Year 
Herd Size
Inc/Cow
Milk/Cow

The Wisconsin Dairy Ratio Benchmarking Tool

The Wisconsin Dairy Ratio Benchmarking Tool (WisDRBT) creates a trend analysis by comparing financial ratios to a farm’s past performance and a comparative analysis with the industry. The WisDRBT represents 15 of the “Sweet 16” financial measures: current ratio (CR), net working capital (NWC), debt to asset ratio (D/A), equity to asset ratio (E/A), net farm income (NFI), rate of return on farm assets (ROROA), rate of return on farm equity (ROROE), operating profit margin (OPM), term debt coverage ratio (TDCR), replacement margin ratio (RMR), asset turnover ratio (ATO), operating expenses ratio (OER), depreciation expense ratio (DER), interest expense ratio (IER), and net farm income ratio (NFIR). Production, operating, and financial decisions are eventually reflected in the financial statements. Therefore, analyzing financial statements can reveal some useful insights into the strengths and weaknesses of a dairy farm operation. Comparing an individual’s ratio values to a group values or measures is just one step in the financial analyses process.

The WisDRBT adds meaning to your farm’s financial performance measures by comparing them graphically to the statewide Agriculture Financial Advisor (AgFA©) database. Annual data from 500+ dairy farms for the years 2000 to 2008 was used to calculate distributions of the 15 financial measures. For each year of analysis, the tool can filter the financial ratios on Herd Size, Income per Cow, or Milk per Cow to display cumulative probability distributions for the 15 financial measures. Individuals can enter their own financial values and compare them to the industry standards and to Wisconsin benchmarks. A DuPont Analysis based on ROROA, OPM, and ATO is also provided. The ratios provide a series of benchmarks for judging performance and the risk associated with each one of them.

Data source for this project are maintained by University of Wisconsin Center for Dairy Profitability. AgFA© is a sample of Wisconsin dairy farms from which financial and production data are collected annually. Lakeshore Farm Management Association, Fox Valley Management Association, Wisconsin County Agents, Wisconsin Technical College System Instructors, and the Center for Dairy Profitability originally collected these data. Personnel affiliated with these associations helped individual farm managers reconcile their financial data. Individual farm managers used a number of different manual and computerized record keeping systems to enter the initial financial records, including the Agricultural Accounting and Information Management System (AAIMS©) and Quickbooks©.

User Notes: Graphs and Ratios are grouped into four areas: (1) Liquidity, (2) Solvency, (3) Profitability, and (4) Financial Efficiency.

For each group, choose the Year and one of the three criteria: Herd Size, Income per Cow, or Milk per Cow.

Input the information for your farm in the Yellow boxes on the top of the graphs. Distribution for the Wisconsin Industry standard is created with information for your farm appearing as a red dot. Therefore, you can know how well your farm perform compared with similar other similar Wisconsin farms. The red vertical line on the graph represents the industry’s minimum recommended level – below this level would indicate a high risk. The green vertical line represents the industry better level or low risk level. The green line doesn’t guarantee success, nor does the red line imply failure, but ultimately you want to fall somewhere to the right of the red line, either in-between the red and green lines, or even better to the right of the green line. A weakness in one area may be overcome by strengths in other areas, so it’s important to look at all the ratios.

The WisDRBT analysis help understand your business by providing a check on the performance of your assets and a warning to potential areas of risk. Combining these ratios with an economic analysis of production costs and returns should provide an excellent basis for decision-making.

Liquidity

Curent Ratio


Net Working Capital (NWC)

Solvency

Debt/Asset Ratio


Equity/Asset Ratio

Profitability

Net Farm Income (NFI)


Rate of Return on Farm Assets (ROROA)


Rate of Return on Farm Equity (ROROE)


Operating Profit Margin(OPM)

Repayment Capacity

Term Debt Coverage Ratio(TDCR)


Replacement Margin(RM)

Financial Efficiency

Asset Turnover Ratio (ATO)


Operating Expenses Ratio (OER)


Depreciation Expenses Ratio (DER)


Interest Expenses Ratio (IER)


Net Farm Income Ratio (NFIR)




Du Pont Analysis
  Rate of Return on Assets
(ROROA)%
Asset Turnover Ratio
(ATO)
Operating Profit Margin
(OPM) %
Wisconsin Farms
Your Farm

For every dollar invested in assets you had $ of profit, 
for every dollar invested in assets you had $ of revenue and 
for every dollar of total revenue you had $ of profit.
Consequently your rate of return of % is of total revenue times of profit.

