Wisconsin Grazing Dairy Profitability
Analysis
Preliminary Fifth Year Summary
Tom Kriegl
U. W. Center For Dairy Profitability
Wisconsin Forage Council Symposium
Eau Claire, Wisconsin
January 23, 2001
Is grazing or conventional dairying more profitable? Many are eagerly awaiting the definitive study to prove that one of the systems is clearly superior in most if not all ways. Not only will we wait a long time for that study, but the expectation for it distracts us from the more important question of –“Which system is best for your family and farm?”
There will never be a study to determine for once and for all and for all conditions that grazing is more or less profitable than conventional dairy farming in the humid part of the US. This is because the “state of the art” allows some practitioners of each strategy to be successful. Secondly, management continues to be the single most important factor determining business success in farming (and in many other businesses too). We can see the evidence of the importance of management everyday.
We are all very aware that many variables affect
productive performance, and economic performance is subject to all of these
variables plus the added uncertainty of price variability.
We know that grazing is the “conventional” system in
New Zealand, Ireland and other places.
Even before the Wisconsin Grazing Dairy
Profitability Analysis (WGDPA), we knew that some graziers succeed while others
fail (though we lacked the actual farm financial data we desired). We knew the same was true for conventional
operations. There have been more
studies addressing the economics of grazing than most people realize but all of
these studies have limitations, most of which are due to the scarcity of
graziers with several years of good data. Graziers in Wis. with several years
of good data are quite scarce relative to conventional dairy farmers. The same
is true in most other states.
Still, most of these studies and the Wisconsin
Grazing Dairy Profitability Analysis confirm the above observations-that
Grazing (Management Intensive Rotational Grazing- MIRG) is an economically
viable alternative for many Wisconsin farm families.
The Wisconsin Grazing Dairy Profitability Analysis relies
on actual farm financial data 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?
Gathering actual farm
financial data is easier said than done.
Most of the participants in the Wisconsin Grazing Dairy Farm
Profitability Analysis indicated their willingness to participate by answering
yes to a question on a 1994 Survey of Wisconsin Grazing Dairy Farmers. Eighty-four graziers said yes on the survey,
but only 45 graziers sent data following a direct one-to-one follow up
contact. The numbers of participants
have narrowed down as follows;
·
45
graziers provided some financial data.
·
26
graziers provided one year of usable financial data for the first year
analysis.
·
25
graziers provided two years of usable financial data for the second year
analysis.
·
21
graziers provided three years of usable financial data for the third
year analysis.
·
19
graziers provided four years of usable financial data for the fourth
year analysis.
·
17
of the original graziers provided five years of usable financial data
for the fifth year analysis. Four new farms were added in 1999.
These are rather small numbers to compare and still
obtain results that would be representative of the grazing dairy industry of
Wisconsin. Consequently, considerable
time and effort was devoted to examining the data for accuracy and consistency.
COMPARING THE FIFTH WITH THE
PREVIOUS YEARS REPORTS.
The major conclusions in the fourth
year report were strengthened with the addition of a fifth year of data. However, one may find small differences when
comparing individual numbers from the reports from different years of the
WGDPA. This is because 21 farms provided three years of usable data for the
third year report and 19 farms provided four years of usable data for the
fourth year report. In the fourth year
report, all group averages for the first three years were recalculated to
include data only from the 19 farms. In
the fifth year, two of the “original” 19 farms “dropped out.” Four new farms were added to bring the total
number of farms back to 21 for 1999.
None of the new farms supplied data back to 1995. For this reason plus the ones that follow, no recalculations of previous years
averages was done for the fifth year preliminary report.
Two of the new herds calve seasonally, but one of
the original seasonal calving herds in the WGDPA became non-seasonal at the beginning
of 1999. Finally, in 1999 tax
depreciation was used on all farms in the WDGPA to make the data more similar
to the data from the FFAMIS farms.
