Operating expense ratio: Protect profitability and your financial fitness

Rising farm input costs or declining commodity prices may well pressure profit margins. As that happens, we recommend farm operations focus on efficiency, a task made easier by using the operating expense ratio (OER).

Operating expense ratio

The operating expense ratio measures an operation’s variable costs relative to that operation’s gross revenue.

Variable costs include daily operational expenses (labour, feed, crop protection, fuel, maintenance, insurance, repairs, and ag specialist fees, for example). Loan payments, depreciation, and capital improvements are excluded from operating expenses.

How it works

An OER of 60% indicates an operation spends 60% of its revenues on variable expenses. If an OER is too high, a farm may have higher expenses than it can be expected to cover with revenue. Possibly exposing a producer to financial challenges if market conditions worsen, an overly high OER also reduces the income available to cover fixed costs or build equity.

A note of caution

Neither the profitability nor the OERs for different sectors are directly comparable, because each OER reflects sector-specific patterns in costs and revenues. Instead, watch historical trends for your sector.

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