Performance Indices and Ratios
Farmers, consultants and financiers frequently compare annual physical and financial performance indices for a farm (calculated from the farm budget and cash flow) to compare with other farms or for different years on the same farm. This comparison gives an indication of how a farm compares to others in the district.
Such comparative criteria may be:
Physical: |
eg, lambing percentage, wool weight ~g/ssu), stocking rate (su/ha), etc. |
Financial: |
Gross income/su, lamb price (s/head), debt servicing ($/su), etc. |
Ratios: |
Generally expressed as a percentage of gross farm income net of livestock purchases. |
Rule of thumb criteria often stated are:-
10-25% |
Debt servicing (as % of gross farm income) |
45-60% |
Cash working expenses |
25% |
Personal drawings, tax, capital/development, profit |
100% |
Table 4.9 shows cash farm expenses as a percentage of gross farm income for the 10 farms over the whole series (12 years) and for the three periods within the series.
This table shows the degree of variation in each period (as measured by the coefficient of variation) and the different mean figures in each period.
Whilst physical and financial performance criteria tend to be farm type and location specific, the ratios tend to apply more generally over all farm types (with the exception of intensive cropping farms).
There is some merit in being able to use these criteria to compare the performance of farms. In general terms, the ratio criteria give financiers, farmers and consultants an indication of the viability of a business. Equity also determines the financier's exposure to "risk".
This study highlights a number of things:-
Physical and financial indices will vary significantly between years depending on climatic conditions and market prices. In this respect they require revising regularly and used to assess the performance of a property need to be taken over several years to smooth the large annual variability.
When farms are exposed to large decreases in incomes they are forced to reduce expenses in order to balance budgets. In periods of low prices, if these criteria are to be maintained, farm expenditure may fall below desirable medium4erm maintenance levels. Our results show that, in reality, this does not occur to a large degree because farmers do not reduce their expenses to the same extent as income varies.
Whilst ratios of expenditure to gross farm income are a useful guide, these ratios will cease to be applicable in years of low incomes when farm management becomes "crisis management". This may occur because expenses rise (debt servicing, feed) or because the denominator gross farm income) falls substantially.
In addition, gross farm income net of livestock purchases may be extraordinarily high (or low) because of extraordinarily low (or high) levels of livestock purchases due to adverse climatic events or due to a change in livestock policy.
Most financiers and consultants are aware of these factors and consider them when making comparisons for a farm or between farms.
Whilst the ratio indices (eg, debt servicing as percentage of gross farm income) may vary substantially between farms and between years they do define in broad terms what is sustainable or viable in the medium to long term. If prices, or performance are likely to remain depressed in the medium term or. if expenditure levels are likely to remain excessive despite improved prices and livestock performance, this is an indication that reorganising of the farm may be required with regard to farm size, levels of debt or other costs and farming policies.
This emphasises the dynamic nature of these comparative criteria (in particular the ratios of costs to gross farm income) and the need to evaluate the performance of a farm over time, both historically and into the future. Taken in isolation for an individual year and out of context of the physical and financial situation for that particular year (when compared to other years) or without due regard to the personal circumstances of the farm owner (eg ability to draw on off-farm resources, individual goals, development status for the property) simple comparison may result in inappropriate conclusions.
This does not mean that such criteria are without merit, simply that they need to be taken in context and that the whole farm situation needs to be taken into account including the human goals and resources.
It is important that farmers, financiers and consultants are aware of the limitations of these criteria and do interpret them in the light of climatic and economic conditions and the physical and management resources of the farm business.
Table 4.9 Cash Farm Expenses as Percent of Gross Farm Income
Property |
Overall |
Post 1987 |
1984-87 |
Pre 1984 |
|||||
Mean |
C.V. |
Mean |
C.V. |
Mean |
C.V. |
Mean |
C.V. |
||
1 |
65.7% |
1.06 |
53.4% |
0.39 |
45.5% |
0.10 |
89.3% |
1.30 |
|
2 |
58.4% |
0.75 |
84.8% |
1.02 |
65.5% |
0.59 |
38.3% |
0.50 |
|
3 |
61.2% |
0.17 |
68.6% |
0.11 |
65.8% |
0.14 |
53.0% |
0.15 |
|
4 |
42.6% |
0.34 |
47.6% |
0.08 |
47.8% |
0.54 |
35.4% |
0.16 |
|
5 |
62.8% |
0.23 |
NA |
NA |
69.3% |
0.22 |
52.8% |
0.15 |
|
6 |
68.2% |
0.51 |
79.8% |
0.69 |
73.3% |
0.76 |
57.1% |
0.12 |
|
7 |
64.7% |
0.24 |
62.4% |
0.18 |
72.4% |
0.36 |
59.8% |
0.17 |
|
8 |
100.9% |
0.89 |
NA |
NA |
135.8% |
0.98 |
NA |
NA |
|
9 |
78.4% |
0.72 |
61.2% |
0.19 |
121.4% |
0.78 |
54.4% |
0.23 |
|
10 |
60.8% |
0.44 |
49.7% |
0.18 |
74.6% |
0.65 |
56.5% |
0.26 |
|
Table 4.10 Debt Servicing as % of G.F.Income (net of Livestock purchase)
| Property | Overall |
Post 1987 |
1984-87 |
Pre 1984 |
||||
Mean |
C.V. |
Mean |
C.V. |
Mean |
C.V. |
Mean |
C.V. |
|
1 |
18.3% |
0.50 |
18.1% |
0.31 |
23.0% |
0.12 |
14.6% |
0.97 |
2 |
31.2% |
0.79 |
48.0% |
1.16 |
24.6% |
0.39 |
25.1% |
0.23 |
3 |
9.0% |
0.42 |
8.1% |
0.27 |
12.4% |
0.38 |
6.9% |
0.32 |
4 |
20.5% |
0.27 |
24.2% |
0.42 |
18.7% |
0.35 |
19.8% |
0.14 |
5 |
11.9% |
0.33 |
NA |
NA |
11.9% |
0.50 |
13.1% |
0.11 |
6 |
13.5% |
0.58 |
17.5% |
0.43 |
15.4% |
0.87 |
9.7% |
0.15 |
7 |
13.7% |
0.31 |
16.7% |
0.21 |
15.3% |
0.33 |
10.6% |
0.27 |
8 |
4.4% |
1.49 |
NA |
NA |
8.4% |
0.93 |
NA |
NA |
9 |
25.7% |
1.07 |
20.4% |
0.13 |
47.1% |
0.96 |
11.8% |
0.35 |
10 |
14.4% |
0.58 |
12.0% |
0.56 |
20.7% |
0.64 |
10.9% |
0.20 |
Figure 4.7 shows mean personal drawings and debt servicing for the 10 farms over the 12 year time series compared to the underlying trend in gross farm income.
In real terms mean debt servicing has remained fairly constant over time with a slight decline in 1986/87 and 1987/88. This decline in debt servicing reflects the debt restructuring which occurred over this period, coinciding with the high interest rate levels.
In contrast, mean personal drawings have fluctuated widely and have declined over the 12 year time series. This decline is a combination of deliberate personal expense reductions as income levels fell and ownership restructuring on several properties which resulted in reduced personal drawing levels. There was considerable variation between levels of personal drawings on individual properties (refer Table 4.11).
It is noticeable that personal drawings declined markedly following the dramatic fall in farm incomes resulting from the withdrawal of subsidies.
Whilst personal drawings have been significantly reduced over time, much of the between year variation is a result of the lumpy nature of personal drawings on individual properties over the period.
With the decrease in personal drawings an increase in off-farm income was significant on some propertie
Table 4.11 Personal Drawings (1990 Dollars)
Overall |
Post 1987 |
1984-87 |
Pre 1984 |
||||||
Property |
Mean |
C.V |
Mean |
C.V |
Mean |
C.V |
Mean |
C.V |
|
1 |
34,428 |
0.29 |
38,389 |
0.33 |
38,619 |
0.19 |
28,699 |
0.39 |
|
2 |
34,088 |
0.60 |
16,255 |
0.82 |
21,426 |
0.12 |
52,386 |
0.22 |
|
3 |
11,024 |
0.23 |
10,564 |
0.07 |
9,906 |
0.31 |
12,196 |
0.26 |
|
4 |
60,821 |
0.69 |
28,253 |
1.42 |
52,069 |
0.82 |
87,363 |
0.43 |
|
5 |
31,046 |
0.85 |
NA |
NA |
11,334 |
1.47 |
55,066 |
0.18 |
|
6 |
60,039 |
0.55 |
69,801 |
0.35 |
53,177 |
0.86 |
59,672 |
0.67 |
|
7 |
20,920 |
0.53 |
14,469 |
0.16 |
21,335 |
0.31 |
24,458 |
0.71 |
|
8 |
22,026 |
0.65 |
NA |
NA |
21,460 |
0.61 |
NA |
NA |
|
9 |
42,450 |
0.65 |
21,583 |
0.43 |
45,223 |
1.04 |
52,751 |
0.27 |
|
10 |
23,773 |
0.22 |
21,203 |
0.34 |
22,166 |
0.13 |
26,600 |
0.23 |
|
This scatterplot (Figure 4.8) illustrates well the
results of previous pages.
A close relationship exists between the level of variation in gross farm income and the level of variation in cash farm surplus.
For the 10 farms the R squared is 0.39; however, if one outlier is removed, the R squared increases to 0.69.
An R2 value of 1.0 indicates a perfect fit, a value of 0.69 indicates that 69% of the variation in cash farm surplus is explained by the variation in gross farm income (for the 10 properties over the 12 year time series).
The fact that all points on the scatterplot fall above the unitary slope line shows that the variation in cash farm surplus is greater that the variation in gross farm income. This again illustrates the farmer's lack of ability to deal with low income by reducing expenditure proportionately. The level of discretionary expenditure is limited.
Similar scatterplots and regressions were calculated for coefficient of variation total lambs sold (CV) against gross farm income (CV) and total wool sold (CV) against gross farm income (CV). In both cases the results showed no relationship between volumes sold and gross farm income. This confirms that the dominant effect on farm incomes was the external product price variation over the time series.
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