Dairy Cropping System Project – Animal Performance and Financial Analysis Part 2

An interdisciplinary team of Penn State and USDA-ARS researchers evaluated a Sustainable Dairy Cropping System to test the hypothesis that a dairy farm can minimize off-farm inputs and environmental impacts, and be productive, profitable, and sustainable.

Forage quality and quantity were covered in Dairy Cropping System Project – Forage Quality and Quantity, Part I. The dairy enterprise and profitability were examined during the eight years of the project comparing the scenarios of broadcast manure/standard herbicide (BMSH) with injected manure/reduced herbicide (IMRH).

Dairy Enterprise – Animal Performance and Milk Income

The benchmark for a herd milking two times per day is greater than 75 pounds as an annual average. Based on the quality of feed harvested for both the BMSH and IMRH scenarios, starting with an average milk production per day of 75 pounds was realistic (Table 1). Income over feed cost was monitored every month, adjusting dry matter intake and milk production for changes in weather and forage quality and quantity. The annual milk production average was calculated accordingly. The gross milk price paid to the Penn State dairy herd was used in the calculation for milk sales.

Starting in 2010, the IMRH scenario produced peas/triticale silage that provided three months of feed for the dry cows and heifers. This was significant as it resulted in carryover of corn silage into the fall of 2011 and winter of 2012 compared to the BMSH scenario, which did not have that additional feed. This resulted in increased milk production in 2012 due to the advantage of maintaining a heavy corn silage-based ration for the milking herd. In 2011, the hay-crop forage for the IMRH system had lower quality compared to the BMSH system and more concentrate was fed.

In 2012 with the BMSH system, there was no carryover of corn silage in the fall, which resulted in fresh corn silage being fed that negatively impacted milk production. This is a common occurrence on real dairy operations. The lack of corn silage carryover impacted milk production for much of 2013 as well. Because of weather conditions affecting corn silage tonnage in 2012, acreage was adjusted so more corn silage could be produced so the herd would have ample carryover. The adjustments in acreage for more corn silage improved the BMSH scenario.

Beginning in 2015, forage quality versus forage quantity was a greater factor affecting animal performance. The 2014 corn silage was very low in starch content and was not as high quality as in previous years. The alfalfa/grass mixture in the IMRH scenario was high in fiber. The BMSH had excellent quality alfalfa silage, which helped improve milk production in 2015. Since the IMRH lactating cows had always been on a heavy corn silage and alfalfa/grass mixture diet, their production has remained steady over the project years. After the corn silage quantity was addressed, this provided a ration of continued heavy corn silage feeding for the BMSH system and coupled with excellent quality alfalfa silage provided a production boost in 2015, 2016, and 2017. However, in 2017, the BMSH was transitioned to alfalfa-grass mixed haylage, which showed similar production to the IMRH toward the end of the year.

From 2010 through 2017, the dairy rations and milk production for the two diversified dairy farms performed similarly. The overall average production for the eight years was 78 pounds. As with any dairy operation, external factors, e.g., weather, forage quality, and quantity, will impact milk production and income on a monthly and yearly basis. Focusing on just the dairy enterprise and milk income, both cropping systems produced acceptable performance for the virtual dairy herd.

Table 1. Animal performance and milk income comparison between the BMSH and IMRH scenarios.

Whole Farm Financial Analysis

FINPACK® was used to analyze the financial metrics for the virtual dairy operations. A beginning and ending balance sheet were completed each year as well as an income statement. A list of all the old and new equipment was compiled so depreciation could be accurately calculated. The premise of the virtual dairy operation was that the producer already had animal facilities and forage storage structures in place and prior to 2010 had been focusing on the cropping enterprise. Loans and lines of credit were established to cover the upgrades to the buildings and structures in addition to the purchase of the dairy herd. The following explains the financial analysis for the whole farm, which includes milk and crop sales as the main income generators (Table 2). Since 2010 was a partial year with the milk herd not beginning until October, the financial analysis focuses on 2011 through 2017.

Liquidity

Both the BMSH and IMRH alternatives had a current ratio below the 1.7 recommended standard from 2010-2013. This was due to the large line of credit required to establish the crop and dairy operations during 2010. The high milk price in 2014 provided cash to fully repay the line of credit loan. This was possible for both alternatives. Following this repayment period, the Current Ratios were well above the 1.7 standard. This reflects lower current debt and a growing cash balance. The strategy taken for the virtual farm was to focus on paying down debt.

