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
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USDA IFAFS Grant
Standardize Data Handling & Analysis
Pool Actual farm financial data from
–
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–
–
–
–
–
–
–

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…

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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:
Opportunity Costs:
Unpaid labor
Unpaid management
Unpaid equity
Non-Basic Costs
Paid labor
Paid management
Interest
Non-livestock depreciation
Income minus allocated costs equals NFIFO
Basic Costs =
Total Costs – Non-Basic Costs –
Opportunity Cost
Allocated Costs =
Non-Basic + Basic
Costs
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
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
Before, during, and after data from 7 farms
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
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
Year started farming ranged from 1977 to 2003.
Comparing Milk Price:
Organic vs. Grazier vs. Confinement
Organic
Year
1999
2000
2001
2002
2003
2004
2005
Graziers
Milk Price Milk Price
$18.12
$15.10
$18.33
$12.38
$19.86
$15.41
$19.21
$12.55
$19.40
$14.01
$19.99
$17.29
$21.17
$17.09
Confinement
Milk Price
$14.71
$12.21
$14.96
$12.66
$12.92
$16.72
$15.95
Comparing Lbs. of Milk Sold per Cow:
Organic vs. Grazier vs. Confinement
Year
1999
2000
2001
2002
2003
2004
2005
Organic Graziers Confinement
Lbs Milk Lbs Milk
Lbs Milk
Sold/Cow Sold/Cow Sold/Cow
15,260
15,374
20,210
15,282
16,083
20,546
14,256
15,644
20,454
14,923
15,644
20,858
13,555
15,796
21,346
14,174
16,526
21,277
13,806
16,700
21,815
Wisconsin Organic vs. Wisconsin
Graziers vs. Wisconsin Confinement vs.
Confinement with 51-75 Cows
35.00%
NFIFO as a Percent of Income
30.00%
25.00%
Graziers
20.00%
Organic
Confinement
15.00%
Confinement 51-75 Cows
10.00%
5.00%
0.00%
1999
2000
2001
2002
Year
2003
2004
2005
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 - $6.66
Seven Year Simple Average Net Farm Income
From Operations as a Percent of Income
Graziers
Organic
<50 Cow Confinement
51-75 Cow Confinement
76-100 Cow Confinement
101-150 Cow Confinement
All Confinement
151-250 Cow Confinement
>250 Cow Confinement
Farm # Range
21-43
6-17
121-158
190-216
93-99
71-91
581-660
32-58
34-80
Ave. Herd Size Range
61-68
48-64
41-42
62-63
87-88
121-125
96-133
188-200
443-555
NFIFO/$ Income
27.59%
21.01%
17.80%
17.23%
15.76%
15.62%
14.26%
14.02%
10.28%
Range
19.23-31.86%
13.53-26.26%
12.87-24.54%
7.76-22.28%
9.27-20.73%
9.32-19.29%
6.99-18.21%
7.43-19.5%
3.85-15.07%
Seven-Year Sinmple Average Cost
of Production
Cost Item
Total
Allocated
Non-basic
Basic
Grazier
98.56%
72.41%
18.52%
53.82%
Cost Categories as Percent of Income
Organic Confinement 51-75 Cows All Confinement
100.07%
N/A
102.23%
79.09%
82.77%
85.74%
23.00%
24.55%
25.43%
56.08%
58.21%
60.31%
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
Purchased Feed Cost:
Seven Year Average Ranking of Wisconsin Dairy by Percent of Income
System
Percent of Income
Range Percent of Income
Organic
Confinement 76-100 Cows
Confinement 51-75 Cows
Confinement <50 Cows
Confinement 101-150 Cows
All Confinement
Confinement 151-250 Cows
Graziers
Confinement>250 Cows
13.95%
15.35%
15.37%
15.53%
16.97%
18.75%
19.13%
20.75%
22.11%
11.04-17.26%
14.18-16.70%
13.68-16.80%
14.06-16.21%
15.37-19.08%
15.99-20.94%
16.85-21.03%
18.82-21.31%
19.50-24.04%
System
Graziers
Confinement >250 Cows
Confinement 150-250 Cows
All Confinement
Organic
Confinement 101-150 Cows
Confinement <50 Cows
Confinement 51-75 Cows
Confinement 76-100 Cows
Cropping Cost:
As a Percent of Income
Percent of Income
5.32%
8.83%
10.33%
10.59%
11.54%
11.67%
11.83%
12.22%
13.08%
Range Percent of Income
4.69-6.86%
8.08-9.25%
9.57-11.40%
9.85-11.01%
8.88-12.61%
10.43-12.82%
10.47-13.83%
10.44-13.80%
11.68-14.89%
Table 5
Purchased Feed Plus Selected Cropping Expense
System
Percent of Income
Range Percent of Income
Organic
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%
“Total” feed cost as % of income
trends 1999-2005
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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.
2.
3.
4.
5.
6.
7.
8.
WI organic dairy farmers raise grain
Organic corn often double commodity price
Commodity corn price will discourage conversion to organic corn
production
Commodity corn price won’t entice organic corn producers
Record level dairy conversions in 2007 increase demand for
organic corn
Organic milk price on steady upward trend
Minimal impact on profitability of veteran WI organic dairy
more difficult for new organic dairy and New England organic
1 of 5
Organic Dairy Farm Economic Summary
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 $6.55 vs.
confinement.
2 of 5
Organic Dairy Farm Economic Summary
4.
Organic most competitive when non-organic price
low.
5.
Wisconsin Organic dairy farms seven-year simple
average NFIFO/$ 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.
3 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.
4 of 5
Organic Dairy Farm Economic Summary
10.
11.
Organic dairy farms in transition appeared to be
competitive with non-organic dairy farms in Quebec
study.
In 2004, organic dairy farms in a New England study
were not as competitive as


