University of Wisconsin Extension and Center for Dairy …conferences.illinois.edu/resources/20033/Presentations/2E... · 2009. 10. 29. · Wisconsin Organic Dairy vs. Other Wisconsin

ECONOMICS OF ORGANIC, GRAZING and CONFINEMENT DAIRY FARMS

Presented by: Tom KrieglUniversity of Wisconsin Extension and

Center for Dairy ProfitabilityWebsite: cdp.wisc.edu

5th National Small Farm ConferenceSpringfield, IL

September 16, 2009

Wisconsin Dairy Farm Systems

l Most Wisconsin dairy farms are still small confinement systems– the size that a husband, wife and children can operate with their labor. Cows are housed in stanchions and fed mechanically harvested feed.

Wisconsin Dairy Farm Systems

About 1990 three “new systems” appeared in Wisconsin1. Large Confinement – cows housed inside, milked in parlors and fed

mechanically harvested feed all year. Lack of land base requires some purchased feed. Most labor is hired.

2. Management Intensive Rotational Grazing (MIRG) – “family sized”, cows milked in parlors but housed inside and fed mechanically harvested feed in non pasture season. Feed but not raise grain.

3. Organic – “family sized”, cows are grazed enough to meet organic standards but otherwise are milked and housed in stanchion barns and fed mechanically harvested feed grown on the farm.

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

l How economically competitive are the dairy systems?

l How long will it take to attain the goal?

l What will it cost to attain the goal?

Actual whole farm financial data:

l 6 years Great Lakes Grazing Network data

l 9 years limited Wisconsin organic data

l 13 years Wisconsin grazing and confinement data

Great Lakes Grazing Network Financial Summary

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

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

l Use AgFA

Performance Measures Include…

l ROROAl NFIFO (Net Farm Income From Operations)l NFIFO/Cowl NFIFO/Acre

l NFIFO/dollar of revenuel NFIFO/Cwt. Equivalent Milk Sold

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

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.

Dairy Grazier Defined

l Milks Cows for livingl Cows move at least every third dayl Harvest 30% of forage needs by grazingl 85% of gross income from milk sales orl 90% of gross income from milk & cattle sales

Wisconsin Organic Participants

Year started farming ranged from 1977 to 2003.

First Year Organic Price Number of Farms

1994 4

1995 1

1996 1

1997 1

1999 3

2001 1

2003 2

2004 2

2005 2

2006 1

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 $12.21 2001 $19.86 $15.41 $14.96 2002 $19.21 $12.55 $12.66 2003 $19.40 $14.01 $12.92 2004 $19.99 $17.29 $16.72 2005 $21.17 $17.09 $15.95 2006 $23.52 $13.75 $13.68 2007 $24.95 $19.56 $18.67

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

Organic Graziers Confinement

YearLbs Milk

Sold/CowLbs Milk

Sold/Cow Lbs Milk Sold/Cow

1999 15,260 15,374 20,210

2000 15,282 16,083 20,546

2001 14,256 15,644 20,454

2002 14,923 15,644 20,858

2003 13,555 15,796 21,346

2004 14,174 16,526 21,277

2005 13,806 16,700 21,815

2006 14,289 16,259 22,149

2007 14,456 16,538 21,994

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 2006 2007

Year

NF

IFO

as

a P

erce

nt o

f In

com

e

Graziers

Organic

Confinement

Confinement 51-75 Cows

Nine Year Simple Average Cost of Production

Cost Categories as Percent of Farm Income

Cost Item Grazier OrganicConfinement 51-75 Cows

All Confinement

Total 101.26% 98.53% N/A 100.13%

Allocated 74.57% 78.22% 81.73% 85.60%

Non-basic 20.27% 23.56% 23.57% 25.04%

Basic 54.40% 54.66% 58.16% 60.55%

WI Dairy Farm Systems Compared

System Range of AverageFarm #

Range of Yearly AverageCows per Farm

Multiple Year Average NFIFO/$ Income

Range of Yearly Average NFIFO/$ Income

Graziers 21-43 61-68 25.33% 19.23-31.86%

Organic 6-17 48-65 21.78% 13.53-26.26%

All Confinement 581-660 96-149 14.40% 6.99-19.4%

Multiple 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%

Wisconsin Organic Dairy vs. Other Wisconsin Systems

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

income than Wisconsin graziers three years of nine. These years were 2002, 2003 and 2006.

l Wisconsin organic had higher NFIFO as a percent of income than Wisconsin confinement eight of nine years. The year in which confinement was higher was 2001.

l Organic price premium $3-5/CWT.

