The Economics of Grass-Based Dairying


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The Economics of Grass-Based Dairying

  1. 1. THE ECONOMICS OF GRASS-BASED DAIRYING RASS BASED LIVESTOCK BUSINESS GUIDEBy Tim JohnsonNCAT Agriculture SpecialistMarch 2002IntroductionA grazing dairy herd iswonderful to watch  greenmeadows filled with cows,harvesting the sun’s energy inthe form of grass, turning it intomilk. Whereas the conventionaldairy emphasizes confinementfeeding, the grass-based dairyallows the animals themselvesto harvest as much of their feedas possible. Depending onlocation, this approach cansignificantly reduce theactivities and expenses ofcutting, storing, and feeding Table of Contents Introduction .............................................................................................................................................................. 1 The Economics of the Dairy Business ................................................................................................................... 2 Comparison of “Conventional” and Grass-based Dairies ................................................................................. 4 Land Requirements for Grazing Dairies .............................................................................................................. 6 Supplementation of Grazing Cattle ...................................................................................................................... 7 Seasonal Dairies ....................................................................................................................................................... 8 Labor .......................................................................................................................................................................... 9 Profitability ............................................................................................................................................................. 10 Other Profitability Factors .................................................................................................................................... 12 Summary ................................................................................................................................................................. 13 OTHER SOURCES OF INFORMATION .............................................................................................................................. 14 References ............................................................................................................................................................... 14ATTRA is the national sustainable agriculture information service operated by the National Centerfor Appropriate Technology under a grant from the Rural Business-Cooperative Service, U.S.Department of Agriculture. These organizations do not recommend or endorse products,companies, or individuals. ATTRA is headquartered in Fayetteville, Arkansas (P.O. Box 3657,Fayetteville, AR 72702), with offices in Butte, Montana and Davis, California.
  2. 2. harvested forages. The use of equipment will The Economics of the Dairythus become a forage-management issue ratherthan a need-to-produce-feed issue. BusinessGrazing can have other positive economic and The economic side of farming is too oftenevironmental effects, as well. For example, treated as an afterthought by many farmers. Inestablishment of permanent pasture minimizes fact, economics should be a top priority, fora farm’s loss of soil and nutrients to erosion without economic resources, the entireand runoff, and grazing animals deposit most operation will quickly grind to a halt. Mostof their manure directly on the pasture, thereby farmers see their main jobs as feeding, milking,reducing labor and capital expense of manure working with animals, and so on. While anyapplication. one of these tasks may be at the top of the list on any given day, the farmer’s primaryBecause they function differently from responsibility is to manage the overall businessconventional dairies, grazing dairies require of milk production. It is therefore incumbentsome different management skills. The grazing on the farmer as farm manager to understandmanager must be attuned to pasture ecology, the financial aspects of the business and howmainly through daily observation of animal management decisions influence the long-termperformance and forage growth. Good financial stability of the will require daily decisions abouthow to meet the needs of both the animals and While this document will attempt to cover thethe pasture at the same time. In some cases, a basics, it is in a manager’s best interest to seekgrazing dairy may decide to milk cows out local resources to assist with financialseasonally, creating periods when all the cows planning. In many cases, local Extensionare dried off, allowing time for other offices may have access to Extension farmmanagement activities during this period of management agents or be able to refer you tolow demand on the manager. other local experts. Banks that do business with farmers and others involved inFarmers contemplating a move from agriculture may also be able to help withconventional to grass-based dairying should financial analysis. Whether you are planning aseriously evaluate their goals, both transition to a grass-based dairy or startingprofessional and personal. Grazing will not from scratch, time spent putting a financialmagically solve the problems of a poorly plan together can give you a tremendousperforming conventional dairy; poor manage- amount of information, point out the keyment skills are not eliminated by simply management issues you need to focus on, andtransforming the business operation. Also provide insight on what may or may not beremember that farming is both your business possible given your goals.and your family’s lifestyle. A grazing dairy isjust one option for using your skills (and Financial Measureslearning new ones), achieving your businessgoals, and meeting your family’s needs. Many dairies focus on pounds of milk produced per cow to evaluate their success; others advocate basing the evaluation on unit COMPARED WITH DAIRY FARMERS WHO cost of production (UCOP). The argument for EMPLOY CONFINEMENT OPERATIONS, UCOP is that the margin on every unit of FARMERS WHO PRACTICE ROTATIONAL output will determine whether an operation is GRAZING WERE MORE LIKELY TO SAY THAT successful. Low-cost producers tend to endure THEIR FAMILY’S QUALITY OF LIFE HAD the swings in the marketplace more IMPROVED OVER THE PAST FIVE YEARS. successfully over the long term than higher- – FINDING FROM A UW-MADISON SURVEY cost producers. However, in some cases, ON ROTATIONAL GRAZING PRACTICES producers who look only at the UCOP figure to gauge their success may not be seeing thePAGE 2 //THE ECONOMICS OF GRASS-BASED DAIRYING
