What a particular cost or investment adds to the business should be easy to assess and measure, but in reality calculating return on investment (ROI) can be inconsistent and difficult.
As David Widmar, of Agriculture Economic Insights explains, ROI should be a simple calculation, but it’s not a perfect measure of performance as there are so many components that can be factored in, and no two farm businesses will come up with the same numbers.
Calculating ROI requires tallying up costs and expenditures, yes, but using the number as a guide requires weeding through a range of outcomes and making certain assumptions about projections.
Widmar says that each farm business should create a consistent, standard operating procedure for calculating ROI. That way, at least within the farm business itself, it’s more likely to be a fair comparison and consistent benchmark to measure against.
What goes into the calculation could look different for everyone. Just as with cost of production, there may be certain overhead costs not factored into the equation. The key instead is to keep it consistent within the farm and from year to year.
Listen on to David Widmar in conversation with Shaun Haney, or download to listen later, story continues below:
Widmar adds that perhaps the two most limiting factors might be the ones that are hardest to measure: time and capital. For example, it’s hard to quantify a labour savings in an ROI of a fungicide pass, for example, and it’s difficult to use ROI as an incentive to buy land.
“Perhaps the person paying the most (for land) is just willing to take the lowest ROI,” he says.
For some farming practices or purchases, we should be happy with small but consistent returns. For other things, such as additional pounds of nitrogen or a fungicide pass in a high-risk years, the payoff should be very clear.
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