Intensive Grazing/Seasonal Dairying: The Mahoning County Dairy Program

1987-1991

OARDC Research Bulletin 1190

Chapter 10: Economic Patterns and Labor Utilization

A seasonal dairying/intensive grazing system has been advanced as an alternative to conventional dairying systems. Compared to conventional systems, a seasonal dairying/intensive grazing system emphasizes reducing capital requirements, thereby allowing easier entry into dairying. Moreover, high milk production is not an overriding objective. Rather, emphasis is placed on lowering feed costs by relying on pasture to provide the animal's forage requirements. Lower capital requirements and lower feed costs then potentially lead to a profitable system.

The Mahoning County Program consisted of a seasonal dairying/intensive grazing system with between 30 and 43 cows and 42 acres of grazed pasture in Northeast Ohio from 1987 through 1991. We used data from this project to address the following question: Can a seasonal dairying/intensive grazing system as structured with the Mahoning Project provide competitive returns to all resources? To address this question, we first highlight production components of a seasonal dairying/intensive grazing system, thereby providing specific criteria for evaluating the system. Then, capital, management, and labor resources used during the project are described. These descriptions serve as the basis for quantifying returns to resources. Following the descriptions, financial reports of the Mahoning Project are analyzed to answer the above question. Based on these analyses, we draw conclusions concerning the commercial applicability of a seasonal dairying/intensive grazing system.

Overview of the Seasonal Dairying/Intensive Grazing System

Briefly, a seasonal dairy has all animals freshen within a short period of time each year. As a result, all cows and heifers must be bred within an 8-week window to remain in the herd. Breeding all animals within this time is crucial for the success of a seasonal dairy.During the Mahoning Project, dairy animals were bred during June and July so that freshening occurred during March and April.

Freshening in March matches the forage requirements of dairy animals with forage production from pasture. However, this timing may yield a lower average milk price than received by a conventional dairy or a seasonal dairy freshening at another time (Ford, 1992). Milk prices follow a seasonal pattern. Milk prices tend to be low during spring months, and prices normally rise in late summer until they peak during the winter months. Prices then decline into spring. Because of seasonal milk prices, a seasonal dairy freshening in March must reduce costs to be economically competitive.

In an intensive grazing system, animals are confined to a small area of pasture (or paddock) which is grazed heavily for a short period of time. Then, animals are moved to another paddock while the already grazed paddock regrows. Intensive grazing allows a paddock to be grazed four to six times during a season, depending on pasture characteristics, weather conditions, and livestock stocking rates (see University of Wisconsin-Extension, 1992, for a more complete description of production practices used in intensive grazing). Possible economic benefits from intensive grazing include increased pasture productivity, increased forage quality, and lower reliance on stored forages (Miller and Schnitkey, 1991). Hence, a dairy using intensive grazing should have lower per-cow feed costs relative to a conventional dairy, particularly if lower milk production levels occur.

Seasonal dairying and intensive grazing do not have to be used together. In tandem, the components potentially offer a low investment system. Investments in forage harvesting equipment and storage facilities are reduced by grazing pastures rather than by feeding stored forages. Use of older facilities may further reduce investment.

Given the above discussion, specific criteria for evaluating the seasonal dairying/intensive grazing system are:

1. Per-cow feed costs of this system should be lower than for a conventional dairy,
2. Per-cow fixed costs should be lower than for a conventional dairy, and
3. The system should generate competitive returns to all resources.

Capital Resources

In keeping with the low investment criterion, an old bank barn was remodeled to serve as the dairy facility. Renovation required installing a stanchion milking area, purchasing used milking equipment and a bulk tank, and building a milk house inside the barn. Renovation investment totaled $8,402. In addition, a larger milk tank was purchased in 1989 at a cost of $4,700. Milking and concentrate feeding occurred in a six-place stanchion installation, requiring moving cows in and out of stanchions. The barn had a partially covered feedlot used for loose housing during winter months. An old corn crib near the barn was converted to a calf-raising facility.