  3. 3. whole picture with regard to long-term Detailed financial information can be put tofinancial health. The cost of production is multiple uses by an astute manager.important in any business, but it must be put “Benchmarking” is one such use. Manyinto perspective since it does not address universities and financial service companiesincome generation. publish financial benchmarks related to theKriegl (1999) advocates “WE’RE IN THE BUSINESS OF performance of variousputting three factors into CONVERTING GRASS INTO MILK AND types of farms in a state orperspective when WITHOUT GOOD FINANCIAL RECORDS region. These can be usedevaluating the financial WE DON’T KNOW HOW WELL WE HAVE by farm managers assuccess of an operation: MANAGED THE BUSINESS OR THE standards to comparecontrol of investment or IMPACT OF ANY CHANGES THAT HAVE against their own farm’sdebt; control of operating BEEN PUT IN PLACE.” performance, to gaugeexpense; and income – GARY BURLEY, SEASONAL GRAZIER, their level of competi-generation. Successful tiveness within the NEW YORKmanagers strive to industry, and to set goalsoptimize the relationships for the next year. Detailedamong these three items. Kreigl also concludes financial information will also help inthat graziers tend to over-focus on cost control arranging loans and other financial agreementsand investment, while non-graziers tend to  for instance, in demonstrating to lendersover-focus on income generation (Kreigl, that the farm has assets available to attach as2001b). While no single number will ever tell collateral. Many managers find that detailedthe whole financial picture, the one figure that financial analysis can also supply a history ofconveys the most information about an the operation, reveal what the results of changeoperation’s financial performance is the rate of have been, and show how wealth hasreturn on farm assets (ROA). ROA accumulated or eroded.summarizes Kreigl’s three factors into onestand-alone figure that can be used to assess To provide the variety of information neededfarm financial performance. for good decision-making, more than the checkbook balance and the schedule F areRate of return on assets measures the extent to required. The farm manager who conducts anwhich the farm generates a profit from its use annual inventory of assets, and maintains aof land, labor, management, and capital. The complete record of cash activity during themanager wants an ROA that exceeds the year, is a long way down the road towardlending rates on the assets. Ultimately, ROA meaningful financial analysis. While financialshould be taken together with other financial records may seem intimidating, realize thatdata to better understand the farming assistance is available, in many cases locallyoperation and explain how the year went from the Extension Service or Farm Creditfinancially. By looking at detailed financial agencies. Farm managers should also becomereports at least yearly, managers can get a acquainted with the key financial measures asbetter notion of where things are headed, see cited by the Farm Financial Standards Council.where improvements should be implemented, Some of the important financial measures willand monitor the results of their efforts. It is be briefly discussed in this text; however, for amore productive to make informed decisions better understanding, other sources ofover time than to make uninformed decisions information should be sought an instant. Ultimately, the farm managershould be able to not only remember therolling herd average and point out the top-performing cow, but also know the costs toproduce a hundredweight of milk, theoperating profit margin, and the rate of returnon equity. //THE ECONOMICS OF GRASS-BASED DAIRYING PAGE 3
  4. 4. Comparison of “Conventional” In comparing grass-based and conventional dairy farms, Kriegl (2001a) found that graziersand Grass-based Dairies fit into two groups. Non-transitionalIn many ways, grass-based dairy operations operations were set up from the beginning asare similar to conventional ones. Cows must low-capital grazing dairies, while transitionalstill be milked, bred, and calved; and or high-capital grazing operations had enoughstockmanship is still the most critical buildings, equipment, and land to farmcomponent in the system. Researchers recently conventionally (and in some cases hadsurveyed Wisconsin dairy operations (Ostrum operated as conventional farms at some point).and Smith, 2000), including those using Between these two grazing groups, the non-management-intensive rotational grazing transitional graziers owned and harvested(MIRG), where cows are moved to new fewer acres, rented more ground dedicated topastures at least once a week; those using non- pasture forages, and were less likely to growintensive grazing, where cows are moved less grain or harvest forage mechanically. The non-frequently; and confinement operations, where transitional and transitional graziers harvestedall forages are brought to the cows. They 3.3 and 2.34 forage acres per cow, respectively,found that MIRG operations required nearly in 1998, with most operations purchasing somethe same amount of labor per cow milked as if not all of their grain. The non-transitionalconfinement operations: 3.03 and 2.87 hours/ graziers employed a larger proportion of the land (four times more) for pasture and milked 26% fewer cows than did the transitional A UW-MADISON SURVEY HAS SHOWN graziers. In terms of net farm income from THAT ABOUT 23 PERCENT OF WISCONSIN’S operations per cow (NFIFO/cow)  a measure DAIRY FARMERS USED MANAGEMENT- to compare financial performance between INTENSIVE ROTATIONAL GRAZING IN 2000, businesses of different sizes, which includes MORE THAN TRIPLE THE 7 PERCENT THAT income minus all cash expenses, interest, USED ROTATIONAL GRAZING IN 1993. depreciation, and hired labor costs  non- transitional graziers had higher NFIFO/cow in 1995 and 1998, but not in 1996 and 1997. In allcow, respectively. The real difference in labor four years studied, the NFIFO/cow for bothbetween the two types of operations was in the types of grazing operations was higher than foramount of non-family labor used per week, conventional dairy operations in Wisconsin.with the confinement operations using 30.2 The NFIFO/cow was found to vary widelyhours per week, versus only 5.0 hours per across all types of grazing operations, from aweek for the MIRG operations. low of - $460 to a high of $2,973.Looking at the use of technology among the Non-transitional graziers had the lowestthree groups, it appears that the MIRG group investment/cow costs when compared toutilized less technology to maximize output  either transitional graziers or