Discovering the Value of Efficiency in Farming

This blog builds on the information I shared in “What is Efficiency in Farming?”.  If you haven’t already, I recommend reading it first. If you have read it, here are a few bullet points to jog your memory.

• Efficiency can be defined as achieving maximum productivity with minimum wasted effort or expense.

• Crop production efficiency (breakeven $/bu.)  is often overshadowed by one of its components: output (yield)
• Understanding efficiency values (breakeven $/bu.) within your operation is important for making agronomic decisions as well as marketing grain.  
• To improve efficiency, inputs must be managed spatially (variable rate).  Flat rate additions or reductions in inputs can have a significant negative impact on efficient production, as yield is variable across the field.
• Yield is a key component of the efficiency, but knowing what it takes to achieve a specific level of production takes you to the next level of understanding profitability.  

Building from the topic of farm efficiency, let’s talk about margin. Unlike the efficiency calculation, which is a ratio, margin is expressed as a difference or variance. Revenue – Expense = Margin (Profit or Loss)

Being more efficient directly leads to improved margins or higher profitability.  

Premier Crop’s Yield Efficiency Score is a new metric that incorporates both efficiency and margin into the calculation. The image below shows how a Yield Efficiency Score is calculated.

The two circles on the left side of the graphic represent Yield and a Benchmark Selling Price for the crop.  Multiplied together, gives us our revenue value. The remaining circles represent four categories of agronomic cost information. The Yield Efficiency Score is calculated by generating the revenue value (Yield x Benchmarking Selling Price) and then subtracting our variable input costs; nutrient, chemical, seed, and operational.  The result is the Yield Efficiency Score, which is a dollar amount (per acre) returned to land and management. You can also think of it as how much money you have left over to cover both land and management costs.  

In the example calculation below we are leaving both land and management costs out.  A Yield Efficiency Score of $473.90/acre means that you have that much leftover to cover both land and management costs.  If the producer in this example is paying $300/acre cash rent, the simple calculation shows $173 leftover to cover management costs.

The efficiency aspect of Yield Efficiency Score comes into play when we analyze the information spatially, or within and across varying agronomic environments.  Harvest yield values change within a field, which equate to different revenue values. Input expenses also change with any variable rate applications. Harnessing this spatial variability is key to understanding how to drive for higher profitability in your operation.  

By now, you might have a few questions related to Yield Efficiency Score.  Below are a few common questions I get asked regarding the new metric.

1) Why is Yield Efficiency Score a better metric to use for agronomic analysis? All yield is not created equal! What does it take (or cost) to produce a bushel of grain?  The combination of spatial agronomic data, both yield and inputs, and a benchmark selling price creates a new way to look at agronomic data.  Yield Efficiency Score is a $/acre value, and it is not crop-specific, which means it can be used in many different ways.

2)  Why don’t you include land and management costs in the calculation? Land costs can make up a significant percentage of total production costs in a cash rent scenario, and not all farmers want to assign an opportunity land cost to owned ground. Management costs can be challenging to calculate because different farmers have different family living expenses and varying management costs. Below is another example, now showing the impact land and management costs have on breakeven $/bu.  

Each scenario has the same yield value, nutrient cost, seed cost, chemical cost, and operations cost.  As Land costs change, so does breakeven $/bushel. Notice that the Yield Efficiency Score does not change. 

Breakeven $/bushel is a very important value, but it doesn’t always provide the best agronomic apples-to-apples comparison.  This is especially true when you’re benchmarking against other farming operations that may value Land and Management costs differently than you. 

3) How can I use the Yield Efficiency Score metric on my own farm?  

The opportunities to utilize your Yield Efficiency Score are endless.  As you become more familiar with the metric, you’ll think of many ways to incorporate the calculation into decision making on your farm.  Here are a few:

• Crop comparisons – Because Yield Efficiency Score is crop-neutral, you can utilize it to compare agronomic information across crop types.  The example below compares an operation’s soybean Yield Efficiency Score to its corn on corn Yield Efficiency Score. Logistics, machinery capacity, time, storage, and many more factors are part of the crop rotation decision, but Yield Efficiency Score can be a great metric to reference and utilize in that decision.  Areas of the country that double-crop or have more sophisticated rotations will be able to utilize this metric even more!

Soybeans following Corn:

Corn on Corn:

• Benchmarking your owned vs. rented ground – How do you currently compare your fields to each other? How does your owned ground compared to rented?  How does Landlord A’s ground compare to Landlord B? Would some fields perform better with improved drainage?  How do you have this conversation with a landlord? Being able to analyze your fields’ Yield Efficiency Scores, independently, allows you to group them into different categories and still have an apples-to-apples comparison.  This enables you to make more informed enterprise decisions on your farm.

• Hybrid / variety comparison – Historically, yield has been the basis for comparing hybrid and variety performance.  The example below shows two hybrids with identical yields, but nearly $40 / acre difference in Yield Efficiency Score.  Without utilizing the Yield Efficiency Score metric, a farmer or agronomist isn’t prompted to investigate or compare the two hybrids because output (yield) was the same. 

Using our Yield Efficiency Score, to analyze the efficiency and margin, within each of your fields, will provide new insights on how to better manage your operation. When combined and compared against regional group data (anonymously), you will have robust metric for benchmarking outside of your own operation.