Cost of Production for Grazing

WISCONSIN GRAZING DAIRY PROFITABILITY ANALYSIS

PRELIMINARY FOURTH YEAR SUMMARY

DRAFT

Tom Kriegl

U.W. Center For Dairy Profitability

Abbreviated for Wisconsin Forage Council Symposium

Full Report at http://www.wisc.edu/dairy-profit/

Wisconsin Dells, Wisconsin

January 25, 2000

 

 

General conclusions drawn from Dairy Grazing Profitability Analyses;

 

  1. Management intensive rotational grazing (MIRG) is economically competitive, probably at all sizes. In contrast to large modern confinement systems, grazing systems can provide a family with a satisfactory amount of dollars for family living with the size of operation that a single family can operate with their own labor and management. About 16 of the 19 graziers in the study are generating the amount of dollars for family living that would satisfy most farm families. Graziers in the study also compare quite favorably with “conventional” Wisconsin dairy farms in the FFAMIS record keeping system when using a variety of financial measures.

 

  1. The MIRG system is more economically flexible than the confinement system. Someone who invests in a well planned grazing operation will likely be able to recover most of their investment, if a few years later they decide to switch to a confinement system or quit farming entirely. In contrast, if you invest “from scratch” into a new confinement system, and decide to change or quit in a few years, you will be lucky to recover half of what you invested in that confinement system.

 

  1. MIRG is a system in which a significant amount of the forage consumed by the cows is harvested by the cows to reduce harvesting costs and enhance forage quality. This is the major difference between grazing farms in this study versus many “confinement“ or “conventional” farms in Wisconsin.

 

  1. MIRG can be done with or without other practices and technologies such as seasonal calving, milking parlors, TMRS, etc. Fully seasonal is shutting down milking facilities at least one day each year (hopefully much more than a day to make it worth the effort to be seasonal.)

 

  1. MIRG is not a reduced management system; it’s a different management system.

 

  1. Making the right investment decisions always enhances profitability. Still, a number of graziers have transitioned from “conventional” systems quickly and successfully. A “traditional small Wisconsin dairy farm” with average or better management has a good chance of improving financial performance by judicious adoption of a MIRG system. Many graziers are showing that some of the old infrastructure (barns, silos, etc.) that may be considered obsolete by “large modern confinement standards” can be valuable tools in a MIRG system if acquired at “discounted” prices.

 

  1. Although many graziers are financially competitive at production levels that are lower than found in other systems, they may be even more competitive if they don’t sacrifice production because cost and investment savings aren’t automatically created when production is reduced. Herds transitioning from another system may not be able to afford much of a production decline.
  1. The graziers which are most successful financially are those who focus on optimizing the three factors of profit, more than worrying about whether or not they are “real graziers”. The three factors of profit are, income generation, operating expense control and investment control.

 

  1. Wisconsin graziers tend to emphasize operating cost and investment control out of proportion with income generation just as traditional Wisconsin dairy farms tend to emphasize income generation out of proportion with operating cost and investment control. Spending money carefully helps profitability more than just not spending.

 

  1. The graziers with the best financial performance had just slightly higher operating expenses per cow, more investment per cow and much more income per cow, than the low group. The ability to generate income is the main factor separating the top group from the bottom group in the study.

 

  1. Low input is not the same as low cost per unit of output. The graziers with the lowest cost per cwt. of milk sold, use large quantities of inputs such as fertilizer and grain as long as the income they generate from those inputs is greater than their cost.

 

  1. Graziers in the study who are fully seasonal, or who don’t use DHI have considerably less desirable financial performance on a per cow and per acre basis than their opposites. To have the same number of dollars available for family living from seasonal calving appears to require two times the number of cows.
  1. There is no single measurement that tells enough about a business to make good important comparisons or decisions without additional information from other measures. Several measures are needed to accurately judge the financial performance of any business, but under Wisconsin conditions, dividing by cows is usually more useful than dividing by acres.

 

 

 

 

 

INTRODUCTION

 

The Wisconsin Grazing Dairy Analysis relies on four years of actual financial data from 19 Wisconsin grazing dairy farms to help answer the following questions;

  • Is grazing economically viable?
  • Where does each system work best?
  • What practices make each system most viable?
  • How can each system be managed for the benefit of the families operating them?

Selected financial performance measures of types of graziers in the study are compared with several selected measures from the 800 plus “conventional” dairy farms, (ranging in size from 19 to 1300 cows) in the Fox Valley and Lakeshore Farm Management Association (FFAMIS) data sets. These Farm Management Associations are cooperatives which provide a variety of farm financial management services to their member/clients. This data has also been used by Dr. Gary Frank of the U. W. Center for Dairy Profitability to do an annual report titled “Milk Production Costs on Selected Wisconsin Dairy Farms”. The final report of the Wisconsin Grazing Dairy Analysis will include a similar milk production cost analysis.