conventionaltechnologies such as regular veterinary service,production testing, total mixed rations (TMR), dairies, while transitional graziers andrBST, and milking parlors. However, when conventional dairies were similar inadjusted for size of operation, MIRG operations investment/cow. Kreigl also reported thatwere using these technologies at the same level during the four years, non-transitional graziersor higher than their contemporaries. The had lower debt per cow than either of the otherMIRG operations differed most significantly in two types of farms. In terms of the basic costtheir lower rate of TMR use  because of the per hundredweight (cwt) equivalent of milklarger contribution made by pasture to the feed sold  the sum of all cash and non-cash costsrequirements  and their greater use of except interest, depreciation, labor, andmilking parlors compared to other dairies of management  graziers that were non-their size, reflecting a selective use of tech- seasonal, used DHI, or were transitional,nology to improve profitability. tended to have lower basic costs than theirPAGE 4 //THE ECONOMICS OF GRASS-BASED DAIRYING
  5. 5. • A “traditional, small Wisconsin dairy farm” “TRANSITION WAS FORCED UPON US AFTER with average or better management has a 1994 THAT A BARN FIRE IN THE FALL OF good chance of improving its financial performance by the judicious adoption of DESTROYED ALL OUR STORED FORAGE, SO an MIRG system. WE PLANTED COOL-SEASON GRASSES AND STARTED GRAZING; THE COWS MILKED WELL • The graziers who are most successful AND LOOKED IN BETTER CONDITION, SO WE financially are those who focus on JUST STUCK WITH IT.” optimizing the three factors of profit: – DON MAYER, DAIRY GRAZIER, ARKANSAS income generation, operating expense control, and investment control.opposites in the study. Only the seasonal, non- • Wisconsin graziers tend to emphasizetransitional, non-DHI group had higher basic operating cost and investment control outcosts than conventional operations. Kreiglconcluded that graziers with higher NFIFO/ of proportion with income generation, justcow also had lower basic costs per cwt as traditional Wisconsin dairy farmers tendequivalent of milk sold. This study suggests to emphasize income generation out ofthat there is more to controlling operating costs proportion with operating cost andthan just not spending money; what money is investment control. Spending moneyspent on is more important than how much is carefully helps profitability more thanspent. simply not spending.The Kriegl survey also looked at two “low- • Low input is not the same as low cost perinput” practices among graziers: seasonal unit of output. Graziers with the lowestcalving and non-use of DHI. These two cost per cwt of milk sold used largepractices are often promoted as ways of quantities of inputs such as fertilizer andimproving profitability because of their low- grain as long as the income they generatedinput nature. Among the non-transitional from those inputs was greater than the cost.farms, those that used DHI, were not fullyseasonal, and were not certified organic, had a • Only one seasonal herd in the studyhigher NFIFO/cow than the graziers who generated enough income in all five yearsfollowed the low-input practices. The four- to provide a sufficient living for a typicalyear averages revealed that NFIFO/cow nearly Wisconsin dairy family. That particulardoubled when either one of these low-input seasonal herd had about twice as manypractices was not utilized. The same trends cows as some of the non-seasonal herdswere seen among transitional graziers, that generated as many or more dollars.although the differences were not as large.Kriegl concluded that the graziers in the study • There is no single measurement that tellsusing at least one of the two low-input enough about a business that a managerstrategies were less competitive. could use it alone to make important decisions or comparisons withoutSome other general conclusions from this additional information.Wisconsin study were: Nott et al. (2000) reported on a Finpack • MIRG operations are economically financial analysis of a subset of 15 grazing competitive with conventional Wisconsin dairies in Wisconsin and Michigan that ranged dairy farms. in size from 23 to 60 cows. When the farms were divided into groups based on farm • MIRG is not a reduced-management income, the average milk production for farms system; it is a different-management in the lower 40 percent was 13,341 lbs per cow, system. while milk production for farms in the higher //THE ECONOMICS OF GRASS-BASED DAIRYING PAGE 5
  6. 6. 40 percent was 17,306 lbs per cow. This producing milk per cwt, and the total cost ofresulted in a large difference in gross cash farm production per cwt, was slightly more than $3income between the two groups. However, the per cwt higher for the below-average expenses per cow were lower for the Operating costs per cwt were $11.64 and $8.59,higher-producing herds. The average cash while total cost of production per cwt wasexpense per cow of the lower 40-percent group $17.23 and $13.71 for below- and above-and the higher 40-percent group were $1815/ average farms, respectively.cow and $1511/cow, respectively. This givesfurther support to our previous conclusion that Another case study (Winsten, 2000) evaluatingit’s not how much one spends but how it is six dairy farms utilizing seasonal calving andspent that may make the difference. management-intensive grazing, concluded that a dairy herd of 75 to 150 cows on 100 to 300If we compare the smaller grazing herds from acres could be economically viable andthe previous study by Nott to all Michigan operated with minimal labor.dairies of between 20 and 75.9 cows (Nott,2000) in 1999, we find that with regard to Land Requirements for Grazing Dairiescapital assets, grazing dairies tend to havemore invested in machinery and equipment, Most graziers will continue to harvest somebuildings, and other capital assets on a per-cow forage, either from excess pasture productionbasis than do conventional dairies. The higher or from traditional hay crop operations. Thelevel of capital investment for the grazing harvest from excess pasture production can bedairies in this study may be the result of utilized as supplemental feed or when pastureconventional dairy operations switching to is unavailable. Kriegl (2001a), in the survey ofgrazing, and not because grazing dairies Wisconsin graziers, reported that the majorityrequire a higher capital investment than of farms harvested 2.74 acres of forage per cow.conventional dairies of the same size. The only In Michigan, Nott (2000) reported that on 11category where conventional small dairies intensively grazed dairies, the average acreagehave a higher capital investment per cow is in used for cropping and