Bulletin #1023, Risk Management for Organic Dairies: Organic Dairying: Can It Work for You?
Developed by Extension Professor Richard Kersbergen, University of Maine Cooperative Extension
Table of Contents:
- Important points to consider
- The market for organic milk
- Costs of organic production
- Getting through the transition period
- The current state of the organic dairy industry
- Data from New England research
- Table 1. Organic milk production and sales data from 44 farms in 2005
- Table 2. Effect of herd nutrition and health costs on profit levels
- Table 3. Average Income and Expenses for 44 farms in Maine and Vermont in 2005
- Challenges in organic management practices
- Organic dairy shows promise
- For more information
- The demand for organic dairy products continues to increase and outstrip supply, creating favorable pricing circumstances for producers. Economists are uncertain how long this trend will continue.
- The organic milk prices paid to producers in the U.S. provide them with stability not found in conventional dairy systems.
- Most organic dairy farmers in the northeastern U.S. transitioned to organic production to try to improve profitability.
- Even with high premiums paid to producers for organic milk, transitioning to organic production does not ensure profitability. However, good management can produce significant rewards.
- Despite the fact that organic farmers are not permitted to use antibiotics, milk produced on organic farms in the Northeast is of high quality. Premiums for quality milk are significantly higher in the organic marketplace.
- Cost, quality, and consistency (of both supply and quality) of organic grains are major concerns in organic livestock production.
- Organic dairy farms have switched from the conventional paradigm of maximum milk per cow to a strategy that focuses on a balance of production, animal health, longevity, and optimal use of quality forage and pasture.
- Clarification of pasture and heifer rules in the U.S. may dictate what organic farms will look like in the future.
- Producers considering organic production must budget carefully for 12 months of transition with higher feed costs and potentially lower production.
The current market for organic dairy products has grown by more than 15 percent per year over the last five years. Organic dairy sales reached $2.14 billion in 2005 and represented 15 percent of total organic retail food sales (OTA 2006). In the northeastern United States, organic dairy production has become one of the fastest growing sectors in agriculture. In this region, producers are currently receiving between $28/cwt and $30/cwt. Since organic milk is a specialized product in the marketplace and in high demand, processors and distributors can command a significantly higher price: retail prices across the country for organic milk are double the prices of conventional milk. Other incentives for producers to transition to organic production include a stable contracted price for organic milk, as well as the absence of transportation costs for shipment of organic milk to the processor.
Organic dairy production practices include several significant differences from conventional production that increase the cost of producing organic milk. Standards include feeding 100 percent organically produced feed (for both forage and concentrate) and providing access to and use of pasture during the growing season. Other conventional production methods not allowed in organic systems include the use of antibiotics and hormones, such as those used in synchronization of cows and heifers. Currently, vaccines are allowed.
A major stumbling block for many producers who are considering organic production is the transition period for the land and animals. For cropland, pesticides and inorganic fertilizers cannot be used for 36 months prior to certification. Transitioning a herd of cows requires that the animals on the farm be managed organically for 12 months before the milk is considered organic. Once a herd has transitioned, all heifers and young stock on the farm must be raised organically from the last third of gestation onward.
This transition process for cows and heifers can be costly since organic feed costs are significantly higher but the milk produced must still be sold on the conventional market while the herd transitions. Processors and buyers are providing transition payments, as well as “signing bonuses,” to producers who sign contracts to encourage adoption of organic practices. Some states, including Vermont and New York, have initiated programs to provide additional incentives for producers who want to transition because state agricultural officials see organic dairy production as a way to sustain the family farm. Many of the processors also provide technical assistance as well as sources of supplies and grain to transitioning farmers.
So what do organic dairy farms in the U.S. look like? Data from a survey conducted in Maine in 2003 indicated that most of the 60 Maine producers transitioned to organic dairy farming for financial reasons. Most felt that the higher premium paid to organic farmers would be sufficient to cover the increased costs of production and provide a positive return on their assets. Many of these farms were considering leaving the dairy industry and wanted to “give organic a try” before they made the decision to quit farming. Most of these farms transitioned in the late 1990s or early in this century. At that time, milk prices were about $20.86/cwt, and production costs were estimated to be $18.00/cwt (McCrory 2000).
The organic dairy farm is characterized as being small, with a 48-cow average in Maine and Vermont, and a 65-cow average in Wisconsin (Barham et al. 2006). Organic production per cow in both regions—40 lb per cow per day in the Northeast and 52 lb per cow per day in Wisconsin—tends to be less than conventional farms of similar sizes.