Approximately 42 acres of tall fescue-legume pasture were fenced into six large paddocks using electrified high-tensile fence costing $7,402. The majority of the grazing occurred on 23 acres while the remainder was used mostly for hay production. Through the year, all acreage was grazed at some time. The large paddocks were divided into smaller paddocks using electrified polywire. The manager moved this polywire fence while bringing the cows in for the p.m. milking.

At the beginning of the project, 30 bred heifers of average to above average genetic potential were purchased. Half of the heifers were Holstein while the other half were Jersey. These animals and their heifer calves provided the vast majority of the milking animals during the project. Cows culled (eight Holsteins, four Jerseys) at the end of the first year were replaced with transferred or purchased pregnant 2-year-olds since no yearling heifers were present during the first year of the project. Pasture was the only on-farm source of feed for the animals. All other feeds were purchased.

Management Resources

The seasonal dairying/intensive grazing system required a differing management emphasis than a conventional dairy. Specific differences are:

1. Dairy animals must be bred successfully every year during June and early July in order to maintain a 12 month calving interval.
2. All dairy animals freshen during March and early April, causing high labor requirements during this period.
3. Pastures must be properly managed to maintain forage yields and quality. Proper management requires moving dairy animals to differing pasture areas at the proper time.
4. The slack season of end-of-lactation and the subsequent dry period of the herd allowed for labor use opportunities not seen in conventional dairying.

A research team provided long-run management guidance. Steve Shoemaker, herdsman for the project, provided day-to-day management. Mr. Shoemaker had extensive dairy herd management experience prior to the Mahoning Project and proved to be an excellent manager for the project. As reported else where, the breeding (Chapter 6), calving (Chapter 3) and pasture (Chapters 8 and 9) programs were successful.

Labor Resources

Detailed labor use records were maintained by the herdsman during 1987 through 1990. We do not report labor use during 1987 because full production was not maintained. Labor use was not recorded during 1991 because labor use did not vary during the prior three years.

We summarized labor requirements into monthly reports. Labor was provided by the herdsman and by employees of the Ohio Agricultural Research and Development Center (OARDC). Labor provided by OARDC employees was reported as supplemental labor. Both herdsman labor and supplemental labor were divided into three activities:

1. Dairy-labor directly related to the care of dairy animals. Labor for dairy animals was further divided into:
   a. cow labor-labor related to milking, feeding, and caring for milking and dry cows,
   b. heifer labor-labor related to feeding and caring for replacement animals, and
   c. reproduction (repro) labor-labor used for heat detection and breeding.
   
2. Pasture-labor related to fence moving, pasture care, and pasture maintenance.
3. Miscellaneous (misc)-labor not directly attributable to dairy or pasture activities. Miscellaneous labor was further divided into:
   a. research labor-labor related to research activities which would not be incurred by commercial enterprises, and
   b. other labor-miscellaneous labor not research oriented. Most of this labor was used for barn maintenance.
   

Labor Use During 1987 Through 1990. An average of 3,037 labor hours were used each year (Table 10.1). The herdsman supplied 91% of the labor while supplemental labor accounted for the remaining 9%. Most supplemental labor was used during January and February when the herdsman was on vacation. During this period, cows were dry and supplemental labor was used to feed cows and haul manure. From February to December, most labor was provided by the herdsman who milked the cows and cared for the calves.

Management of livestock required the most labor, accounting for 2,460 hours or 81% of total labor use. Within this management activity, milking, feeding, and caring for cows required 1,974 hours, 65% of total labor use (Figure 10.1). Heifers required 14% of total labor while reproductive activities required 2%. Activities related to the pasture accounted for 242 hours or 8% of total labor use. Miscellaneous activities accounted for 11% of labor use.

Figure 10.1. Labor distribution by activity, 1988-1990.