forage production wasbreeding livestock. If we evaluate the financial 3.9 acres per cow. New York researchersefficiency ratios for these same two groups, (Conneman, 2001) found little differencehowever, the graziers hold an edge in every between more profitable and less profitablecategory. The grazing dairies have a higher grazing dairy farms with regard to the numberasset turnover rate and net farm income ratio, of acres per cow. Both utilized approximatelywhile also having a lower operating expense 2.55 tillable acres per cow and 1.57 forage acresratio, lower depreciation expense ratio, and per cow.lower interest expense ratio, compared toconventional farms of similar size in 1999. On the six farms that Winsten (2000) surveyed, average crop and pasture acres ranged fromIn New York, Conneman et al. (2001) found 1.77 to 4.2 per cow-in-milk. On three of thethat in 2000, the average net farm income per farms that had less than 3 acres per cow-in-cow without appreciation averaged $450. milk, milk production was depressed,When 30 intensive-grazing dairy farms were compared to farms with 3 or more acres perdivided into 17 above-average and 13 below- cow-in-milk. Using simple averages, milkaverage farms, based on net farm income per production was 3,667 pounds less per cowcow without appreciation, there were large when a farm had less than 3 acres per cow-in-differences for several standard measures of milk of crop and pasture ground available fordairy production. The above-average farms forage production. While purchased feedproduced 4,267 pounds more milk sold per could be used to make up the difference incow (19,075 and 14,808 pounds of milk sold per milk production, the six farms surveyed all hadcow for above-average and below-average purchased-feed costs per cow-in-milk thatfarms, respectively). The operating cost of were very similar, despite large differences inPAGE 6 //THE ECONOMICS OF GRASS-BASED DAIRYING
  7. 7. milk production. Therefore, we might of ½ to 1½ pounds of milk for every pound ofconclude that the foraging ability of the cow grain fed, with 1 pound of milk per pound ofand the access to this forage are critical grain the average response. The response iscomponents of milk production. greatest with the first 5 to 10 pounds of supplemental feed and diminishes beyondSupplementation of Grazing Cattle that.Researchers at the University of Vermont have The need for additional energy in a dairy cow’sfound that when pasture is well managed, diet is related to the non-fiber carbohydratecows can consume up to 3 percent of their (NFC) content of forages typically found inbody weight in forage dry matter per day pastures. The NFC in pasture forage is(Anon., 1996). In most cases, maximizing milk typically low: between 15 and 20 percent on aproduction from forage requires some dry matter basis. High-producing cows needsupplementation with grain to provide a better about 35 percent NFC. With the NFC contentbalance of protein and energy. At the of grains being relatively high (50−70%), theSouthwest Center of the Missouri Agricultural amount of grain fed to cows in a pasture-basedExperiment Station, grain system can have a positive long-term effect onsupplementation is adjusted overall energy balance, milkto match forage availability production, reproduction,(Anon., 2001a). When forage “IN 2000, WE EXPERIMENTED AND body weight, and of high quality, the REMOVED ALL SUPPLEMENTALsupplement is mainly corn GRAIN; CONCEPTION RATES The message is that as longand soy hulls plus minerals; SLIPPED 10%, BODY CONDITION as the financial margins onas summer approaches and DETERIORATED, AND OVERALL supplemental grain feedingforage quality declines, COW HEALTH WAS POORER; SO IN are positive, there aresoybean meal is added to the 2001, WE PUT SUPPLEMENT BACK additional gains to be madesupplement. Grain is fed at by feeding supplements to IN THE RATION.”a maximum rate of 16 high-producing cows. In a – GARY BURLEY, DAIRYMAN,pounds per head per day. technical bulletin for Irish NEW YORK graziers, Peyraud (2001)The cost of supplementalfeed and hay at the reported that a summary ofSouthwest Center is $3.92 grazing supplementationper cwt milk, or $561 per cow per year. research indicated that, above 33 pounds of milk, cows grazing on pasture were able toA research review by Muller (1997), reported produce only 65 percent of expected milk yield.that in several cases in Wisconsin and The difference between expected and actualPennsylvania, unsupplemented cows had milk production indicated that there was alower milk production and lost body condition shortfall in energy input from forage alone towhen compared to supplemented cows. In meet the milk production requirements.both cases, cows consumed over three percentof their body weight in forage dry matter. The same review reported that research sinceNew Zealand studies from the same review 1990 has shown a large positive response toreported that intake from high-quality pastures supplementation, probably because of themay provide sufficient nutrients to maintain 35 increasing genetic merit of the cow for milkto 50 pounds of milk daily with no production. When feeding supplements, besupplemental energy. In most situations, aware that they can have an effect on milkenergy is the most limiting nutritional components. Generally, as milk yield risescomponent for profitable milk production and with increased supplementation, proteinnormal reproductive performance when using content will also rise, and milk fat will decline;pasture as the main source of forage. Research however, the response is variable. In a studyhas demonstrated milk production responses of 76 New York grazing dairies, Grace (1998) //THE ECONOMICS OF GRASS-BASED DAIRYING PAGE 7
  8. 8. reported that the more-profitable operations rising through the summer, and peakingfed more supplemental grain than the less- during the winter. Having the dry period andprofitable ones. The more-profitable no milk sales at a time of year when prices areoperations fed an average of 17.4 pounds of highest could have a significant negativegrain, while the less-profitable ones fed an impact on overall income.average of only 12.6 pounds of grain. Seasonal production exaggerates seasonal milkSeasonal Dairies price fluctuations. The low milk prices characteristic of spring must be offset byIn some cases, graziers will manage the herd so substantially reducing the cost of productionthat all the cows are dry at the same time, by producing more milk on the cheapest feedtypically for a short, two-month period when possible, mainly the lush spring growth ofpastures are limited or when supplemental pasture forages (Miller, 1994). In an analysis offeeding would be prohibitively costly for seasonal milk prices in Virginia, Groover (2000)lactating cows. The