More recently, a comprehensive study by researchers at the University of Maine and the University of Vermont looked at demographics, management, and financial performance data from 30 farms in 2004 and 44 farms in 2005. Data from these studies are presented in Tables 1-3.
|Cows per farm||56||22||184|
|Milk produced (lb/farm)||740,098||197,000||2,357,600|
|Milk marketed (lb/cow)||12,619||6,115||19,508|
|Milk price ($/cwt)||24.94||22.38||30.95|
|Milk revenue ($/year)||184,144||49,981||588,091|
All organic producers rely on their pastures as an important source of forage during the grazing season. Seventy-three percent of producers move their milking herds onto fresh pastures at least every day and more than half of the producers in each of the profit tiers move their herds to fresh pastures twice a day. On average, organic producers met 88 percent of their herd’s annual forage needs with hay, haylage, silage, or greenchop grown on the farm. In addition to the forage ration, each milking cow received 12 lb of grain daily in the summer and 14.5 lb of grain in the winter, on average. Similar practices are noted among farms in different profit levels. It should be noted that farms in Maine and Vermont do not grow much, if any, of their own grain concentrate; almost all is purchased from sources throughout the U.S. and Canada.
|Amount of purchased forage (%)||12||6||18||12|
|Veterinary visits (farm/year)||11||11||10||10.4|
Annual amount of milk shipped ranges from approximately 197,000 lb to 2,357,600 lb on organic farms, averaging 740,098 lb in 2005. The average milk shipped per cow was 12,619 lb.
|Fuel and oil||104.42|
|Total cash expense
|Total milk revenue||3,134.00|
|Net income for farm family labor and management and debt service||491.88|
|*Dairy Herd Improvement Association|
Milk prices in 2006 and 2007 reached simulated need.
When trying to predict costs and returns to farms for 2006 and 2007, researchers simulated costs that would include higher fuel and purchased feed costs than they actually anticipated. Based on these simulations, they concluded that producers would need to receive about $27/cwt of milk to see a positive return on equity and assets. This is the price that producers in the region are now receiving.
Several factors have changed how organic dairy farms manage their cows. First, since purchased organic grains are extremely expensive—often double the price of conventional sources of concentrate—producers reduce the amount they feed. Quality, availability, and consistency of supply and quality are also issues when sourcing organic grains. As seen in Table 1, producers in the Northeast feed between 11 and 15.5 lb of grain to their cows to supplement forage and pasture. This is significantly lower than in conventional farms.
In addition to the cost of the grain, producers must consider the challenges of disease and stress in cows that are fed for maximum production. Most of the producers choose an artificial limit of 30 percent concentrate in the diet. By doing so, they have also decided to breed their cows differently, including crossbreeding: organic farmers are choosing breeds that may produce lower volumes of milk, but maybe better converters of forage to milk and can better withstand a negative energy balance in early lactation.
Another potential challenge is that the National Organic Program is considering a stricter interpretation of pasture rules and heifer raising practices in organic production systems. These changes may affect how current organic farms produce organic milk and may also change the national market.
Achievement of significant profits in an organic dairy requires a knowledgeable operator who can effectively manage pasture systems, harvest high-quality forage to reduce the need for purchased concentrates, and practice preventative health care for the herd.
Currently, organic production, with its significantly higher milk premiums, seems to be providing an economically viable alternative that can help small producers stay in business. Researchers in Wisconsin also found that the switch to organic production has given rise to dairy farmers who are far more satisfied with their income and quality of life. Compared to their conventional counterparts, organic dairy farmers in Wisconsin were more optimistic about the future viability of their operations (Barham et al. 2006). Maine and Vermont researchers reported that 85 percent of the farms in their study were very satisfied with their decision to produce for the organic market; none were dissatisfied.
Barham, Bradford L., Caroline Brock, and Jeremy Foltz, 2006. PATS Research Report No.16 — Organic Dairy Farms in Wisconsin: Prosperous, Modern, and Expansive (PDF) (accessed 3 January 2007).
Dalton, Timothy J., Lisa A. Bragg, Rick Kersbergen, Robert Parsons, Glen Rogers, Dennis Kauppila, and Qingbin Wang, 2005. University of Maine Department of Resource Economics and Policy Staff Paper #555 — Cost and Returns to Organic Dairy Farming in Maine and Vermont for 2004. Orono, ME: University of Maine Department of Resource Economics and Policy.
McCrory, Lisa, 2001. An Economic Comparison of Organic and Conventional Dairy Production, and Estimations on the Cost of Transitioning to Organic Production (PDF) Richmond, VT: Northeast Organic Farming Association of Vermont’s Dairy Technical Assistance Program. (accessed September 2007).
Organic Trade Association (OTA), 2006. The Organic Trade Association 2006 Manufacturer Survey (www.ota.com/pics/documents/short overview MMS.pdf). Greenfield, MA: Organic Trade Association. (accessed 14 December 2006).
1 cwt: hundredweight
This publication is sponsored by the Northeast Center for Risk Management Education under USDA/CSREES award #2004-49200-02254.
Information in this publication is provided purely for educational purposes. No responsibility is assumed for any problems associated with the use of products or services mentioned. No endorsement of products or companies is intended, nor is criticism of unnamed products or companies implied.
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