Labor use averaged less than 4 hours per day during January and February when cows were dry. Labor use rose dramatically in March and peaked at over 10 hours per day in April through June. During this period, freshening cows and young calves required a great deal of care. Labor use in July through October was fairly stable, averaging between 8.5 and 9 hours per day. During November, labor use increased to 9.6 hours per day because cows were not always on pasture, increasing time spent cleaning the barn. Daily labor use declined to 6.3 hours in December as cows were dried off.

Most of the unevenness in labor use is attributable to cow and heifer activities. When cows were milking, labor use for cow care always exceeded 5 hours per day (Figure 10.3), with the majority of labor use accounted for by milking time. Labor use for heifers was highest in April and May when heifers were young.

Although crucial for the success of a seasonal dairy, reproduction activities did not require a great deal of time. Even in June, when most reproduction activities occurred, average hours for reproduction activities did not exceed an average of 1 hour per day (Figure 10.3).

Summary of Labor Use. Labor use during this project was relatively high and fully employed one person. It was originally thought that this enterprise would allow for possible outside employment. However, labor use was such that only the dry period offered the herdsman any "free" time for vacation or outside employment.

Labor use was very high between April and June when cows were freshening and heifers were young. This period presents a labor bottleneck. Larger herd sizes would require either supplemental labor or a means of reducing labor.

Reductions in labor use most likely would occur by reducing milking time. Modification of the six stanchion parlor to allow additional automation or for more cows milking at once would reduce milking time. Reducing miLking time, however, would likely require investment. Hence, there is a trade-off between labor productivity and investment.

Financial Results

Yearly income statements were prepared using modified costing principles (Frey et al., 1989). These statements provide two measures of income: income before interest and taxes, and cash operating income. Income before interest and taxes measures returns for equity financing, unpaid labor, and unpaid management. Cash operating income measures funds available to make debt principal payments, fund expansion, pay income taxes, and provide for family living.

Income statements were prepared as if the project had been a commercial enterprise assuming that one family owned the cows, managed the herd, and provided all labor. We took this perspective to determine if the project could have been a viable, commercial enterprise. The commercial perspective differed from the actual research arrangement. As the project was structured, the herdsman owned 30 of the cows and he received rental payments for these cows. In addition, the herdsman was provided a salary for operating the enterprise. Expenses for cow rental and herdsman salary were not included in the income statements because a family enterprise would not incur these costs.

We presumed that a family starting this enterprise would rent buildings and land. A rental arrangement was chosen over a purchase arrangement in order to minimize initial investment. As part of the rent, the family was presumed to pay for all building renovations and make a $3,190 yearly payment. About $1,000 of the $3,190 (for rent and taxes) covered property taxes (Table 10.2). If a purchase arrangement had been chosen, rent less property taxes could have serviced debt on a land and building purchase. The $2,190 would have serviced a 20-year amortized loan having a 10% interest rate with a beginning balance of $18,645. Value of the property used in the project was estimated to be between $30,000 and $50,000.

Even without a land and building purchase, an initial investment was still required for building renovation, fencing investment, and cow purchases. At the beginning of the project, building renovations and fencing investment totaled $13,102. Cows would have cost approximately $30,000 (30 cows x $1,000 per cow). Hence, an investment of $43,102 was required. We presumed these investments were equity financed; therefore, no interest costs were included in the income statements. However, the income statements included depreciation on building renovations and fencing investments.

Figure 10.2. Average hours per day by activity and month, 1988-1990.

Most data for income statement preparation came from two sources. The OARDC's accounting office provided yearly reports for 1988 through 1991 listing receipts and disbursements. Receipts and disbursement data were not available for 1987; therefore, an income statement was not prepared for the first year of the project. The herdsman provided ending year inventories of cows, bred heifers, and heifer calves. Data not coming from these two sources are listed in the footnotes (Figure 10.4).

Figure 10.3. Average hours per day by dairy activity and month, 1988-1990.

