Operating Efficiency Among Agriculture Borrowers a comparison of four farms
By Tim Ohlde, Country Banker
Agriculture is a cyclical industry and, recently, this has been evident across all the commodities. Monitoring Financial Efficiency ratios is key to understanding the health of operations particularly in times of transition between cycles. Although there are several efficiency ratios to choose from, the Operating Expense Efficiency (OEE) ratio is one of the best to start with. Tracking the proportion of expenses to revenue gives keen insight on asset utilization, management aptitude and discipline. In this case, less is more; a lower ratio (percentage) is the goal so that expenses are lower per dollar of revenue. The formula for the Operating Expense Efficiency ratio is: Total Operating Expenses (Excluding Depreciation and Interest) divided by Gross Revenue
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• September-October 2021
In essence, tracking how many cents of operating expense it takes to produce a dollar of Gross Revenue. To illustrate the value of the OEE ratio, data was gathered for four farms to display changes in efficiency as they moved toward, through and beyond the most recent super cycle. The four farms all include a cow calf operation and approximately the same percentage of acres in a mix of dryland and irrigated row crops. They could each be dubbed a typical midwestern farm. It is important to note that all four borrowers are using accrual adjusted Income Statements. Their data quality is high and reflects true profitability. If you have not moved to accrual adjusted Income Statements, it is a foundational piece to enhanced quality analysis. The chart below displays three-year averages of the OEE ratio for each of the four farms.