Wisconsin Organic vs. Grazier vs. Wisconsin Confinement

l Organic data still very limitedl 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 nine-year simple average cost as a percent of income than graziers and confinement for the following items, listed in order of magnitude of difference:

l Non-livestock depreciationl Repairsl Gasoline, Fuel, and Oill Rentl Seedsl Custom Machine Hirel Utilitiesl Marketing and Hedgingl Breedingl 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%

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

Cropping cost includes chemicals, custom work, fertilizer,& lime, fuel, seeds & other crop expense.

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

Estimated Feed Cost

l If half of the cost of paid labor, depreciation, interest, rent, and repairs were also assigned to cropping cost, this would increase the cost of feed by the following percent of income.

% Added to Feed Cost in this Table New Total Feed Cost

Grazier 13.6% 39.67%

Organic 17.01% 42.51%

Confinement All 17.39% 46.58%

Confinement 51-75 Cow 20.33% 47.93%

Confinement >250 Cow 17.40% 48.34%

Feed Costs Per Cow Trends 1999-2008

l Raised and purchased feed cost/cow increasing for all systems

l Cost increases most notable from 2006 to 2008

l Costs decrease likely from 2008 to 2009.l Costs are distorted by tax managementl Costs could be distorted by choosing to feed

less

“Allocated” feed cost as % of income trends 1999-2008

l Organic had smallest advantage in 2005l Up trend appears for all systemsl Up trend appears smallest for graziersl Up trend appears strongest for organic and

large confinementl Up trend could increase most for systems that

buy more feed in the next few yearsl Milk price offset feed price increases until

2009.

1. By most measures organic was always the high total and allocated cost producers usually followed by large confinement, then small confinement with graziers being the lowest cost producers in most measures most years.

2. Organic had 2nd highest 9 year simple average NFIFO/$ income & highest 9 year simple average NFIFO/Cow. Graziers had highest 9 year simple average NFIFO/$ income & 2nd highest 9 year simple average NFIFO/Cow, followed by small & then large confinement.

Dairy Farm Systems Economic Summary

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3. Organic price premiums ranged from $2.70 to $9.84/CWT vs. non-organic. Largest margin in 2006 (could be larger in 2009). Organic needs a price premium of about $5.00/CWT to offset their higher cost of production.

4. Less experienced organic dairy farms than those sharing financial data may not perform as well.

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

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


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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.

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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 l Non-organic New England dairy farms l Any Wisconsin dairy system

12. In 2005, organic dairy farms in a New England study were competitive with non-organic dairy farms but not with most Wisconsin farm systems.


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13. 7 Vermont organic farms competitive with New England not organic in 1999

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

15. Minnesota organic dairy performance appears similar to Wisconsin from 2005 to 2007.

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

17. This economic dairy data indicates that the economies of scale (lowest cost of production per unit) occur at a much smaller size than people expect (somewhere less than 100 cows per farm).

18. There are large consistent differences in NFIFO/$ revenue between many states and systems.

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19. Graziers typically attain more NFIFO/$ revenue than other dairy systems in their states.

20. Wisconsin dairy systems typically attain more NFIFO/$ revenue than similar dairy systems in the same state.

21. Small dairy systems typically attain more NFIFO/$ revenue than large dairy systems in the same state.

22. The largest farms tend to generate more dollars of total NFIFO per farm and per owner compared to the smallest farms.

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23. Large confinement systems rely much more on hired labor than the other three systems. This explains part but not all of the difference in their NFIFO/$ revenue.

24. The ranking of financial performance by state is very different from the official USDA cost of production estimate ranking which relies very heavily on opportunity cost.

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25. Family size farms (the size that can be operated mainly by family labor) are fairly similar across states in terms of the total NFIFO they generate. However, the size of family size farms can be quite different from state-to-state.

26. 25. Organic, graziers, and large confinement more satisfied than small confinement and non intensive graziers. http://www.cias.wisc.edu/wp-content/uploads/2008/07/qol707final.pdf

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Other Cooperators and Contacts

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

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

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

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

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

Other Cooperators and Contacts

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

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

l 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

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

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

More Participants Wanted!

Website: cdp.wisc.edu

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

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

l 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 LaborReturn to unpaid Family MngmtReturn to unpaid Equity

Wisconsin Dairy Farm Systems Key Performance Measures

$ Per Liter Sold

Grazier Organic Confinement 51-75 Cows

All Confinement

Income $0.424 $0.567 $0.418 $0.403

Total Cost $0.430 $0.559 NA $0.404

Allocated $0.317 $0.443 $0.342 $0.345

Non-basic $0.083 $0.133 $0.099 $0.101

Basic $0.233 $0.310 $0.243 $0.244

NFIFO $0.108 $0.124 $0.076 $0.058

Documents

University of Wisconsin Extension and Center for Dairy …conferences.illinois.edu/resources/20033/Presentations/2E... · 2009. 10. 29. · Wisconsin Organic Dairy vs. Other Wisconsin