challenge with a seasonal reported that the net difference betweenoperation is getting cows to calve at about the seasonal production and year-roundsame time, in a relatively narrow calving production would be only $756 or about 1interval so that they are dry over the same percent of gross milk sales based on 1987 toperiod each year. It also means selling 1997 prices. However, this study assumed thatproductive cows that do not conform to calving milk production per cow was similar for bothperiod. A seasonal calving approach may conventional and seasonal dairies. Theincrease the number of cull cows compared to seasonal dairy produced milk for only tena year-round milking operation. Selling months, with a definite peak in total herd milkfunctional milk cows may generate more production in May; while the conventionalincome than selling a cull cow for beef, but the herd had production levels that varied littleloss of a capital asset can have a negative throughout the year. Therefore, the low-priceimpact on the bottom line. This is especially months were compensated for with increasedtrue if there is not another cow available to volumes of milk, to help offset potentialreplace her milk production, or if considerable income loss during the two months of the yearresources have been put into developing the with no milk production. Since the studymilk cow, only to have someone else harvest compared conventional dairy operations, if onethe return. Winsten and Petrucci (2000), in a were to add the lower production levelsstudy of 6 seasonal dairies, reported that culls associated with grazing into the mix, this smallfor beef ranged from 10 to 20 percent per farm, difference might grow to be quite large. Thewith an additional 10 to 20 percent of cows Groover study looked only at the impact ofbeing culled for reasons related to the seasonal milk prices on conventionally operated,calving period on the farms. seasonal dairies. When Kriegl (2001a) evaluated a subset of graziers in Wisconsin,Because the goal of seasonality is to maximize only one of the fully seasonal farms generatedproduction from pasture forages, it is essential enough income to satisfy family living in eachthat the dry period coincide with the time of of the five years evaluated.year when pastures are typically poorest. Insome areas of the U.S., the best time to dry the There are some other issues to consider whencows off may be winter; in others, it may be the evaluating a seasonal operation. The dailymiddle of the summer. The seasonal grazier workload can change drastically. When cowsshould also attempt to match the period of are dry, the daily labor requirement is low, butmaximum forage production with the period of during calving season, the labor demand canmaximum milk production, since to produce more than triple. Not only will calving requiremilk you need ample amounts of forage. attention, but milk output will also increase,Remember too that milk prices follow a and shortly thereafter, milk production willseasonal pattern, being lower in the spring, peak. This peak may require additionalPAGE 8 //THE ECONOMICS OF GRASS-BASED DAIRYING
  9. 9. storage capacity beyond what an average farm hours of labor per week by non-familywith stable, year-round milk production would workers. However, when the data wererequire. Some capital assets, such as calf corrected for farm size and evaluated based onrearing facilities, will be used only for a short labor hours per cow, the grazing dairies usedperiod, but must be large to accommodate all slightly more labor than the conventionalthe calves at once. Finally, as discussed earlier, dairies, at 3.03 and 2.87 hours per cow perwith seasonal production come seasonal milk week, respectively. This trend of more hourschecks. Will the farm’s cash flow survive the per cow milked, but fewer overall hours andperiods of the year with no milk check? This less non-family labor, also held true for grazingalone warrants analysis to determine whether dairies in a similar 1994 survey report byseasonal production is viable for you. While Jackson-Smith et al. (1996).many consider seasonal dairying a low-inputtechnique, because it requires less harvested In a 1999 comparison of conventional andforage with the herd being dry during most of grazing dairies in Michigan, however, thethe non-grazing season, there are many trend was reversed with regard to hoursimportant points that must be considered worked per cow (Nott, 2000). When farms ofbefore making such a major management similar size were compared, conventionalchange. The conclusion about seasonal dairy farms averaging 98.5 cows per farm and theoperations is that one should carefully consider grazing dairies with 94.4 cows per farm, theall the ramifications of making such a annual labor hours per cow were 83.9 and 75.8,transition. While there are many positives, respectively. Of interest in this report is thatsuch as changing work demands and the when the grazing group was divided in half byopportunity for a vacation, there may also be net farm income, the lower-income groupsome negatives, such as averaged 91.2 hours per cow annually, whereasreduced cash flow during the higher-income groupthe dry months, and IN CONVERSATION WITH GRAZING averaged only 69.3 hoursunder-utilization of capital DAIRY PRODUCERS, ALMOST ALL per cow annually. Theassets. As stated STATED THAT THEY ENJOYED THE average herd size almostpreviously by Kreigl LIFESTYLE, THE TYPE OF MANAGEMENT, tripled between the two(2001a), NFIFO/cow groups, with the lower- AND THE LOWER STRESS LEVEL THATnearly doubled when income group having an CAME WITH GRAZING, AND WOULDgraziers did not use average herd of just 56.8 NEVER RETURN TO A CONVENTIONAL cows, versus the higher-seasonal production in DAIRY OPERATION. income group milking anWisconsin during the five-year period studied. average herd of 132 cows. Even graziers have taken advantage of theLabor economics of scale, realizing that, in certain situations, it takes the same amount of time toGrazing has often been touted as requiring complete certain tasks no matter how manymuch less labor than conventional dairying. In cows one has.some cases, this may be true, but in manycases, the labor hours worked by managers and Certainly there is a lot of discussion about theother family members may not be drastically labor savings possible with grazing operations.different. Ostrum and Jackson-Smith (2000) However, in the limited number of reportsreported in a 1993 survey of Wisconsin dairy available with documented evidence, theoperations that labor on grazing dairies number of hours worked by various types ofaveraged 102 hours per week, compared to dairy operations, based on size, indicates thatconventional dairy labor forces that worked there are no tremendous labor savings, at leastmore than 148 hours per week. The grazing not for the owner/operator. The savings inoperations reported an average of five hours labor for graziers seems to come from theper week of non-family labor, whereas reduced need for hired labor to assist withconventional dairies reported more than 30 mechanical harvest of forages and the feeding //THE ECONOMICS OF GRASS-BASED DAIRYING PAGE 9
