare/acre, and there wouldn’t be any point in trying to emulate their costs.
However, if your variable costs – such as for feed, fertiliser, seed or sprays – are higher per unit of production than your peer group, than you can try to reduce these costs while maintaining the same level of production. Individual improvements like these can add up to substantial cost savings for your business.
It can be beneficial to get a third party - like a consultant or adviser - to help analyse the results, identify areas to focus on and recognise areas where action can’t be taken. Joining local or regional benchmarking and discussion groups can also help you to learn more about your business performance in a peer-to-peer environment.
The beauty of benchmarking is that the more you do it, the greater understanding you’ll have and the more you can use it to control the costs and efficiency of your business.
Actions to consider
- Check out some of the free benchmarking websites – try entering your trading figures and get some help if you need it
- Explore getting a third party to help analyse the results – look for areas of focus and areas where action can’t be taken
- Join a farm discussion group who use benchmarking and keep up the process. The more you benchmark, the greater understanding you’ll develop and the more you can use it to influence the productivity of your business