Comparative Analysis

John T. Farmer, a midwestern grain and beef producer, knew that some changes were needed in his farm operation. But he did not know what changes to make. John realized he needed to determine the strong and weak pointy of his business, but he did not know how to make these assessments. For agricultural producers, like John, there area number of farm and financial management techniques to analyze a farm business' profitability and efficiency. Given the tight profit margins in agriculture, these techniques can make a huge difference to agricultural producers.

Beef producers, like other producers of agricultural products, use a number of financial management techniques to analyze their farm businesses in terms of profitability and efficiency. (SCS Photo by Erwin W Cole, Minn-1771)

One such management technique is comparative analysis, which allows the individual producer to compare his or her farm with a specific set of farms, say the "top 25 percent net income group." That is, comparative analysis allows the individual producer to ask, "How does my farm business compare with other farms of similar size, type, and enterprise mix?" By using this management technique, an agricultural producer can determine both the strong and weak points of the farming operation and make the needed changes.

Comparative Analysis Requirements

An accurate and detailed set of farm records is needed to use any management technique effectively. The farmer needs income and expense information for the whole farm, as well as for individual enterprises. But more important, the farmer needs production and physical data yields, acreage, investment, number of head sold, feed cost per hundredweight, and pounds produced.

Since a farm operation is compared with a specific set of farms of a similar type and size, the analysis can be on a countywide, regional, or statewide basis. Comparative analysis usually involves a comparison with a set of farms that represent either the average group, the top 25 percent net income group, or the top 10 percent net income group. Most State Extension Services provide information from actual farm records, that can be used for this analysis; if not, they will have typical cost-return budgets for various enterprises.

For his analysis, John felt that his farm operation should be compared with all farms of the same type that by income comprised the "top 25 percent income group." John's comparative analysis considered whole-farm and management factors, as well as enterprise analysis and management factors.

Whole-Farm Analysis. Comparative analysis on a whole-farm basis allows the farmer to compare his or her farm operation with a group of farms of a similar type and size. Income and expenses must be compared on an item-by-item basis to determine items that are potentially problematic. If possible, income and expenses should be divided between the crop and livestock segments of the farm operation. With separate records, the farmer can analyze such expenses as gasoline, oil, and utilities on a per-head or per-acre basis. But even without this fine tuning of the records, important information can be gleaned from the whole-farm information.