ECONOMICS OF ORGANIC DAIRY FARMS COMPARED TO OTHER DAIRY SYSTEMS

Presented by: Tom Kriegl

University of Wisconsin Center for Dairy Profitability

2007 National Farm Management Conference

Rochester, WI

June 12, 2007

What potential organic dairy producers want to know about the economic impact of choosing that system:

Is organic economically viable?

How long will it take to attain the goal?

What will it cost to attain the goal?

Actual whole farm financial data:

5 years Great Lakes Grazing Network data

7 years limited Wisconsin organic data

11 years Wisconsin grazing and confinement data

Much Wisconsin Data Collected By:

Fox Valley Farm Management Association

Lakeshore Farm Management Association

Wisconsin Farm and Business Management Incorporated

Project Initally funded by USDA

Initiative for Future Agriculture and Food Systems (IFAS) grant:

to promote sustainable farming systems to enhance profitability of small and medium

size farms to enhance opportunities to market and add

value to farm products to reduce reliance on fossil fuels

Great Lakes Grazing Network Financial Summary

USDA IFAFS Grant Standardize Data Handling & Analysis Pool Actual farm financial data from

– Illinois– Indiana– Iowa– Michigan– Minnesota– Missouri– New York– Ohio– Ontario– Pennsylvania– Wisconsin

Use AgFA

AgFA

Agricultural Financial Analysis

Web based financial analysis aggregation

– Allows for easy development

of regional benchmark data

– Allows wide distribution

of the benchmark data

Profitability VS Satisfaction

Defining the Terms– Profit – Accounting & Economic Term

Most important business goal

– Satisfy – combines business and personal goals

Performance Measures Include…

ROROA NFIFO (Net Farm Income From Operations) NFIFO/Cow NFIFO/Acre

NFIFO/dollar of revenue NFIFO/Cwt. Equivalent Milk Sold

Basic Cost/Cwt. Equivalent Milk Sold Non-basic Cost/Cwt. Equivalent Milk Sold Allocated Cost/Cwt. Equivalent Milk Sold Total Cost/Cwt. Equivalent Milk Sold

NFIFO/hour labor– NFIFO = Net Farm Income From Operations

Good Labor Data is Scarce

Most important and most difficult factor to measure is Management !

  Management = the ability to do what needs to be done when it needs to be done

Financially Successful Managers– Control Operating Costs– Control Investment/Debt– Generate Income

Optimize relationship of above 3 factors of profitability

3 Factors of Profitability

Operating Income

Minus Operating Expense

Plus or minus Inventory Changes

Plus or minus Annual Fixed Cost

Equals Return to unpaid Family Labor

Return to unpaid Family Mngmt

Return to unpaid Equity

Net Farm Income From Operations (NFIFO) cash and non-cash

Available to pay family living expenses and new capital investment.

Cost of housing, income tax, social security, medical, food, clothing, etc.

Total Cost Composition:

Allocated Costs = Non-Basic + Basic Costs

Opportunity Costs:Unpaid laborUnpaid managementUnpaid equity

Non-Basic CostsPaid laborPaid managementInterest

Non-livestock depreciation

Basic Costs =Total Costs – Non-Basic Costs – Opportunity Cost

Income minus allocated costs equals NFIFO

Stages of Organic Production

1. Pre-organic

2. Transitional organic

3. Certified organic

4. Certified market organic

Few farms supplied before and after data.

Maturing of Organic System

Becoming more scientific

Becoming less evangelistic

Wisconsin Organic Participants

Before, during, and after data from 7 farms

GLGN Wisconsin Wisconsin

Year Organic Farms Organic Farms Organic and Graze

1999 6 6 2

2000 8 8 2

2001 11 8 4

2002 12 8 4

2003 13 12 8

2004 13 11 7

2005 19 17 10

Dairy Grazier Defined

Milks Cows for living Cows move at least every third day Harvest 30% of forage needs by grazing 85% of gross income from milk sales or 90% of gross income from milk & cattle sales

Wisconsin Organic Participants

6 contributed data 7 years. 1 contributed data 6 years. 1 contributed data 5 years. 2 contributed data 4 years. 2 contributed data 3 years. 3 contributed data 2 years. 5 contributed data 1 year.

Wisconsin Organic Participants

Year started farming ranged from 1977 to 2003.

