Risk Management for Organic Dairies
Organic Dairying: Can It Work for You?
Bulletin #1023

Developed by Extension Professor Richard Kersbergen, University of Maine Cooperative Extension

The market for organic milk

The current market for organic dairy products has grown by more than 15 percent per year over the last five years. Organic dairy sales reached $2.14 billion in 2005 and represented 15 percent of total organic retail food sales (OTA 2006). In the northeastern United States, organic dairy production has become one of the fastest growing sectors in agriculture. In this region producers are currently receiving between $28/cwt and $30/cwt. Since organic milk is a specialized product in the marketplace and in high demand, processors and distributors can command a significantly higher price: retail prices across the country for organic milk are double the prices of conventional milk. Other incentives for producers to transition to organic production include a stable contracted price for organic milk, as well as the absence of transportation costs for shipment of organic milk to the processor.

Costs of organic production

Organic dairy production practices include several significant differences from conventional production that increase the cost of producing organic milk. Standards include feeding 100 percent organically produced feed (for both forage and concentrate) and providing access to and use of pasture during the growing season. Other conventional production methods not allowed in organic systems include the use of antibiotics and hormones, such as those used in synchronization of cows and heifers. Currently vaccines are allowed.  

Getting through the transition period

A major stumbling block for many producers who are considering organic production is the transition period for the land and animals. For cropland, pesticides and inorganic fertilizers cannot be used for 36 months prior to certification. Transitioning a herd of cows requires that the animals on the farm be managed organically for 12 months before the milk is considered organic. Once a herd has transitioned, all heifers and young stock on the farm must be raised organically from the last third of gestation onward.

This transition process for cows and heifers can be costly, since organic feed costs are significantly higher but the milk produced must still be sold on the conventional market while the herd transitions. Processors and buyers are providing transition payments, as well as “signing bonuses," to producers who sign contracts to encourage adoption of organic practices. Some states, including Vermont and New York, have initiated programs to provide additional incentives for producers who want to transition, because state agricultural officials see organic dairy production as a way to sustain the family farm. Many of the processors also provide technical assistance as well as sources of supplies and grain to transitioning farmers.

The current state of the organic dairy industry

So what do organic dairy farms in the U.S. look like? Data from a survey conducted in Maine in 2003 indicated that most of the 60 Maine producers transitioned to organic dairy farming for financial reasons. Most felt that the higher premium paid to organic farmers would be sufficient to cover the increased costs of production and provide a positive return on their assets. Many of these farms were considering leaving the dairy industry and wanted to “give organic a try” before they made the decision to quit farming. Most of these farms transitioned in the late 1990s or early in this century. At that time, milk prices were about $20.86/cwt, and production costs were estimated to be $18.00/cwt (McCrory 2000).

The organic dairy farm is characterized as being small, with a 48-cow average in Maine and Vermont, and a 65-cow average in Wisconsin (Barham et al. 2006). Organic production per cow in both regions—40 lb per cow per day in the Northeast and 52 lb per cow per day in Wisconsin—tends to be less than conventional farms of similar sizes.

Data from New England research

More recently, a comprehensive study by researchers at the University of Maine and the University of Vermont looked at demographic, management, and financial performance data from 30 farms in 2004 and 44 farms in 2005. Data from these studies is presented in Tables 1-3.

Table 1. Organic milk production and sales data from 44 farms in 2005
	Average	Lowest	Highest
Cows per farm	56	22	184
Milk produced (lb/farm)	740,098	197,000	2,357,600
Milk marketed (lb/cow)	12,619	6,115	19,508
Milk price ($/cwt)	24.94	22.38	30.95
Milk revenue ($/year)	184,144	49,981	588,091

All organic producers rely on their pastures as an important source of forage during the grazing season. Seventy-three percent of producers move their milking herds onto fresh pastures at least every day and more than half of the producers in each of the profit tiers move their herds to fresh pastures twice a day. On average, organic producers met 88 percent of their herd’s annual forage needs with hay, haylage, silage, or greenchop grown on the farm. In addition to the forage ration, each milking cow received 12 lb of grain daily in the summer and 14.5 lb of grain in the winter, on average. Similar practices are noted among farms in different profit levels. It should be noted that farms in Maine and Vermont do not grow much, if any, of their own grain concentrate; almost all is purchased from sources throughout the U.S. and Canada.

Table 2. Effect of herd nutrition and health costs on profit levels
		Profit levels
		Low	Middle	High	Average
Amount of purchased forage (%)		12	6	18	12
Grain (lb/cow/day)
	Summer	11	11.79	12.4	12
	Winter	13.67	14.6	15.9	14.5
Veterinary visits (farm/year)		11	11	10	10.4

Annual amount of milk shipped ranges from approximately 197,000 lb to 2,357,600 lb on organic farms, averaging 740,098 lb in 2005. The average milk shipped per cow was 12,619 lb.

