Full Report

Organic Dairy COP Calculator

Acknowledgements

We would like to thank the nine producers for their participation in this project. This document would not have been possible without their valuable contributions and cooperation. 

This project was funded in part by the Canadian Agricultural Partnership, a five-year federal-provincial-territorial initiative.

The views expressed in the report and associated materials are the views of the Organic Council of Ontario and do not necessarily reflect those of the Canadian Agricultural Partnership.

We would also like to acknowledge the support of the Canadian Organic Growers in producing these materials, as well as our advisory committee, including Hugh Martin, Rob Wallbridge, Eric Payseur, and Norm Hansen. 

About the Author

Dirk Brunsveld grew up on a dairy farm and currently runs an organic dairy near Cambridge with his family. He has a degree in organic agriculture from Guelph University and worked in agricultural banking for both Farm Credit Canada and RBC for a few years before returning to work on the farm. 

Dirk regularly participates in benchmarking seminars and reads the latest Cost of Production reports available for conventional dairy farms.

Introduction

Scope

This document is part of the 2020 series of organic cost of production (COP) models prepared by the Organic Council of Ontario. This particular model focuses on organic dairy production based on financial data from 2018. 

Who is This Resource For?

Dairy COP models are a management tool to estimate costs, understand profitability and evaluate performance. They are also utilized in the production cost component of milk pricing formulas as part of the supply management framework. The primary objectives of this COP model are to assist:

• New entrants to the organic dairy industry;
• Conventional farmers in considering the decision to adopt some organic production methods and even engage in the transition to certified organic production by understanding the organic COP and profitability;
• Organic farmers in the management of their own production costs and to benchmark their results to average industry performance.

**Note that none of the farms participating in this study were part of the Dairy Farmers’ of Ontario (DFO) Grassfed program. This COP model is based on the Canadian Organic Standards requirements for the amount of grass and forage in the diet (please see this section for more information about organic dairy production). This COP model may not be effective for evaluating the cost of production for farms in the DFO Grassfed program or farms doing 100% grassfed production as the difference in feed and other costs is significant. 

Reliability Disclaimer

The model’s projections do not necessarily indicate recommended practices, however, over 10% of Ontario’s organic dairy farmers are represented in the sample. Given the sample size of nine producers out of a total of 80, the COP model may not be statistically significant, but it is a relatively accurate representation of the industry. Samples were drawn from a variety of operations of varying sizes, geography, management and operational styles. 

Furthermore, every farm is different in terms of climate, region, soil conditions, farm size, crop rotations, infrastructure, resources, debt level, and management style. Therefore, the model represents neither any farm in particular and operations could see a considerable variance from the model. 

Environmental Scan

There is one other relevant organic dairy COP report made by the Dairy Farmers of Ontario (DFO) that is not publicly available due to small sample size. DFO conducted this study in 2016 to provide data for their milk pricing formula. The author had access to this report and was able to develop dairy appropriate expense categories based on the DFO model.

Methodology

Participant Overview

Nine producers participated in this Cost of Production study, with the smallest milking 26 cows and the largest milking 150 cows. The nine producers are representative of varying factors such as scale, producer age, barn type, location/geography, and family background. The producers chosen for this report all had 75% or higher of their total revenue derived from milk sales, with data collected from the 2018 fiscal year. All nine participants in the report have been under organic management for more than 5 years, with six producers under organic management for more than 10 years.

Data Methodology 

Financial production data was collected via producer financial statements and personal tax returns. Personal tax returns were updated to reflect inventory adjustments to ensure data consistency across all participants.  

Line items were grouped in this COP study like the annual Dairy Farmers of Ontario (DFO) COP study, with adjustments made for management wages, organic grains opportunity cost, land and capital costs and unpaid labour.

Calculations within spreadsheet:

Standardized Litres 

• Total Kg of in-quota milk shipped in 2018 was collected from each producer.
• Each litre of milk was standardized to a 3.8% butterfat (B.F.) to account for differences between cattle breeds and rations. Litres were standardized by dividing the in-quota Kg produced by 0.038 (based on 3.8% average butterfat).

Somatic Cell Count (SCC)

• Each producers’ milk cheque SCC totals were totalled for the reference period (12 months of 2018) and averaged to provide a single annual summary.

