1. ECONOMICS OF ORGANIC DAIRY FARMS COMPARED TO OTHER DAIRY SYSTEMS Presented by: Tom Kriegl University of Wisconsin Center for Dairy Profitability 2007 National Farm Management Conference Rochester, WI June 12, 2007

2. What potential organic dairy producers want to know about the economic impact of choosing that system: Is organic economically viable? How long will it take to attain the goal? What will it cost to attain the goal?

3. Actual whole farm financial data: 5 years Great Lakes Grazing Network data 7 years limited Wisconsin organic data 11 years Wisconsin grazing and confinement data

4. Much Wisconsin Data Collected By: Fox Valley Farm Management Association Lakeshore Farm Management Association Wisconsin Farm and Business Management Incorporated

5. Project Initally funded by USDA Initiative for Future Agriculture and Food Systems (IFAS) grant: to promote sustainable farming systems to enhance profitability of small and medium size farms to enhance opportunities to market and add value to farm products to reduce reliance on fossil fuels

6. Great Lakes Grazing Network Financial Summary USDA IFAFS Grant Standardize Data Handling & Analysis Pool Actual farm financial data from – Illinois – Indiana – Iowa – Michigan – Minnesota – Missouri – New York – Ohio – Ontario – Pennsylvania – Wisconsin Use AgFA

7. AgFA Agricultural Financial Analysis Web based financial analysis aggregation – Allows for easy development of regional benchmark data – Allows wide distribution of the benchmark data

8. Profitability VS Satisfaction Defining the Terms – Profit – Accounting & Economic Term Most important business goal – Satisfy – combines business and personal goals

9. Performance Measures Include… ROROA NFIFO (Net Farm Income From Operations) NFIFO/Cow NFIFO/Acre NFIFO/dollar of revenue NFIFO/Cwt. Equivalent Milk Sold Basic Cost/Cwt. Equivalent Milk Sold Non-basic Cost/Cwt. Equivalent Milk Sold Allocated Cost/Cwt. Equivalent Milk Sold Total Cost/Cwt. Equivalent Milk Sold

10. NFIFO/hour labor – NFIFO = Net Farm Income From Operations Good Labor Data is Scarce

11. Most important and most difficult factor to measure is Management ! Management = the ability to do what needs to be done when it needs to be done Financially Successful Managers – Control Operating Costs – Control Investment/Debt – Generate Income Optimize relationship of above 3 factors of profitability

12. 3 Factors of Profitability Operating Income MinusOperating Expense Plus or minus Inventory Changes Plus or minus Annual Fixed Cost EqualsReturn to unpaid Family Labor Return to unpaid Family Mngmt Return to unpaid Equity

13. Net Farm Income From Operations (NFIFO) cash and non-cash Available to pay family living expenses and new capital investment. Cost of housing, income tax, social security, medical, food, clothing, etc.

14. Total Cost Composition: Allocated Costs = Non-Basic + Basic Costs Opportunity Costs: Unpaid labor Unpaid management Unpaid equity Non-Basic Costs Paid labor Paid management Interest Non-livestock depreciation Basic Costs = Total Costs – Non-Basic Costs – Opportunity Cost Income minus allocated costs equals NFIFO

15. Stages of Organic Production 1.Pre-organic 2.Transitional organic 3.Certified organic 4.Certified market organic Few farms supplied before and after data.

16. Maturing of Organic System Becoming more scientific Becoming less evangelistic

17. Wisconsin Organic Participants Before, during, and after data from 7 farms

18. Dairy Grazier Defined Milks Cows for living Cows move at least every third day Harvest 30% of forage needs by grazing 85% of gross income from milk sales or 90% of gross income from milk & cattle sales

19. Wisconsin Organic Participants 6 contributed data 7 years. 1 contributed data 6 years. 1 contributed data 5 years. 2 contributed data 4 years. 2 contributed data 3 years. 3 contributed data 2 years. 5 contributed data 1 year.

20. Wisconsin Organic Participants Year started farming ranged from 1977 to 2003.

21. Comparing Milk Price: Organic vs. Grazier vs. Confinement

22. Comparing Lbs. of Milk Sold per Cow: Organic vs. Grazier vs. Confinement

23. Wisconsin Organic vs. Wisconsin Graziers vs. Wisconsin Confinement vs. Confinement with 51-75 Cows

24. Wisconsin Organic Dairy vs. Other Wisconsin Systems Organic data still limited. Wisconsin organic had higher NFIFO as a percent of income than Wisconsin graziers two years of seven. These years were 2002 and 2003. Wisconsin organic had higher NFIFO as a percent of income than Wisconsin confinement five of seven years. The years in which confinement was higher were 2001 and 2005. Organic price premium $2.70 - $6.66

25. Seven Year Simple Average Net Farm Income From Operations as a Percent of Income

26. Seven-Year Sinmple Average Cost of Production

27. Wisconsin Organic vs. Grazier vs. Wisconsin Confinement Organic data still very limited Organic had lower cost as a percent of income all years in the following categories – Purchased feed – Veterinarian and medicine – Depreciation on purchased livestock (higher results from either higher turnover or expansion) – Chemicals

28. Wisconsin Organic vs. Grazier vs. Confinement Organic had higher seven-year simple average cost as a percent of income than graziers and confinement for the following items, listed in order of magnitude of difference: Non-livestock depreciation Repairs Gasoline, Fuel, and Oil Custom Machine Hire Utilities Marketing and Hedging Breeding Farm Insurance

32. “Total” feed cost as % of income trends 1999-2005 Organic had smallest advantage in 2005 Up trend appears for all systems Up trend appears smallest for graziers Up trend appears strongest for organic and large confinement Up trend likely to increase most for systems that buy more feed in the next few years

33. Organic Grain Price & Profitability in 2007 1. WI organic dairy farmers raise grain 2. Organic corn often double commodity price 3. Commodity corn price will discourage conversion to organic corn production 4. Commodity corn price won’t entice organic corn producers 5. Record level dairy conversions in 2007 increase demand for organic corn 6. Organic milk price on steady upward trend 7. Minimal impact on profitability of veteran WI organic dairy 8. more difficult for new organic dairy and New England organic

34. 1. Data scarce from any organic group especially from transitional organic. 2. Individual farms are achieving financial success in organic dairy. Less experienced organic dairy farms than those sharing financial data may not perform as well. 3. Organic price premiums ranged from $2.70 to $6.66/CWT vs. graziers and from $3.27 to $6.55 vs. confinement. Organic Dairy Farm Economic Summary 1 of 5

35. 4. Organic most competitive when non-organic price low. 5. Wisconsin Organic dairy farms seven-year simple average NFIFO/$ income ranks below graziers and above all confinement sizes. 6. Grazing Organic dairy farm’s seven-year simple average NFIFO/$ income ranks slightly below graziers. Organic Dairy Farm Economic Summary 2 of 5

36. Organic Dairy Farm Economic Summary 7. Grazing probably “helps” the organic system more than vice versa. 8. If already practicing organic – go for reward 9. If far from organic practices, 3-5 year transition challenging. 3 of 5

37. 10. Organic dairy farms in transition appeared to be competitive with non-organic dairy farms in Quebec study. 11. In 2004, organic dairy farms in a New England study were not as competitive as non-organic New England dairy farms any Wisconsin dairy system 12. 7 Vermont organic farms competitive with New England not organic in 1999 Organic Dairy Farm Economic Summary 4 of 5

38. 13. Feed costs were much higher for New England farms – especially for those which are organic. 14. Use Caution comparing one dairy system from one state to other dairy systems in other states. 15. The jury is still out regarding many other economic questions about organic dairy farming. Organic Dairy Farm Economic Summary 5 of 5

39. Much Wisconsin Data Collected By: Fox Valley Farm Management Association Lakeshore Farm Management Association Wisconsin Farm and Business Management Incorporated

40. Other Cooperators and Contacts Jim Endress – University of Illinois (815) 397-7714 Ed Heckman – Purdue University – Indiana (765) 557-0401 Robert Tigner/Larry Tranel – Iowa State University (641) 394-2174/(583) 583-6496 Bill Bivens/Chris Wolf/Phil Taylor – Michigan State University – (517) 788-4292/(517) 353-3974/(517) 543-2310 Margot Rudstrom – University of Minnesota – (320) 589-1711

41. Other Cooperators and Contacts Tony Rickard- University of Missouri – (417) 847-3161 Jim Grace – Cornell University – New York (607) 776-9631 x 2300 Thomas Noyes/Cliff Little – Ohio State University – (330) 264-8722/(740) 432-9300 John Molenhuis/Jack Kyle – Ontario Ministry of Agriculture and Food–(613) 475-9472/(705) 324-5855 Craig Williams – Pennsylvania State University – (570) 724-9120 Tom Kriegl/Gary Frank – University of Wisconsin-Madison – (608) 263-2685/(608) 265-8506

42. More Participants Wanted! Website: cdp.wisc.edu

43. Multi-State Project Overview Consistent state-to-state financial performance difference. Graziers economically competitive with confinement herds. Top half herds had a large advantage in NFIFO/Cow and in NFIFO/CWT. Herds less than 100 cows had a higher NFIFO/Cow and per CWT EQ Achieving a specific level of NFIFO/Cow or NFIFO/CWT EQ in a seasonal calving/milking system is more difficult than in a non-seasonal system. Graziers with Holsteins are competitive with other breeds

44. Additional Results Probably competitive at most sizes (Multi- State) Grazing more economically flexible Graziers using DHI more profitable (Wis) Transitional not automatic disadvantage (Wis) Major costs similar graziers vs confinement

45. Additional Results Graziers with more farm management experience are more profitable (Wis) Farm management experience appears to be more important for profitability than grazing experience (Wis)

46. Questions: Is organic economically viable? What practices contribute to organic profitability? How can organic and other farming systems be managed for the benefit of the families operating them?

47. Wisconsin Organic

49. Wisconsin Organic vs. Wisconsin Graziers vs. Wisconsin Confinement

50. Seven Year Simple Average Net Farm Income From Operations as a Percent of Income

51. Wisconsin 10 Year Average Cost of Production Basic Cost Items Shown as a Percent of Income Grazing 1.01% 0.29% 2.02% 0.07% 20.75% Breeding Fees Car & Truck Expense Custom Hire Custom Heifer Raising Feed Purchased Confinement 1.08% 0.50% 2.59% 0.36% 18.66%

52. Wisconsin 10 Year Average Cost of Production Basic Cost Items Shown as a Percent of Income Grazing 2.23% 0.86% 1.51% 1.30% 1.15% Fertilizer &Lime Freight & Trucking Gasoline, Fuel and Oil Farm Insurance Marketing & Hedging Confinement 2.59% 0.86% 1.95% 1.22%

53. Wisconsin 10 Year Average Cost of Production Basic Cost Items Shown as a Percent of Income Grazing 0.65% 1.59% 4.83% 1.22% 3.82% Rent/Lease Equipment Rent/Lease Other Repairs, All Seeds & Plants Purchased Supplies Purchased Confinement 0.72% 3.60% 5.48% 2.09% 3.03%

54. Wisconsin 10 Year Average Cost of Production Basic Cost Items Shown as a Percent of Income Grazing 1.87% 0% 2.02% 2.31% Taxes Other Taxes-Payroll Utilities Veterinary Fees & Medicine Confinement 1.44% 0% 1.95% 2.81%

55. Wisconsin 10 Year Average Cost of Production Basic Cost Items Shown as a Percent of Income Grazing 2.88% 0.22% -0.36% 1.08% 53.82% Other Farm Expenses Other Crop Expenses Combined Non-Cash Adjustments Depreciation Livestock Total Basic Confinement 1.08% 0.50% 2.59% 1.95% 59.65%

56. Total Costs All cash and non-cash costs including: Unpaid Labor Unpaid Management Return to Equity Capital

57. Total Allocated Costs All cash and non-cash costs except: Unpaid Labor Unpaid Management Return to Equity Capital

58. Basic Costs All cash and non-cash costs except All Opportunity Costs Interest Depreciation on buildings and equipment Labor Management

59. Wisconsin Top Half/Bottom Half Comparison between Confinement and Grazier Dairy Herds (2002, -0.04)

60. Comparing the Financial Performance of Graziers to Confinement Dairy Herds in Two Participating States in 2001 Wisconsin Grazier Confinement New York Grazier Confinement Number of Cows Per Herd6210694340 Average Pounds of Milk Per Cow15,64420,45416,15022,191 NFIFO Per Cow842520549508 NFIFO Per CWT EQ4.482.172.682.05 NFIFO Per Farm52,44654,57951,428172,785 NFIFO Per CWT EQ (Without Deducting Labor Compensation) 5.023.753.964.07 NFIFO Per Cow (Without Deducting Labor Compensation) 9338978101163

61. Categories of Organic Production 1.Pre-organic- The period of operation of a farm before it attempted to become organic. Since anyone not attempting to become organic could be called pre-organic, it may not be as important to gather data from that period as it is to gather data from farms at some other “organic stage.” 2.Transitional organic- The period of operation of a farm from the time it began to adopt organic practices until achieving organic certification. This is expected to be the least profitable stage. 3.Certified organic- The period of operation of a farm from the time it achieved organic certification until receiving organic milk price premiums. 4. Certified market organic- The period of operation of a farm during which it receives organic milk price premiums.

62. Five-Year (2000-2004) Simple Average ranking of States’ Cost of Purchased Feed per CWT EQ from Most Desirable Value to the Least Desirable Value

63. Five Year (2000-2004) Simple Average Ranking of States Selected Feed Raising Costs (Chemicals, Custom Machine Work, Fertilizer and Lime, Gas, Fuel, and Oil, Seeds, and Other Crop Expense) per CWT EQ from Most Desirable Value to Least Desirable Value.

64. Five Year (2000-2004) Simple Average Ranking of States’ Cost of Purchased Feed plus Selected Feed Raising Costs (Chemicals, Custom Machine Work, Fertilizer and Lime, Gas, Fuel, and Oil, Seeds, and Other Crop Expense) per CWT EQ from Most Desirable Value to Least Desirable Value (combines values from charts 1-2 and 1-3)

65. The Five Year (2000-2004) Simple Average Number of Cows Per Herd Per State

66. Wisconsin Organic vs. Wisconsin Graziers vs. Wisconsin Confinement