Financial benchmarking using The Farm Financial Survey

Monday, December 6, 2010

by RANDY DUFFY

How do the figures for your farm compare? Benchmarking means different things to different people. Generally, people wish to compare their production and/or financial figures. There are many sources of information available to potentially use to measure your operation.

One source for financial benchmarking is the Farm Financial Survey published by Statistics Canada. It provides average farm values for assets, liabilities, revenues, expenses and net cash farm income for various farm types and provinces/regions within Canada. There are some limitations with the data. Not all farms that produce pigs are included in the data and there is no associated production size, productivity, or debt servicing (principal payments) data. Also, the most recent data available is for 2008 due to the time lag related to income tax filings. The lack of data for 2009 is a concern since financial conditions changed hog and pig farm balance sheets dramatically. However, the 2007 and 2008 data incorporates part of the very unprofitable period the industry experienced from late 2006 to the spring of 2010.

The Farm Financial Survey still provides a meaningful benchmark average for Ontario hog and pig farms as it allows financial ratios to be calculated and compared to an individual producer's own figures. Ontario hog producers can also use the data to compare themselves to other provinces or farm types.

A time series exists for 2001-2008 which highlights trends that have occurred. Looking simply at the averages over this entire period doesn't tell the whole story. It is helpful to look at the changes that occurred when comparing the first half of the period (2001-2004) to the last half of the period (2005-2008) since these were two very different periods in terms of industry profitability. Financial calculations such as Return on Assets (ROA) and Return on Equity (ROE) or Debt:Assets and Debt:Equity ratios allow comparisons between different farms or regions because these variables are measures of profitability and competitiveness, not farm size.

Table 1 shows financial calculations for the 2001-2004 and 2005-2008 periods for Manitoba, Ontario and Quebec. The figures show that Quebec farms appeared to be more profitable (based on ROA and ROE) but also carried higher debt loads (based on Debt:Assets and Debt:Equity). Manitoba farms had lower debt levels overall and were more profitable than Ontario farms in the 2001-2004 period but were less profitable in the 2005-2008 period.

Table 1 also shows the ROA and ROE calculations with the revenue from government program payments excluded. These revised figures show that Manitoba farms with 5.4 per cent for both ROA and ROE were relatively the most profitable from 2001-2004 while Ontario farms fared better (i.e. 2.3 per cent ROA and 0.3 per cent ROE) in the 2005-2008 period.

In summary, when using the Farm Financial Survey for benchmarking purposes, Quebec farms appeared to be more profitable than Manitoba and Ontario farms. However, Quebec farms also had higher debt levels. Profitability calculations, when government program payments were removed from income, indicated that Ontario farms were very competitive with those in Manitoba and Quebec. BP

Randy Duffy is Research Associate at the University of Guelph, Ridgetown Campus.