Farm Revenue & Expenses Special Considerations

Management Wages

Management wages were not always categorized properly because they often fall under various line items like shareholder withdrawals, dividends or drawings depending on accounting preferences. For the purposes of this study, the total sum of these categories was included in the budget calculator under management wages. Additionally, unpaid management labour was accounted for using a similar approach to unpaid labour (see below). A value of $30,000/year was placed on each full-time equivalent of unpaid management labour provided. 

Unpaid Labour

Farm employee wages and salaries were usually accounted for using the appropriate farm expense category. However, there is often unpaid family labour which may not have been accurately reflected in the farm’s financial statements. To account for this unpaid labour, an annual salary of $30,000 was included for each full-time equivalent employee. The value was chosen to reflect the usual situation of unpaid family members wherein housing, vehicles and other benefits are often included in addition to a small salary. Hourly rates were not used to calculate unpaid labour or management wages since many farmers do not fill out the required time sheets. The lack of data on labour hours is a significant issue in conventional dairy cost studies as well.   

Calculation of Unpaid Labour:

(# of full time equivalent employees)*($30,000) – (Management Wages) – (Stated Wages & Salaries)

Basically, unpaid labour was added when “Salaries & Wages” and “Management Wages” did not accurately reflect the number of full-time equivalent employees. 

Opportunity Cost of Organic Grains

Since this study was attempting to capture the COP of organic milk, a value was placed on all organic grain that was fed to cows. The reasoning behind this was that organic grains can be sold for 3-4 times the value of conventional grains. Therefore, if a farmer grows their own grain for their cattle, the true market value is not being accurately represented. Essentially, the value of the crop enterprise is artificially subsidizing the dairy operation via below-market grain costs. 

An additional $0.10/L expense was added to producers that grew their own grain and fed it to their animals. However, if producers purchased much of their grain and grew very little feed relative to their size, the additional $0.10/L expense was not added. This is because purchased feed would more accurately reflect the true market value. 

Whatever grain was homegrown was given a value and categorized under the opportunity cost of organic grain. The value of purchased feeds was left unchanged. 

Land & Capital Costs

To account for the value of producer owned land used in the production of organic milk, a value of $150/acre was assigned to land owned by participants. Producer owned land was used to account for owned acres used in production that could have been generating rental income. Rented land was left at the rental cost paid as indicated in financial information. 

Analysis and Observations

When the study was first undertaken, the goal was to rank producers by COP per litre, similar to how the Dairy Farmers of Ontario do with their annual accounting project. However, the data showed that maximizing litre per cow with the lowest COP per litre wasn’t necessarily the key to profitability in organic dairies compared to conventional farms. Organic operations usually grow their own feed due to the cost of organic grains and tend to sell any leftovers. The most profitable organic operations relied on homegrown crops as well as selling unneeded crops. They did not necessarily have the lowest cost of production but excelled due to the contribution of their cropping operations. 

As such, Net Farm Income per standardized litre produced was used as a basis for comparison and analysis. This is likely to maximize the usefulness of the study to those transitioning and new entrants alike. Each litre of milk was standardized to a 3.8% butterfat (B.F.) to account for differences between cattle breeds and rations. The following trends were observed in more profitable operations.

Gross Milk Price

Despite all producers receiving the same monthly per litre milk price, the total annual per litre price differed between producers depending on the timing of production (i.e. each individual’s level of production each month). This is a relevant consideration because the organic premium received over and above the conventional milk price varies by month depending on organic milk utilization. During summer months, the premium often drops due to poorer fluid milk utilization (i.e. children are not in school). Therefore, producers with increased production over the summer months tended to have a lower overall gross return per litre of milk sold.

Yield Per Acre

Producers who were able to generate greater forage and grain yields per acre generally had to purchase much less feed. Often, after accounting for their own feed requirements, they were also able to sell any leftover organic grains. This is significant due to the large profit margins on organic grains. More successful crop management styles focused on rotations and utilization of livestock manure to ensure adequate feed production for use and sale. 

This study did not attempt to exclude non-milk revenue because of the overlap between many crop and dairy expense items. There was too much expense overlap in certain areas. To minimize distortionary effects, participants were chosen on the basis that the vast majority of their gross income was derived from milk sales.

Labour Costs

The variation in total labour cost and custom work per litre of milk sold was significant among the participating farms.  Higher profit producers were able to use significantly less labour/custom work to produce the same or more milk as average or below-average producers. 