The third year report added a direct comparison of
the financial data from more conventional Wis. dairy farms to different types
of grazing operations. Specifically, 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 fifth year report of the Wisconsin Grazing Dairy
Profitability Analysis will include a similar milk production cost analysis.
The computer system used by the Fox Valley and
Lakeshore Farm Management Associations during these five years is known as Farm
Financial Analysis and Management Information System (FFAMIS) and the data from
these farms will be referred to in this analysis as FFAMIS data or farms.
As with conventional farms, “one size does not fit
all” in grazing operations. So in
addressing the study’s questions, it's important to define the kinds of farms
being analyzed and compared in this study.
Types
of Conventional or Confinement Dairy Farms
The terms conventional and confinement are often used loosely and inter changeably and therefore need to be clarified for the purposes of the WGDPA. For many years, the typical Wisconsin dairy farm housed and milked cows in two story stanchion barns, raised and mechanically harvested most of the feed (including grain) used on the farm and calved and milked cows all year. Most of these farms were about the size that one family could handle without much hired labor. Because cattle on this type of farms are confined to buildings or paved lots most of the time, the term confinement became a popular term to describe them. Since most Wisconsin dairy farms shared these characteristics for many years, the term conventional also became a popular term to describe them. “Traditional confinement” or simply “traditional” are better terms to use to differentiate them from the other farms often referred to as conventional or confinement farms.
Beginning mainly in the 1990s, some Wisconsin farms expanded to much larger sizes and built entirely new facilities including free stall barns, with natural ventilation, milking parlors, etc. They continued to raise and deliver mechanically harvested feed (including grain) to their confined cattle. They continued to calve, and milk year-round.
Most of the labor is hired on such farms and many have 300 or more cows. This type is also often referred to as conventional but is better described as “large modern confinement”.
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 referrals in the WGDPA to confinement, conventional, or FFAMIS will be referrals 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 from being considered a grazier. Young
stock are likely to graze on the farm.
Since being able to make the right investment
decisions should enhance economic performance, it is useful to categorize
graziers in a way to reflect these investment decisions. These categories will
be transitional and non- transitional.
A "typical" non- transitional (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. The investment (and fixed costs
per cow) represented by land, buildings, and equipment is less than in a high
capital or transitional grazing operation for several reasons: 1) the decision
to graze was probably made simultaneously with the decision to dairy, 2) much
of the land may be steeper, stonier or wetter than class I, II or III
soil, 3) there is less machinery and/or it's older, 4) there are fewer
buildings and are usually older, 5) or if the operation has the land, buildings
and equipment that would allow it to be farmed conventionally without much
additional investment, the grazier bought it for a discounted price.
Any farm with enough land, buildings, equipment and
investment to farm conventionally, but also has chosen the grazing practices
described above recently enough to have the investment structure of a
“conventional” farm is considered a high capital or transitional grazier because
it has a foot in both systems. Also important to the definition of this
category is that the land, buildings and equipment were not obtined at a
discounted price. All transitional
graziers in the study operated their farms as traditional confinement systems
before switching to MIRG.
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 these categories still
relies heavily on judgment. However,
the key difference is that the "ideal" non-transitional grazier has
very little invested beyond what is needed for a grazing operation. Therefore their profit potential should be
greater than expected for transitional graziers.
Seasonal
vs. Non-seasonal Calving
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 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 (transitional and non-transitional) 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.
The average non-transitional grazier averages fewer
years of farming experience but more years of grazing experience. However, if two long time graziers
were omitted from this group, the remaining low capital graziers would only
average 7.9 years of farming and 3.1 years of grazing at the beginning of the
study. This is actually a little bit less grazing time than logged by the
transitional group.
The average non-transitional grazier had fewer owned
and harvested acres and is less likely to mechanically harvest forage or grow
grain.
The non-transitional and transitional graziers
harvested 3.3 and 2.34 forage acres per cow respectively, in 1998, and most of
them buy some if not all of their grain.
