“Ideally, business decisions are made on profitability, not on cash flow,” Jon Winsten, an agricultural economist, said, addressing dairy farmers via a University of Vermont Extension webinar.
Those words of wisdom are the impetus behind the Large-Herd, Low-Overhead Dairy Grazing model (LODG) Winsten has been promoting and advocating for in the Northeast. The model is based upon New Zealand’s dairy system, and Winsten hopes that Northeast dairy farmers will take a look at it – including the financial data simulation he developed based on real-world data – and consider if it might work on their operations.
Winsted grew up on a 60-head registered Holstein dairy (the kind that “mostly don’t exist anymore” in the Northeast, he said, where rapid consolidation to large confinement dairy farming is putting small farms out of business). He’s hoping that LODG dairy grazing can reverse that trend.
“Farmers need a viable alternative to the current ‘get big or get out’ trend,” Winsten said. “It’s really about trying to understand the economics of this system.”
Dairy Profitability Plus
The reality is that dairy farmers are operating to keep their cash flow coming. In today’s large confinement herds, the goal is to maximize milk output no matter the market, the effect on the cows’ physiology or the inefficiency of doing so.
When a farmer is focused on having the cash needed to pay the monthly bills, a lower milk price requires an increase in production. It defies the basic economic premise of decreasing production when the price is low while increasing output when prices rise, Winsten said.
Grazing dairies have lower feed costs per hundredweight of milk produced, but the milk per cow is lower. If cows are confined, there isn’t enough room to expand the herd. Feeding more grain and inputs to produce more milk seems to make economic sense. With high debt loads, space constraints and high overhead costs per cow, increasing milk production per cow to keep cash flowing – no matter the decrease in net farm income per hundredweight of milk, otherwise known as profitability – is the apparent solution many of today’s dairy farms rely upon to stay in business.
All that increased milk production further destabilizes the milk market. It’s not a recipe for profitability when “cash flow needs prohibit profitable decisions,” Winsten said.
Instead of large debt loads that result in cash flow problems, Winsten advocates for maximizing net income per hundredweight of milk shipped by reducing the direct costs of feed, labor and milk production and decreasing the overhead needed for successful operations.
Along with the economic benefits this model offers, it also has environmental benefits. It positively contributes to the rural economy by making dairy farming more accessible to more families, keeps lands in agriculture and stimulates the local business economy.
“How can we have profitable agriculture on permanent vegetative cover?” Winsten asked. LODG is an answer to that question.
While large confinement dairies require numerous laborers, involve the use of fuel and equipment to grow and harvest feed, manage manure and milk the herd, LODG operations are designed for labor and milking efficiency. Grazing cows simplifies manure management and decreases environmental concerns surrounding manure storage and excess nutrient loads.
Seasonal spring calving is another efficiency which takes advantage of pasture availability and consolidates labor needs. Reducing the cull rate through better cow health – as cows aren’t being pushed to produce, and grazing herds tend to have health benefits over confined cows – while raising replacement heifers offers another income stream via heifer sales.
Confinement dairy models operate on “slim margins over a lot of hundredweights” of milk shipped. LODG is based on decreasing the overhead per hundredweight of milk shipped through feeding and milking system efficiency, thus maximizing the ratio of cows and land to the value of buildings and machinery. It’s the opposite approach.
The key to LODG is maximizing nutrient intake from grazing and utilizing supplements wisely to minimize the feed cost of producing each hundredweight of milk while maximizing the amount of milk shipped per acre. Labor needs are decreased using high through-put milking parlors, like the New Zealand swing-style parlors, which allow one or two people to milk quickly.
While there are not many farmers in the U.S. using the LODG model, Winsten provided some examples from Missouri, where a New Zealand-based investment group operates more than a dozen farms, each with 550 – 750 cows, using swing-over parlors with one person milking 75 -100 cows per hour.
In Pennsylvania, one producer with more than 200 cows out-winters the herd using large round bales to provide windbreaks and bale feeding on pasture in the snow. While the LODG system can include keeping animals on pasture year-round, housing and feeding grain can also be cost effective if keeping production up minimizes overhead costs per hundredweight produced.
Winsten worked with an advisory panel of three dairy farmers in New York and Pennsylvania who have been raising their herds in a manner similar to LODG, as well as financial experts, in developing the LODG financial simulations. Using their input and expertise, he was able to create a program to demonstrate the possible financial outcomes on a fictional 240-head dairy in New England with 360 rented acres.
Inputting information based on real-life production scenarios, milk and feed prices and debt and financing, Winsten’s simulation showed net farm income on the modeled LODG farm from inception to year five. Ten thousand simulations were run, using actual Farm Credit data for New England dairy farms.
Eighty percent of the simulations showed the LODG model farm generating between $1.30 and $4.56 of profit per cow. The actual profit per cow of large New England dairy farms was $1.71 during the same time period.
“Folks who are interested … can start to understand the potential of his system” through the simulations, Winsten said. Importantly, his simulated models include $50,000 paid to the dairy farmer for their labor annually. “I think we did this analysis with as much conservative bias as possible.”
The LODG system allows dairy farmers to stop increasing milk production when prices fall. Instead, as they are not taking on large amounts of debt for overhead costs (those needed to maintain and operate the farm, such as equipment and buildings) and they are maximizing their return on investment by minimizing direct costs such as feed, labor, fuel and fertilizer that result directly from producing milk, the farm has the ability to profitably make decisions by focusing on economic data, such as the milk price-to-grain cost ratio. Instead of chasing cash flow with more milk, the farm can pivot to raising beef or selling heifers when milk prices are low and maximize net farm income.
Other benefits include keeping land in permanent pasture, reducing the need for manure storage and hauling and decreasing the resulting nutrient overload that can result. Food system benefits that directly impact human health, as grass-based milk has higher levels of omega-3 fatty acid and other components, are possible.
“This seems like a win-win system – more profitable, and with some environmental and social benefits,” Winsten said.
To find out more, email Winsted.email@example.com.
by Tamara Scully