First Year Organic Price Number of Farms1994 41995 11996 11997 11999 32001 12003 22004 22005 2

Comparing Milk Price:Organic vs. Grazier vs. Confinement

Organic Graziers Confinement

Year Milk Price Milk Price Milk Price1999 $18.12 $15.10 $14.71 2000 $18.33 $12.38 $12.212001 $19.86 $15.41 $14.962002 $19.21 $12.55 $12.662003 $19.40 $14.01 $12.922004 $19.99 $17.29 $16.722005 $21.17 $17.09 $15.95

Comparing Lbs. of Milk Sold per Cow:Organic vs. Grazier vs. Confinement

Organic Graziers Confinement

YearLbs Milk

Sold/CowLbs Milk

Sold/CowLbs Milk

Sold/Cow1999 15,260 15,374 20,2102000 15,282 16,083 20,5462001 14,256 15,644 20,4542002 14,923 15,644 20,8582003 13,555 15,796 21,3462004 14,174 16,526 21,2772005 13,806 16,700 21,815

Wisconsin Organic vs. Wisconsin Graziers vs. Wisconsin Confinement vs. Confinement with 51-75 Cows

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

35.00%

1999 2000 2001 2002 2003 2004 2005

Year

NF

IFO

as

a P

erc

en

t o

f In

co

me

Graziers

Organic

Confinement

Confinement 51-75 Cows

Wisconsin Organic Dairy vs. Other Wisconsin Systems

Organic data still limited. Wisconsin organic had higher NFIFO as a percent of

income than Wisconsin graziers two years of seven. These years were 2002 and 2003.

Wisconsin organic had higher NFIFO as a percent of income than Wisconsin confinement five of seven years. The years in which confinement was higher were 2001 and 2005.

Organic price premium $2.70 - $6.66

Seven Year Simple Average Net Farm Income From Operations as a Percent of Income

Farm # Range Ave. Herd Size Range NFIFO/$ Income RangeGraziers 21-43 61-68 27.59% 19.23-31.86%Organic 6-17 48-64 21.01% 13.53-26.26%

<50 Cow Confinement 121-158 41-42 17.80% 12.87-24.54%51-75 Cow Confinement 190-216 62-63 17.23% 7.76-22.28%

76-100 Cow Confinement 93-99 87-88 15.76% 9.27-20.73%101-150 Cow Confinement 71-91 121-125 15.62% 9.32-19.29%

All Confinement 581-660 96-133 14.26% 6.99-18.21%151-250 Cow Confinement 32-58 188-200 14.02% 7.43-19.5%

>250 Cow Confinement 34-80 443-555 10.28% 3.85-15.07%

Seven-Year Sinmple Average Cost of Production

Cost Item Grazier Organic Confinement 51-75 Cows All ConfinementTotal 98.56% 100.07% N/A 102.23%

Allocated 72.41% 79.09% 82.77% 85.74%Non-basic 18.52% 23.00% 24.55% 25.43%

Basic 53.82% 56.08% 58.21% 60.31%

Cost Categories as Percent of Income

Wisconsin Organic vs. Grazier vs. Wisconsin Confinement

Organic data still very limited Organic had lower cost as a percent of income

all years in the following categories– Purchased feed – Veterinarian and medicine – Depreciation on purchased livestock (higher results

from either higher turnover or expansion) – Chemicals

Wisconsin Organic vs. Grazier vs. Confinement

Organic had higher seven-year simple average cost as a percent of income than graziers and confinement for the following items, listed in order of magnitude of difference:

Non-livestock depreciation Repairs Gasoline, Fuel, and Oil Custom Machine Hire Utilities Marketing and Hedging Breeding Farm Insurance

System Percent of Income Range Percent of Income

Organic 13.95% 11.04-17.26%Confinement 76-100 Cows 15.35% 14.18-16.70%

Confinement 51-75 Cows 15.37% 13.68-16.80%Confinement <50 Cows 15.53% 14.06-16.21%

Confinement 101-150 Cows 16.97% 15.37-19.08%All Confinement 18.75% 15.99-20.94%

Confinement 151-250 Cows 19.13% 16.85-21.03%Graziers 20.75% 18.82-21.31%

Confinement>250 Cows 22.11% 19.50-24.04%

Seven Year Average Ranking of Wisconsin Dairy by Percent of IncomePurchased Feed Cost:

System Percent of Income Range Percent of IncomeGraziers 5.32% 4.69-6.86%

Confinement >250 Cows 8.83% 8.08-9.25%Confinement 150-250 Cows 10.33% 9.57-11.40%