This compares with the old thumb rule of needing 3 acres per cow in
Wisconsin to provide all the feed needed for a cow and her share of the young
stock except for mineral and protein supplement. Only one grazier in the study feeds little or no grain. The
FFAMIS farms had 3.27 crop and pasture acres per cow in 1998, down from 3.34 in
1997, 3.5 in 1996, and 3.6 in 1995. Most of the FFAMIS farms grew much of the
corn consumed on the farm. Acres used
for growing grain were included in the preceding acre per cow numbers for the
FFAMIS farms.
The average herd size has increased in all three
groups but the FFAMIS herd size average is about twice as large as the
non-transitional graziers with the transitional group fitting almost half way
in between.
For pounds of milk sold per cow, the average FFAMIS
farm was higher than the transitional graziers, for the last three years. The
non-transitional graziers were consistently lowest by a large margin. Production per cow increased for the average
FFAMIS farm for all five years, but for all grazier groups, production per cow
was less in in 1998 than in 1995.
One of the original purposes of the Wisconsin
Grazing Dairy Profitability Analysis was to provide financial benchmarks for
graziers. Developing reliable benchmarks requires much information. It’s also
very important to understand how to use the benchmarks as it is to have the
benchmarks. Unfortunately that
understanding is seldom gained easily or quickly.
To effectively use benchmarks to project the success
of any business including a grazing dairy, its important to have a good
understanding of enough benchmarks to project and monitor the relationship of the
three major factors of profitability which are;
1.
income generation;
2.
the control of investment/debt and;
3.
the control of operating costs.
Benchmarks can be used to summarize the many
important underlying details of a part of a farm business financial
situation. They can be used
individually as indicators of strengths and weaknesses of a business. They can be used together to assess the
overall financial performance of a farm business. To do this effectively, one must have at least a decent
understanding of the type of business being analyzed. It’s not good enough just
to know if a key financial measurement deviates significantly from a benchmark
value. One needs to know why it
deviates. Not until one knows why it
deviates can one accurately say whether it’s a problem or not, and if its a
problem, what could or should be done about it.
Never use one benchmark to make important decisions
and don’t think of benchmarks as absolute values. In other words, no single
benchmark will guarantee success or failure.
Still, some benchmarks are more important than others are.
Fortunately we have universally reliable values for
the two most comprehensive and therefore most important benchmarks, which are
the rate of return on assets (ROROA) and rate of return on equity (ROROE).
The benchmark values for ROROA and ROROE are the
same for all types of dairy operations--in fact for all businesses. Both should be higher than the rate of
inflation and higher than the interest rate one is paying on borrowed money.
For those who are debt free, ROROA and ROROE should be higher than inflation
and higher than one's opportunity cost.
Two other important features of ROROA and ROROE are that they can be used to compare businesses (farms) of different sizes. Secondly once you calculate one, calculation of the other one is easy.
Performance of Transitional
Vs Non-Transitional Graziers Vs FFAMIS Dairy Farms
ROROA values for the average grazier in the study
exceeded the interest rate on borrowed money in all years but 1997. The average ROROA for non-transitional
graziers was higher than the average ROROA for the transitional graziers in
1995, 1998 and 1999 but not in the other two years. Despite the importance and usefulness of ROROA and ROROE, they
are not printed in this preliminary report. This is because asset values in the grazing data are handled
differently than asset values for the FFAMIS farms. Even so, all of the income
reported for both sets of farms comes from the operation-not from asset appreciation.
Net farm income from operations per cow (NFIFO/cow) is another benchmark that
can be used to make “apples to apples” comparisons of financial performance
between businesses of different sizes.
It also directly measures the impact of two of the three most important
components of profitability- 1. operating income and 2. control of operating
expense.
In the WGDPA, NFIFO/cow for the non-transitional
graziers was higher than the NFIFO/cow for the transitional 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 transitional graziers and downward for the other two groups from
1995 to 1997, before reaching the study’s high point for all groups in 1998.
