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By Jon Walsh, MS Candidate, University of Vermont, Department of Community Development and Applied Economics
(See full charts at the bottom of this article.)
2018 marked a sad year for the Vermont agricultural community with the passing of Extension Economist Bob Parsons. As part of his legacy UVM, along with NOFA VT, is working to continue with the ongoing organic dairy profitability study. This article provides a summary of the 2016 data collected by Bob and the rest of the study team.
For the year 2016, 35 Vermont organic dairy farms participated in the study. All farms have been certified organic for at least 2 years, with some over 15 years. The smallest farm in the study milked 26 cows and the largest milked 145. The average number of cows per farm was 64.1.
Profitability analysis of the 2016 data shows that the average Return on Assets (ROA) for farms in the study remained similar to the previous two years at 1.88% (compared with 1.71% in 2015 and 1.81% in 2014). Milk prices were also very similar to 2015, with an average price per hundredweight received of $35.58/cwt (compared with $35.59/cwt in 2015). This relatively high price did not last long into 2017, and next year’s data will certainly reflect lower prices and decreased ROA.
In 2016, however, organic dairy operations did much better than similarly sized conventional farms. Data from the 2016 NEDF survey shows that small conventional farms (68 cows per farm) had an average ROA of -.08% with an average received milk price of $16.69/cwt.
In terms of milk production, farms in the study produced an average of 13,717 lbs per cow, far below the 20,679 lbs per cow achieved by small conventional New England dairies. These numbers are both similar to the 2015 data.
The average farm in the 2016 study earned a total of $369,928 in cash receipts, with $345,167 coming from milk sales and $13,612 from cow and calf sales. At $3,824 dairy cow sales did not change much from 2015. Other important sources of income included crop sales and syrup production (on 13 and 6 farms respectively). In terms of expenses, the highest category was purchased feed, with the average farm spending $93,194 on grain and concentrates and $18,305 on purchased forages. As in previous years, repairs and supplies were the next biggest expense at $45,174, followed by $41,495 in depreciation and $34,886 in labor costs. Another important cost assumed by this particular study is $38,000 for operator labor and management. On an accrual basis, 13 of the farms in the study did not earn enough to cover this implied expense, although 8 of these farms also received off-farm income not counted in the farm profitability assessment.
On a per cow basis, farms in the study had higher expenses than similar sized conventional dairy farms ($5,050 vs. $4,224), but also received higher revenues ($5,878 vs. $4,465). In 2016 organic feed costs were $1,741 per cow vs. $1,197 conventional, repairs and supplies were $705 vs. $657, labor was $545 vs. $292, and depreciation was $655 vs. $539.
Some costs were actually lower on organic farms per cow, including veterinary and medical expenses, fertilizers, fuel, and seed costs. Subtracting costs from revenues, organic farms in this study earned $587 more per cow than similarly sized conventional farms. In 2016, much as in 2015, high organic milk prices more than compensated for higher per cow expenses. While the milk price did not change, revenue per cow increased by $192 while expenses also increased by $275 from 2015 to 2016, meaning that per cow revenue decreased by $83 in 2016.
All of the above analysis should be tempered by the fact that most conventional dairy farms are far larger than organic farms, with an average of 403 cows per farm, meaning that many of the above per cow estimates for small conventional farms do not hold true for the industry as a whole.
In order to draw conclusions about what it is that makes a dairy farm financially successful, it is useful to divide farms into groups based on their profitability level. Compared with 2015, variation in profitability across these groups increased somewhat in 2016. The highest profitability group had an average ROA of 7.45%, far above the conventional industry average of 1.1% ROA. The mid profitability group matched the conventional average ROA at 1.1%. This group is staying afloat but not performing any better than conventional farms (though they are achieving this result with far fewer cows on average). The low profitability group achieved an ROA of -3.34, slightly better than 2015 but still unsustainable in the long term.
