Organic Dairying Not All Peaches, Cream and Granola
Aug 29, 2011
A new study from the University of Vermont shows that organic dairies face stomach-churning economic pressure, just as their conventional neighbors do.
Even with $20+ conventional prices for milk, $30 for organic milk sounds even better. But an analysis of financial records of Vermont organic dairy producers suggests it’s not all peaches, cream and granola.
Bob Parsons, an Extension economist with the University of Vermont, has been tracking the economics of Vermont organic dairies since 2004. If there is a test case for organic versus conventional, Vermont is your laboratory. The state currently has 990 dairy farms, a fifth of which are organic.
The organic herds tend to be smaller, grass-based and lower producing. In fact, they only produce 4% of the state’s total milk output. Organic herds average just a little over 13,000 lb./milk/cow while their conventional neighbors now approach 20,000 lb.
And just like their neighbors, organic dairies have faced stomach-churning economic pressure over these seven years. In fact, despite organic milk prices well above conventional prices, there have been years when conventional dairies out-performed organic.
Conversely, organic dairies cash-flowed through the debacle of 2009 while conventional dairies lost money and equity. In 2009, organic dairies reported net farm revenue of $828 per cow—an astounding feat given what was happening in the rest of the industry.
But organic producers also got a cold splash of reality when organic milk sales dived in 2008 due to the Great Recession. Instead of seeing 20% annual growth in sales, disappearance shrunk up to 15%, with organic surpluses then dumped onto the conventional market at conventional prices.
Organic processors started pulling back on contracts. H.B. Hood cancelled some of its contracts in neighboring Maine. Horizon gave producers a choice: Accept price cut backs and marketing restrictions or contracts possibly would not be renewed. Organic Valley imposed quota reductions of 7% of a farm’s three-year average. Plus, it instituted hauling charges—which had previously given organic an even greater advantage over conventional.
Organic sales have since rebounded—but they are still not on the growth path they were prior to the Great Recession. (Earlier this month, Fonterra, the New-Zealand-based dairy giant, announced it will restructure its organic operations.) And with BST-milk now only a memory in most New England markets, that could give consumers even less incentive to pay 2X for organic milk.
Parsons has also calculated return on assets for organic dairies over the past seven years. They’ve ranged from a low of -1% in 2004 to a high of 5.1% in 2006 (organic’s glory year?), and have averaged just 2.2% over the seven years. Similarly sized conventional dairies had return on assets average 0.8% over the seven years, ranging from -2.8% in 2009 to 5% in 2007, according to Farm Credit records.
There’s also a wide range of economic performance farm to farm. “There’s as much variation, if not more, in financial performance on organic dairies,” says Parsons. In 2010, for example, seven of the 28 organic farms in the study had a negative return on assets. Another seven has greater than a 6% return on assets (with three of those posting 8% to 10%.)
The lessons from this analysis:
• As more dairies convert to organic, organic milk has become a commodity. As such, individual dairies have less and less control over their markets.
• Organic milk is subject to the same kind of market economics as other commodities, and is as vulnerable to market shocks. The advantage: Contracts stabilize monthly milk prices, and organic producers know what they’ll be receiving for each hundredweight the entire year.
• Individual farm management, cost control and production per cow all are key to profitability. A $30 milk price doesn’t ensure profitability in an organic herd any more than a gleaming new, high-tech milking parlor ensures profitability on a conventional dairy.
• Many conventional dairies which switched to organic did so for economic and price stability reasons. And organic is a way for many smaller producers to stay in business without expansion and huge investment. But the pressure to contain costs and to be just a little bit better than their neighbors is still the same.
• An average family living draw of $35,000 in 2010 suggests some organic farms need a second income if they want to fund health insurance, a college fund for the kids and a retirement for mom and dad. That’s not unlike conventional dairies milking similarly sized herds.