Profitability

Across the years of the project, there was no difference on profitability between the two scenarios. The rate of return on assets was 6.5/6.6 percent for both with many farms ranging between 4 to 8 percent. Strong crop sales and keeping total feed costs in line helped the virtual farm stay profitable.

Solvency

Both scenarios are very strong from a solvency standpoint. With an average debt to asset ratio of 21 percent across all years, both alternatives demonstrate strong financial position. The benchmark is less than 30 percent. This is primarily due to the moderate investment made in the farm business. While new investment was needed for both alternatives, the choices made were well within the means of the farm operation.

Repayment Capacity

The term debt coverage ratio was similar for both scenarios at 1.60/1.59. The benchmark is greater than 1.5. This ratio determines the farm’s ability to generate enough income to cover all scheduled intermediate and long-term debt payments. This does not include line of credit payments.

Efficiency

The operating expense ratio was similar for both. The BMSH alternative at 63.7 percent compared to 64.7 percent for the IMRH alternative. Both are very desirable ratios for Pennsylvania dairy farms. While the standard is 60 percent or less, many Pennsylvania dairy farms struggle to get this ratio below 70 percent. This ratio is excellent for both alternatives because the dairy is producing sufficient milk for the dollars invested in that production. This ratio gets out of range when costs are excessive (especially feed cost) and when revenue is low during a low milk price cycle.

Total Feed Cost and Cost of Production

There was a $76/cow/year advantage for the IMRH alternative compared to BMSH alternative. However, both alternatives were exceptional on total feed cost. At $1,923/cow for the BMSH alternative and $1,847/cow for IMRH, both scenarios illustrate total feed costs that rank consistently with the most competitive group of Pennsylvania dairy farms. The cost of production for both alternatives is also highly favorable at $16.85/cwt for BMSH and $16.41/cwt for IMRH. These cost of production numbers would place both scenarios in the most competitive group of Pennsylvania dairies.

One disadvantage to the virtual farm is that it is "virtual". The Extension dairy business management team conducted an on-farm research project during 2016 and 2017 capturing similar information as the "virtual dairy farm" on over 20 dairy operations (Table 2). The dairy farms on the "Crops to Cow Project" ranged in size from 40 to 1100 cows. Over half of the farms utilized double cropping (e.g., ryelage) in addition to alfalfa silage or an alfalfa/grass mixture. One of the major advantages to the virtual farm was the ability to raise most of the feed and have substantial crop sales to help support the dairy enterprise. Many of the "Crops to Cow Project" participants relied heavily on the dairy enterprise for their income and did not have crop sales and/or the ability to raise corn or soybeans. However, the real dairy farm data does provide insight that the virtual farm was not extreme in its approach and was comparable to real world numbers.

Table 2. Financial comparison between the BMSH and IMRH scenarios.

Crops to Cow Project: Ishler, V. et al. NESARE ENE 15-136. The Impact of Corn Silage Harvesting and Feeding Decisions on Income Over Feed Costs.

Summary

The virtual farm as a component of the Dairy Systems Cropping Project provided additional insight about managing a dairy operation. If this had been just a cropping rotation project focused solely on yields and costs, many of the decisions made over the 8 years probably would not have occurred. The whole farm approach illustrated that the animal component is what drives the decisions on the cropping plan. It is the quality, quantity, and costs that influence animal performance and the profitability of the operation. Perhaps the most significant observation about this study is the importance of having a strong ratio of cow numbers to crop acreage. Both these scenarios provided excess crop production that could be used for crop sales. All forages and grains were home-raised at competitive values. Excess crops for sale are also a risk management strategy that would help protect the farm against fluctuating commodity prices and provide some drought resilience during short crop years. While cow/crop acre ratios are not favorable throughout all of Pennsylvania, this study demonstrates the importance of this fundamental concept. Combined with the moderate investment used to establish the farm, this study demonstrates small to medium-sized farms can achieve profitability and repay debt on schedule if milk production and feed costs are carefully managed.

References

Binder, J., H.D. Karsten, D. B. Beegle, and C. J. Dell. 2020. Manure injection and rye double cropping increase nutrient recovery and forage production. Agronomy Journal. Doi:10.1002/agj2.20181

Karsten, H. D., Adams, T., Dell, C., Ishler, V., Tooker, J., Wallace, J., Beck, T., Beegle, D. B., Curran, W. S., Hoover, R., Jahanzad, E., Kleinman, P., Richard, T., Sutradhar, A., Malcolm, G. M., & White, C. (2020). Advanced sustainable cropping systems for dairy farms in Northeast. SARE Outreach: College Park, MD.