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Study Finds Mixed Levels of Profitability On Vermont Organic Dairy Farms for 2011

By Bob Parsons, UVM Extension Ag Economist & Professor

Added September 10, 2012

Study Finds _dairychart1The preliminary results for the 2011 financial returns from Vermont’s organic dairy farms show a mixed picture. Organic dairy farms in Vermont show an average profit almost identical to 2010 at $5879, continuing a trend of lower profits since 2006. The return on assets was only 1.3%. This figure is derived after a charge of $35,000 for owner labor and management.

Costs continue to increase for repairs, parts & supplies, labor, fuel, and taxes, while milk prices rose a bit in late 2011 due to seasonal pricing. We all know the story about feed prices that have caused many farmers to reduce grain amounts and protein as purchased grain per cow increased from $1013 in 2010 to $1244 per cow in 2011. Rising feed costs are also responsible for a jump in accounts payable on some farms.

For the 8th year, UVM Extension and NOFA Vermont collected economic data from 40 Vermont organic dairy farms. (See chart on page 6.) In 2011, the average farm of 57.4 cows earned a profit of $40,879 (median of $31,941) before any charges for family withdrawal which was calculated at $35,000, leaving, on average, a return of $5879 (median -$3060) of profits for reinvestment and paying real estate loan principles. The average farm shipped 13,515 lb. of milk per cow (median 13,091) and received an average price of $30.64 per cwt. (median $30.89). The return on assets was 1.34% (median 0.74%). You will immediately notice that the average is higher than the median, indicating a few well performing farms are influencing the analysis. For 2011, we have 19 farms with net income above zero and 21 farms with net income below zero. Note that we have kept the family cost of living constant for the past few years at $35,000 for comparison between years. Therefore if we used a higher cost of living, average profits would be lower. In addition, the study uses a conservative estimate for the value of land, cattle, and equipment to assess return on assets.

These results indicate a continued period of low profits that does not return even a low amount of $35,000 for unpaid family labor for more than half of the farms in the study. In contrast, in 2006 the average farm in the study earned $58,443 before family living and the return on assets was 4.2%. Milk price was highest in 2008 at $30.90 per cwt. With expected increased expenses, the profits from organic dairy will likely decline further without some increase in income. So farmers may not have much choice except to increase milk production per cow or add more cows. And higher milk production per cow can be questionable with high grain prices. Talk about being between a rock and a hard place! Even though organic dairy is not a panacea, few, if any, organic dairy farmers are thinking about going back to conventional production. Without higher income, it will be difficult to entice the younger generation to step up to become a steward of Vermont’s rural farming landscape.

Study Finds _vermont_dairy_data

When one looks at the fine details, there are a number of changes from 2011. There is a return of a market for organic dairy cows. Government payments were less significant ($2888) because there were no MILC payments. Other government programs, such as conservation program cost-share remain a significant part of government payments but may be threatened by new Farm Bill negotiations in Congress. For 2011, more than 90% of farm income comes from the sale of milk.

On the expense side, the largest expense continues to be purchased grain costs at $1244 per cow plus purchased forage of $45 per cow for total purchased feed cost of $1289 (96.5% for grain). Purchased grain cost is up more than $200 per cows from 2010. Farmers are doing what is expected…reducing protein levels and feeding less grain. Two farms in the study feed no grain at all (with a 9,078 and 10,378 pound milk average per cow). What is more interesting is that 5 other herds produce less than 11,000 lbs. per cow yet are spending $700-$1200 per cow in purchased grain costs.

The second major area of expense is supplies and repairs, at $537 per cow. Not much need for explanation here, as when was the last time a part or a repair labor charge went down? Other top expenses were labor at $305 per cow, utilities at $153 per cow, fuel at $167 per cow, and custom hire at $171 per cow. Interestingly, farmers spent more on bedding at $102 than for vet and medicine at $52 per cow, which has been quite constant over the past 5 years.

Accrual adjustments for 2011 included an average of $24,574 per farm for depreciation ($467 per cow). One aspect that indicates the low level of farm profitability was that prepaid expenses and supplies were down again in 2011. This is likely because farmers did not have extra cash in December to prepay items, and tax bills were not as large.

Study Finds _dairychart2So how are some of the lower income farms surviving? Things may get a bit complicated but there is noticeably fewer equipment purchases and reinvesting on some farms that are “living off of depreciation” from past years, and off-farm income. Off-farm income is becoming more important, especially if that off-farm income is providing retirement and insurance benefits. Realistically, some of the lower net income farms are not replacing equipment, they are depending on state supported programs for insurance for their children, and are hoping none of the adults will get hurt or seriously ill. The average and median farm income is insufficient to pay real estate principal payments, reinvestments in capital and equipment, and taxes. Nobody needed to buy a bigger truck to haul the profits to the bank in 2011.