Income Statements of the Mahoning Dairy Project. In all years, milk sales accounted for over 75% of total revenue. Milk sales steadily increased from a low of $39,998 in 1988 up to a high of $74,866 in 1991 (Table 10.2). Three factors contributed to the increase. First, pounds of milk sold per cow increased over time. Milk sold rose from 10,831 pounds per cow in 1988 to 13,077 pounds in 1991. Second, cow numbers generally increased over time. Cows milked numbered 30, 36,32, and 43 in 1988 through 1991, respectively. Third, milk prices were substantially lower in 1988 and 1989 than in 1990 and 1991. Milk prices averaged below $13.00 per cwt. in 1988 and 1989 while milk prices were above $13.30 per cwt in 1990 and 1991. Part of the difference in milk prices is explained by a switch from a Grade B to a Grade A dairy in August, 1990.

Yearly average milk prices for 1988 through 1991 were compared to ten-month (March through December) and nine-month (April through December) averages (Table 10.3) to quantify the disadvantage from freshening in March. For these years, ten- and nine-month averages ranged from 97% to 101% of the yearly average, suggesting that the milk price disadvantage is not large. However, this method does not take into account monthly variations in milk volume as seen in a seasonal herd. Price by month is more important under these terms. For example, Figure 1.1 shows the effect of volume with an 85% persistent lactation curve and its effect on aggregate milk price over a ten-month lactation. Not to be forgotten is a great difference in Grade B and Grade A prices which can have a major effect on profitability.

Seasonal production has the effect of exaggerating seasonal milk price effects. The low milk prices characteristic of spring must, therefore, be overcome by substantially reduced costs of production. This leads to the maximum conversion of the best feed to the most milk at least cost through intensive rotational grazing of a herd where all cows are at peak production together when the forages are most abundant and nutritious, namely spring.

The second largest contributor to total revenue was market gain (change in inventory value) on the herd, accounting for at least 10% of total revenue in each year (Table 10.2). During 1988, market gain was primarily attributable to an increase in animal numbers during the herd's build-up stage. The herd consisted of 18 cows and 15 heifer calves at the beginning of 1988, while the herd had 23 cows, 13 bred heifers, and 13 heifer calves at the end of 1988 (Figure 10.4). As a result, the ending inventory was worth $11,600 more at the end of the year than at the beginning of the year for 1988. In 1989 through 1991, inventory change accounted for less while cull cow sales accounted for more of the market gain.

Per-cow milk production was relatively low during the Mahoning Project. Reasons for low milk production in order of their importance included:

1. Tall fescue was relatively poor forage, thus limiting nutrient intake and milk production levels (Chapter 9).
2. Seasonal dairying reduced the average number of days cows were in milk during a lactation. Cows in a conventional dairy average over 305 DIM. This seasonal dairy averaged about 270 DIM, about 35 days short of a complete lactation period since drying-off always preceded Christmas day. This could have been alleviated by milking the herd throughout December and into mid-January.
3. A small amount of milk was dumped in March. Often, one or two cows freshened before other cows, resulting in an insufficient quantity of milk for collection.
4. Some milk produced by lactating cows was fed to calves.

The second and third reasons will be obstacles for all seasonal dairies, but they can be minimized. Improvement in profitability would be expected by remedying the first and fourth reasons.

The largest expense was purchased feed, accounting for over 50% of total expenses in all years. Year to year variations in costs were highly correlated to cow numbers. The cost of purchased feed was somewhat surprising, given the project's emphasis on reducing feed costs. Because of the size of feed costs, increases in profitability are likely to come from increasing the efficiency of the feeding program.

Income before interest and taxes ranged from a low of $8,109 to a high of $26,551 (Table 10.2). Profitability can be gauged by imputing returns for equity financing, unpaid labor, and unpaid management. The imputed returns represent returns unpaid factors could have generated in alternative uses. Profit is calculated by subtracting imputed returns from income. At a minimum, the $43,000 of equity could have earned 4% interest in a bank savings account, yielding a yearly return of $1,720 ($43,000 equity financing x .04 interest rate). Hourly wages for agricultural workers averaged $6.00 per hour (Ohio Agricultural Statistics Service), giving a labor return of $18,222 per year (3,037 hours per year x $6 per hour). Management charges often are imputed as 5% of gross revenue. These imputed returns result in the following yearly profits:

On average, income generated by the project under Grade B management did not cover imputed returns. A positive profit was generated only in 1991 after conversion to Grade A and considerable genetic improvement. In these comparisons, we used conservative rates of return for the resources. Many dairy farms generate above average to exceptional rates of return.