Table 3. Average Income and Expenses for 44 farms in Maine and Vermont in 2005
Expenses	Cost ($/cow)
Auto expenses	43.16
Bedding	64.48
Breeding	45.98
Chemicals	1.35
Custom hire	72.70
DHIA*	13.26
Fertilizers	19.18
Purchased feed	936.09
Fuel and oil	104.42
Insurance	72.00
Interest	124.29
Hired labor	338.21
Marketing	51.42
Taxes	62.47
Rent	47.07
Repairs	216.27
Seeds	13.51
Supplies	183.89
Utilities	125.93
Veterinary services	39.38
Medicinal supplies	6.31
Miscellaneous	60.75
Total cash expense	2,642.12
Total milk revenue	3,134.00
Net income for farm family labor and management and debt service	491.88
*Dairy Herd Improvement Association

Milk prices in 2006 and 2007 reached simulated need

When trying to predict costs and returns to farms for 2006 and 2007, researchers simulated costs that would include higher fuel and purchased feed costs than they actually anticipated. Based on these simulations, they concluded that producers would need to receive about $27/cwt of milk to see a positive return on equity and assets. This is the price that producers in the region are now receiving.

Challenges in organic management practices

Several factors have changed how organic dairy farms manage their cows. First, since purchased organic grains are extremely expensive—often double the price of conventional sources of concentrate—producers reduce the amount they feed. Quality, availability, and consistency of supply and quality are also issues when sourcing organic grains. As seen in Table 1, producers in the Northeast feed between 11 and 15.5 lb of grain to their cows to supplement forage and pasture. This is significantly lower than conventional farms.

In addition to the cost of the grain, producers must consider the challenges of disease and stress in cows that are fed for maximum production. Most of the producers choose an artificial limit of 30 percent concentrate in the diet. By doing so, they have also decided to breed their cows differently, including crossbreeding: organic farmers are choosing breeds that may produce lower volumes of milk, but may be better converters of forage to milk and can better withstand a negative energy balance in early lactation.

Another potential challenge is that the National Organic Program is considering a stricter interpretation of pasture rules and heifer raising practices in organic production systems. These changes may affect how current organic farms produce organic milk and may also change the national market.

Achievement of significant profits in an organic dairy requires a knowledgeable operator who can effectively manage pasture systems, harvest high-quality forage to reduce the need for purchased concentrates, and practice preventative health care for the herd.

Organic dairy shows promise

Currently organic production, with its significantly higher milk premiums, seems to be providing an economically viable alternative that can help small producers stay in business. Researchers in Wisconsin also found that the switch to organic production has given rise to dairy farmers who are far more satisfied with their income and quality of life. Compared to their conventional counterparts, organic dairy farmers in Wisconsin were more optimistic about the future viability of their operations (Barham et al. 2006). Maine and Vermont researchers reported that 85 percent of the farms in their study were very satisfied with their decision to produce for the organic market; none were dissatisfied.

For more information

Barham, Bradford L., Caroline Brock, and Jeremy Foltz, 2006. PATS Research Report No.16—Organic Dairy Farms in Wisconsin: Prosperous, Modern, and Expansive (www.pats.wisc.edu/pdf documents/Organic_Dairy_Farms_in_Wisconsin_6_16_06 with executive summary and front cover2.pdf). Madison, WI: Program on Agricultural Technology Studies. (accessed 3 January 2007).

Dalton, Timothy J., Lisa A. Bragg, Rick Kersbergen, Robert Parsons, Glen Rogers, Dennis Kauppila, and Qingbin Wang, 2005. University of Maine Department of Resource Economics and Policy Staff Paper #555—Cost and Returns to Organic Dairy Farming in Maine and Vermont for 2004. Orono, ME: University of Maine Department of Resource Economics and Policy.

McCrory, Lisa, 2001. An Economic Comparison of Organic and Conventional Dairy Production, and Estimations on the Cost of Transitioning to Organic Production (www.nofavt.org/programs/dairy-technical-resources/economic_comparison_organic_conventional_dairy.pdf). Richmond, VT: Northeast Organic Farming Association of Vermont’s Dairy Technical Assistance Program. (accessed September 2007).

Organic Trade Association (OTA), 2006. The Organic Trade Association 2006 Manufacturer Survey (www.ota.com/pics/documents/short overview MMS.pdf). Greenfield, MA: Organic Trade Association. (accessed 14 December 2006).

¹ cwt: hundredweight

This publication is sponsored by the Northeast Center for Risk Management Education under USDA/CSREES award #2004-49200-02254.

© 2007