 

DEFINITIONS-TYPES OF FARMS

The FFAMIS farms include all types of Wisconsin dairy farms, including a few graziers and large modern confinement farms, but most of the farms in the FFAMIS system are traditional in type.  Most comparisons in this analysis to confinement, conventional, or FFAMIS will be comparisons mainly to “traditional” farms.

 

Types of grazing dairy Farms

To be included in the study, a dairy farm practicing management intensive rotational grazing (MIRG) had to be big enough to potentially support a family in exchange for family labor (this doesn’t preclude hired help).  Dairy and forage (often grass) are the major enterprises and the dairy cows graze about half of the forage they consume.  Pastures are rotated daily in most cases.  “Winter” forage is likely to be raised on the farm in a typical year.  Grain is likely to be fed in near “conventional” amounts although grain is less likely to be raised on the farm.  Being a low or high input operator alone doesn’t eliminate someone being considered a grazier.  Young stock are likely to graze on the farm.

 

A “typical” low capital grazing operation then is loosely defined for Wisconsin as one in which the assets are more or less ideally suited for grazing and where the livestock harvest about half of the forage consumed in a typical year.

 

A transitional (high capital) grazier is one with enough land, buildings and equipment to farm conventionally, but also has chosen the grazing practices described above recently enough to still have the investment structure of a “conventional” farm. The high capital or transitional grazier is more likely to raise and feed grain in larger quantities and is less likely to practice seasonal calving.

 

Categorizing graziers into the low capital and high capital or transitional categories still relies heavily on judgment.  However, the key difference is that the “ideal” low capital grazier has very little invested beyond what is needed for a grazing operation.  Therefore their profit potential should be greater than for high capital or transitional graziers.

 

The seasonal calving strategy is an independent practice that is used extensively in combination with MIRG in New Zealand and in some other places, but not so extensively in other places, such as Wisconsin and Argentina.  In this study, a herd is not considered seasonal unless the dry period of all the cows in the herd overlap enough to shut down the milking facility for more than a day and preferably for at least a few weeks.  Defined as semi-seasonal are those herds that make a serious attempt to “bunch” their calving to one or two times of the year, but don’t sacrifice healthy, highly productive animals that don’t quite fit that mold.  A semi-seasonal calving herd not only “bunches” calving, but also milks at least one cow every day of the year (and many more on most days). Any calving strategy not meeting the preceding seasonal definition is referred to as non-seasonal in this analysis.

 

Physical Performance Indicators

Appendix one and two provide some physical characteristic information about two (low capital and high capital) groups of graziers in the study. Appendix one uses cow and acreage data from 1995, while appendix two uses cow and acreage data from 1998.

 

Performance of High Vs Low Capital Graziers Vs FFAMIS Dairy Farms

 

Net farm income from operations per cow (NFIFO/cow can be used to make “apples to apples” comparison of financial performance between businesses of different sizes.  It also directly measures the impact of two of the three most important components of profitability-operating income and operating expense.

 

In this comparison, NFIFO/cow for the low capital graziers was higher than the NFIFO/cow for the high capital graziers in 1995 and 1998 but not in 1996 and 1997.  The FFAMIS (mainly traditional) farms were lower in all four years.  Interestingly enough, the NFIFO/cow trends upward for the high capital graziers and downward for the other two groups from 1995 to 1997, before reaching the study’s high point for all groups in 1998.

 

The $3063 range from the lowest (-460) to highest (2593) NFIFO/cow value from grazing is astounding especially from a group as small as 19 farms.

 

In terms of investment per cow, the high capital graziers had the highest level in two of the first three years and in all years were similar to the FFAMIS farms.  The low capital graziers had investment levels that were considerably lower, but not as low as most people expect.  The high/low range in this measure for the graziers in the study is also large.

 

The comments made about investment per cow apply to debt per cow with two additions.  In looking at the individual grazier’s data, it’s obvious that the debt level has been influencing profitability much more than investment levels have influenced profitability.  The FFAMIS farms consistently had higher debt per cow levels than the high capital graziers whose levels were much higher than the low capital graziers.

 

Basic cost per hundred weight of milk produced (hereafter referred to simply as basic cost), is another useful measure.  Basic costs are all the cash and non-cash costs except interest, depreciation, labor, and management.  The fact that some farms have only unpaid labor while others pay family members or non-family hired help makes it difficult to compare farms fairly on a total cost basis.  The costs of interest, depreciation and management also have characteristics that make direct comparisons difficult.  That is why a concept such as basic cost is so useful (this concept has been popularized by Dr. Gary Frank of the UW Center for Dairy Profitability).

