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By Bob Parsons, Professor, Extension Ag Economist, University of Vermont Extension/Department of Community Development and Applied Economics, Burlington, VT
Added March 23, 2017. An analysis of the returns to organic dairy farms (N=36) in Vermont shows that the average Return on Assets (ROA) remained about the same, at 1.71% as compared to 1.81% in 2014. Average milk price received by farmers increased from $35.09 in 2014 to $38.59 in 2015.
In using statistics, the group can be affected by an outlier, and this is the case this year. If one farm was dropped from the data set of 36 farms, the ROA would average 2.47%, well above last year and more reflective of the increase in milk price. Similar size conventional dairy farms (67 cows per farm) averaged -1.13% in 2015 with an average milk price of $18.12 per cwt.
The farms participating in the study for 2015 have all been certified organic for at least 2 years, with some certified for more than 15 years. All but one farm were from Vermont, with the biggest farm at 135 cows and smallest at 27 cows. Three of the farms had more than 100 head and two farms had less than 30 cows. This is a reflection of the 203 organic dairy farms in Vermont.
The farms averaged 61.1 cows per farm, with milk production per cow at 13,289 lbs., well below the 19,957 for conventional dairy farms. For 2015, 14 of the 36 farms did not achieve the $38,000 charge for the operator labor and management on an accrual basis. Of these farms, eight had off-farm income that offset family living costs not covered by the farm.
The average farm earned $311,898 in milk sales and $17,523 in cow and calf sales, reflecting higher beef prices and $4000 in surplus dairy animals sold in 2015. On the expense side, the largest expense was feed, with grain purchases at $89,440 and forages at $11,718. The next highest expenses were repairs and supplies at $41,513 and labor at $34,424. Depreciation averaged $36,195 per farm.
As compared to similar size conventional farms, feed cost was $1657 per cow vs. $1307. Additionally, repairs and supplies were $680 per cow vs $624, labor was $564 vs $370, and fuel cost was $137 per cow vs $178 for conventional dairy farms. When looking at total expenses, organic dairy farms averaged $4775 vs $4520 per cow for the conventional dairy farms. On the revenue side, organic dairy farms averaged $5686 per cow vs $4871 for conventional dairy farms. So with less milk per cow and more than twice the milk price, organic dairy farms averaged more than $800 additional revenue per cow in 2015.
As compared to 2014, the biggest difference for organic dairy farmers was the milk price with an increase of $3.50. Additionally, the farms averaged 3.4 more cows and 550 lbs. more milk sold per cow. Total revenue per cow was up nearly $800 per cow while expenses were up just over $600 per cow, leaving the average farm with an additional $200 per cow.
There continues to be a variation between organic dairy farms. When the 36 farms in the study were divided into 3 groups, we found a distinct profitable group (6.3% ROA), one that is getting by (2.4% ROA), and another for which some farms’ future is highly questionable (-3.6% ROA).
The primary characteristics of the most profitable group are not a surprise to knowledgeable dairy farmers. This group has 16-19 more cows than the less profitable groups and produced 2800 lbs. more milk per cow. There is considerable advantage in getting more milk per cow and milking more cows, as the higher profit group averaged nearly $1000 of additional revenue per cow ($6218) than the other two groups. This provided the high profit group more than $151,000 additional revenue per farm over the mid-profit group and $191,000 over the low profit group. To make more profit, it helps to have more revenue to start with.
On the expense side, the high profit group had more cash to spend and they did. The high profit group averaged $4966 in expenses per cow vs $4673 for the low profit group. Interestingly, the mid-profit group had the lowest expense per cow at $4384 per cow. The mid-profit group appears to fit the definition of “tight with a buck” in limiting their cash expenses.
