How Strong Is the Economic Leg?
Economic Sustainability
A study on the economics of organic dairy involved 34 Vermont dairy farms for the 2012 tax year. The study was conducted with the cooperation of the University of Vermont, NOFA-Vermont, Organic Valley Cooperative and Vermont organic dairy farmers. Vermont has had more than 200 organic dairy farms since 2007, accounting for 23% of Vermont’s dairy farms today. This is a rapid growth from just 2 certified organic dairy farms in 1993. Data was collected from farm visits and compiled to compare balance sheets and accrual income for the 2012 tax year. The farms ranged in size from 24 to 100 cows. All farms have been certified organic for at least 5 years. Only one of the farms raised some grain, and 2 of the farms did not any feed grain. As compared to earlier years, expenses were up about 5% but milk prices were up by about 10%, from $30.63 to $33.39 per cwt, following fairly consistent prices since 2007 that ranged from $29.35 to $30.90 per cwt.
The farm level results indicate the herds averaged 58.6 cows producing 12,834 lbs of milk and sold 753,340 lbs of milk per farm. Average milk price for the year was $33.39/cwt. The farms averaged a net revenue of $46,541 before any payment for unpaid owner labor and management and principal payments were made. A charge of $36,000 for family living costs was used to represent payment to the owner, leaving a Return on Assets of 1.84%. On average, the farms are getting along, however, there is reason for concern as 16 of the 34 farms in the study failed to provide enough income for a positive ROA (Return on Assets) and to meet family living needs. The largest expenses were purchased feed (36.1%), repairs and supplies (12.4%), labor (9.8%), and depreciation (8.9%). Of the purchased feed, 96% was for grain supplement. In contrast to fairly level milk prices, organic production expenses have increased about 4-5% per year.
To get a better analysis of the data, the herds were examined by profit groups, which shows a sizable difference between the farms. Each group was 11-12 farms, and ranked by overall farm profitability. The three groups showed returns of 5.82%, 1.94% and -2.25%. The most profitable farms averaged more cows per farm (67.5), more milk per cow (14,628 lbs), and a higher milk price ($34.41/cwt) than the other 2 groups. The low profit group averaged only 56.9 cows producing 11,297 lbs of milk per cow at a farm price of $32.39 per cwt. In comparison to the high profit group, the low profit group is producing 2300 lbs less milk per cow, milking 10 fewer cows, and receiving $2 less per cwt! The middle profit group has fewer cows but more milk per cow and lower expenses. Total revenue per cow ranged from $4,041 for the low profit group to $5,619 for the high profit group.
The high profit group also had the highest expenses on per farm and per cow basis. It’s common behavior among businesses to spend more when you have more. Thus earning a higher income allows the high profit group to have more money available for optional expenditures. In particular, the high profit group spends more than $400 per cow for grain but pays for the grain with higher milk production. The difference between the highest profit and low profit groups in expense per cow is less than 10%, ranging from $3,831 to $4,214 per cow.
While having higher expenses than the other 2 groups, the highest profit group earned $1405 per cow while the middle group earned $964 and the low profit group earned $128 per cow to pay for owner labor, principal payments, and reinvestment in the farm. As would be expected, off farm income is of greater importance to the low profit group, at $335 per cow, while the high profit group only has $191of off farm income per cow.
There is another way to keep expenses under control and that is to eliminate the major areas of expense. Two farms have tried this by eliminating all grain and feeding just forage. One of these farms does spend about $60 per cow for minerals. These 2 farms milked 43 and 56 cows, producing 8707 and 9470 lbs of milk per cow. However, by eliminating purchased grain, they finished the year with $59,176 and 54,699 to pay for owner family living expense and to make payments, ending with a ROA of 5.01% and 4.62%, respectively. Is zero grain fed the way to go? Neither of these farms are in the top profit group, all of whom feed purchased grain. But they are not in the low profit group, who also all feed purchased grain. There is no answer here but it does present an interesting view on how some farmers adapt to make a profit that works for their farm.
When compared to similar sized conventional dairy farms over the past 9 years, the study has shown that organic has done better 4 times, conventional has done better 4 times, and 1 year was a tossup. For 2012, the organic dairy farms fared a bit better with 1.92% as compared to -0.02% ROA for conventional. But if we are looking for consistent returns over the past 9 years, organic would be the top choice due to the volatility of conventional milk prices. Organic dairy farms have averaged 1.81% ROA since 2004 while similar scale conventional dairy farms averaged only 0.86% ROA.
There are several characteristics of the conventional dairy farms. Herd size is generally 67-71 cows per farm and production has centered around 19,500 lbs of milk per cow. Generally, the conventional dairy farms pay more for repairs and supplies, but less for labor while feed expense per cow is strikingly similar to that spent by organic dairy farms. The challenge for conventional dairy farms are volatile milk prices, which have ranged from $13.30 in 2009 to $20.93 in 2011.
There is little doubt that organic has provided a saving lifeline to Vermont’s small scale dairy farms. In discussing challenges with organic dairy farmers, more than 75% believe they would not be in business today if they had not had the option to go organic. These farms are supporting their local communities and there is evidence that they contribute more to the local economy than a similar sized conventional dairy farm. What does the future hold? This is a big question as nearly half of the farms cannot pay the owner a reasonable wage for unpaid labor and management. These farms are not economically sustainable. There is less likelihood that the next generation will be interested, willing, or able to take over a farm that cannot make breakeven returns. In the long term, these farms will most likely not survive, leaving a question as to where more organic milk will be sourced. It’s also clear that without the $2.80 increase in average milk price this year, more farms would not have been able to meet family minimal family living expenses. So this brings up some big questions facing the future of Vermont organic dairy farms. Can farm milk prices continue to increase to help cover rising production costs? Will the market be able to charge more without losing customers? These are major questions for the sector for the long term viability of organic dairy and their importance to rural Vermont.
In conclusion, organic farms are getting by. Organic is not the road to riches for many, however it has been a key vehicle of survival for many of the smaller farms who likely would be out of business if they had not had the option to go organic. Higher milk prices are needed but can the market absorb a higher price without losing consumer demand? So while the coming years likely will not see an immediate loss of organic dairy farms, there should be concern for long run viability and sustainable and healthy supply of organic milk from Vermont farms. Without a higher price, organic dairy farms have only the same options they had available when on the conventional treadmill; add more cows and produce more milk per cow to meet rising expenses.