  10. 10. of cows. However, this reduction in hired If we compare NFIFO per cwt of milklabor does not necessarily mean a reduction in equivalent during the five years, graziers hadoverall labor or labor costs. Kriegl (2001b) the lead each year, with advantages rangingreported on labor costs per cwt of milk  from $1.36 to $1.94. Some of the largeincluding non-dependant, unpaid, manage- differences in basic cash expenses between thement, and other family labor  for five years in two groups were related to chemicals, seedsthe Wisconsin dairies he studied, and he found and plants, and veterinary fees. In all threethat graziers had higher costs than conven- categories, graziers had less expense, in parttional dairies. In one year the difference was as because they used grazing resources more thanlittle as $0.15 per cwt of milk produced, in harvested forages to produce milk. However,another it was as much as $0.78 per cwt of when comparing feed purchase costs per cwtmilk. During the five years, 1995 to 1999, of milk equivalent, graziers lost some groundgraziers’ labor costs exceeded conventional and had higher costs for this item than theirdairies’ by an average of $0.57 per cwt of milk. conventional counterparts.In New York, total labor costs were $3.78 percwt of milk sold. Hired labor accounts for$1.28 per cwt and the remainder for unpaid In two other reports that use financialfamily labor and management (Conneman et measures to compare similar-size grazing andal., 2001). To milk an average of 93 cows, these conventional dairies in Michigan, both by Nottsame farms had an average of 2.76 workers per (2000), graziers again had less total cashfarm, of which 1.35 was the operator/manager. expenditure for seed, chemicals, and veterinary services, and slightly greater cash expenses for purchased feed. The grazing operations in “THE DAILY CHALLENGE OF MANAGING A Michigan, while not a random group, do offer GRAZING SYSTEM, THE COWS, THE FORAGES, some interesting observations. While having THE PEOPLE, IS WHAT MAKES THE JOB SO financial ratios competitive with conventional ENJOYABLE. I DON’T MISS THE MONOTONY farms in regard to return on assets, operating OF A CONVENTIONAL DAIRY AT ALL.” profit margin, and asset turnover, the grazing farms also had similar levels of total farm – TOM ORMOND, DAIRYMAN, NEW YORK liability. However, the total assets for the grazing operations were less than half those of the conventional farms. Longevity of theProfitability business, transitional phase, and pre-existing debt could all be contributing factors to thisThe need for good financial management large difference. What is most evident is thatcannot be stressed enough, and the ability to great variation exists among operations. Whensee and evaluate the farm’s economic situation operations are sorted according to net farmis vital to good management. Several reports income, there are large differences even withinhave documented the financial success of types of operations for most of the importantgrazing operations. In a five-year financial financial benchmarks. Again, this lendscomparison, Kreigl (2001b) found that graziers evidence that management, and howoutpaced conventional farms in Wisconsin allfive years in terms of net farm income from management uses available resources, can haveoperations per cow (NFIFO/cow). This same a large impact on farm performance andfive-year study found that graziers had less ultimately on profitability.investment per cow and lower debt per cow,when compared to conventional dairy farms. Earlier, return on assets (ROA) was proposedOn average, most graziers also produced less as a critical measure if one were to look only atmilk per cow, but some grazing operations a single number to evaluate an operation, butwere at the same level of milk production as there are other measures that can be used fortheir conventional counterparts, thereby daily decision making. Income per cow is onedispelling the myth that you cannot get cows such figure; it has been proposed by Sipiorskito produce milk on grass. (1998) to be the number-one financial indicatorPAGE 10 //THE ECONOMICS OF GRASS-BASED DAIRYING
  11. 11. for dairy managers. On most operations, milk Michigan results from 1999 had ratios of 67.6is 85 percent of income, and a profitable goal is percent and 63.1 percent for grazing operations$3000 of milk sales per cow per year. In and conventional farms, respectively (Nott,Wisconsin (Kriegl, 2001a), graziers had cash 2000). In Conneman’s review (2001) on Newincome per cow ranging from a high of $4061 York dairies, similar values can be a low of $913. What was interesting in this When evaluating 17 above–average farms, thestudy is that the high-capital producers operating expense ratio was 67%, while the 13generated approximately $600 more income below–average farms had levels at 81%.per cow in each of the four years of the study,than did to the low-capital farms. In Another key is the current ratio. This numberevaluating six seasonal dairies across the is important in evaluating the ability of thecountry, Winsten and Petrucci (2000) found business to cover short-term cash flow. Farmsthat net farm income per cow was generally would like to have $2 of current assets to coverless than $1000 per cow per year, with $600 to every $1 in current liabilities, including current$700 being the average. When comparing portions of intermediate and long-term debt.pasture-based and conventional dairies in The larger this number the better, withinMissouri in 1998, Hamilton et al. (2000) reason. Ideally, any number above two is whatreported $2265 and $2411 total income per most lenders and financial consultantscow, respectively. The pasture-based consider a strong position. Grazing operationsoperations, while generating less income, also in Michigan had current ratios of 1.70 for thehad fewer expenses per cow and were entire group; however, the producers withtherefore able to generate a higher operating higher net farm incomes had current ratios ofmargin per cow. In New York (Conneman et 1.92, while farms with lower net farm incomesal., 2001), on intensive grazing dairies, net farm had a current ratio of 1.30 (Nott, 2000). Theincome per cow without appreciation averaged lower ratio indicates that some of these farms$310 on 65 farms. On these same New Yorkfarms, there was a trend toward net farm may have difficulty keeping short-term cashincome