These figures also pose some major challenges for lenders. All borrowers, both conventional and organic, must have sufficient cash flow to repay loans for cows, equipment, and land. Therefore the results of this study will likely cause lenders to be more cautious in developing cash flow plans and budgets for organic farms. Clearly more than half of the farms in this study would have difficulty meeting the cash flow needs to repay additional loans.

Does herd size impact net farm income? The answer is some but not with any consistency. Of the 21 herds with negative net farm income, 10 herds had more than 57.4 cows and 2 of the herds had exactly 57 cows, with the remaining 9 herds having fewer than 57 cows. Of the profitable group of 19 herds, 10 had more than 57 cows, and 9 had fewer than 57 cows. There were 4 herds in the profitable group that had less than 42 cows! However, the top 5 most profitable herds all had more than 66 cows.

Does milk per cow impact net farm income? The answer here again is “some but not much.” Of the 21 herds with negative net farm income, 10 herds produced more than the average of 13,515 lbs. per cow, and 9 herds produced less than the average. Of the 19 herds with a profit, 9 herds produce more milk per cow than 13,515, while 10 herds produce less than the average milk per cow. However, the top 5 most profitable herds all produced more than
13,515. One should note that the 2 herds that fed no grain had fewer than the average number of cows and were more profitable than average. So a statistician would say there is very little correlation between herd size and milk per cow on profitability.

Organic Profits Compared To Conventional

How did organic compare to conventional for 2011? Net farm accrual income for small size conventional dairy farms as reported in the Northeast Dairy Farm Summary (After family living of $35,000), was reported at $203 per cow vs. $102 for organic and return on assets was positive at 1.95% for conventional vs. 1.34% for organic herds. By other comparison figures, organic dairy farms produced 70% as much milk as small conventional herds but at a higher price and milk sales per cow are remarkably close. Conventional farms spent less for feed but more for fuel, supplies and repairs. However, organic herds are spending more on labor and utilities per cow. Conventional herds also have a higher investment per cow and have greater equity in their farms. The conventional market did recover in 2011 but in 2012 it now faces high grain costs and declining milk prices. Please note that the conventional herds in the NEDFS are generally considered to be very well managed farms and tend to have much lower debt than typically found on conventional dairy farms.

What does this information project for the organic dairy sector? There is an insufficient profit level on most farms to allow for reasonable return to farm labor and management and for reinvestment. One can easily assume that production expenses as labor, taxes, repairs, and utilities will continue to rise, putting additional pressure on limited profits and farm survival. More concern is that while the average farm is barely getting by, the median figures show more concern, indicating there are more farms doing worse than the average. Some of these farms are still suffering some lingering results from the 2009 market quotas but those circumstances should work through this year. There are some organic dairy farms doing quite well but the majority are losing money or just getting by.

In comparison to conventional herds, organic dairy farms were not doing as well in 2011. But conventional herds are again facing volatile milk prices as feed prices are jumping. Those volatile milk prices are still a factor that brings nightmares to organic dairy farmers. But organic production is still desirable as some additional herds are transitioning to organic.

There is always a question of what the future holds. How will the organic dairy farms do in 2012 and beyond? There are a couple of points that can help shed some light on this question. First, in 2012, there will be some USDA MILC payments for a few months that will help farm income. Second, milk prices for organic are higher due to the winter bonus for this year. Third, farmers will have to adjust their feed rations as feed prices show no change in the coming months due to the drought.

For 2011, the organic milk price would have to have been $33.27 per cwt. to give our average farm a 4% return on assets. This is $2.63 more than the $30.64 Vermont organic dairy farmers received in 2011 with seasonal and quality premiums and components. And a 4% return is not considered a high profit by the business world or by lenders, nor is it an adequate return for the increased time, expense and work to be organically certified.

What would farmers need to cover higher feed costs and other expenses? Project a 5% increase in feed prices and a 5% increase in all other expenses (fuel, utilities, repairs and supplies, labor, vet, bedding, etc). If milk production stayed constant, the cost of production would increase by $1.26 per cwt. Our average farm would need a milk price of $34.54 to make a 4% return on assets. This gives a question of how can organic farmers work to get the price they need to keep living reasonably and continue to dairy farm?

Bob Parsons will be one of our featured speakers at our 2012 NODPA Field Days; workshop topic: ‘Maintaining Cow Health While Having Realistic Production Goals And A Good Cash Flow’.