All Confinement 10.59% 9.85-11.01%Organic 11.54% 8.88-12.61%

Confinement 101-150 Cows 11.67% 10.43-12.82%Confinement <50 Cows 11.83% 10.47-13.83%

Confinement 51-75 Cows 12.22% 10.44-13.80%Confinement 76-100 Cows 13.08% 11.68-14.89%

Cropping Cost:As a Percent of Income

Table 5

System Percent of Income Range Percent of IncomeOrganic 25.50% 20.39-29.63%

Graziers 26.07% 26.34-30.29%<50 Cow Confinement 27.36% 24.53-30.04%

51-75 Cow Confinement 27.60% 24.12-30.15%76-100 Cow Confinement 28.44% 25.86-29.80%

101-150 Cow Confinement 28.64% 25.80-30.49%All Confinement 29.19% 25.85-31.21%

151-250 Cow Confinement 29.46% 26.72-30.78%>250 Cow Confinement 30.94% 27.58-32.69%

Purchased Feed Plus Selected Cropping Expense

“Total” feed cost as % of income trends 1999-2005

Organic had smallest advantage in 2005 Up trend appears for all systems Up trend appears smallest for graziers Up trend appears strongest for organic and

large confinement Up trend likely to increase most for systems

that buy more feed in the next few years

Organic Grain Price & Profitability in 2007

1. WI organic dairy farmers raise grain2. Organic corn often double commodity price3. Commodity corn price will discourage conversion to organic corn

production4. Commodity corn price won’t entice organic corn producers5. Record level dairy conversions in 2007 increase demand for

organic corn6. Organic milk price on steady upward trend7. Minimal impact on profitability of veteran WI organic dairy 8. more difficult for new organic dairy and New England organic

1. Data scarce from any organic group especially from transitional organic.

2. Individual farms are achieving financial success in organic dairy. Less experienced organic dairy farms than those sharing financial data may not perform as well.

3. Organic price premiums ranged from $2.70 to $6.66/CWT vs. graziers and from $3.27 to $6.55 vs. confinement.

Organic Dairy Farm Economic Summary

1 of 5

4. Organic most competitive when non-organic price low.

5. Wisconsin Organic dairy farms seven-year simple average NFIFO/$ income ranks below graziers and above all confinement sizes.

6. Grazing Organic dairy farm’s seven-year simple average NFIFO/$ income ranks slightly below graziers.

Organic Dairy Farm Economic Summary

2 of 5

Organic Dairy Farm Economic Summary

7. Grazing probably “helps” the organic system more than vice versa.

8. If already practicing organic – go for reward

9. If far from organic practices, 3-5 year transition challenging.

3 of 5

10. Organic dairy farms in transition appeared to be competitive with non-organic dairy farms in Quebec study.

11. In 2004, organic dairy farms in a New England study were not as competitive as

non-organic New England dairy farms any Wisconsin dairy system

12. 7 Vermont organic farms competitive with New England not organic in 1999

Organic Dairy Farm Economic Summary

4 of 5

13. Feed costs were much higher for New England farms – especially for those which are organic.

14. Use Caution comparing one dairy system from one state to other dairy systems in other states.

15. The jury is still out regarding many other economic questions about organic dairy farming.

Organic Dairy Farm Economic Summary

5 of 5

Much Wisconsin Data Collected By:

Fox Valley Farm Management Association

Lakeshore Farm Management Association

Wisconsin Farm and Business Management Incorporated

Other Cooperators and Contacts

Jim Endress – University of Illinois (815) 397-7714

Ed Heckman – Purdue University – Indiana (765) 557-0401

Robert Tigner/Larry Tranel – Iowa State University (641) 394-2174/(583) 583-6496

Bill Bivens/Chris Wolf/Phil Taylor – Michigan State University – (517) 788-4292/(517) 353-3974/(517) 543-2310

Margot Rudstrom – University of Minnesota – (320) 589-1711

Other Cooperators and Contacts

Tony Rickard- University of Missouri – (417) 847-3161

Jim Grace – Cornell University – New York (607) 776-9631 x 2300

Thomas Noyes/Cliff Little – Ohio State University – (330) 264-8722/(740) 432-9300

John Molenhuis/Jack Kyle – Ontario Ministry of Agriculture and Food–(613) 475-9472/(705) 324-5855

Craig Williams – Pennsylvania State University – (570) 724-9120

Tom Kriegl/Gary Frank – University of Wisconsin-Madison – (608) 263-2685/(608) 265-8506

More Participants Wanted!