per cow increasing with increased flow current. The same scenario was repeatedlevels of milk production. in New York dairies (Conneman et al., 2001), with above-average farms increasing theirThe next key financial indicator that Sipiorski current ratio from 1.47 in 1999 to 1.69 in 2000.proposes is the operating expense ratio—the The below-average farms decreased theirtotal production cost, minus depreciation and current ratios; in fact, the ratio on these farmsinterest, divided by gross income. This slipped below 1.0, indicating a potential cashnumber should be between 60 and 70 percent. flow problem in the near future. FARMERS REPLY TO THE QUESTION: “WHAT FINANCIAL NUMBERS DO YOU CONSIDER THE MOST IMPORTANT TO YOUR OPERATION?” BILL PATTERSON, VA – “THE TWO NUMBERS WE LOOK AT THE MOST ARE TOTAL NET FARM INCOME AND THE INCOME-EXPENSE RATIO.” DON MAYER, AR – “NET RETURN AND NET INCOME PER COW, WITH A TARGET OF $750 NET INCOME PER COW.” GARY BURLEY, NY – “RETURN ON EQUITY AND COST OF PRODUCTION PER CWT OF MILK.” DAVE FORGEY, IN – “NET FARM INCOME IS IMPORTANT BUT WE LOOK CLOSELY AT ROA AND IN 2000 THAT NUMBER WAS 11.32%.” //THE ECONOMICS OF GRASS-BASED DAIRYING PAGE 11
  12. 12. One financial figure that most dairymenprobably know off the tops of their heads is the “I THINK THAT ONE OF THE IMPORTANTprice received per cwt of milk. The challenge is THINGS ABOUT ROTATIONAL GRAZING ISto know what the cost of producing that cwt of THAT EVERY DAY OF THE GRAZING SEASONmilk really is, so that on a daily basis we can YOU SHOULD BE TURNING A COW INTO Amake decisions to ensure a positive margin PASTURE THAT’S ABOUT 8 INCHES TALL, OFbetween the two. The calculation of this CONSISTENT, HIGH DENSITY, SO THAT EVERYnumber is more than simply the cash expenses MOUTHFUL THAT COW TAKES EVERY DAY OFdivided by the total cwts of milk produced.The expenses must be adjusted for accounts HER LIFE IS THE SAME. YOU SAY, ‘WELL,payable, prepaid expenses, family living costs, HOW DO I DO THAT? GRASS IS GROWINGtaxes, and depreciation. Then other farm ALL THE TIME.’ AND THAT’S THE MANAGE-income items, such as cull cows, inventory MENT STRATEGY OF ROTATIONAL GRAZING.adjustments, valuation adjustments, and YOU NEED TO SET UP A ROTATION EARLY INgovernment payments must be subtracted to THE SEASON, TO WHERE EVERY PADDOCK ISget adjusted expenses. The adjusted expenses MATURING AT A DIFFERENT DAY.”can then be divided by the cwts of milk -DAVE FORGEY, GRAZING DAIRY FARMER,produced to get a true cost of production.Obviously, the lower the number the better. INDIANADebt per cow is another important The most interesting point in this report is theconsideration; it has been suggested that debt impact of water availability on milk productionper cow be no greater than $3000 per cow and profitability. Sixty-seven percent of the(Sipiorski, 1998). In Michigan, graziers more-profitable farms had water available inreported an average debt per cow of $2308 in every paddock, versus only 22 percent of the1999 (Nott, 2000), while in Wisconsin, graziers less-profitable farms. The two-thirds of high-reported $1964 debt per cow in the same year profit farms that offered water in every(Kreigl, 2001a). New York graziers had an paddock produced 3,000 more pounds of milkaverage $2149 debt per cow on 65 dairies in than high-profit farms that didn’t offer water,2000, with a subset of 17 above–average farms resulting in $246 more net farm income perhaving lower debt per cow of $1475, and 13 cow, and lower operating cost per cwt milk.below–average farms had a higher debt per The difference between the high-profit farmscow of $2341 (Conneman et al., 2001). offering water and low-profit farms not offering water was even greater for the sameOther Profitability Factors criteria. High-profit herds with water, produced about 5,500 pounds more milk, had aSome others items that have been found to positive net farm income per cow, andenhance profitability, or at least differ on produced milk for $4.69 less per cwt, while themore–profitable versus less–profitable grazingdairies, is the availability of water. In addition, low-profit, no-water herds had a loss of $174Jim Grace (1998) found that among New York per cow. Among the more-profitable farms,graziers, farms that were more profitable those that rotated cows onto fresh pasture afterproduced over 4,000 pounds more milk, with each milking produced 4,000 pounds morean operating cost per cwt of almost $4 less. milk per cow than those that rotated onto freshThis resulted in a net farm income per cow that pasture only once a day.was $870 different, $729 and negative $141 forhigh-profit dairies versus low-profit dairies, Earlier discussion pointed out the importancerespectively. More grain was fed to the high- of ROA as a financial indicator. In aprofit herds versus the low-profit herds. In comparison of correlations between ROA andaddition, more pasture had been reseeded in other components of profitability, correlationsthe past ten years for the high-profit herds were higher for measures related to incomeversus the low-profit herds. generation than for measures related to eitherPAGE 12 //THE ECONOMICS OF GRASS-BASED DAIRYING
  13. 13. operation cost control or investment/debt weather, all year long. If the farm manager iscontrol in Wisconsin grazing operations. The going to be competitive, meet obligations tostudy concluded that the inability to generate creditors, raise a family, and have opportunityincome caused more of the difference in to enjoy the effort invested, sound financialprofitability between the most– and least– management is critical.profitable graziers than did considerations ofoperating cost control or control ofinvestment/debt (Kreigl, 1999). “WE CONCENTRATE ON BEING EFFECTIVE VERSUS EFFICIENT, AND IF WE’RE DOING ITWhile none of these indicators alone will RIGHT, 100 COWS IS ONLY PART TIME.”guarantee success or failure, when taken – BRUCE RIVINGTON, DAIRY GRAZIER, NEWcollectively they can help managers to assess YORKaccurately the direction the business is headed,and thereby make better decisions regardingfuture directions and emphases. To emphasize a point made earlier: several studies have found that the “lowest cost”Summary producer is not necessarily the most profitable. The farms that generated higher returns withIn the dairy business, management skill is the dollars invested—in other words, thosewhat will ultimately decide the outcome. That with the greatest financial efficiency— tended toskill requires a keen sense of biology, attention make the most profit. Rather than cutting allto accounting, and analytical prowess to get expenses, focus on cutting the right expenses.the result that was planned. The grazing dairy Cadwallander (1998) found that the top thirdmanager requires no less skill simply because