THE PROFITABILITY OF ORGANIC DAIRY FARMING

Hella Bauer-Eden

Aim: To compare the relative profitability of organic and conventional milk production in New Zealand.

Background: A Masters thesis in Agricultural Sciences with the topic ‘Feasibility study of organic milk production in Nelson’ closely evaluated 7 certified organic dairy farms in New Zealand. The farms are situated between Northland and South Canterbury, included seasonal and all year supply and have been Bio-Gro and Demeter certified. Production and input data for the 1997/98 season have been gathered and compared to statistical data available. The intention of the feasibility study was to evaluate the profitability of the different production systems, while considering the overall production environment for organic production in New Zealand. This article summarises the results of the comparative profitability of organic dairy farming.

Introduction: A wide range of factors defines the profitability of dairy farming: region, soil characteristics, farm management and financial circumstances – many of these are not influenced by the production system, organic or conventional. In order to compare the production systems, an analysis has been made of how organic production standards directly influence the profitability of milk production. A model has been developed to calculate the gross margin including the factors defined by organic production standards, and excluding factors that are influenced by personal management decisions or overall financial circumstances of individual farms.

Profitability: The gross margin is defined as income minus variable costs. Traditionally it is used on a per cow basis and includes animal health, herd improvement (artificial breeding and herd testing), shed and electricity expenses (Financial Budget Manual 1999). This does not allow a comparison of production systems. Overall farm profitability is evaluated through the Economic Farm Surplus or EFS. This includes additional factors of administration, vehicles, repair and maintenance grazing off, feed supplements and others and is calculated on a per hectare basis. In this model many factors are included that are influenced by farm management or individual farm variables and not by the production system.

The profitability of organic in comparison to conventional dairy production has been calculated as gross margin per hectare. The data used in the calculations are as follows:

Organic farms: production data (milk production according to LIC herd tests) stock numbers sold, feed supplements bought and made on the farm have been gathered. The costs for making feed supplements have been calculated according to Thomson & Wrenn 1996. Input data for fertiliser have been gathered and prices have been calculated according to the Financial Budget Manual 1999 and information given by the farmers.

Conventional farms: Production and costs are according to an LIC Farms Survey of 2000 dairy farms over three years (Leslie 1998).

Results of the seasonal supply farms are represented in ranges rather than in averages, as the number of farms has been small and the production areas are diverse.

Table 1: Range of milk production per hectare

Like conventional farms, organic farms show a wide range of milk production per hectare as has to be expected considering the diversity of production areas – milk production tends to be 10 % lower per hectare on organic farms.

Prices used to calculate the income are the averaged NZ payout for milk (without considering premiums) and stock according to the Financial Budget Manual 1999. Variable costs that are directly influenced by organic production standards are fertiliser, supplements made, supplements bought, grazing off, animal health and replacements reared, other factors have been set the same for all farms.

Table 2: Gross Margin per hectare

Although milk production per hectare tends to be lower, the gross margin per hectare tends to be higher on organic dairy farms. The reasons are consistently lower production costs. The expenditure for fertiliser and animal health are the most prominent factors that tend to decrease dramatically in organically managed dairy farms.

Characteristics of organic dairy farms influencing profitability are lower stocking rates and a low input system. Low input is not synonymous with low production. One reason for a decreased milk production per hectare is the current lack of certified organic feed and grazing. As all stock has to be grazed on the home farm all year round, grass grown is not only converted into milk but also into raising young and feeding dry stock.

A consequence of the lower stocking rate is a much better return on capital invested in cattle. The gross margin per $ invested in cattle is calculated as total gross margin realised by the farm divided by the total $ value invested in cattle. Assuming the same value of stock for all farms, a comparison of the gross margin per dollar invested in cattle shows the following ranges:

Table 3: Comparative gross margin per $ invested in cattle

Conclusion: The number of evaluated farms has been small, but considerably lower production costs have been consistent to all organic farms. These reductions seem to outweigh losses in milk production and result in comparable to higher gross margins per hectare as realised on conventional dairy farms. In the above calculations, no premiums for certified organic milk have been considered. If farmers receive a premium for their milk, organic production will be even more profitable. These results confirm findings of an earlier study, comparing soil properties and economic performance of 16 biodynamic and conventional farm pairs in New Zealand. Reganold et al. maintain ‘Economic stability is one of the most significant characteristics of sustainable farming systems’ (Reganold et al, 1993). According to comments made by organic farmers, organic production seems to have more far-reaching advantages than mere financial aspects: better soil, better pasture, better animal health, economic stability and less stress for the farmer.

References:

Bauer-Eden, H., ‘Feasibility study of organic milk production in Nelson, New Zealand’.

Humboldt University, Berlin, July 1999

Financial Budget Manual 1999, Lincoln University, 1999

Leslie, M. ‘Profitability of farms less than 60 ha’, Dairy Farming Annual 1998, Pp. 31-41

Reganold, J.P., Palmer, S., Lockhart, J., Macgregor, A.N., ‘Soil Quality and Financial

Performance of Biodynamic and Conventional Farms in New Zealand’, Science

Volume 260, April 1993, Pp. 344-349

Thomson & Wrenn ‘Costs of making hay and silage’, Animal Industries Workshop

Silages and Hay – Production and Use, Lincoln University1996, Pp. 31-43

hella.bauer-eden@clear.net.nz