 

Unfortunately an average basic cost value is not calculated yet for each grazing group but the high and low basic costs for the 19 graziers in the study can be compared with the average basic cost of the 800 plus conventional dairy farms in the FoxValley and Lakeshore Farm Management Association (FFAMIS) data set.

 

Economic Impact of Selected “Low Input” Practices Among Low Capital Graziers

 

Those who promote seasonal calving and non-use of DHI often describe these strategies as low input. Promoters often predict that these practices will enhance profitability because of their “low input” nature.  Unfortunately, low input doesn’t always mean least cost per unit and least cost per unit doesn’t always equal maximum profit.

 

In addition to having separated all the graziers into low and high capital groups, the 19 graziers were also separated two other ways to calculate the average financial performance of seasonal vs. non-seasonal calving; and DHI use vs. non-DHI use herds in the study.

 

It’s important to recognize that even four years of data from 19 farms still represents a very small number of observations on which to base solid conclusions.  So when dividing an already small number into even smaller numbers, one must be even more cautious about conclusions.  Still in the absence of better information, one can make some comparisons knowing that they fit those specific farms in those specific circumstances.

 

A careful study of all of these comparisons within the low capital group shows that the fully seasonal, non-DHI herds also tend to have substantially more debt per cow despite having a lower investment per cow. When compared to their oppositesamong all the graziers in the study, these graziers using the “low input” practices had slightly less investment and debt.

 

While MIRG has provided economic performance to most of the 19 graziers in the study that was competitive with the FFAMIS farms, the graziers in the study using at least one of the “two low input” strategies were less competitive.  Only one seasonal herd in the study generated the amount of dollars available for family living in all four years that would satisfy most Wisconsin dairy families.  That seasonal herd had about twice as many cows as some of the non-seasonal herds that generated as many or more dollars available for family living.

 

Ranking the 19 Graziers by Financial Performance

 

When ranking the 19 graziers into a high, middle, and low group based on a simple average of the four years NFIFO/cow, the following observations can be made in comparing the high third with the low third. Most of the following statements hold true when the graziers are ranked by their four year simple average ROROA.

 

  1. All but two or three of the graziers (found in the low group) are generating the amount of dollars for family living that would satisfy many Wisconsin farm families.

 

  1. NFIFO, NFIFO/Cow, NFIFO/Acre, cash income per cow, investment per cow, and pounds of milk sold per cow were substantially higher for the high group.Debt per cow was lower.

 

  1. The margin of difference between the high and low group widened substantially from 1995-1997 for the measures of NFIFO/Cow, debt per cow, and pounds of milk sold per cow, but narrowed in terms of investment per cow.The trend continued in 1998 for NFIFO/cow and pounds of milk per cow but not for the other two measures.

 

  1. The milk price was slightly higher for the high group.

 

  1. The low group had a very slight advantage in dollars of cash expense per cow with the middle group being the highest the last three years.This measurement comparison raises some very serious questions about the fairly common belief among many graziers that the “secret to economic success” via grazing is to control operating costs.  Among this group of 19 graziers over a four year period, the difference in operating cost per cow represents a much smaller part of the difference in profitability than is represented by income generation and investment control.  A closer look at individual cost components shows that a higher percentage of cash (operating) cost as well as income is spent on interest in the low group.

 

  1. The low group had a few more cows in three out of four years.

 

  1. In most of the above comparisons, the middle group was in the middle.The three exceptions occurred in cash expense per cow in which they were usually higher than the other two groups, debt per cow in which their four year average is close to the four year average of the low group and pounds of milk sold per cow in which they were roughly equal to the higher group.

 

  1. In terms of types of graziers, the six graziers in the top group include:
  • Two low capital herds
  • Four high capital herds
  • Five DHI herds
  • No organic herds
  • No seasonal herds

 

  1. In terms of types of graziers, the six graziers in the middle group include:
  • Two low capital herds
  • Three high capital herds
  • Two DHI herds
  • No organic herd
  • No seasonal herds

 

  1. In terms of types of graziers, the seven graziers in the low group include:
  • Four low capital herds
  • Three high capital herds
  • Two DHI herds
  • One organic herd (not organic market all years)
  • Four seasonal herds

Acknowledgement

 

I am very grateful to the Wisconsin graziers who are participating in the study survey, and to Wisconsin County Extension Agricultural Agents, the Soil Conservation Service, and Grazier Networks for all of their help in providing data.  I also thank Arlin Brannstrom, Gary Frank, and Jenny Vanderlin for their help in providing the conventional farm data, and Larry Baumann, Sandy Costello, Rick Klemme, Lee Milligan, Stan Schraufnagel, Terry Smith and Michelle Weighart for initiating the study.