Farm Size and Scale 

The larger farms in the study tended to have a higher profit per litre. One component of this was that fixed overhead costs were lower per litre of milk sold on larger farms compared to smaller farms. Theoretically, production on a larger scale spreads out fixed costs over more units than smaller operations. However, larger scale didn’t necessarily guarantee the highest profitability per litre as some of the smaller farms were also able to achieve greater profitability per litre. The results appear to suggest that while scale can help increase profit per litre, management is the primary driver. 

Rations

On a dry matter basis, most rations will total 20-24 Kg/cow per day. Certain producer data provided was inconsistent with the above guideline due to a deliberate attempt to generate extra feed. The leftover feed is usually fed to youngstock to avoid having to chop another TMR mix. 

Higher grain rations will result in daily Kg consumption reaching a higher level while a ration composed of more forages will result in daily consumption closer to 20 Kg/day.

Milk Production Per Cow

Similar to the effect of scale on profit per litre, milk production per cow wasn’t always linked to profit per litre. This is because of the many other variables within each operation and their effect on profitability. It is likely that higher profit producers excelled in multiple areas, and production per cow was generally the result of multiple factors. This is evidenced by certain lower profit producers, who had above average production per cow. 

Compared to milk production per cow, a better indicator of profit per litre was the quantity of grain fed per litre of milk sold. This would reflect overall management through the quality of forage prepared, and of the cows’ environment.

Using this COP Model on Your Farm

Cost of Production for Organic Dairy Calculator

Estimating Your Own Costs Using the Budget Calculator

The accompanying budget calculator requires the producer to enter the number of kilograms of quota they own and intend to fill. It will then pre-populate the projected milk and non-milk revenue based on the per-Kg averages of nine existing organic producers. 

The main reason a per Kg standard was chosen is that the monthly organic premium varies based on processor-level milk utilization, which makes it difficult to accurately predict. Therefore, an annual average of historical milk prices received at the producer level is a better indication to predict projected milk revenue. Using kilograms of filled quota is the most accurate method to accomplish this because projections on a per-litre basis may distort results. This is due to the different component levels produced by each breed of cattle. This also allows producers to adjust the percentage of Kg’s filled to account for individual incentive filling capacity. A per-litre calculation was also avoided because a new entrant or transitioning producer may not have a good idea of how the organic standards will affect their production. Every effort was made to keep the calculator extremely simple while offering a realistic budgeting tool. 

Producers can make manual adjustments to the following line items based on your unique circumstances:

Animal Sales

• A producer may or may not have excess animals to sell. It depends on individual production levels and whether they intend to fill incentive days.

Crop Sales

• Heavily dependent on each individual situation regarding acres owned/rented as well as capacity and yields.

Other Farm Income

• Some farmers may have rental properties, solar contracts or unique agricultural income sources.

Depreciation 

• Dependent on individual choices i.e. capital investments in robotic milking systems, barn construction or equipment purchases. 

Tile Drainage 

• This expense may not be widely applicable or occur every year.

Management Wages 

• Each producer has a different method of personal compensation depending on their needs, meaning they are better suited to accurately project this item.

Note* Each of the adjustable revenue and expense items can be left blank and a per Kg average will be automatically inserted instead.

** Given that the purpose of the calculator is to help producers project actual costs, certain non-cash expenses like land/capital cost, unpaid labour were excluded. If a producer wishes to understand the implications of compensating unpaid labour, they can simply add additional management wages.

Things to Consider if You Are a New or Transitioning Operator 

Quota

Since the Canadian dairy industry is supply managed a producer must purchase quota for the right to produce and sell milk to the provincial marketing board, the Dairy Farmers of Ontario (DFO) who in turn markets that milk to processors. Quota is purchased by dairy farms on a per kilogram of B.F. basis. One kilogram of quota allows a producer to ship 1 kilogram of B.F. every day for 365 days per year. To translate this into litres, take the number of kilograms you currently produce or want to produce and divide it by the B.F. on a decimal basis. For example, 1 kilogram of quota at 3.8% B.F. requires 26.3 litres to fill (1 / 0.038 = 26.3). The milk price is set by DFO based on what the average producer needs to make a profit. Therefore DFO examines producer production costs yearly to determine if milk price adjustments are required. This system of supply management ensures supply meets demand which prevents both surpluses and shortages of milk for the country.

