The Organic Valley/CROPP Cooperative “Path to Profitability on an Organic Dairy,” workshop was held in Penn Yann, NY recently. Featured speaker was Dr. Larry Tranel, Iowa State University Extension & Outreach Dairy Specialist. Originally organized to offer remote access via webinar, technical difficulties prevented that from happening. Fay Benson, Project Manager of the New York Organic Dairy Initiative Program (NYODP) is attempting to schedule another webinar with Dr. Tranel later this year.
Dr. Tranel’s presentation focused on the need for record keeping, and tracking the costs of production, in order to determine profitability. He also focused on ways for organic dairy farmers to increase profitability in their operations.
Dr. Tranel emphasizes that profitability cannot be judged by Net Cash Income calculations alone. Instead, it is a compilation of rate of return on assets, milk production costs per hundred weight equivalent, and return to unpaid labor per hour emphasizing that real profitability accounts for unpaid labor hours, as well as debt. All three aspects combine for a true look at profitability.
“Opportunity costs of owned equity and unpaid labor” must be calculated when talking about dairy profitability, Dr. Tranel said. “There is a cost to use those assets,” no matter who owns them.
In a study of 15 Iowa organic dairy farms, using 2014 data, profitability calculations show commonalities in those dairies with the highest profitability. They had less milk per cow, the equivalent of 700 lbs. lower than average farms. They received 0.10 cents per cwt lower milk prices, and had 36 percent more crop sales than the average organic dairy farms.
These statistics lead to the assumption that these higher profits have more to do with dairy expenses than with the total cash income per cow.
“Differences in profitability are on the expense side, even as total cash income for the high-profit farms was $158 per cow lower than the average farm,” Dr. Tranel explained.
The high profit farms spent much less on purchased feed, purchasing 47 percent less feed per cow, and had 9.6 percent more land. As a result, total cash expense per cow was lower for high-profit farms.
Higher profit farms did have more net cash income, calculated by subtracting total cash expenses from total cash income. But that isn’t the full picture. Labor and assets still need to be accounted for to calculate true profitability, Dr. Tranel said. Higher profit farms did have a higher equity charge per cow, as they were employing more assets, so the return to labor per cow is higher.
“Inventory changes and opportunity costs of equity or unpaid labor could negate positive net farm incomes,” he said. Labor earnings per hour are a “key profit indicator for comparison purposes. Labor efficiency is a great strength on the more profitable herds in any dairy production system.”
Labor earning per hour show that higher profit farms, after taking unpaid labor costs and dividing them by unpaid labor hours, show higher per hour labor earnings than the average dairy farms. While the average rate in this study was $19.58 per hour, the higher profit farms had labor earnings per hour of $38.78.
“Labor efficiency tends to be the strongest correlation to dairy profits of any,” Dr. Tranel said. “The bottom line with organic or other type of dairy: Design a labor efficient system.”
Another profit indicator, the net income per cwt equivalent, is calculated by taking the gross income per cwt equivalent and subtracting the gross cost per cwt equivalent. These figures already include the opportunity costs of unpaid labor and equity. Higher profit farms had a net income per cwt equivalent of $4.71, over all other costs, compared to the $0.63 of the average performing farms, Dr. Tranel explained.
No matter where you are located, the same principles apply. While geography does play some role in organic dairy markets, “management plays more of a key role than geography,” Dr. Tranel emphasized.
Low Cost Parlors
According to Dr. Tranel, many higher profit organic dairy producers are milking in low cost parlors. The parlors enable them to be more efficient with their milking labor hours than when milking in old parlors or stall barns. Increased cow comfort leads to increased milk production and lower somatic cell counts.
Dr. Tranel advises producers milking less than 45 cows per hour to consider a low cost parlor to increase labor efficiency and enjoy easier milking. Tools to help producers calculate the net financial impact of switching to a low cost parlor, such as a TRANS Iowa parlor, are available at: www.extension.iastate.edu/dubuque/dairy
Consultation Grants for NY Organic Dairy Farms
The NYODP is currently seeking dairy farmers to participate in Cornell’s Dairy Farm Business Summary and modified “Profit Teams,” Benson said. The program offers consultants to assist farmers by working together in a team approach to find solutions to the most challenging issues on their farm.
Funding is provided for Farm Business Specialists to work individually with the organic dairy, and upload the participant’s business information into the Cornell Organic Dairy Farm Business Summary. The Summary is a confidential program, which collects a farm’s information and produces a report that assists the farmer by highlighting areas in which the farm is doing well, and meeting family goals. Eventually, if a large enough database can be generated, the Summary program can offer benchmarks, so that organic dairy farmers will have some yardstick with which to compare their dairy’s performance against other local farms of similar size.
The Summary report generated isn’t the final product. Farm Business Specialists will review the results with the farm family, and work with them to develop a short-term project to better meet some of their goal’s for the dairy. Goals must be achievable within 18 months.
The types of projects that are eligible for Summary participants include: farm transition planning; infrastructure construction; and business plan development; as well as others. NYODP will provide up to $1,500 toward the consultant and dairy profit team to complete the project. Funding is first come, first serve. More information is available by contacting Fay Benson at email@example.com or 607-391-2660 x410.