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Quantitative Measures And Performance Indicators In The Agri-Business Sector [1]

Venton Cook

Principal Strategy Consultant, Primary Industries and Resources, SA.

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 2001).

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 food revenue’.

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 structure.

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 revenues.

Scorecard concepts presented here are not new; rather they are an extension of measures and indicators being routinely applied by farm and business managers.

References

Agriculture and Agri-Food Canada, 2000, A Portrait of the Canadian Agri-Food System, Economic and Policy Analysis Directorate.

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 45^th 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, South  Australia.

O’Sullivan, Mark, 1998/1999, Queensland Value Chain Analysis Series (Vol 1-4), Queensland Department of Primary Industry.