Cash operating income rose steadily over the four years, beginning at $2,454 in 1988 and moving to $26,167 in 1991 (Table 10.2). Since the operation was presumed to have no debt, cash operating income could be used for family living expenditures and income tax payments. During 1988, 1989, and 1990, it is doubtful that the operation would have provided enough funds to sustain family living. In 1991, cash operating income could have provided most of family living expenditures, given a relatively modest lifestyle.

Funds available for family living would have decreased, if a portion of the $43,000 beginning investment was financed. Yearly reductions are given below for differing debt-to-asset ratios, presuming debt was financed using a ten-year, amortized loan having a 10% interest rate:

Presence of debt would significantly reduce funds available for family living, particularly in early years of the project.

Dairy Enterprise Returns and Costs. Yearly results reflecting performance on a cow basis also were prepared. These results allowed analysis of the strengths and weaknesses of the seasonal dairy for the given small number of cows in the herd. Moreover, these results not only included cash costs but also included opportunity costs for equity investment, unpaid labor, and unpaid management, thereby giving return above total costs. An enterprise must have positive returns to be viable in the long-run. Most receipt and cost categories in the per cow results equaled their respective categories in the income statement divided by the number of cows. For example, the 1988 per cow milk sales of $1,333 (Table 10.4) equal $39,998 (total milk sales divided by 30, the number of cows milked during 1988). Items not calculated in the above manner are explained in the footnotes (Figure 10.5).

In all years, per-cow returns above total costs for the dairy enterprise were negative (Table 10.4). Hence, the dairy enterprise did not generate the opportunity return of the resources used in the operation.

During the first three years, the dairy enterprise, operated under Grade B terms, immature cows, limited genetics, and a short lactation period, did not cover opportunity costs, and it compared unfavorably to overall U.S. dairy enterprises. For example, residual returns to management and risk for U.S. dairy enterprises were $280 and $178 per cow, respectively, in 1988 and 1989 (USDA, 1991a). Comparable returns for the Mahoning dairy were $391 in 1988 (-$478 return above total costs + $87 management charge) and -$606 in 1989. Differences in herd sizes are probably important in considering these comparisons.

Potential reasons for poor profitability can be gauged by comparing the 1991 costs of the Mahoning dairy enterprise to costs from a 1991 budget prepared by Ohio State University Extension (1991). The budget chosen for comparison approximates typical costs for a herd producing 13,000 pounds of milk:

The Mahoning dairy had approximately the same feed costs, higher other variable costs, and lower fixed costs.

Lower fixed costs indicated that the project was successful in lowering capital inputs. Most of the gain was attributed to equipment and building charges, which averaged $109 per cow in the Mahoning project as compared to $493 in the enterprise budgets.

These gains were partially offset by higher costs for variable items other than feed. The single category having the largest difference was utilities: $114 for the Mahoning project as compared to $54 in the budgets. Thus, increased variable cost control could result in higher profits.

The Mahoning Project's feed costs were roughly equal to figures from the Ohio budget. Although a stated objective of the project was to reduce feed costs, purchased feed costs approached $800 per cow in each year (Table 10.4).

Intensive Grazing Returns and Costs. Per acre intensive grazing results were calculated in a manner similar to per cow dairy results. Returns above total costs for intensive grazing were positive in all years (Table 10.5). Moreover, returns above total costs from intensive grazing were higher than returns from most major grain crops grown in the United States (USDA, 1991b). Hence, intensive grazing compared favorably to other cropping alternatives.

Returns from an intensive grazing enterprise depend on stocking rates. Hence, 1991 results are better than previous years. While stocking rates at 1991 levels can be maintained, dealing with adverse conditions resulting from droughts will become more problematic.