The highest expense for each group was purchased grain. The higher profit group spent $1692 per cow, followed by the low profit group at $1445 and mid-profit group at $1220. Another revealing characteristic was expenditures on forage. The low profit group spent $314 vs $201 for the mid-group, and only $90 for the high profit group. This aspect has one wondering about the forage quality and quantity of the low profit group farms and their inability to get higher production from their cows, considering the amount spend on grain. Organic grain is 2.5 to 3 times the cost of conventional grain but there are farmers who believe that given the higher milk price, feeding organic grain is worth the price. Of the 36 farms in the study, 11 produce more than 16,000 lbs. of milk per cow and 1 farm produced 19,636 lbs. per cow.
Other high expense categories include repairs and supplies and labor. Repairs and supplies totaled $631 per cow for the low profit group, $611 for the mid-group, and $714 for the high profit group. These expenses reflect the situation that if you have more money, more is spent on repairs and supplies but the difference is only $86 per cow.
Labor provided the biggest difference between the profit groups. The high profit group spend $734 per cow for labor, more than twice that of the mid group and $256 more than the low profit group. Even with more cows to spread the labor cost, the high profit group had more labor per cow. The mid-and low profit groups both had similar cow numbers but the mid-profit group makes best use of their labor. Close examination of the 2 groups does not reveal any major characteristic such as paying family members a higher wage than one would normally receive as a cause for the difference in labor costs.
Depreciation is a cost that is generally related to income because it provides options on reducing taxes and the simple fact that you cannot reinvest without having the cash to repay loans or pay for replacement equipment or building improvements and repairs. On a per cow basis, the mid-group has the highest depreciation, followed by the low profit and then the high profit group. On a per farm level, the mid and high profit group are nearly the same with $40,004 and $39,115, respectively. The low profit group comes in at only $29,465.
The study charged $38,000 for owner labor and management. None of the farms in the low profit group and 2 farms in the mid-profit group could not meet the $38,000 charge on an accrual basis. This is where the reasons for showing a loss get a bit cloudy as 9 of these 14 farms had off-farm income to help make up for any shortage of farm income to cover family cost of living. In addition, 5 of the farms showed a loss due to rapid depreciation tax strategies. Only 3 of the farms failed to cover the $38,000 family living charge on a cash basis. This is sometimes a dilemma in using accrual analysis but to fairly compare farms, one has to account for all expenses and all depreciation has to be charged sometime.
The study for 2015 also includes 5 farms that did not feed any grain in 2015, for a market niche of grass fed milk. As a group, these 5 farms averaged $43.16 per cwt while producing an average of 7703 lbs. milk per cow. The market for grass fed milk (no grain allowed) pays the farmer a bonus of $4.00 above the organic price plus the farmer can get an additional $1/cwt to purchase fertility to add to their soil. The thought process here is that since no grain nutrients are coming on the farm, the farmer needs to replenish their soil though compost, manure, or other organic supplements.
The grass fed farms averaged $3719 per cow total revenue and incurred $2879 of expenses per cow. Feed costs were only $240 per cow for forages and minerals. While the farms did not have a grain bill to pay, they did experience a downturn in milk production. Two of the five farms did not earn $38,000 for operator income but did better than they did the year before. But three of the farms did cover the $38,000 operator charge and showed a positive ROA. One of the farms achieved a 4.5% ROA, while as a group they averaged 1.91% ROA.
None of the grass fed milk farms were in the most profitable group, with three in the mid-profit group and 2 in the low profit group.
The organic sector in Vermont remains profitable and, with contract prices, looks to be profitable again in 2016. The entry of the grass fed milk market adds a new dimension to organic, representing low input for low output but, if priced as it is now, appears to be a route to profitability. It will be interesting to see how these farms do after another year of adjustment to no grain. Overall, the organic sector appears to have had a healthy year in 2015. We do know that milk prices dropped in 2016 and there are now some fears of overproduction with the creation of production quotas if needed in 2017. The organic sector is adjusting its milk price to reflect supply and demand. Demand goes down in the summer yet that is when milk production tends to go up due to more abundant pastures. We can expect milk pricing changes to continue and realize that the profitability of organic dairy ultimately will depend upon how many consumers are willing to pay more for organic milk.
Posted: to Economics of Organic Dairy Production on Thu, Mar 23, 2017
Updated: Thu, Mar 23, 2017