Economic Overview of the SW Center Pasture-Based Dairy (1999 - 2004)

The University of Missouri Southwest Center Dairy began its seventh year of operation when the first calf of the season (a heifer) hit the ground on February 8, 2005. Started in 1999, the seasonal, pasture based operation serves not only as a research and demonstration model, but also provides economic data on this alternative form of dairying. With six full years of data (1999-2004), we are beginning to see some consistent trends that compare favorably to private dairy operations of this type in the area.

Overview of Production (1999-2004) and Economics (2001-2004)

Table 1 shows various production data for the Southwest Center Dairy. Our first year of operation began with all first calf heifers. It was quite a learning experience for us as well as for the dairy cattle. Into the second year, animals were continuing to grow, and we were still not generating our own replacements. By the third year of operation, we were finally at what can be referred to as a "steady state." That is, cows had reached mature size, we were producing our own replacements (and even had some extras to sell), our pastures were established, and our herd manager, Chris Davis, was well acclimated to the system.

Since this is a seasonal dairy, it is important to remember that certain figures represent an average over the year. For example, the hay intake of 11.2 to 13.7 lb per cow per day does not mean we fed that amount every day. During most of the grazing season, little if any hay was fed; in contrast, winter forage intake was almost entirely hay.

In order for the economic data for the SW Center Dairy to more closely reflect what a private dairy might expect, certain adjustments were necessary. Expenses which are not actually incurred by the SW Center Dairy (i.e. taxes, insurance) or which are not easily monitored (i.e. fuel, vehicle use, labor) are obtained from the financial records of cooperating grazing dairies in the area. These "real world" numbers are denoted by an asterisk.

Economic data are shown in Tables 2, 3 and 4 for the years 2001 thru 2004 (after reaching “steady state”). Expenses depict direct cash costs in categories determined by the cooperating dairymen and recorded using Quicken® financial software. Costs are calculated on a per cow basis as well as a per hundredweight of milk basis.

Table 2 shows all costs involved in producing milk. Specific costs related to pasture production are further broken out in Table 3. Our data indicates that we can grow pasture for around 1.8-2.0¢ per pound of dry matter consumed. The average cost for us to produce milk over the five years of operation was $1,218/cow or $9.16/cwt.In contrast, a recent survey of large confinement dairies (avg. 1,485 cows/farm and greater than 20,000lb herd average) in the west showed cost of production of $10.88/cwt.

When total expenditures are subtracted from total income (again, for the years 2001- 2004), the resulting operating margin averages $1,160/cow or $8.70/cwt. Keep in mind, however, that income, expenses and operating margin all vary widely from year to year and are directly influenced by factors such as milk price, feed costs, weather, government programs, etc. Our operating margin ranged from $903 to $1642/cow and from $6.59 to 11.92/cwt for the four years reported.

Our margin as reported here does not include replacement heifer costs. If one subtracts an average of $150/cow in annual heifer costs from the steady state operating margin above, the resulting adjusted operating margin is still over $1,000/cow averaged over the four years.

Operating margins, as calculated here, is the amount available to the dairyperson for debt service (principal and interest), heifer replacement or development (if not already deducted), income taxes, and family living. Because debt load varies from farm to farm, individuals can better project their own net margin or profit by entering their own values for P&I, taxes, etc.

The 2004 Season

Higher milk prices and favorable weather contributed to higher profits in 2004. Pay price for the SW Center Dairy, which peaked over $20/cwt in May, averaged $17.94 for the year! Cooler temperatures and abundant rainfall during much of the 2004 grazing season resulted in lower heat stress on cows and enhanced quality and yield of forages. This is evidenced by a more than 1,000 lb/cow jump in milk production compared to the previous year.

Higher fuel costs during the second half of 2004 had less of an impact on pasture-based dairies compared to dairies that rely more heavily on machinery to plant, harvest, store, process and feed out forages and crops. Fertilizer costs tend to follow fuel costs, and by having the cows return 95% of the nutrients (in manure) back to the pastures, grazing dairies tend to have reduced fertilizer costs compared to conventional dairies. As gasoline, diesel and fertilizer prices continue to climb in 2005, this difference will likely become even greater giving pasture-based dairies an even bigger advantage.

High milk prices as well as high cattle prices (for sale of culls and replacements), combined with a total cost of production under $9.00/cwt resulted in a very profitable year for the SW Center Dairy. The cooperating pasture-based dairies that we work with in the region are reporting similar results for 2004.

Conclusions

In summary, the economic data generated by the Southwest Center Dairy compares well with actual grazing dairies in the region. This is not to suggest that all dairy operations should be 60 to 80 cows, but that smaller, grazing dairies can be profitable and competitive in the dairy industry. These smaller dairies can compete with larger dairies in the arid west mainly because of the lower cost of production, typically $1.00 to $1.50/cwt lower, resulting from greater reliance on high quality pasture compared to harvested forages.

Table 1: Production Overview of Southwest Center Dairy

Table 2: Summary of Expenditures of Southwest Center Dairy

Table 3: Summary of Expenditures of Southwest Center Dairy for Forages

Table 4: Summary of Income of Southwest Center Dairy