Trends In Organic Dairy for 2008-2009
By Bob Parsons, Extension Ag Educator, Professor, University of Vermont
Added July 18, 2011. While its been 2 years, sometimes it's worth looking back to see where we have been to help plan for where we may have to go in the future. The year 2009 doesn't bring back many fond memories. As a country, we were in the greatest financial crisis since the Great Depression. The stock market collapsed, wiping out the retirement and savings of many people. In the agricultural sector, we saw our neighboring conventional dairy farmers experience another price collapse, wiping out equity and plunging many into greater debt. Organic dairy farmers were lucky in comparison, but still were undergoing pressure to reduce production as demand for organic milk was waning. But how bad was 2009? Surprisingly, the numbers don't show that much difference between 2008 and 2009, despite the unprecedented actions of milk companies imposing quotas and reductions in production. While this is a relative statement, we all know that family living, real estate taxes, and other charges just keep increasing, putting greater demand on limited profits.
Vermont's ongoing Organic Dairy Economic Study, jointly conducted between UVM Extension and NOFA Vermont, examined the results between 2009 and 2008 and found very little difference. The farms in the study averaged 67 cows for both years. Milk production was down just over 500 lbs per cow in 2009 and milk price averaged $30.23 vs $30.90 in 2008. Less money for less milk isn't the way to advance each year and exerts a negative effect on cash flow. Pressure on cash flow was compounded by banks and vendors tightening credit as collateral in property disappeared with the economic collapse.
Total income also was impacted by sale of animals and receipt of government payments. The biggest impact was the sale of dairy animals, where the market almost disappeared as few dairy farmers were looking for more cows. But this was offset by a significant increase in government payments as MILC was in effect for nearly all of 2009 and farmers received a one-time disaster payment from the Federal Government. While many dairy farmers cringe at needing government payments, on a per cow basis, government payments increased by $176 per cow, providing significant help for organic as well as conventional dairy farmers.
Overall, gross accrual income per cow in 2009 was down only $150 per cow, and nearly half of that was the result of lower feed inventories. Accrual income takes changes in feed inventory into account. Feed on hand is like a savings account, so if you end up with more feed left over, its like extra savings, and vice versa, when you end up with less feed, you have a lower savings account and farm families used all their available feed leaving them more exposed to changes in the marketplace
On the expense side, organic dairy farmers saw cash expenses increase $33 per cow and total expenses decrease by $68 per cow. A logical question is how can this be when no expenses went down? Parts? Labor? Repairs? Taxes? How can dairy farmers believe some economist who tells them their expenses went down? Well, they did. Lets look at them individually.
Feed grain prices…down about $100 per cow. It's not from lower feed prices but farmers fed less grain in 2009 in response to processors asking for cuts in production. With many farmers on restricted production it was not worth the extra grain to produce more and others reduced their cow numbers. So less grain was fed. Repairs and supplies were up $40 per cow. Logical; when was the last time a machinery part cost you less money? Labor was up nearly $100 per cow. This is more difficult to explain and is believed to be more of a factor of the sample of farms instead of a general trend across farms to spend more on labor. Depreciation was also lower in 2009. When times are tough, there isn't much investment in new equipment.
Surprisingly, unpaid bills actually decreased in 2009. What this tells me is the typical "Yankee Thrift" is still very present among organic dairy farmers and they responded in typical yankee fashion, spending less, making do, and stretching their dollars where they could.
At the bottom line, 2009 saw a drop in net accrual farm revenue of $82 per cow compared to the 2008 year. The net revenue in 2009 was $828 per cow. This is what is left to pay for family living, loan repayments, and reinvestment. Please note that net accrual farm revenue takes into account cash income and accrual changes like feed inventories, herd numbers, depreciation, and accounts payable and receivable.
The recently published USDA organic survey showed that the majority of organic dairy farms are smaller, depend on a variety of other income sources including off farm income, and cannot sustain their operations at the 2009 level of income from organic dairy activity. With smaller herds, it takes a higher return per cow to meet family living expenses. In 2009, Vermont organic dairy farms survived but cannot survive with a future like 2009.
We are now finishing up collecting data for 2010 tax year and should have results ready in August. An initial observation is that farmers were able to regain some stability in their operations as restrictions on production were lifted and financial incentives for winter production increased. The effect of increases in feed costs will not show in the 2010 figures but loom large for the 2011 fiscal year as prices for corn are nearly triple what they were in 2010. The interesting questions for the financial future of organic dairies when we look at the 2010 data are: