By Thomas S. Kriegl, University of Wisconsin Center for Dairy Profitability
Most of us have the perception that input costs rose slowly and steadily through 2006 before taking a big jump in 2007 due to major increases in the prices of inputs directly related to energy costs. Grain-price increases had the most impact on livestock and dairy producers. This jolt caused dairy farmers—especially grazing and organic farms—to question if it pays to feed grain to dairy cows.
Another perception among dairy graziers is that their feed costs are substantially lower than those for confinement herds. There is also the belief that the “grazing advantage” increased with the 2006-2007 grain-price jolt.
Are these perceptions supported by evidence?
In an attempt to find out, data was analyzed from Wisconsin confinement and grazing herds from 1995 through 2010, and organic farms from 1999 to 2010, on a hundredweight (cwt.)-sold basis.
This study used the Wisconsin Agricultural Financial Advisor (AgFA) data set. AgFA is a sample of Wisconsin dairy farms from which financial and production data are collected annually. Data were originally collected by a number of providers: Lakeshore and Fox Valley Management Association, Wisconsin Farm and Business Management Inc., other independent consultants, UW-Extension agricultural agents, Wisconsin Technical College System instructors and Center for Dairy Profitability staff. Personnel affiliated with these associations helped individual farm managers reconcile their financial data.
The grazing data included 12 to 41 observations per year. Until 2006, a few organic graziers were included in the grazing group, but they represented 25% of the grazing herds in 2004 and 2005, and less than 14% in any previous year. The annual average grazing herd size ranged from 50 to 67 cows. The confinement herd summaries ranged from 441 to 928 farms per year, with annual average herd size ranging from 76 to 172 cows. The organic herd summaries ranged from 6 to 17 herds with an annual average herd size of 48 to 76 cows. Not all organic herds were intensive graziers.
AgFA categorizes expenses much like they are categorized on Federal Tax Schedule F. Since many Wisconsin dairy farms attempt to raise most of their feed, and since few farms do enterprise accounting, the routine AgFA summaries don’t attempt to provide a total feed cost number. However, one can do a reasonable job of estimating feed costs for Wisconsin dairy farms from the AgFA data using the following steps.
Purchased feed cost was figured first. Next came direct feed raising costs, which include chemicals, custom machine work, fertilizer and lime, gas, fuel and oil, seeds, plants and an “other crop expense” category. Finally, indirect feed raising costs were estimated by taking half of the expenses for interest, non-livestock depreciation, paid labor compensation, rent and repairs. Combined, these costs are called “estimated feed costs.” No opportunity costs were included in this calculation.
Net Farm Income from Operations (NFIFO) was also calculated by subtracting from gross income all costs, with the exceptions of family labor and management (both paid and unpaid), along with equity capital. NFIFO thus represents the return to equity and family labor and management.
The accompanying graphs tell much of the story. Here are some of the highlights:
1. Estimated feed costs/cwt. sold were always highest for organic herds and usually lowest (not by much) for grazing herds with confinement in between. Estimated feed costs/cwt. sold trended upward throughout the period for all groups.
2. The data suggest that the changes in input costs from 2006 to 2010 may not favor either system (based on NFIFO per cwt. sold). The 12-year estimated feed cost per hundredweight sold was $8.38 for graziers, $8.65 for confinement, and $11.01 for organic. The same values for 2006 to 2010 were $10.10, $10.24, and $13.09 for grazing, confinement and organic respectively. The organic feed cost increased a bit more in absolute terms, but the percent increase was similar. The feed cost number is probably higher than what many graziers might have thought was the case. Pounds of milk sold per cow appears to play a large role in this outcome: Since 1999, average milk sold per cow increased by about 2400 lbs. for the confinement group, about 1700 lbs. for graziers, and actually decreased 1,832 lbs. for organic herds. High production doesn’t guarantee profitability, but low production is even less of a guarantee.
3. For the 12 years, estimated feed costs used 47.32% of the income on confinement farms, compared to 44.18% for graziers and 41.0% for organic. For the group of confinement farms similar in size to the grazing and organic farm average (51-75 cows), estimated feed costs used 45% of income. The organic price premium was high enough to make organic the lowest cost by this measure, despite being the high feed cost system per cwt. sold.
4. As expected, estimated feed costs/cwt. sold increased noticeably from 2006 to 2007, and all of the yearly average numbers beginning in 2007 were as high or higher than in any previous year for each system. This suggests a new and higher plateau for feed costs. A similar jump occurred from 2003 to 2004 for each system, but for some reason that increase doesn’t seem as memorable. If ethanol use declined, we would likely revert to a lower grain price plateau.
5. Graziers’ estimated feed cost jumped $1.24/cwt. sold in 2004 and $2.04 in 2007. For confinement herds, the jumps were $1.30 and $1.93, respectively. For organic herds, the jumps were delayed a year with an increase of $2.24 from 2004 to 2005 and $1.68 from 2007 to 2008. New feed price peaks were established for organic herds in 2005 and 2008.
6. There was less variability in the indirect feed raising cost category from year to year, and no obvious up or down trend for grazing and confinement. This shouldn’t be a surprise, as this cost category is dominated by fixed costs of land, buildings, and equipment. This cost trended up after 2002 for organic herds.
7. Graziers’ largest economic advantage in estimated feed costs came from the indirect feed-raising expenses. As is shown in Table 2, graziers’ costs for depreciation, paid labor, interest and repairs are well below those for the confinement group, which was always lower than the organic herds.
8. In terms of NFIFO/cwt. sold, organic had a 12 year average advantage of $1.03 over graziers and $3.21 over confinement herds from 1999-2010.
9. As shown in Table 1, the NFIFO performances of the three systems moved largely in tandem, indicating that many external factors (weather, milk prices) influencing profitability have similar effects on each dairy system in most years.
10. 2008 was the year of the highest estimated feed costs for all three groups and NFIFO/cwt. sold for graziers and confinement. The NFIFO for organic herds in 2008 was only $0.07 lower than their peak in 2007. The data is not precise enough to determine what proportion of the feed cost was used for forage versus grain. As important as feed costs are, they don’t totally determine profit levels.
The organic herds were easily the highest cost producers on a per cwt. sold basis with a 12 year average allocated cost (all but opportunity costs) per cwt. sold that was $5.23 and $5.12 higher than the grazing and confinement herds respectively. However, the organic herds also had the highest and most consistent milk price which provided them a 12-year average milk income per cwt. sold that was $5.93 and $8.33 higher than the grazing and confinement herds respectively. Therefore, all of the 12-year average milk income per cwt. sold advantage over the grazing and confinement herds respectively came from the income side of the equation.
In comparing the financial performance between any groups, it is much more common to find the advantage of one group spread across many items as opposed to one or two items. That clearly was the case in comparing Wisconsin grazing to confinement herds. A nickel per cwt. sold per item doesn’t sound like much, but if found in enough places, they can add up to a significant difference. Every dollar of a cost saved per cwt. milk sold could add $10,000 to NFIFO on a farm selling 10,000 cwts (1,000,000 lbs) per year. A herd of 67 cows selling 15,000 lbs milk per cow per year would sell about 10,000 cwts.
Much of the graziers’ 12-year average advantage over confinement NFIFO/cwt. sold also came from the income side of the equation.
The estimated feed costs were spread between basic and non-basic costs and accounted for $0.27 of the grazier 12 year average advantage in NFIFO/cwt. sold. (Table 2) Consequently grazing herds had more of an advantage in feed costs than from other costs. Most of this advantage came from the indirect feed costs which include the non-livestock depreciation and interest expenses associated mainly with capital investments such as buildings, equipment, and land.
Graziers and organic herds also typically achieved higher NFIFO per cow and NFIFO as a percent of income. However the average confinement farm may achieve higher total NFIFO per farm because the average confinement farm has been about twice as large.
However, graziers regularly talk about productivity problems with their pastures. The Wisconsin data shows that compared to confinement farms, graziers often use about one more acre per cow to produce forage, even though the confinement herds sell more milk per cow. Pasture can be a low-cost feed if grown productively and harvested at optimum quality, but that won’t be the case if the land was purchased for $10,000/acre and/or yields or quality are low.
Possible declining productivity per acre and per cow could also diminish organic profitability in the future.
Overall, the data indicate that there are many similarities and differences between the Wisconsin dairy systems. They also suggest that neither Wisconsin system is gaining any major advantage because of higher feed costs.
Tom Kriegl is Farm Financial Analyst, Center for Dairy Profitability, College of Agricultural and Life Sciences and Cooperative Extension, University of Madison. http://cdp.wisc.edu. The author thanks coworker Ken Bolton for reviewing the document and making helpful suggestions. A shorter version of this article was prepared for Graze magazine.