In addition to benchmarking liquidity, solvency and profitability, it is often useful for a farm to benchmark labor costs. Two commonly used benchmarks related to labor costs are labor efficiency and labor productivity.

Both these benchmarks should include family and operator labor as well as hired labor. This article briefly describes the computation of labor efficiency and labor productivity.

Computing labor measures

Labor efficiency is computed by dividing cost for hired labor plus family and operator labor by gross revenue. Hired labor cost and gross revenue can be found on a farm’s income statement.

Family and operator labor can be represented by family withdrawals, which can be found on a “Sources and uses of funds” statement.

Labor productivity is computed by dividing gross revenue by the number of workers. If all employees, including the operators, are fully employed on the farm, it is relatively easy to compute the number of workers.

It is relatively more difficult to compute this figure when employing part-time and/or seasonal workers. If some of the hired labor is seasonal or part time, the total months worked by all hired and seasonal employees should be summed and then divided by 12 to arrive at the number of workers.

Understanding the numbers

Using various sources of farm management data, a commonly used labor benchmark for crop farms is a labor efficiency value below 0.10. This means that labor accounts for 10% or less of total costs in the farm operation.

Likewise, a commonly used benchmark for labor productivity is a value greater than $500,000 per worker in the operation.

If labor efficiency is relatively high and labor productivity is relatively low, it may indicate that the farm is going to have difficulty supporting all farm employees in the future. Timeliness of operations should be incorporated into the evaluation of whether a farm has excess labor.

Conversely, if labor efficiency is relatively low and labor productivity is relatively high, the farm is likely in a good position. However, it is important to check the efficiency of machinery use.

Sometimes a farm will be efficient with respect to labor but have relatively high machinery benchmarks, or vice versa. Ideally, a farm would be competitive with respect to both labor and machinery.

In summary, farms should compute and compare labor efficiency and productivity on their farms with the benchmarks noted in this article. If their values are relatively high, farms need to examine costs per acre for individual crop enterprises, and compute and compare benchmarks for other cost items such as machinery and equipment.

Langemeier is a Purdue University Extension ag economics specialist and associate director of the Purdue Center for Commercial Agriculture. He writes from West Lafayette, Ind.