Organic Dairy’s Dilemma

Published on: 16:20PM Nov 12, 2009

By Jim Dickrell

A study of organic dairies, released last week by USDA’s Economic Research Service, shows that organic dairy producers face some of the very same dilemmas as conventional producers.

If they wish to remain small, organic producers must rely on unpaid family labor to keep the operation cash flowing. But if they want to capture economies of scale and reach any reasonable level of profitability, they have to invest heavily in capital and paid labor to milk and house hundreds of cows. Sound familiar?

And they have further burdens. After years of growing markets, organic milk sales stopped dead in their tracks last winter when the full brunt of the nastiest recession since the Great Depression gripped the nation.

According to USDA estimates of whole and reduced-fat organic milk volume, sales fell 27% in January and 12% in February compared to year-earlier sales. April was down 6%, May -8%. Through August, organic sales for these two categories are down some 70 million lb., or -6.4% compared to last year. 

Sales of all categories of conventional fluid milk, however, are up 475 million lb, or 1.4%. Not only has conventional milk grabbed back market share, it has expanded sales as cheaper fluid prices have enticed shoppers back to the dairy case.

And then there’s the cost of organic production. The ERS study is based on data collected in 2005 from 352 organic dairy farms in 14 states. Even then, operating costs for organic dairies with fewer than 50 cows was $17.65/cwt and $18.25 for organic herds with 50 to 99 cows. But total economic costs for these herds were $38.50 and $33.36, reflecting huge inputs of unpaid family labor.

Large organic dairies, those with more than 200 cows, had operating costs of $19.66/cwt and total costs of $24.84. Their operating costs were higher than the small herds because they were too large to rely solely on family labor and actually had to pay for hired labor. But economies of scale brought their total costs down to levels that were nearly competitive with conventional dairies.

Organic producers enjoyed substantially higher prices in 2005 than the U.S. all-milk price of $15.15/cwt. USDA calculated the gross value of organic milk that year to be about $25/cwt for herds with fewer than 100 cows and about $23.50 for herds with more than 200. The reason for the disparity is that most of the small herds are located in the Northeast and Midwest, where milk prices—even organic milk prices—tend to be higher. The larger herds in the USDA study were in the West—where prices are lower. Sound familiar?

The kicker to all of this is that the very smallest herds still had losses of nearly $13/cwt when all costs were included. Herds with 50 to 99 cows were losing $8.50/cwt, and the larger herds, because of their lower milk prices, were losing $1.25/cwt.

As we recover from the Great Recession, it will be interesting to see what happens to organic milk sales. The huge jumps in growth that were common over the past few years might be a thing of the past. Already, some organic processors have notified their farmers they would not be renewing contacts for 2010.

And that leaves the organic industry in a quandary. To be profitable, herds must grow. To be the most profitable, they must grow a lot. But if sales and market growth aren’t forth coming to support that expansion, organic farms will have to start cannibalizing their organic neighbors as they claw their way to black ink. Sound familiar?

—Jim Dickrell is editor of Dairy Today. You can reach him via e-mail at [email protected].

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