of grazing dairies, based on net farm income,the farm may not have the latest line of 4WD had higher expenses for feed than the bottomtractors or the largest combine. Graziers have third, but spent less on interest. The top thirdto do the same daily balancing act that occurs shipped more milk, got a higher price per cwt,on most farms  after all, when dealing with a and had lower cash expenses per cwt than thebiological system, everything is subject to bottom third of farms. The most importantchange. feature was that profitability was enhanced by putting emphasis on milk. Debt can go down and net worth can increase as long as money is “THE CRITICAL FACTORS OF OUR SUCCESS put into things that have a direct impact on ARE PLANNING AHEAD, STAYING FOCUSED, making milk. AND CONTINUALLY SEEKING OUT EDUCATIONAL OPPORTUNITIES TO LEARN As stated earlier, no single number can tell you NEW THINGS.” everything, and no single production practice – GARY BURLEY, DAIRYMAN GRAZING 400 can guarantee positive results. Rather, the intelligent use of the various tools available is COWS SEASONALLY, NEW YORK what determines the overall success or failure of the system. Operating a grazing dairy isHaving an understanding of accounting, or only one means to an end, but if you want toworking with someone trustworthy who be successful, financial management is not onlyknows cash accounting very well, can be of a tool to have in the box, it’s a tool that needsgreat assistance to the grazier. Successful farm to be used.managers need a keen understanding of thefarm’s finances to ensure that the farm The management of grass-based dairyprospers. The job of managing a dairy operations is different from that ofoperation is no different from running a retail conventional dairies. Grazing should not beor manufacturing business, except that the considered as an option to make up for poorwork goes on every day, in all types of management of a conventional dairy. Relative //THE ECONOMICS OF GRASS-BASED DAIRYING PAGE 13
  14. 14. to time spent managing conventional row Business Management Concepts: http://www.crops, graziers spend more of their time and managing grass. While manysuccessful graziers do grow corn silage andother crops for harvest or feed when pasture Referencesmay be unavailable or limited, their focus isstill on maximizing forage production for Anon. 1996. Harness Pasture Power.harvest by cows. Grazing managers spend more Sustainable Agriculture Network.time observing and planning the next step to Profitable Dairy Options.take than do many conventional dairymanagers, whose time is spent primarily on Anon. 2001a. Southwest Center Dairy – Moreoperating machinery, making repairs, and on Seasonality. Southwest Centerfeeding cows. Most graziers, as their Ruminations. Vol. 7, No. 3.experience and knowledge of the productivityof available resources expands, will increase Anon. 2001b. Southwest Center Dairy – Isthe grazing season to maximize the number of Seasonal for You? Southwest Centerdays the cows are meeting their intake needs Ruminations. Vol. 7, No. 2.on pasture. Cadwallader, T. 1998. On Common Ground.Other Sources of Information Pasture Talk. Vol. 4., No. 6. p. 6.To take a virtual farm tour of a grazing dairy Conneman et al. 2001. Dairy Farm Businessoperation, visit Dave Forgey’s dairy operation Summary: Intensive Grazing Farms Newin Indiana by stopping by the farm web site at York 2000. E.B. 2001-13. Department of Applied Economics and Management, College of Agriculture and Life Sciences,Purdue Pasture Management guide: Cornell University, Ithaca, NY. Grace. J. 1998. The Characteristics of More and Less Profitable MIG Operation. PastureGreat Lakes Grazing Network: Talk. Vol. 4., No. 11. p. 8-9. Groover, G. 2000. The Income Side of, a comprehensive vs. Year-Round Pasture-based Milkinformation site on grass-based farming Production. Virginia Cooperativesystems from American Farmland Trust: Extension Dairy Science Publication 404- 113.The University of Wisconsin Center for Dairy Hamilton, S., R. Young, and G. Bishop-Hurley.Profitability: 2000. Economics of Pasture-based Dairy Production. Missouri Dairy GrazingPro-Dairy at Cornell University: http:// Manual. University of Extension. < mgt/dairy.htm>.Owenlea Farms, home of F.W. Owens, grazingHolsteins in Ohio: Jackson-Smith, D., B. Barham, M. Nevius, and~fwo/index.html R. Klemme. 1996. Grazing in Dairyland: The Use and Performance ofMeasuring & Analyzing Farm Financial Management Intensive RotationalPerformance: / Grazing Among Wisconsin Dairy Farms.extensio/finance/ ATFFI Technical Report #5.PAGE 14 //THE ECONOMICS OF GRASS-BASED DAIRYING
  15. 15. Kreigl, T. 1999. Acres vs. Cows – Comparing Nutrient Requirements of Dairy Cattle. 2001. 7th Financial Measures. UW Center for Dairy Revised Edition, National Research Profitability. Council.Kreigl, T. 2001a. Wisconsin Grazing Dairy Ostrom M.R. and D.B.J. Smith. 2000. The Use Profitability Analysis – Preliminary Fifth and Performance of Management Year Summary. UW Center for Dairy Intensive Rotational Grazing among Profitability. Wisconsin Dairy Farms in the 1990’s. PATS Research Report No. 8.Kriegl, T. 2001b. Wisconsin Grazing Dairy Profitability Analysis – A Preliminary Peyraud, J.L. 2001. Complementary Five-Year Comparison of the Cost of Supplementation of Grazing Dairy Cows. Production of Selected “Conventional” R&H Hall Technical Bulletin. Issue No. 2. and Grazing Wisconsin Dairy Farms. UW Center for Dairy Profitability. Sipiorski, G.F. 1998. The Dairy Dozen: 12 Key Financial Indicators. Hoard’s Dairyman.Miller, D.P. and G.D. Schnitkey. 1994. Intensive Vol. 143, No. 16. p. 643. Grazing/Seasonal Dairying: The Mahoning County Dairy Program 1987- Winsten, J.R. and B.T. Petrucci. 2000. Seasonal 1991. Chapter 10: Economic Patterns and Dairy Grazing: A Viable Alternative for Labor Utilization. OARDC Research the 21st Century. American Farmland Bulletin 1190. Trust.Muller, L. D. 1997. Nutritional Considerations and Supplemental Feeding for Dairy By Tim Johnson Cattle on Intensive Grazing Systems. NCAT Agriculture Specialist Pasture Talk. Vol. 3, No. 10. p. 8-11. Edited by Richard Earles andNott, S.B. 2000. Dairy Grazing Farms in Paul Williams Michigan, 1999. Michigan State University Agricultural Economics Formatted by Ronda Vaughan Department. Staff Paper 2000-33. March 2002Nott, S.B. 2000. 1999. Business Analysis Summary for Dairy Farms. Michigan State University Agricultural Economics IP210 Department. Staff Paper #00-24. The electronic version of The Economics ofNott, S.B., T. Kriegl, and W.M. Bivens. 2000. Grass-based Dairying is located at: Dairy Grazing Finances in Michigan and HTML Wisconsin, 1999. Michigan State University Agricultural Economics PDF Department. Staff Paper 2000-54. //THE ECONOMICS OF GRASS-BASED DAIRYING PAGE 15