For most groups, 1999 financial performance came in a close second to 1999.
The $3433 range from the lowest (-$460) to highest
($2973) NFIFO/cow value from any grazing herd during the five years is
astounding especially from a group as small as 19 to 21 farms.
In terms of investment per cow, the transitional graziers
had the highest level in two of the first three years and in all years were
similar to the FFAMIS farms. The
non-transitional 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 transitional graziers. The
non-transitional grazier’s debt per cow levels was lowest of all. The debt per
cow of the seasonal herds increased substantially from 1996 to 1997 and
remained at a fairly high level in 1999.
Measuring
the Cost of Milk Production in Wisconsin Grazing Dairy Herds
The
cost of production is not yet updated beyond the fourth year report. Cost of production is extremely important to any business! But as important as the cost of production
is, it must be put into perspective.
Many
seem to think the cost of production is the economic bottom line. In fact, the cost of production is at least
one step away from the economic bottom line of a business. This becomes a bit easier to understand by
examining the three major factors of profitability, which are:
·
Control
of Investment/Debt
·
Control
of Operating Expense
·
Income
Generation
As
it is referred to, the cost of production directly deals with operating cost
and indirectly deals with investment/debt control. It doesn’t deal with the third factor – income generation.
Graziers
tend to over focus on controlling cost and investment while non-graziers tend
to over focus on income generation.
The
most successful managers optimize the interrelationship of all three.
Because all
businesses must cover all costs to succeed in the long run, it’s important to
calculate “total cost.” However there
are other cost categories that are useful too. Getting more detailed breakdowns
below total cost can help determine why costs are high or low. Dr. Gary Frank
of the University of Wisconsin Center For Dairy Profitability in his annual
(since 1992) cost of milk production on selected Wisconsin dairy farms report
has popularized two other cost groupings called “allocated costs” and “basic
costs.” He compares all three cost
groupings on a per cow and per cwt. of milk equivalent sold basis. To make it
easy to compare the grazier’s cost of production data with that of conventional
farms the following cost measures have been calculated (but not always
reported) for some years of the study:
1.
Total
cost per cwt. milk equivalent sold
2.
Total
cost per cow
3.
Allocated
cost per cwt. milk equivalent sold
4.
Allocated
cost per cow
5.
Basic
cost per cwt. milk equivalent sold
6.
Basic
cost per cow
All
three cost groupings have pluses and minuses.
The following definitions will help understand these pluses and minuses.
Total
costs include all cash and non-cash costs including the opportunity
cost of unpaid labor, management and equity capital. Another way to describe the opportunity cost is that it is a
reasonable reward for the unpaid labor, management and capital supplied by the
owning family.
The
total cost concept is needed to determine the minimum cost required to meet all
financial obligations of the business, which includes a satisfactorily reward
for the owners’ unpaid labor, management and equity capital.
Since
many business owners are willing to work for less than the opportunity cost of
their labor, management and equity, the allocated cost group becomes useful
too.
Traditionally, total cost is divide into fixed and variable cost. While these traditional cost breakdowns are still valid, there are some difficulties associated with comparisons of the financial performance of farms of greatly differing size and type that aren’t adequately handled by these traditional measures. Therefore, other measures can be useful.
Total allocated cost equals total cost minus the
opportunity cost of unpaid labor, management and capital supplied by the owning
family. Since opportunity cost isn’t consciously calculated by everyone,
allocated cost is often used by default in place of total cost.
Caution
must be exercised in comparing the allocated costs of graziers versus FFAMIS
farms. Included in the expenses of many
of the FFAMIS farms are wages and benefits to dependent family members
primarily for tax purposes. Wage and
benefit payments made to dependent family members were not included in expenses
of grazing farms. So far, its not been
possible to determine how much this difference inflates allocated costs of the
FFAMIS farms.