12.
non-organic New England dairy farms
any Wisconsin dairy system
7 Vermont organic farms competitive with New
England not organic in 1999
5 of 5
Organic Dairy Farm Economic Summary
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.
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
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Probably competitive at most sizes (MultiState)
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
Year Herd Size
1999
48
2000
50
2001
48
2002
50
2003
60
2004
62
2005
64
Organic
Lbs Milk
Sold/Cow
15,260
15,282
14,256
14,923
13,555
14,174
13,806
Graziers Confinement
Milk
Milk
Price
Price
Milk Price
$18.12 $15.10
$14.71
$18.33 $12.38
$12.21
$19.86 $15.41
$14.96
$19.21 $12.55
$12.66
$19.40 $14.01
$12.92
$19.99 $17.29
$16.72
$21.17 $17.09
$15.95
Wisconsin Organic
Year
1999
2000
2001
2002
2003
2004
2005
Organic
Graziers
Confinement
Lbs Milk
Lbs Milk
Lbs Milk
Herd Size Sold/Cow Milk Price Milk Price Sold/Cow Milk Price Sold/Cow
48
15,260
$18.12
$15.10
15,374
$14.71
20,210
50
15,282
$18.33
$12.38
16,083
$12.21
20,546
48
14,256
$19.86
$15.41
15,644
$14.96
20,454
50
14,923
$19.21
$12.55
15,644
$12.66
20,858
60
13,555
$19.40
$14.01
15,796
$12.92
21,346
62
14,174
$19.99
$17.29
16,526
$16.72
21,277
64
13,806
$21.17
$17.09
16,700
$15.95
21,815
Wisconsin Organic vs. Wisconsin
Graziers vs. Wisconsin Confinement
35.00%
NFIFO as a Percent of Income
30.00%
25.00%
20.00%
Graziers
Organic
15.00%
Confinement
10.00%
5.00%
0.00%
1999
2000
2001
2002
Year
2003
2004
2005
Seven Year Simple Average Net Farm Income
From Operations as a Percent of Income
Farm # Range Ave. Herd Size Range NFIFO/$ Income
Graziers
21-43
61-68
27.59%
Organic
6-17
48-64
20.91%
All Confinement 581-660
96-133
14.26%
Range
19.23-31.86%
13.53-26.26%
6.99-18.21%
Wisconsin 10 Year Average Cost of
Production
Basic Cost Items Shown as a Percent of Income
Grazing
1.01%
0.29%
2.02%
0.07%
20.75%
Confinement
Breeding Fees
Car & Truck Expense
Custom Hire
Custom Heifer Raising
Feed Purchased
1.08%
0.50%
2.59%
0.36%
18.66%
Wisconsin 10 Year Average Cost of
Production
Basic Cost Items Shown as a Percent of Income
Grazing
2.23%
0.86%
1.51%
1.30%
1.15%
Confinement
Fertilizer &Lime
Freight & Trucking
Gasoline, Fuel and Oil
Farm Insurance
Marketing & Hedging
2.59%
0.86%
1.95%
1.22%
1.22%
Wisconsin 10 Year Average Cost of
Production
Basic Cost Items Shown as a Percent of Income
Grazing
0.65%
1.59%
4.83%
1.22%
3.82%
Confinement
Rent/Lease Equipment
Rent/Lease Other
Repairs, All
Seeds & Plants
Purchased
Supplies Purchased
0.72%
3.60%
5.48%
2.09%
3.03%
Wisconsin 10 Year Average Cost of
Production
Basic Cost Items Shown as a Percent of Income
Grazing
1.87%
0%
2.02%
2.31%
Confinement
Taxes Other
Taxes-Payroll
Utilities
Veterinary Fees &
Medicine
1.44%
0%
1.95%
2.81%
Wisconsin 10 Year Average Cost of
Production
Basic Cost Items Shown as a Percent of Income
Grazing
2.88%
0.22%
-0.36%
1.08%
53.82%
Confinement
Other Farm Expenses
Other Crop Expenses
Combined Non-Cash
Adjustments
Depreciation Livestock
Total Basic
1.08%
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
$7.00
$6.00
NFIFO/CWT EQ
$5.00
Graziers Top Half
$4.00
Grazier Bottom Half
Confinement Top Half
$3.00
Confinement Bottom Half
$2.00
$1.00
(2002, -0.04)
$0.00
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
Year
Comparing the Financial Performance of Graziers to
Confinement Dairy Herds in Two Participating States
in 2001
Wisconsin
Grazier
New York
Confinement
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
Ontario
$1.75
2
3
4
Wisconsin Michigan New York
$2.66
$3.06
$3.09
5
Ohio
$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
Ohio
$1.02
2
3
4
Wisconsin Michigan New York
$1.18
$1.44
$1.45
5
Ontario
$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
Ontario
$3.53
2
3
4
Wisconsin Michigan New York
$3.84
$4.50
$4.54
5
Ohio
$4.63
The Five Year (2000-2004) Simple Average Number of
Cows Per Herd Per State
1
Ohio
119.40
2
3
4
Michigan New York Wisconsin
116.80
101.70
62.80
5
Ontario
50.80
Wisconsin Organic vs. Wisconsin Graziers vs.
Wisconsin Confinement
$5.00
$4.50
$4.00
NFIFO/CWT EQ
$3.50
$3.00
Graziers
$2.50
Organic
Confinement
$2.00
$1.50
$1.00
$0.50
$0.00
1998
1999
2000
2001
2002
Year
2003
2004
2005
2006