Dairy grazing can provide good financial return (Research Brief #50)
Posted January 2000
An ongoing financial study of farms that use management intensive rotational grazing (MIRG) shows that generation of income is the main factor separating the farms with the best financial performance from those with the worst financial performance.
The graziers with the best financial performance in this study had slightly higher operating expenses per cow, higher investment per cow, and much higher income per cow than those with a lower financial performance. Financial success is possible for operations set up as MIRG dairy farms and for confinement dairy farms that transition to grazing. But managing farm resources efficiently is the key to top financial performance on MIRG dairy farms, just like on confinement dairies.
“Management is the single most important factor determining financial success on farms, and this study confirms that this holds true on MIRG dairy farms,” says Tom Kriegl, farm management project coordinator with the UW-Madison Center for Dairy Profitability. He has been working with UW-River Falls farm management specialists Stan Schraufnagel and Nate Splett and the UW-Madison Center for Integrated Agricultural Systems to collect and analyze four years of
financial data from 21 MIRG dairy farms.
For the purposes of this study, the researchers defined a MIRG dairy farm as one large enough to potentially support a family primarily using family labor (but doesn’t exclude farms with hired help). Dairy and forage are the major enterprises on MIRG dairy farms and cows graze at least half of the forage they consume, typically being rotated to new pastures daily.
One purpose of this study is to provide financial benchmarks for MIRG dairy farms to give dairy graziers some information to evaluate their farm’s financial position. This study also serves as a basis for comparison between grazing farms in the study (for example, seasonal calving versus non-seasonal calving herds) and between MIRG dairy farms and confinement dairy farms of similar size.
Income generation and cost control
“The study shows that graziers who are most financially successful are those who focus on optimizing the relationship between generation of income and control of operating expenses and investments,” says Kriegl. He says that Wisconsin graziers often emphasize operating cost and investment control out of proportion with income generation, while conventional dairy operators tend to emphasize income generation.
“Low input is not the same as low cost per unit of output. Spending money carefully can help profitability more than not spending at all,” Kriegl states. The graziers with the lowest costs per unit of milk sold used relatively high quantities of purchased fertilizer and grain. But the income generated by these inputs more than covers their costs.
Kriegl highlighted several financial measures as benchmarks that show the financial status of the farm. “Never use one benchmark to make important decisions about your operation. No single benchmark will guarantee success or failure,” he warns. Individually, benchmarks can indicate strengths and weaknesses of a business, but they can also be used together to assess overall financial performance.
Kriegl sought to compare two types of MIRG dairy farms: low capital grazing operations in which the assets are close to being ideally suited for grazing, and transitional or high capital grazing operations on which there are enough land, buildings, and equipment to farm conventionally, but the operators have decided to use grazing.
The investment and fixed costs per cow on the low capital grazing farms are lower than on the high capital grazing farms because of some or all of the following factors: less tillable land, less or older equipment and buildings, or discounted purchase price. While the low capital graziers tend to have fewer years in farming than the high capital graziers, they tend to have more years in grazing. Low capital graziers also tend to have fewer cows and fewer harvested acres.
Net farm income from operations per cow (NFIFO/cow) is a financial benchmark that allows for comparing different size farms. NFIFO represents the returns from the farm operation to cover unpaid labor, management, and equity capital invested in the farm business. It directly measures the impact of two of the three most important components of profitability-operating income and operating expense.
Profitability as measured by NFIFO per cow was similar for the low and high capital graziers. The weighted four-year average of NFIFO per cow was $837 for the low capital graziers and $850 for the high capital graziers. It was higher for the low capital graziers than the high capital graziers in 1995 and 1998, but not the other two years. NFIFO per cow was trending upward for the high capital graziers and downward for the low capital graziers from 1995 to 1997, but increased for both groups in 1998 with relatively high milk prices (see table).
Investment per cow is useful in comparing MIRG farms, since for many of these farms investment per cow is intended to be low. The low capital graziers had signficantly lower levels of investment per cow than the high capital graziers.
Debt per cow was much higher for the high capital graziers than the low capital graziers from 1995 through 1998. Debt per cow for both low and high capital graziers decreased from 1995 to 1996, increased from 1996 to 1997, and decreased in 1998.
The pounds of milk produced per cow was lower for the low capital graziers than for the high capital graziers. Pounds of milk produced per cow dropped sharply for both groups in 1996, but 1998 levels are higher than those of the previous two years for both groups. In comparison, the average milk price per hundredweight was consistently higher for the low capital graziers than for the high capital graziers, with an average of $14.62 per hundredweight for the low capital graziers for 1995 through 1998 and $14.14 per hundredweight for the high capital graziers. The higher milk price on the low capital grazing farms was likely because these farms sell milk that is higher in solids.
Seasonal calving farms
Some dairy farmers are calving their herds seasonally. This approach can increase labor efficiency by concentrating major activities like calving and breeding at one time. And since the cows all go dry at the same time in a seasonal system, the farmer gets a break from milking.
The researchers evaluated the financial performance of farms using seasonal calving versus those that do not. They warn that the small number of farms involved in this study cause caution about drawing conclusions about seasonal grazing dairy operations in general.
All of the farms calving seasonally were in the low capital graziers group. Four of the nine low capital graziers were fully seasonal. The seasonal low capital graziers generated less NFIFO per cow than their non-seasonal low capital counterparts. The fully seasonal operations also tended to have substantially more debt per cow despite having a lower investment per cow (see table).
The role of grazing dairy systems
“In contrast to large modern confinement dairy farms, MIRG dairy farms can provide a family with a satisfactory amount of money with the size of operation that a single family can operate with their own labor and management,” says Kriegl. This is due in part to the ability of a grazing system to productively use lower cost assets, often used instead of new, that are far less useful in a confinement system.
Grazing dairy systems hold promise for current conventional dairy farmers as well as new dairy farmers. “The grazing system is more economically flexible than the confinement system,” says Kriegl, “for example, someone who invests in a well-planned grazing operation will likely be able to recover most of his or her investment in assets if they leave farming a few years later.” But a farmer who invests from scratch in a confinement system would be lucky to recover half of what’s invested if he or she decides to leave farming.
Traditional dairy farms have been able to improve financial performance by converting to grazing. Grazing systems should also be competitive at larger herd sizes. In fact, a grazing system may be one of the best choices for a farmer starting from scratch at under 300 cows. But managing the farm’s resources wisely will be the key to financial success for any size or style of operation.
|Financial measures, 1995-1998|
|Low and high capital graziers|
|Seasonal and non-seasonal low capital graziers|
Published as Research Brief #50