Basic cost per hundred
weight of milk equivalent sold (hereafter referred to simply as basic cost/cwt.)
is another useful measure. Allocated cost minus the cost of interest,
depreciation, labor, and management equals basic cost. Another way of saying
this is that basic costs are all the cash and non-cash costs except interest,
depreciation, labor, and management.
Basic
cost is a useful measure for comparing one farm to another because it is not
influenced by the farm’s debt structure, the amount of paid versus unpaid
labor, or the capital consumption claimed (depreciation). 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 only a total cost basis or on the basis of
fixed and variable costs. The costs of
interest, depreciation and management also have characteristics that make
direct comparisons difficult. Basic
cost is very similar to the cost of goods concept that is commonly used by many
non-farm businesses.
Since
basic cost primarily includes day-to-day expenses (those most affected by daily
decisions), its use allows a fairly good look at how well the grazing farms
control operating costs compared to more conventional farms.
The
difference between the allocated cost and the basic cost provides some
indication of the impact of investment/debt control on the cost of production.
The average allocated and basic cost
is calculated per cwt. for several groups of graziers for the first three years
of the study. (Some of the same
computer difficulties that delayed the calculations for the first three years
have delayed the 1998 calculations.)
When all the graziers in the study are compared with the FFAMIS farms,
their basic cost was 95 cents/cwt. less in 1995, 75 cents less in 1996, but
only seven cents less in 1997.
Among the graziers, those which are
non-seasonal, use DHI or are transitional, tend to have lower basic costs
then their opposites in the study for the first three years. Only the seasonal,
and the non-transitional, non-DHI group of graziers in 1996 and1997 had higher
basic costs than the FFAMIS farms.
Among
the graziers, those which are non-seasonal or are non-transitional tend to have
lower allocated costs than their opposites. The non-transitional users
of DHI had lower allocated costs than non-transitional non-DHI users. When all
graziers were divided into users and non-users of DHI, users were lower two out
of the first three years. All
categories of graziers have lower allocated costs than the FFAMIS farms.
When all the graziers in the study are compared with the FFAMIS farms, their
allocated cost was $1.81/cwt. less in 1995, $2.25 less in 1996, and $2.05 less
in 1997.
When
the basic cost margin is subtracted from the allocated cost margin between the
average grazier and the FFAMIS farms, the graziers paid $0.86/cwt. less in
1995, $1.50 less in 1996, and $1.98 less in 1997 per cwt. of milk equivalent
sold for interest, depreciation, labor and management. Caution must be
exercised in comparing the allocated costs of graziers versus FFAMIS
farms. Included in the expenses of many
of the FFAMIS farms are wages and benefits to dependent family members
primarily for tax purposes. Wage and
benefit payments made to dependent family members were not included in expenses
of grazing farms. So far, its not been
possible to determine how much this difference inflates allocated costs of the
FFAMIS farms. This is one of the issues
that has delayed the completion of cost of production comparisons.
It may be surprising to see that the
transitional herds had slightly lower basic costs than the non-transitional
herds. This relationship indicates that
the amount of investment (while important) may not be as important as what one
invests in.
Graziers with higher NFIFO/cow also
had lower basic cost/cwt. equivalent of milk sold. This suggests that there is much more to controlling operating
costs than just not spending money.
Again this suggests that what money is spent on is more important than the
amount that is spent.
More
details on the individual expense items will be calculated and reported in the
final fifth year report.
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 non-transitional and transitional groups, the 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 and a fifth year of data
from 21 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.
As luck would have it, all of the graziers in the
study, who are fully seasonal in calving strategy, are within the
non-transitional category. Five of the
eleven non-transitional graziers are fully seasonal. One of the non-transitional graziers became a certified organic
producer during the study. This grazier
is also fully seasonal. One farm that
had been seasonal during the first four years became non-seasonal for
1999. A non-transitional farm new to
the WGDPA in 1999 sold organic milk prior to joining the WGDPA, but didn’t in
1999. A transitional non-seasonal farm new to the WGDPA in 1999 does sell
organic milk. None of the fully seasonal herds use DHI. This is a long way of saying that in this
low capital grazier data set, those graziers which are fully seasonal are
unlikely to use DHI and are just slightly more likely to be certified
organic. They may be the least
conventional (conventional in this case being traditional WI confinement dairy)
group among the graziers in the data set.
