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By Bob Parsons, Ph.D, UVM Extension
Added January 25, 2016
(See full charts at the bottom of this article.)
A study on the economics of organic dairy, involving 35 Vermont dairy farms for the 2014 tax year, found that Return on Assets (ROA) increased slightly from 1.6% (2013) to 1.9% in 2014. The study was conducted with the cooperation of the University of Vermont Extension, NOFA-Vermont, Vermont organic dairy farmers, and the generous financial support from Stonyfield Farms, Yankee Farm Credit, Vermont Agency of Agriculture, and Green Mountain Feeds.
Data was collected from farm visits and compiled to compare balance sheets and accrual income for the 2014 tax year. The farms ranged in size from 26.5 to 98.5 cows. All farms have been certified organic for at least 5 years. Only one of the farms raised some grain, and 5 of the farms did not any feed grain for at least part of the year.
For 2014, the farms in the study averaged 57.7 (56.2 in 2013) cows producing 12,765 lbs. (13,144 lbs. in 2013) of milk per cow and sold 749,955 lbs. (739,986 lbs. in 2013) of milk per farm. Average milk price for the year was $35.09/cwt, up $1.40/cwt from 2013. The farms averaged a net revenue of $47,603 before any charge for unpaid owner labor and management and principal payments were made. A charge of $37,000 for family living costs was used to represent payment to the owner, leaving a Return on Assets of 1.90% vs. 1.6% in 2013.
On average, the farms are getting along, however, there is reason for concern as 10 of the 35 farms in the study failed to provide enough income for a positive return on assets (ROA) and to meet family living needs. The sustainability of these farms is highly questionable.
The largest expenses were purchased feed (34.2% of total expenses), repairs and supplies (13.3%), labor (11.7%), and depreciation (11.2%). Of the purchased feed, 92.5% was for grain supplement. Compared to 2013, farm level organic production expenses increased about $6000 while revenue increased $8800. While this helps explain the increase in ROA, some is attributed to lower grain costs by farms beginning to produce grain free milk.
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 5.39%, 1.69%, and -1.95%, respectively. The High Profit group averaged more cows per farm (69.0), more milk per cow (15,115 lbs.), and a mid-range milk price ($35.00/cwt) as compared to the Middle Profit and Low Profit groups.
The Low Profit group averaged only 57.3 cows producing 11,203 lbs. of milk per cow at a farm price of $34.39 per cwt. In comparison to the High Profit group, the Low Profit group produces 3,910 lbs. less milk per cow and milks 12 fewer cows.
The Middle Profit group averaged 11 fewer cows than the Low Profit group but produce 703 lbs. more milk per cow (11,906 lbs.) and have the lowest expenses on a per farm basis, with expenses $52,905 lower than the low profit group. On a per cow basis, the Middle Profit group averaged $273 lower expenses than the Low Profit group. The key to the profitability was in the High Profit group, averaging net farm revenue of $1372 per cow vs. $1010 for the Middle Group, and only $143 for the Low Profit group. When considering the High Profit group has more cows, it’s no surprise the farms with more milk per cow and more cows have a higher ROA.
The High Profit group had the highest expenses on a 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 repairs and reinvestment that the Low Profit group is likely putting off. Interest is not a major expense category for any of the groups as the highest debt/asset ratio was 29.3% for the Low Profit group and only 18.1% for the High Profit group.
Different from last year, the High and Middle Profit groups are spending more on feed per cow at $1459 and $1343, as compared to the Low Profit group at $1311.
There is another way to keep expenses under control and that is to keep expenses under control, or as described in Farm Credit’s Dairy Farm Summary, being ”tight with a buck.” The Middle Profit group had the lowest expenses per cow for bedding, labor, repairs, supplies, and utilities, breeding, and custom hire on a per cows basis. It appears this group fits the reputation of the Vermont Yankee Farmer of being tight with their money. This strategy may not fit everyone but works for some farmers.
Purchased feed is usually the largest expense on dairy farms. Two farms in the study have not fed grain for at least 5 years and have maintained profitability. One of the farms does purchase minerals. These 2 farms milked 53.5 and 46 cows, producing 7536 and 7160 lbs. of milk per cow in 2014. However, by eliminating purchased grain, they finished the year with net farm revenue of $65,131 and $25,399, respectively, to pay for owner family living expenses. These farms ended the year with a ROA of 5.8% and -0.07%, respectively. Both of these farms are now supplying Organic Valley with grass fed milk which today is paying an average additional premium of $5/cwt.
There are several other farms in the study that have discontinued feeding grain for only part of the year so it’s difficult to make an assessment for those farms. However, the ROA for these 3 farms are 5.4%, 0.9%, and -5.6%. There does not seem to be a pattern among these farms but it will be interesting to compare them in 2015 when they will receive a higher milk price premium for their milk.
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.
What does the future hold? This is a big question as nearly 30% 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.
The question of the next generation to operate Vermont’s organic farms remains a challenge. During data collection, the question of long term transition came up repeatedly. We have profitable farms with no identified successor, and we have farms that are profitable for one family but not profitable enough to support 2 families during a transition process. Clearly the question of who will be operating Vermont’s organic dairy farms in 10 years is a major question facing the organic sector.
It’s also clear that some of the organic dairy farms either need a higher milk price or lower feed expenses to become more profitable. For a number of farms in the study, organic grazing rules limit the ability to add more cows as they have limited pasture availability. The milk price did increase in 2015, and may rise more in 2016. The premium for grass fed milk adds an additional option for some of the farms to increase revenue. As discussed above, not feeding grain can be done profitably. Add a price premium and it looks much more appealing but it also has management challenges.
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? Can farmers find ways to reduce production costs to increase overall profitability? These are major discussion points to consider for the long term viability of organic dairy and their importance to the rural Vermont landscape.
In conclusion, organic farms are getting by. Organic production 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? While the coming years likely will not see an immediate loss of organic dairy farms, there should be concern for long term viability and a 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.
Bob Parsons, PhD. is an Extension Agricultural Economist Professor, UVM Extension/Department of Community Development and Applied Economics, and can be reached at 802-656-2109 or by email, email@example.com
Posted: to Economics of Organic Dairy Production on Mon, Jan 25, 2016
Updated: Mon, Jan 25, 2016