Unsurprisingly, farms in the highly profitable group had more cows on average at 78.6 (14.5 above the study average of 64.1). Pounds milk shipped per cow was somewhat higher on these farms, but at $14,421 was only 700 pounds per cow above the study average of $13,717. The combination of these two factors had a strong effect on total farm revenue, with the high profitability farms bringing in an average of $488,101 compared with the study average of $369,928. Interestingly, low profitability farms actually had a higher total revenue than the mid profitability farms, ($338,165 vs. $260,226). However, the low profitability farms also had much higher total expenses, leading to net farm revenues of just $17,565 for this group (compared with $47,832 for the middle group and $101,623 for the high profitability group. This pattern shows that increasing production does not always lead to higher profitability, especially when production costs become too high.
The mid-profit group has the lowest total expenses per cow at $4,153. Per cow expenses are almost the same on the low and high profit farms at $4,243 and $4,267. Given that the middle group also has the fewest cows per farm (48), this low expenditure per cow becomes even more dramatic. However, a comparison with the other groups reveals that cost reduction is not enough to ensure high profitability. By maximizing production while keeping costs as low as the low profit farms, the high profit group does a far better job at keeping profits up.
Breaking per cow expenses down reveals a few more interesting trends in 2016. The mid-profitability group actually spent the most on purchased grain per cow at $1,502 despite generally lower expenses (compared with $1,219 on low profit and $1,423 on high profit farms). This is very different from the situation in 2015, when the middle group spent the least on purchased grain. The low amount of purchased grain on low-profit farms is likely related to their relatively low production numbers. The relatively high amount spent on forages by low profit farms ($297 per cow vs. 120 on mid-profit farms and 251 on high profit farms) is likely due to substitution of expensive organic grain with relatively cheaper forages (lowering production numbers as well as profits).
Repairs and supply expenses follow the same pattern as grain expenses, with low profit farms spending $654, middle farms spending the most at $751, and high profit farms spending $674. The middle group spent the least on labor and depreciation, with the low profit group spending the most and the high profit group in the middle. Depreciation was significantly higher in 2016 than 2015 at $655 vs. $593.
Vermont organic dairy producers have for several years had the option of switching to a zero-grain production model as Organic Valley and other processors have expanded their grass-fed dairy product lines. This market is less saturated than the organic dairy market as a whole, a fact reflected by a lack of production quotas and the continuing acceptance of new producers in 2016. Grass fed producers selling to Organic Valley receive a guaranteed premium above the organic price in addition to a $1 premium that must be used to purchase additional soil fertility. This is intended to help grass-fed producers replace the nutrients typically brought onto the farm in the form of purchased grain.
The 2016 study included 5 farms that do not feed any grain. On average, this group of farms received a price of $41.74/cwt, slightly lower than the 2015 grass-fed price of $43.16 but still above the organic price. These grass-fed farms were slightly smaller than the organic group with an average of 53.1 cows per farm. Unsurprisingly, milk production per cow is significantly lower for this group at 8,580 lbs per cow (compared with 13,717). This lower production is somewhat compensated by extremely low purchased feed expenses of $207 per cow. Additionally, in 2016 production on grass fed farms increased by 877 lbs per cow, perhaps indicating an improvement in pasture and forage quality on these farms. This increase in production was matched by an increase in per cow expenses, up from $2,879 in 2015 to $3,612 in 2016. Average per cow revenues on the grass-fed farms were $3,869 in 2016, higher than in 2015 but not enough to make up for the increase in expenses. As a result, grass-fed dairy farms were less profitable in 2016 than in 2015, with the average ROA decreasing from 1.91% to -1.47%
In general, 2016 was a relatively good year for Vermont dairy producers on average, with ROA still positive for the average farm at 1.88%. However, 2016 also saw the beginning of the price reductions that have continued into 2018 due to market oversupply. Decreasing pay prices will make expanding herd size and production per cow more appealing as margins decrease, while smaller farms will likely take the biggest financial hit. While demand for some organic dairy products (ice cream and cheese) continues to increase slowly, the market will likely take several years to adjust to the current oversupply situation. The study team is currently in the process of collecting data for 2017, which will make it possible to understand exactly how the reduction in price affected organic dairy profitability for that year.
Posted: to Economics of Organic Dairy Production on Tue, Aug 7, 2018
Updated: Tue, Aug 7, 2018