Website: cdp.wisc.edu

Multi-State Project Overview

Consistent state-to-state financial performance difference .

Graziers economically competitive with confinement herds. Top half herds had a large advantage in NFIFO/Cow and in NFIFO/CWT.

Herds less than 100 cows had a higher NFIFO/Cow and per CWT EQ

Achieving a specific level of NFIFO/Cow or NFIFO/CWT EQ in a seasonal calving/milking system is more difficult than in a non-seasonal system.

Graziers with Holsteins are competitive with other breeds

Additional Results

Probably competitive at most sizes (Multi-State)

Grazing more economically flexible Graziers using DHI more profitable (Wis) Transitional not automatic disadvantage (Wis) Major costs similar graziers vs confinement

Additional Results

Graziers with more farm management experience are more profitable (Wis)

Farm management experience appears to be more important for profitability than grazing experience (Wis)

Questions:

Is organic economically viable?

What practices contribute to organic profitability?

How can organic and other farming systems be managed for the benefit of the families operating them?

Wisconsin Organic

Graziers Confinement

Year Herd SizeLbs Milk Sold/Cow

Milk Price

Milk Price Milk Price

1999 48 15,260 $18.12 $15.10 $14.71 2000 50 15,282 $18.33 $12.38 $12.212001 48 14,256 $19.86 $15.41 $14.962002 50 14,923 $19.21 $12.55 $12.662003 60 13,555 $19.40 $14.01 $12.922004 62 14,174 $19.99 $17.29 $16.722005 64 13,806 $21.17 $17.09 $15.95

Organic

Wisconsin Organic

Year Herd SizeLbs Milk Sold/Cow Milk Price Milk Price

Lbs Milk Sold/Cow Milk Price

Lbs Milk Sold/Cow

1999 48 15,260 $18.12 $15.10 15,374 $14.71 20,2102000 50 15,282 $18.33 $12.38 16,083 $12.21 20,5462001 48 14,256 $19.86 $15.41 15,644 $14.96 20,4542002 50 14,923 $19.21 $12.55 15,644 $12.66 20,8582003 60 13,555 $19.40 $14.01 15,796 $12.92 21,3462004 62 14,174 $19.99 $17.29 16,526 $16.72 21,2772005 64 13,806 $21.17 $17.09 16,700 $15.95 21,815

Organic ConfinementGraziers

Wisconsin Organic vs. Wisconsin Graziers vs. Wisconsin Confinement

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

35.00%

1999 2000 2001 2002 2003 2004 2005

Year

NF

IFO

as

a P

erce

nt

of

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Graziers

Organic

Confinement

Seven Year Simple Average Net Farm Income From Operations as a Percent of Income

Farm # Range Ave. Herd Size Range NFIFO/$ Income RangeGraziers 21-43 61-68 27.59% 19.23-31.86%Organic 6-17 48-64 20.91% 13.53-26.26%

All Confinement 581-660 96-133 14.26% 6.99-18.21%

Wisconsin 10 Year Average Cost of Production

Basic Cost Items Shown as a Percent of Income

Grazing1.01%

0.29%

2.02%

0.07%

20.75%

Breeding Fees

Car & Truck Expense

Custom Hire

Custom Heifer Raising

Feed Purchased

Confinement1.08%

0.50%

2.59%

0.36%

18.66%

Wisconsin 10 Year Average Cost of Production

Basic Cost Items Shown as a Percent of Income

Grazing2.23%

0.86%

1.51%

1.30%

1.15%

Fertilizer &Lime

Freight & Trucking

Gasoline, Fuel and Oil

Farm Insurance

Marketing & Hedging

Confinement2.59%

0.86%

1.95%

1.22%

1.22%

Wisconsin 10 Year Average Cost of Production

Basic Cost Items Shown as a Percent of Income

Grazing0.65%

1.59%

4.83%

1.22%

3.82%

Rent/Lease Equipment

Rent/Lease Other

Repairs, All

Seeds & Plants Purchased

Supplies Purchased

Confinement0.72%

3.60%

5.48%

2.09%

3.03%

Wisconsin 10 Year Average Cost of Production

Basic Cost Items Shown as a Percent of Income

Grazing1.87%

0%

2.02%

2.31%

Taxes Other

Taxes-Payroll

Utilities

Veterinary Fees & Medicine

Confinement1.44%

0%

1.95%

2.81%

Wisconsin 10 Year Average Cost of Production

Basic Cost Items Shown as a Percent of Income

Grazing2.88%

0.22%

-0.36%

1.08%

53.82%

Other Farm Expenses

Other Crop Expenses

Combined Non-Cash Adjustments

Depreciation Livestock

Total Basic

Confinement1.08%

0.50%

2.59%

1.95%

59.65%

Total Costs

All cash and non-cash costs including:

Unpaid Labor

Unpaid Management

Return to Equity Capital

Total Allocated Costs

All cash and non-cash costs except:

Unpaid Labor

Unpaid Management

Return to Equity Capital

Basic Costs

All cash and non-cash costs except

All Opportunity Costs

Interest

Depreciation on buildings and equipment

Labor

Management

Wisconsin Top Half/Bottom Half Comparison between Confinement and Grazier Dairy Herds

$0.00

$1.00

$2.00

$3.00

$4.00

$5.00

$6.00

$7.00

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Year

NF

IFO

/CW

T E

Q

Graziers Top Half

Grazier Bottom Half

Confinement Top Half

Confinement Bottom Half

(2002, -0.04)

Comparing the Financial Performance of Graziers to Confinement Dairy Herds in Two Participating States in 2001

  Wisconsin 

Grazier Confinement

New York 

Grazier Confinement

Number of Cows Per Herd 62 106 94 340

Average Pounds of Milk Per Cow 15,644 20,454 16,150 22,191

NFIFO Per Cow 842 520 549 508

NFIFO Per CWT EQ 4.48 2.17 2.68 2.05

NFIFO Per Farm 52,446 54,579 51,428 172,785

NFIFO Per CWT EQ (Without Deducting Labor Compensation)

5.02 3.75 3.96 4.07

NFIFO Per Cow (Without Deducting Labor Compensation)

933 897 810 1163

Categories of Organic Production

1. Pre-organic- The period of operation of a farm before it attempted to become organic. Since anyone not attempting to become organic could be called pre-organic, it may not be as important to gather data from that period as it is to gather data from farms at some other “organic stage.”

2. Transitional organic- The period of operation of a farm from the time it began to adopt organic practices until achieving organic certification. This is expected to be the least profitable stage.

3. Certified organic- The period of operation of a farm from the time it achieved organic certification until receiving organic milk price premiums.

4. Certified market organic- The period of operation of a farm during which it receives organic milk price premiums.

Five-Year (2000-2004) Simple Average ranking of States’ Cost of Purchased Feed per CWT EQ from Most Desirable Value to the Least Desirable Value

1 2 3 4 5Ontario Wisconsin Michigan New York Ohio$1.75 $2.66 $3.06 $3.09 $3.39

Five Year (2000-2004) Simple Average Ranking of States Selected Feed Raising Costs (Chemicals, Custom Machine Work, Fertilizer and Lime, Gas, Fuel, and Oil, Seeds, and Other Crop Expense) per CWT EQ from Most Desirable Value to Least Desirable Value.

1 2 3 4 5Ohio Wisconsin Michigan New York Ontario

$1.02 $1.18 $1.44 $1.45 $1.79

Five Year (2000-2004) Simple Average Ranking of States’ Cost of Purchased Feed plus Selected Feed Raising Costs (Chemicals, Custom Machine Work, Fertilizer and Lime, Gas, Fuel, and Oil, Seeds, and Other Crop Expense) per CWT EQ from Most Desirable Value to Least Desirable Value (combines values from charts 1-2 and 1-3)

1 2 3 4 5Ontario Wisconsin Michigan New York Ohio$3.53 $3.84 $4.50 $4.54 $4.63

The Five Year (2000-2004) Simple Average Number of

Cows Per Herd Per State

1 2 3 4 5Ohio Michigan New York Wisconsin Ontario

119.40 116.80 101.70 62.80 50.80

Wisconsin Organic vs. Wisconsin Graziers vs. Wisconsin Confinement

$0.00

$0.50

$1.00

$1.50

$2.00

$2.50

$3.00

$3.50

$4.00

$4.50

$5.00

1998 1999 2000 2001 2002 2003 2004 2005 2006

Year

NF

IFO

/CW

T E

Q

Graziers

Organic

Confinem ent