When an ag economist studied organic dairies over a nine-year span, he found that half the farms couldn’t generate enough money to meet living expenses.
Because dairies face a low return on assets and variable feed costs and milk prices, researcher Robert Parsons said, “Organic is not the road to riches for the typical farmer.”
Parsons, an economist in the Department of Community Development and Applied Economics at the University of Vermont, conducted the longest running economic analysis of organic dairy operations in the U.S.
In Vermont, he said, 210 dairy farms — 23 percent — are certified organic. He visited 30 to 40 dairies every year, looking at tax forms and record books, developing balance sheets and accrual income statements, obtaining cash flows and double-checking inventories and household expenses.
One variable all dairies have in common is milk price, which increased from $22.80 a hundredweight in 1999 to $33.39 in 2012. Average milk production per cow has held steady at about 13,000 pounds.
Only a few Vermont dairies grow their own grain or corn silage, and feed prices now are $200 to $300 more per cow than in 2009, he said.
When the return on investment is as low as 0.77 percent, Parsons said, “The farmer has no choice but to try to increase milk production.”
To explore what makes some dairies more profitable than others, he divided them into three groups. The least profitable farms averaged $6,469 net farm revenue; the middle-range group averaged $43,131; and the most profitable, $90,333.
The most profitable farms had:
• More cows per farm, an average of about 68.
• Most milk per cow, 14,628 pounds.
• Greatest return over purchased feed cost, $3,221 per cow.
• Greatest cost of repairs and supplies, $529 per cow.
• Highest labor expenses, $437 per cow.
• Lowest depreciation expenses, $331 per cow.
• Least custom expenses, $127 per cow.
• Highest total expenses per cow, $4,214.
The most profitable dairies ended up with greater return on assets and lower debt-to-asset ratio.
Parson’s conclusions: Profit is associated with more cows and higher production. More revenue per cow provides more cash to pay expenses, pay family living expenses and have extras in life.
“A farmer in the top group profits from management skills more than what he’s producing,” he said. “He keeps expenses down and has a simple system.”
The least profitable farms live on the edge, and Parsons wondered how long they could survive. They require off-farm income, or else they live on less money.
“Does anybody (in the family) want to take over that farm?” he said.
Parson also studied two “different” farms, which raise all their forage with some added minerals. They have no grain bill and lower production costs, and their return on assets ranges from 4.6 percent to 5 percent.
Their expenses per cow can be zero for feed and labor when only family members are working. They do pay more for repairs, but their net revenue per cow is as high as $1,376 per cow.
“Is that the way to farm organically?” he asked. “Some say no, but these guys are making it work.”
Parsons’ research was funded in part by USDA’s National Institute of Food and Agriculture, the Northeast Organic Farming Association and Organic Valley.