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Profitability Declines Slightly in 2013

By Bob Parsons, Ph.D., UVM Extension

Added January 14, 2015

A study on the economics of organic dairy involved 34 Vermont dairy farms for the 2013 tax year found that Return on Assets (ROA) dropped from 1.82% to 1.60%. The study was conducted with the cooperation of the University of Vermont Extension, NOFA-Vermont, Vermont organic dairy farmers, and the generous financial support from Stonyfield Farms, Morrison Custom Feeds, Vermont Agency of Agriculture, Green Mountain Feeds, and Yankee Farm Credit.

Data was collected from farm visits and compiled to compare balance sheets and accrual income for the 2013 tax year. The farms ranged in size from 24 to 102 cows. All farms have been certified organic for at least 5 years. Only one of the farms raised some grain, and 4 of the farms did not feed any grain for at least part of the year.

For 2013, the farms in the study averaged 55.0 (59.7 in 2012) cows producing 13,144 lbs. (12,531 in 2012) of milk per cow and sold 739,986 lbs. (744,537 in 2012) of milk per farm. Average milk price for the year was $33.69/cwt, up $0.30 from 2012. The farms averaged a net revenue of $44,760 before any payment for unpaid owner labor and management and principal payments were made. A charge of $37,000 for family living costs was used to represent payment to the owner, leaving a Return on Assets of 1.60% vs. 1.82%. On average, the farms are getting along, however, there is reason for concern as 11 of the 34 farms in the study failed to provide enough income for a positive ROA (Return on Assets) and to meet family living needs. The sustainability of these farms is highly questionable.

The largest expenses were purchased feed (36.2%), repairs and supplies (13.6%), labor (10.1%), and depreciation (9.5%). Of the purchased feed, 94% was for grain supplement. Compared to 2012, farm level organic production expenses increased about $4600 while revenue increased only about $2000. This isn’t a desired trend.

To get a better analysis of the data, the herds were examined by profit groups, which shows a sizable difference between the farms. Each group was 11-12 farms, and ranked by overall farm profitability. The three groups showed returns of 5.17%, 2.25%, and -2.67%, respectively. The most profitable farms averaged more cows per farm (62.25), more milk per cow (14,968 lbs.), and a slightly higher milk price ($33.96/cwt) than the other 2 groups. The low profit group averaged only 51.4 cows producing 12,653 lbs. of milk per cow at a farm price of $33.89 per cwt. In comparison to the high profit group, the low profit group is producing 2315 lbs. less milk per cow, and milking 11 fewer cows. The middle profit group has 3 more cows than the lower profit group but produced less milk per cow (11,924 lbs.) and had the lowest expenses on a per farm and per cow basis, $3580 vs. $4326 (most profitable) and $4423 (low profit). Total revenue per cow ranged from $4,527 for the middle profit group to $5,664 for the high profit group.

The high profit group had the highest expenses on per farm and per cow basis. It’s common behavior among businesses to spend more when you have more. Thus earning a higher income allows the high profit group to have more money available for repairs and reinvestment that the low profit group is likely putting off. However, the difference between the highest profit and low profit groups in expense per cow is only $97 higher for the low profit group. Interest is not a major expense category as the highest debt/asset ratio was 24.03% for the low profit group.

The formula for profitability appears to be linked to revenue generated as the expenses per cow are nearly identical. The higher revenue results in a net farm revenue of $1,339 for the high profit group vs $946 for the middle profit group and $232 for the low profit group to pay for owner labor, principal payments, and reinvestment in the farm. Incidentally, the high profit group is not spending more on feed to get more milk. The high profit group spent $1541 per cow on feed vs $1744 for the low profit group. As would be expected, off farm income is of greater importance to the low profit group, at $390 per cow, while the high profit group only has $229 of off farm income per cow.

There is another way to keep expenses under control and that is to keep expenses under control, or as described in Farm Credit’s Dairy Farm Summary, being ”tight with a buck.” The middle profit group had the lowest milk per cow, milk price, revenue per cow but also had the lowest expense per farm and per cow basis. The middle group had expenses per cow that were $750 or more lower than the other two groups. The middle group had the lowest expenses per cow for feed, fuel, bedding, labor, repairs, supplies, and utilities. It appears this group fits the reputation of the Vermont Yankee Farmer of being tight with their money. This strategy may not fit everyone but works for some farmers.

Purchased feed is usually the largest expense on dairy farms. Two farms in the study have not fed grain for at least 5 years and have maintained profitability. One of the farms does purchase minerals. These 2 farms milked 48 and 53 cows, producing 7078 and 8271 lbs. of milk per cow in 2013. However, by eliminating purchased grain, they finished the year with net farm revenue of $47,260 and $67,126, respectively, to pay for owner family living expenses. These farms ended the year with a ROA of 2.9% and 6.5%, respectively, well above average for the group. Both of these farms are now supplying the grass fed milk market. There are several other farms in the study that have discontinued feeding grain for only part of the year so it’s difficult to make an assessment for those farms.

There is little doubt that organic has provided a saving lifeline to Vermont’s small scale dairy farms. In discussing challenges with organic dairy farmers, more than 75% believe they would not be in business today if they had not had the option to go organic.

What does the future hold? This is a big question as nearly 33% of the farms cannot pay the owner a reasonable wage for unpaid labor and management. These farms are not economically sustainable. There is less likelihood that the next generation will be interested, willing, or able to take over a farm that cannot make breakeven returns. In the long term, these farms will most likely not survive, leaving a question as to where more organic milk will be sourced.

It’s also clear that organic either needs a higher milk price or lower feed expenses to become more profitable. For a number of farms in the study, organic grazing rules limit the ability to add more cows as they have limited pasture availability. There are reports of higher milk prices in 2014 which will be highly appreciated. The addition of a premium for grass fed milk adds an additional option for some of the farms to increase revenue. As discussed above, not feeding grain can be done with profitable returns. Add a price premium and it looks much more appealing.

So this brings up some big questions facing the future of Vermont organic dairy farms. Can farm milk prices continue to increase to help cover rising production costs? Will the market be able to charge more without losing customers? Can farmers find ways to reduce production costs to increase overall profitability? These are major questions for the sector for the long term viability of organic dairy and their importance to rural Vermont.

In conclusion, organic farms are getting by. Organic is not the road to riches for many, however it has been a key vehicle of survival for many of the smaller farms who likely would be out of business if they had not had the option to go organic. Higher milk prices are needed but can the market absorb a higher price without losing consumer demand? So while the coming years likely will not see an immediate loss of organic dairy farms, there should be concern for long run viability and sustainable and healthy supply of organic milk from Vermont farms. Without a higher price, organic dairy farms have only the same options they had available when on the conventional treadmill; add more cows and produce more milk per cow to meet rising expenses.

Bob Parsons, PhD. is an Extension Agricultural Economist Professor, UVM Extension/
Department of Community Development and Applied Economics, and can be reached at:
802-656-2109, or bob.parsons@uvm.edu