Think about new investments carefully. Will new investments improve future earning potential? Does the new investment fit the long term goal of the farm? It is tempting to make quick investment decisions around tax planning time with the goal of minimizing taxes. It is better to anticipate good years and invest in assets anticipated to have a high return, such as better transition cow facilities or improved cow comfort.
In general, farms with a limited land base that only own cows tend to have lower operating profit margins, but higher asset turnover ratios. Dairy farms with large land bases tend to have lower asset turnover ratios, but higher operating profit margins. However, farms that control less land and purchase feed are at a higher risk of widely fluctuating feed prices.
Understanding the DuPont equation can be valuable in helping farm managers drill down and understand the factors that are driving farm profitability. Benchmarking your farm with other similar farms will help you determine your strengths and opportunities. If your profitability, asset turnover and operating profit margin are high – keep up the good work. If some of the areas could use improvement, work with your advisors and others to develop a strategy to improve farm profitability.
|Item||Average||Low 20%2||20-40%||40-60%||60-80%||High 20%|
|Return on assets||5.9%||-4.1%||2.6%||5.5%||8.5%||13.1%|
|Operating profit margin||16.0%||-15.1%||7.7%||15.1%||22.3%||29.8%|
|Asset turnover rate||36.7%||27.3%||33.8%||36.7%||38.2%||44.0%|
|1FINBIN – Data from MNSCU Farm Business Management for herds from 51 to 200 cows – cost basis.