When the study began,
there were three non-transitional graziers that were anticipating organic
production and one that was selling organic certified milk. The grazier that was certified organic at
the beginning of the study only participated in the study for two years. That data is not included in the third and
fourth-year reports. It turns out that only one of the other graziers did enter
the certified organic market since the study began. Early drafts of the third year report contained comments about
certified organic producers, which were made with the understanding that three
of the herds in the study did become organic certified (in keeping with earlier
discussions it would be appropriate to categorize this organic herd as a
transitional organic certified herd for the term of the study.) It’s very dangerous to make many conclusions
based on two farms, so any comments about organic producers should not
be taken as proof of what other organic producers might experience. However, a
few comments will follow that are true comparisons between the two farms in the
study which did sell organic milk in 1999 and the other 19.
Among the
non-transitional graziers group, those which use DHI, are not fully seasonal,
or are not organic certified, have higher NFIFO/Cow than their fellow graziers
who follow the alternate practices (Appendix 3 and 4).
The above also holds true when the transitional
graziers are brought into all three comparisons, even though the amount of
difference decreases in financial performance for the three practices in
question.
A careful study of all of these comparisons within
the non-transitional 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 opposites among 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 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 five 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.
In the fourth year
report, the four year average NFIFO/cow was used to rank the graziers by
financial performance. In this fifth
year preliminary report when ranking the graziers into a high, middle, and low
group based on the 1999 NFIFO/cow, the following observations can be made in
comparing the high third with the low third. Most of the following statements
also hold true when the graziers are ranked by their five year simple average
ROROA.
1.
All
but two or three of the graziers (in the low group) are generating the amount
of dollars for family living that would satisfy many Wisconsin farm families.
2.
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.
3.
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 through 1999 for NFIFO/cow but not for the
other measures.
4.
The
milk price was slightly higher for the high group for the first four years but
not in 1999.
5.
The
low group had a very slight advantage in dollars of cash expense per cow with
the middle group being the highest the first four 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 graziers over a five
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.
6.
The
low group had a few more cows than the higher group in four out of five years.
7.
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 five year average is close to the five year average
of the low group and pounds of milk sold per cow in which they were roughly
equal to the higher group until 1999. In 1999 they were far below the top group
and slightly below the low group in pounds of milk sold per cow.
General Conclusions Drawn
From The Wisconsin Dairy Grazing Profitability Analysis;
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. All but two or three of the 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.
2. 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.
3. 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.
4.
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.)
5.
MIRG is not a reduced management system; it’s a different management system.
6.
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.
7.
Although
many graziers are financially competitive at production levels that are lower
than often 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.
8.
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 fit a specific stereotype or system. The three factors of profit are,
income generation, operating expense control and investment control.
9.
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. Either tendency can be just a
different road to the same dismal place. Spending money carefully helps
profitability more than just not spending.
10.
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 of graziers from the bottom group in the study.
11.
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.
12.
Graziers
in the study who are fully seasonal, or who don’t use DHI have had, (over a
five year period), less desirable financial performance than their opposites,
whether NFIFO/acre, NFIFO/cow, NFIFO/cwt. equivalent of milk sold, NFIFO/farm,
or ROROA is used as the yardstick. To have the same number of dollars
available for family living, the herds that practiced seasonal calving needed
twice as many cows as needed by the non-seasonal graziers but about the same
number of cows required by the traditional confinement herds which the graziers
are compared to.
13.
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.
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 my U.W. Center for Dairy Profitability Coworkers 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.