Profitability of Northeast Organic Dairy Farms

Rick Kersbergen

Tim Dalton

Lisa Bragg

University of Maine

Bob ParsonsQingbin WangGlenn Rogers

Dennis KauppilaUniversity of Vermont

NOFA-Vermont

Presented at the 2007 National Farm Management Conference

Study: To Determine the Profitability of Organic Dairy Farms in Vermont & Maine

• 44 farms for 2005– Vermont – 26 farms, Maine – 18 farms

• 30 farms in 2004

• 7 farms in 1999

Organic Dairy in New England

• Maine – 70 organic dairy farms

• Vermont – 1130 total dairy farms– 126 organic dairy farms May 1, 2007– 80 farms in transition to be certified in June– 3 certified farms in 1994– 47 certified farms in 2000– 200+ farms by July 1

Study Supporters & Procedure

• Study funded by USDA CSREES and UVM Experiment Station

• Cooperate with NOFA and MOMP

• Teams visit farms to gather financial and survey data

Questions Addressed by Study

• How profitable is organic dairy?

• What is the trend in profitability?

• Variability of profitability?

• Cost of production?

First…Let’s Look at Trends1999

(n=7)

2004

(n=30)

2005

(n=44)

Milk price $22.83 $22.97 $24.94

Milk /cow 13,272 14,060 12,619

Herd size 48 48 56

Milk/farm 615,112 689,000 740,100

Net revenue $38,364 $28,114 $33,409

2005 Income?

• Milk Sales - $184,144

• Dairy cattle sales - $3147

• Cull cows and calves - $5648

• Government payments - $6108– Organic farms eligible for MILC

• Value of farm production - $211,098

Now the Expenses…2004 2005

Supplies & repairs/cow

$365 $400

Feed/cow $1003 $936

Labor/cow $320 $332

Depreciation/farm $19,332 $20,371

Total acc expenses $154,635 $177,688

So What’s the Bottom Line?

• Net cash income - $49,466

• Net farm Revenue - $33,409– $28,114 in 2004

• Farm Revenue up 18.8% from 2004!

Cost of Production

• $24.58 per cwt vs. $24.94 milk price

• In 2004 - $22.13 cost vs. $22.97 price

• Cost of production/cwt up 11%

• Milk price up 8.6%

Unpaid Family Labor and Management

• Families supplied 5641 hours for $5.92/hr

• At family living expense of $35,000, net farm revenue (without off-farm income) was -$1591

What is Profit:

• “Economic” profit is what is left over after all expenses, depreciation, and owner labor is paid.

• So the “Average” farm did not earn a “profit”– 19 farms with positive “profit”– Wide variation between farms– -0.33% Return on Equity

Profitability of Organic Dairy Farms (2005)

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Accrual Income ($000)

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Return on Equity of Organic Farms

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< -10% -10 to -6% -5% to -1% 0-5% 6-10% > 10%

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Income per Cow Down from 1999

1999 2004 2005

Revenue/cow $3248 $3648 $3600

Expenses/cow $2414 $3057 $3021

Net /cow $834 $590 $579

Farm Revenue $38,364 $28,114 $33,409

Organic Costs Up $607 Per Cow!

Per Cow 1999 2004 2005

Feed $966 $1003 $936

Fuel $58 $93 $72

Labor $133 $320 $332

Total costs $2414 $3057 $3021

Cost/cwt $18.20 $22.13 $24.58

Results: Organic Profits Up in 2005

• Net farm revenue still not at 1999 levels

• Milk price is up

• Income still not meeting family living

• 1999 – positive return on equity

• 2004 – negative return on equity

• 2005 – almost break even

Reasons for Organic

• 48% chose organic for higher profits– 30% stable milk prices– 9% ethical reasons

• Age: 52.6 years

• > 80% practice intensive grazing (<2 da)

• 41% Ship milk to Horizon

Satisfaction with Organic

• 85% Very satisfied

• 15% Satisfied

• None dissatisfied

• Observation - Many farms would not be in business without switching to Organic!

What Price Needed for Profit?

• Price to break even in 2005 - $25.15/cwt

• Price to earn 5% ROE - $28.42/cwt

• Many farms at that level right now.

How Does Organic Dairy Farm Profitability Compare to

Conventional?

• Compare to “Northeast Dairy Farm Summary 2005” published by Northeast Farm Credit, farms under 90 head

• Caution – Not “apples to apples”– 2004 was record milk price

– 2005 down but not rock bottom

Conventional farms higher production, lower milk price

for 2005

2005 Organic Conventional

Cows per farm 56 66

Average assets 630,410 839,190

Milk per cow 12,619 19,494

Milk price $24.94 $15.91

Milk marketed per farm

740,100 lbs 1,286,604

Comparing Profitability2005 Organic

(N=44)NEDFS (N=146)

Cows per farm 56 66

Net farm revenue $33,409 $28,842

Net revenue/cow $579 $437

Net revenue/cwt $4.17 $2.24

Are Costs any Different?

2005 Organic Conventional

Cost per cow $3021 $3052

Cost per cwt $24.58 $15.66

Purchased Feed per cow

$936 $789

Purchased Feed cost per cwt

$7.41 $4.05

Conventional vs. Organic - 2005

• Organic more profitable – farm, cow, and cwt basis

• Conventional milks more cows

• Reality:

– Conventional farm milks 10 more cows

– For $4,567 less net revenue!

View of 2005…

• Average organic farm profitability improved over 2004– Still large variability between farms

• More profitable than Conventional

• Still not as profitable as in 1999

So What’s the Story?

• 2005 income up but still not quite enough• Farmers still need more $$ for milk• Organic better than conventional in 2005

– More income per cow and cwt

– Smaller farms, fewer cows

– Limits demand for expanded facilities

– Some farms would not be in business!

More to Learn

• Study needs a bigger sample of organic farms

• Small farms can survive as organic but still face profit squeeze

• How high can organic milk price go?

• Growth of organic milk market?

• Change in grazing restrictions?

Any Questions??????

Thank You for your Coming!!!!!