Principal Strategy Consultant, Primary Industries and Resources,
Developing ways to measure farm business
performance has led to a range of indicators such as interest cover, income
to debt, income to operation expense and many others.
These indicators, often expressed as ratios, allow farm managers,
their advisers and financiers to assess financial health of a farm business.
However, no single ratio is usually sufficient to provide a complete
picture of the business, rather a suite of measures is preferred (Cook,
Edwards and Ronan 1994).
The means of analysing farm businesses has
developed greatly in recent decades. Pre
1970 in Australia the concept of gross margin was, if not new, unexplained
and was certainly not adopted as a useful management tool by farmers.
Similarly, cash flow budgets, prepared on a monthly or quarterly
basis, were almost unheard of.
Progress with farm business tools such as
these has been stimulated by a number of factors including, increasing
reliance on bank finance and the need for external parties to understand the
farm business, the growth of farm businesses and importantly the advent and
adoption of personal computers on farms.
The latter, with increasing friendly software, has made the use of
financial management tools very much easier.
There are parallels between the analysis of
the farm as a business and appraisal of agricultural and food producing
sectors of the Australian economy. These
similarities include production of commodities for sale without significant
or even minimal value adding - production of intermediate products, eg feed
and grains, which are used on farm for fattening livestock and in some cases
the existence of extensive value adding enterprises.
Value chains have been analysed for a range
of agricultural enterprises (O’Sullivan 1998-99).
The agri-food sector includes all of the
attributes of individual enterprises and they are a part of what is known as
the agri-food value chain, with goods passing from the producers, to export
and domestic markets, sometimes with value adding along the way (Agriculture
and Agri-Food Canada, 2000).
One measure of the size of the agri-food
sector is turnover, at the final level of sale (Cook, Langberg and Esvelt
Measurement of the turnover of national
agri-food industry is a straightforward summation of food exports
(commodities and processed products) and domestic food sales.
This amount, to coin a phrase, is called
‘gross national food revenue’, However, as this turnover figure includes
the contribution of imported food products, a further indicator (of national
food turnover), taking imports into account, may be termed ‘net national
A deeper look at the sector indicates that
the value chain for the food industry shows that the value chain comprises
more than export and domestic sales, as described above. Intermediate
outputs can be identified and easily monitored from the Australian Bureau of
Statistics (ABS). Farm gate production and agri-food processing turnover for
example are clear indicators of production and manufacturing trends.
Combined with export and domestic sales performance a clear picture
is built up of the size and structure of the agri-food industry.
Looked at in the ways described above, the industry can be monitored
over time and by drilling into the figures, industry sectors and individual
food products can be analysed (Cook, Esvelt and Langberg 2002).
Using this framework, data from ABS is
enhanced to assist understanding of the value chain including its strengths
and weaknesses. For instance,
the trend of processing output, combined with employment and new capital
investment shows extent of growth.
Compared with traditional means of measuring
industry output, such as input-output tables and national accounts, a food
industry scorecard as described above is a timely and easily understood
data-base for users.
Such an industry scorecard, as described, can
be constructed quite readily on a state-by-state basis.
One qualification should be emphasised however.
As agricultural and food products move freely between States some
account should be taken of these flows.
They are effectively interstate exports and imports.
In the absence of official statistics on these flows Primary
Industries and Resources South Australia has developed a methodology for
measuring interstate imports and exports (Cook, Esvelt and Langberg 2001).
Indicators and measures of farm business and
agric-food industry performance are all designed to cast light on sometimes
complex farm and industry systems. Performance
indicators and ratios are management tools designed to dissect industry
In many ways, development and adoption of
measures of agri-food value chains is similar to the progress of farm
business that occurred in the period 1970-1990.
Concepts such as ‘gross food revenue’ and ‘net food revenue’,
as applied to national or State agri-food sectors, provide an indicator of
sector size. Intermediate
outputs, such as farm gate production and processing turnover, are the fuel
for the final products sold on export or domestic markets. As such they
correspond to the inputs of the farm business that contribute to farm gross
Scorecard concepts presented here are not
new; rather they are an extension of measures and indicators being routinely
applied by farm and business managers.
Agriculture and Agri-Food Canada, 2000, A Portrait of the Canadian Agri-Food System, Economic and Policy
Brown, Mark Graham, 1996, Keeping Score – Using the Right Metrics to Drive World-Class
Performance, Quality Resource Books.
Cook, Venton, Esvelt, Rob and Langberg, Jack,
January 2001, Measuring the Value of
the Food Industry – A Revenue Approach as applied to South Australia, Paper
presented to 45th
Annual Conference of Australian Agricultural and Resource Economics Society,
Adelaide, South Australia.
Cook, Venton, Esvelt, Rob and Langberg, Jack,
January 2002, 2000-2001 Scorecard Papers,
PIRSA publication Adelaide,
O’Sullivan, Mark, 1998/1999, Queensland Value Chain Analysis Series (Vol 1-4), Queensland
Department of Primary Industry.