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Profitability of Organic Dairy, 2007

By Bob Parsons, Glenn Rogers and Dennis Kauppila of UVM Extension,
and Lisa McCrory of NOFA-VT

The farm analyses to date show substantially lower profits with growing accounts payable. The biggest area of concern is the growing accounts payable as farmers are not able to keep up with feed bills.

Added June 1, 2009. Vermont organic dairy farms had another profitable year in 2007 although down from 2006. The results of an on-going financial analysis of Vermont’s organic dairy sector by UVM and NOFA-VT indicate farms in the study averaged $18,522 net farm earnings, a 0.5% return on owner equity. Note that this amount is the profit after a charge for depreciation and $35,000 charge for family living.

This is down from the $28,970 and 4.5% ROE reported in 2006. The results are from 28 Vermont farms and do not include any Maine farms as compared to earlier years. Profits were down due to several factors but feed costs can account for some of the difference as the price of a 16% feed mix went from $330 per ton in 2005 to $565 per ton in 2008; a 71% increase. The farms averaged 65.7 cows producing 13,152 lbs of milk per cow and received $29.35 per cwt (including premiums). These compare to 62.7 cows, 13,455 lbs per cow, and $28.84 per cwt in 2006.

In comparison, smaller conventional dairy farms (average of 66 cows) in the Northeast Dairy Farm Summary reported net farm earnings of $33,960. These farms produced 19,609 lbs per cow and received $20.20 per cwt (before hauling of $0.55 per cwt). Both organic and conventional herds faced significantly higher feed prices in 2007. So this quick comparison indicates that the conventional sector did better than the organic sector in 2007.

The reaction by farmers to the high feed prices was predictable. During 2007, organic dairy farmers spent $1157 per cow on purchased feed, $15 less than the $1172 they reportedly spent in 2006. This is interesting as it indicates that farmers were spending about the same on organic feed, but were feeding less grain per cow, reducing protein levels, and/or shifting to lower cost feeds. In both years purchased grain accounted for about 92% of total feed costs.

Fuel expense, to no one’s surprise, went up by 10.5% from 2005 to 2007. We all know it went up more than this. So the financial results are again showing the farmer’s ability to tighten their belts when needed. By the way, the average organic dairy farm spent $122 per cow for fuel in 2007, compared to $188 for conventional dairy farms, a whooping 54% less.

One expense that is up quite dramatically is interest. In 2007, interest was going up slowly but not by 43%. So what is going on here? During 2006 when farmers were enjoying a fairly profitable time, there was substantial reinvestment going on. Farmers were replacing machinery, making repairs, and making investments that made their work easier. This is another confirmation of a time proven belief that farmers are quick to reinvest in their operations when profits permit. But as shown in 2007, the higher interest costs remain after those investments.

Now the question always comes up of what would the milk price need to be if organic dairy farmers were to achieve a fair 5% return on their equity? They were close to a 5% return on equity in 2006. For 2007, the milk price received by organic dairy farmers would need to hit $30.81 per cwt, a $1.46 extra than what was received by farmers in 2007. And this would not take into account the belt tightening in the feed and fuel expenses.

While economically the organic sector, on average, continued to show profits in 2007, initial analysis for 2008 is not so promising. The farm analyzes to date show substantially lower profits with growing accounts payable. The biggest area of concern is the growing accounts payable as farmers are not able to keep up with feed bills. Farmers have cut back protein entirely from late lactation cows.

So what is the future bringing? Even though fuel and feed costs are declining slightly, other costs continue to go up. If one assumes that farmers will try to feed a bit more grain as feed prices decline, we can expect the cash cost of production to hit $25 per cwt. Add another $6 per cwt for family living and we are looking at a break-even price of $31 per cwt. An initial analysis indicates that organic dairy farmers need a price of $31.55 per cwt to achieve a 5% return on their equity. However, with hauling costs going up and the base price declining, the outlook for profitability for 2009 is downright pessimistic.

Another concern is the impact of farmer decision on the industry. There are numerous comments from farmers making efforts to shift to spring freshening to make use of lower cost feed from pasture. However, anyone familiar with milk demand knows that fluid milk sales go down in the spring and rise in the fall. It’s been that way for ages. One can just wonder what the impact will be if a sizeable number of farmers complete this shift.

The number of Vermont organic dairy farms had grown to 210 (about 20% of Vermont’s dairy farms) but has gone down to just below 200. There are many reasons why farmers decide to get out of dairying and at this point, only a couple farms have sold their cows because they cannot remain in business with this price/cost. No other state has as high a concentration of organic dairy farms as Vermont. Maine is close but has not seen the rise like Vermont has experienced in the past 2 years.

One reason for the growth in the organic sector has been the steadily increasing milk price, going from $22.97 in 2004 to $28.84 in 2006 to $29.35 (average with premiums) in 2007. But now prices are headed in the wrong direction as production costs continue to rise.

What will the future bring? We have the national economy which is discouraging organic milk sales, feed prices will likely remain high for the foreseeable future, fuel prices will likely go up, other production costs will continue to go up, and family cost of living, health and education, well, let’s not even go there. The organic sector is facing some tough times and farmers must stick together if they are to profitably provide consumers with quality organic milk.