Standard Organic Production Practices

Typically, organic dairy farms tend to be about half the size compared to the average conventional dairy operation. Significant differences between organic and conventional production methods include:

• Only certified organic grains, forages and supplements may be fed to cattle, and all crops must be grown without the use of synthetic pesticides or fertilizers. Similarly, all purchased feeds and minerals must be certified organic. 
• Typical crop rotations include multiple years of alfalfa or grass, and then 1-2 years of row crops/cereals before being returned to grass or alfalfa. The main source of fertility for crops is usually livestock manure and/or some basic purchased fertilizers containing non-synthetic, low density nutrient sources. 
• Compared to conventional operations, organic dairy farms typically feed more grass and alfalfa forages versus row crops such as corn silage.
• Any products and/or medications used by producers must be certified organic or a veterinarian prescription is required. Guidelines around vet prescribed medications state that producers must use the greater of:
• Double the conventional medication withdrawal instructions
• Minimum of two weeks 
• Often an emphasis is placed on preventive measures to protect animals’ health given the restrictions producers must work within.
• Cattle must graze a minimum of one-third of their forage intake during grazing months, and they must have outdoor access every day weather permitting 
• Organic operations typically feed less grain per cow due to the higher growing and purchase costs. Therefore, milk production per cow ranges from 50-100% of the average conventional dairy herd. 

Business Decisions Based on Your Cost of Production

A producer can compare not only their final net income per kg of butterfat to the average, but also each individual expense category to see how that net was arrived at. The producer may then begin to examine the management decisions which led up to that value. For example, if a producer has an above average breeding cost they may want to look into what genetics they are purchasing for their herd vs what others are doing. On the opposite end if a producer is doing very well in a category such as repairs they may still want to find out where those savings come from and expand on them. For example, they may be very handy with machinery, or it could be that they are getting more custom work done. All individual categories need to be examined in proper context based on the individual management characteristics of the farm.  

Glossary

DHI - Dairy Herd Index is a lab service used by dairy producers which collects milk samples from each individual cow. Samples are tested for B.F., protein and somatic cell count along with the cows production. The farmer receives a benchmark report back based on these results which helps them make day-to-day management decisions for ration changes, and culling decisions etc.

Heifer - A young female cow, the age range from when they are weaned off of milk until they have their first calf (thereafter being referred to as a cow).

Incentive Days - When there is additional market demand not being met DFO may issue one or more incentive days of production to producers. One incentive day is equal to the amount of quota a producer owns and is permitted to produce in one day. For example, one incentive day for a producer that owns 50 kgs of quota is an additional 50 kgs of bonus production for the month or 3.3% in a month with 30 days. DFO will issue incentive days instead of permanent quota increases if they are unsure the new demand will be consistent going forward.

Quota - The right to produce milk in Canada is basically measured out using quota in kgs of butterfat. Quota is bought and sold on the Dairy Farmers of Ontario producer exchange monthly by farmers wanting to either expand or reduce production. A producer may bid for up to 10% of their current holdings every month. The value is capped at $24,000 per kg and if demand for quota exceeds what is for sale each producer receives a certain amount pro/rated to their current holdings. If there is more quota for sale than is bid for the quota remains unsold in the hands of the current holder. If overall industry demand grows or contracts, all dairy farmers can have their quota holdings arbitrarily increased or decreased until supply meets demand.      

Somatic Cell Count (SCC) - White blood cell count in milk. This is indicative of a cow or herd fighting infections if the count is high. The permitted SCC limit for milk produced in Ontario is 400,000 cells per millilitre after which a producer will be penalized until their somatic cell count test is under 400,000 ml.

Supply management - A national agricultural policy framework used in Canada that controls the supply of dairy, poultry, and eggs through both production and import controls, and pricing mechanisms ensuring stable prices without shortages and surpluses.

Tile drainage - Tile drainage is a form of water management that removes water from the subsurface of the soil, a practice particularly used when land does not drain readily in the spring. Drainage lines can be dug several feet under the surface to help the fields become workable earlier in the spring so the producer can proceed with tillage. Generally, a crop planted earlier has a higher yield potential because it captures additional growing days/heat units before it changes from the vegetative growth stage into the reproductive stage. 

TMR - Total mixed ration is when all the feed for the cows is put into a large tub grinder, usually run by a tractor, and ground up to ensure each bite of feed is the same consistency. This ensures cows have fewer metabolic issues since they can’t just overeat on grain while not eating their hay/fibre. TMR rations are often used to save labour since the entire ration can be fed in 1 or 2 feedings.