Researcher: Higher Price for Organic Milk Doesn’t Lead to Bigger Profits

12/21/2013 7:00 AM
By Chris Torres Regional Editor

Is organic dairy farming the “road to riches” for the struggling dairy farmer? Based on the price organic dairy farmers get for their milk, you might say yes. But researcher Bob Parsons isn’t convinced.

“They have the same pressure to control costs, increase production and revenue. It doesn’t look like organic is the road to riches for the typical farmer,” Parsons said during a recent webinar on a study of the economics of organic dairy farming.

For the last eight years, Parsons, a professor of community development and applied economics at the University of Vermont, has led what he believes is the largest ongoing study of organic dairy farming in the U.S.

With funding from the USDA’s Agricultural Food Research Initiative, NOFA-VT, Organic Valley and farmers themselves, Parsons and other researchers have focused on the economic sustainability of organic dairy farming in Vermont.

The study began in 2004 with 30 dairy farms and since then has averaged around 34 farms a year, mostly in Vermont, although some years it’s included a handful of farms in Maine.

Participating farmers were paid a small stipend to participate in the study and, in return, they turned over tax forms, record books, balance sheets and other information to researchers to look through.

“There was always a lot of questions of how profitable are those organic dairies,” Parsons said. “No one really knew.”

He’s found the average gross revenue per farm during the study has held steady at around $250,000, although that number went up significantly in 2012 — $280,000 — due to higher milk prices.

But expenses have gone up, too, from an annual average of $200,000 in 2009 to $234,000 in 2012. The high cost of producing organic milk, he said, has for the most part left many farmers in the study with very little to show for their hard work.

“Our dairy farmers are not making that much money at this time period,” he said.

The price of organic milk has gone from $22.83 per hundredweight in 1999 to $33.39 in 2012 — the year of the study Parsons focused his webinar on. Milk production per cow has ranged from 12,500 pounds to 13,500 pounds, with some farms getting as much as 18,000 pounds of milk. The average herd size was around 60 cows, although some farms had more than 80 cows and some had less than 40 cows.

The average feed cost per cow increased from $1,200 per cow in 2009 to $1,442 in 2012, primarily due to the price of purchased grains. Feed costs made up the largest overall expense on each farm.

“Some raise their own grain, but not much. Most is purchased,” he said.

The high cost of producing organic milk, he said, had many farms struggling to make any net return from the farm. Parsons said nearly half of all farms in the 2012 study failed to even meet the $36,000 threshold to pay for family living expenses — a number he got from the Farm Credit Association’s 2012 Northeast Dairy Farm Summary.

“This represents a real challenge for any farm trying to operate. It shows there is not really a whole lot of profitability,” he said. Even though two farms netted more than $100,000, many are using their own equity to stay afloat. “To put this in another perspective, if you decide to stay at home and not work, you’d be a lot better off because you’re not losing money.”

Still, some farms did very well and based off information he collected, management looks to be one of the main factors.

Parsons took a closer look at the overall data, separating farms into low-, medium- and high-profit groups, to come up with what he believes are some key factors to improving profitability on organic dairies.

High-profit farms, he said, average more milk production per cow — 14,628 pounds — compared to medium-profit farms — 12,599 pounds — and even less for the low-profit farms. The farms that did better, he said, also got more money for milk components — many had Jersey cows or other crossbreeds that provided more high-value components — and they took advantage of quality bonuses, getting on average nearly $2 per hundredweight more than the lower-profit dairies.

These high-profit farms also purchased more feed, spending $400 to $500 more per cow for feed. They also spent more on repairs and supplies and labor costs were also higher, due to the fact that these higher-profit operations tended to be a little larger.

Even so, the average expense per cow — $4,214 — wasn’t that much higher than the lower-profit operations — $3,913 — or the mid-profit operations — $3,805.

A higher milk price coupled with better production and expenses that weren’t too high equated to higher net returns from the higher-profit farms, Parsons said.

“We have a group that is really doing quite well ... but the low group is really in some problems,” he said. “We’ve got some real things going on here that we’re trying to figure out.

“This is a business no matter how you want to think about,” he said.

But bigger doesn’t always mean better. Parsons said two dairies in particular — one with 43 cows and the other with 55 cows — have made money by minimizing expenses as much as possible, with both feeding an all-forage diet with no grain being purchased. Each farm has relatively low milk production — 8,707 pounds per cow on the one farm and 9,470 pounds on the other. Each farm was getting between $30 and $34 per hundredweight for their milk and the overall revenue per cow was $3,275 and $4,794. But neither was buying in grain, leading to a net revenue per cow of $986 for the one farm and $1,376 for the other. A good milk price coupled with very low feed costs equated to success for these two small dairies.

The economic sustainability of organic dairy farming, Parsons said, will be key if the industry hopes to grow into the future. Organic dairy farming has already grown significantly in Vermont, with only two organic dairies in 1993 to more than 200 today. Parsons said it’s the fastest growing segment of dairy in the state, comprising 22 percent of the 900 or so overall dairy farms in Vermont and 8 percent of overall milk production.

Based on interviews with farmers in the study, Parsons said 75 percent would be out of business if they hadn’t made the switch from conventional to organic farming. But he’s concerned there hasn’t been much turnover in farms to the next generation — the average age of an organic dairy farmer, he said, is around 55. Parsons said the relatively low income generated by organic dairies isn’t enough to support multiple families.

Just like any form of farming, Parsons said good management is the key to making it work.

“The ones that make money, they do very well,” he said. “The story of success isn’t from what you are producing, but management skills.

“Organic fits in very well with the dairy farms here in the Northeast, because of size,” he added. “Organic has a positive impact on the community, but the cost structure is difficult since the costs go up. Also, think about what will happen to organic milk. If the consumer balks at paying a higher price for organic, how will that impact the price a farmer gets?”

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