Ratio Wisconsin Ratio Your Ratio Percentile

Summary of Terms

Liquidity
Ability to meet financial obligations. Capacity to generate enough cash for family living, expenses, taxes and debts

Current Ratio
Extent to which current assets would pay off the farm liabilities
= current farm assets / current farm liabilities

Improve by :
-Increase cash reserve
-Improve profitability
-Restructure debt
-Self underutilized assets to pay debts

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Net Working Capital
Operating capital available from short term from within farm business
= current farm assets - current farm liabilities

Improve by :
-Increase cash reserve
-Improve profitability
-Restructure debt

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Solvency
Ability to pay all debts if farm businesses were sold tomorrow

Debt/Asset Ratio
Bank's share of the farm business. Total farm debt vs total farm assets
= total farm liabilities / total farm assets

Improve by :
-Improve profitability
-Take on(additional) partners
-Do nothing if farm is profitable

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Equity/Asset Ratio
Farm's share of the farm business. Farm equity compared to the total farm assets. Complement of Debt/Asset Ratio
= farm net worth / total farm assets

Improve by :
-Improve profitability
-Take on(additional) partners
-Do nothing if farm is profitable

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Profitability
Difference between value of goods produced and costs of resources used in their production

Net Farm Income
Return to
1.Labor 2.Management & 3.Equity     that the farm invested in business
= Farm revenues - Farm business

Improve by :
-Better Marketing
-Decrease Cost of Production
-Sell underutilized assets

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Rate of Return on Assets
Average interest gained on all investments in the farm
= return on farm assets / average farm assets
Return on farm assets = net farm income + farm interest - value of operator labor & management

Improve by :
-Rent productive assets
-Same as NFI

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Rate of Return on Farm Equity
Interest rate gained by own investment on the farm
= return on farm equity / average farm net worth
Return on farm equity = net farm income - value of operator labor & management

Improve by :
-Rent productive assets
-Same as NFI

...................................................................................................................................

Operating Profit Margin
A low margin can be due to low prices, high operating expenses, or inefficient production.
= return on farm assets / value of farm production
Value of farm production = gross cash from income + change value enterprises

Improve by :
-Rent productive assets
-Same as NFI

____________________________________________________________________________________________________________

Repayment
Farm's ability to repay term debts on time. Includes non-farm income

Term Debt Coverage Ratio
Amount generated from farm and non-farm sources to cover debt-payment and capital replacement.
= capital debt repayment capacity / scheduled principal and interest on term loans
Value of farm production = gross cash from income + change value enterprises

Improve by :
-Same as NFI
-Improve Tax Management

...................................................................................................................................

Replacement Margin
Amount of remaining income after paying principal and interest on term loans and unfunded(cash) capital purchases.
= capital debt replacement capacity - unfunded (cash) capital replacement allowance
Value of farm production = gross cash from income + change value enterprises

Improve by :
-TDCR

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Efficiency
How effectively assets are used to generate income. Past performance could indicate future accomplishments

Asset Turnover Ration
Measures efficiency in using capital. Capital Productivity
= value of farm production / average farm assets

Improve by :
-Improve Marketing
-Rent additional assets if profitable
-Assess asset valuation

...................................................................................................................................

Operating Expenses Ratio
Proportion of farm income used to pay operating expenses, not including principal interest or depreciation
= (total farm operating expense - interest - depreciation) / gross farm income

Improve by :
-Increase gross farm income
-Same as ATO

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Depreciation Expense Ration
Proportion of farm income needed to maintain the capital used by the farm business. Indicates how fast the business wears out capital.
= depreciation / gross farm income

Improve by :
-Assess depreciation shield
-Consider used rented/equipment

...................................................................................................................................

Interest Expense Ratio
Show how much of the gross farm income is used to pay for interest on borrowed capital.
= farm interest / gross farm income

Improve by :
-Restructure debt
-Increase cash reserves in good years
-Make additional principal payments

...................................................................................................................................

Net Farm Income Ratio
How much is left after the farm expenses, except: unpaid labor and management. Compares profit to gross farm income.
= net farm income / gross farm income

Improve by :
-Better marketing
-Better costs of production