One area where cost could have been reduced was fencing, which accounted for $56 of per acre costs. Individuals involved with the project believed that the initial investment could have been reduced, thereby lowering costs.

Summary of the Financial Results. Following are key points from the financial analysis:

1. As structured, the Mahoning Project did not generate opportunity returns to resources, particularly in the early years of the project while operating as a Grade B dairy. This, however, is typical of research projects. For an intensive grazing/seasonal dairying project to be viable, increases in profitability must occur.

2. Seasonal dairying, as separated from intensive grazing, was unprofitable. Possibilities for increasing profitability center around increasing the efficiency of the feeding program. The final year showed substantial progress in this area, indicating profit potential had been reached.

3. Intensive grazing was profitable.

Discussion: Economic Possibilities of Intensive Grazing/Seasonal Dairying Systems

Based on our analyses of labor use and financial results of the Mahoning Project, we arrived at four conclusions:

1. Intensive grazing may be a profitable alternative for some dairy farms.

   Intensive grazing may be a means for some dairy farms to increase profitability. Moreover, intensive grazing does not have to be used in conjunction with seasonal dairying. Hence, conventional dairies may use intensive grazing to supplement other forage sources. Generally, dairies with less than 100 cows may be able to profitably use intensive grazing. Budgeting work by Tranel and Frank (1991) support this conclusion.

2. The feed program must be improved before seasonal dairying is a profitable alternative.

   The efficiency of the Mahoning project's feeding program could have been increased by having higher quality pastures. Use of higher quality pastures would have reduced feed costs per cwt. of milk by reducing the need for purchased feeds (Chapter 9) and by supporting greater milk production. Given that higher quality pastures are used, a seasonal dairying/intensive grazing system has two diametrically opposed options for increasing efficiency, i.e., low production with commensurately lower feed costs or high production with more efficient feed conversion even though feed costs would increase. In other words, operate without grain feeding which lowers production or feed grain and increase production.

   For option one, purchased feed costs could be lowered while accepting low levels of milk production per cow. At the 13,000 lb milk production level per cow maintained during the Mahoning Project, purchased feed costs would have had to be lowered by $400 per cow for the enterprise to be profitable. Reductions in feed costs would have to be even higher if per-cow milk production declined with the feed cost reduction. Whether reductions of this magnitude are possible is not known.

   Alternatively, in the second option, emphasis could be placed on achieving greater per-cow milk production levels. For the dairying enterprise to be profitable, per-cow milk production levels would have to increase by 2,730 lb (1,241 kg) giving a per-cow production level of 15,807 lb (7,185 kg), assuming that all other costs remain constant. Production increases would likely have to be higher because feed costs most likely would increase with higher production levels. This option would likely be more feasible than the first option.

3. Herd size must be increased, given that the efficiency of the feed program can be improved.

   It's highly unlikely that a 30-cow herd will provide sufficient income for family living. Herd size must be at least in the 40- to 50-cow range. Herd sizes above 70 cows have more potential to be viable than smaller herds.

4. Labor requirements must be reduced, particularly if herd size is to be increased.

   Significant labor reductions are possible by changing the milking facilities. For example, a parlor rather than a six-place stanchion facility could have reduced milking time. Such a modification is necessary if more cows are to be milked and additional labor is not obtained.

Summary

Seasonal dairying may appeal to small dairy producers trying to avoid additional investment in buildings or to dairy producers trying to start a firm with limited resources. Seasonal dairying with spring freshening may not be an attractive alternative for the majority of Ohio's current dairy farmers. Critical to success is maintaining low capital resources while obtaining feed efficiency. An efficiently managed intensive grazing system will improve the profitability of many dairy producers. With proper management, a seasonal dairying/ intensive grazing system offers some unique opportunities for dairy producers.

Table 10.2. Yearly income statements.
Table 10.4. Per-cow and replacement dairy returns and costs budget.
Table 10.5. Per-acre intensive grazing results.