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The economics of organic dairy farming

Dec. 26, 2013 | 0 comments


Although Vermont is losing dairy farms, it’s the conventional operations that are locking their barn doors.

Three years ago, there were 1,000 dairy farms in Vermont. While the total has dropped to 900, the number of organic dairies has remained steady, says  Dr. Robert Parsons, University of Vermont Extension ag economist.

During an eOrganic /Extension webinar on Dec. 12, Parsons said there has been rapid growth in the organic sector in the Northeast since the 1990s, with 210 certified organic dairies in current operation in Vermont. They contribute $76 million annually to the state’s economy and support over 1,000 jobs.

To answer the many questions about their relative profitability, Parsons and his team has been collecting financial data from many of the farms for nearly a decade. The on-going study features between 30-40 farms each year and is the longest ongoing economic analysis of organic dairy operations in the U.S.

The study includes a farm visit and uses tax forms, record books, balance sheets, cash flow, and accrual income statements. It double-checks inventories and tracks household expenses.

In Vermont, 23 percent of dairy farms are certified organic and they produce 8 percent of the state’s milk. The 210 farms average 140 cows apiece, although the vast majority is under 70 cows. Milk production averages 10,000 to 13,000 pounds per cow, with the high at 19,752 pounds and the low at 7,633 pounds per cow.

 Most were conventional farms that transitioned to organic, Parsons said. In most cases, they stayed relatively the same size and are pastured-based.

The pay for organic milk has inched up from $22.80 in 1999 to around $30 by 2011, and then $33.39 in 2012. As with conventional farms, the price of labor, taxes, feed and machinery has gone up while milk prices remained the same, Parson pointed out.

Trends from 2008 through 2012

Trends over the last four years show the milk price hanging at $30 to now, $33 per hundredweight, with production per cow holding in a consistent range of 13,500 pounds in 2008 to 12,500 pounds in 2012. Expenses per cow have been rising gradually, while net farm revenue has been declining and Returns on Assets (ROA) dropped to less than 1 percent in 2010/2011and was less than 2 percent in 2012. “Our dairy farmers are not making very much money,” Parsons said.

The trends from 2009 to 2012 show that, while revenue per cow rose from $4,366 to $4,794, feed per cow rose from $1,194 to $1,442, and expenses per cow bumped from $3,512 to $3,999. The net revenue per cow dropped from $838 to $795.

There is no doubt that feed is the highest expense, with 36 percent of the farms’ total expenses going for purchased grains for the cattle. Only one farm in the study group raises its own grain and two raise corn silage, Parsons noted.

The net farm revenue in 2012, before charging for owner labor, ranged from a low of $24,300 to a high of $189,700 for the 34 farms in the study. The average was $46,500. However, almost half of the farms weren’t making $36,000, considered the minimal amount to support family living. “That represents a real challenge,” Parsons said.


On paper, many of the state’s organic dairy farms were losing equity. “With return on assets, it doesn’t look real strong for this industry. About half were not doing very well in 2012, and 2012 was better than 2011,” he said.

However, as shown by the debt to asset ratio, the profitability of Vermont’s organic dairies improved in 2012, primarily due to the $3 increase in the milk price, Parsons explained.

Profit Groups

Parsons diced up the data on a “cows per farm” basis and split the study farms into groups with low, mid and high profits. “This allows us to tear apart the average and get a closer look at them individually, where we can see some real distinct differences,” he explained.

The data shows the organic farms making more profits have more cows, but the mid-profit group was the farms with the smallest herds.

The highest profit group had the highest milk production per cow, while the middle profit group came in second. The highest profit group also had highest milk price of $34.31, while the middle profit group got $33.47 and the lowest profit group got $32.39.

The top group tends to feature Jerseys, Parsons noted.

Under revenue per cow, the highest profit group made over $5,600, while the mid-profit group made around $4,700 and the lowest profit group made just over $4,000.

While purchased feed costs were around $400 more per cow for the high-profit group, that group made $3,200 in returns over feed cost per cow, while the low profit group made $2,350 and the mid-profit group made $2,900.

Repairs and supplies were lowest for the mid-profit group, as were expenses per cow at $3,800. The low- profit group spent $3,900 per cow and the high profit group spent $4,200.

Getting down to net revenue, the low profit group made $6,500, while the middle profit group marked $43,100 and the highest profit group made $90,300. “We have the high group doing really quite well, the middle group treading water and the low group in trouble,” Parsons said.

For return on assets, the high profit group marked nearly 6 percent, while the mid-profit group made nearly 2 percent and the low profit group lost more than 2 percent. “This is a business, not matter how you are farming, and your economic sustainability affects your social and environmental sustainability,” Parsons concluded.

Group Conclusions

The numbers show profit is associated with more cows, higher production and a higher milk price, all of which is a result of management. The more profitable farms also had expenses under control, spending only $300 more per cow than the lowest profit farms.

The bottom third of Vermont’s organic dairy farms are stressed to stay in business. The middle third tends to be cost managers who are covering their costs, but barely covering family living. A ROA of 1.94 percent is not much of a return on $600,000 equity, Parsons noted. This group is challenged to stay even.

The top third of Vermont’s organic dairy farms are thriving. “There is some real profit in this group,” Parsons said.”The story of success here isn’t from what you are producing, but your management skills.”

Questions for the future

How long can the bottom third of organic dairy farms survive and will they survive as organic operations? “Going conventional is only going to make things worse for them”, Parsons said.

How can Vermont keep its organic dairy sector going if they are losing a third of their farms? In some cases, an off-farm job has been the answer. On one farm, Parson noted, the father quit working off the farm, but didn’t get an increase in milk production, so now the son is working off the farm.

 Will there be anybody to take over as farmers move into retirement and will it pay enough for them to retire? “There is a real farm transition dilemma,” Parsons said.

Conventional Compared To Organic

While cows on a conventional dairy typically produce more milk, they do not last as long as on an organic diary. While the price of purchased feed has risen for both sectors, organic farms do not spend as much on fuel as conventional farms do, largely because conventional farms are harvesting more crops

While profit per cow has been a nightmare for conventional dairy farmers, Parsons reported it has held more consistent for organic farmers. There was a lot of profit for organic producers in 2006, he noted, and 80 farmers transitioned from conventional. Since then, there has been a gradual decline in profits until the price of milk rose last year.

The challenge is how to keep profitability up when expenses keep going up and returns drop every year. “Organic dairy farming is still a treadmill, as it is for conventional farmers,” Parsons said. “There are the same pressures for controlling cost and increasing production and revenue to keep even with inflation.”

Organic dairy farming does not look like the road to riches for a typical farm, he said, but it has provided a lifeline for some farmers, enabling them to stay as a small herd and keep operating.  Three-quarters of organic farms would not be in business if they had stayed as conventional farms.

Keeping smaller dairy farms in the Northeast through organic production is a positive. The makeup of the area lends itself to the trimmer size operation which, in turn, bolsters the economic health of the community, Parsons said.

He cited a study showing smaller farms have more positive impact locally than larger conventional dairies do, largely because the Hispanic workers at larger dairies send money out of country.  “With family-operated smaller farms, the money stays in the community,” he observed.

The Future of Organic Dairying

Organic dairy farmers are watching to see what happens to milk prices, Parsons concluded. Can prices increase enough to allow farmers to stay even or will they force farmers to increase herd size and try to get more milk per cow, just as the conventional market?  “I don’t know the answer,” he said, “but these are real questions the industry needs to ask itself. “

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