Grazing’s potential: predicting expansion’s cost, profit (Research Brief #30)
Posted September 1998
Many successful graziers, confident in their grazing and management skills, are now asking: Will an expansion pay for a labor-saving parlor within a modified seasonal calving system to allow me and my family a better of quality of life? Probably, according to the models formulated by a team of UW-Madison and Extension economists, but it depends on factors including existing capital, debt, production levels, and sweat equity.
Using models of management intensive rotational grazing operations, this team looked at the financial trade-offs of expansion in terms of cost, profit, labor, and debt. They found that expanding to 125 cows with the parlor provides the best return on farms at all levels of current investment. Additionally, an expansion to either 100 or 125 cows with a parlor would provide more flexibility for the future.
Bimal RajBhandary, a research assistant with the Center for Integrated Agricultural Systems (CIAS), says “the study had in mind graziers who would like to expand within their resource base of management, capital investment, and land.” The study also aimed to give lenders and others who work with graziers more information about grazing’s potential. The UW team included RajBhandary, Gary Frank, a farm management specialist with the Center for Dairy Profitability, Rick Klemme, CIAS director and ag economist, and Larry Tranel, Iowa County extension farm management educator.
Looking toward expansion
This group’s previous research showed that management intensive grass dairying could be as profitable as confinement, year-round systems, based on budgets for 50- and 70-cow farms. (See CIAS Research Brief #19.) Results of those studies also suggested that grazing-based, spring-calving systems might lower overall profits but increase profits per labor hour compared to other systems.
As a follow-up, the researchers examined the potential for expanding a 70-cow, 150-acre, grass-based dairy farm to a 100- and 125-cow farm. These studies assumed that graziers are calving their herds year-round but would like to construct a New Zealand-style swing-over parlor and move to a modified seasonal calving system in which only 20 to 30 percent of the cows are milked through the winter.
Scenarios considered existing building conditions, debt load, herd size, and upkeep expenses. The study focused on profitability; effects on cash flow and the impact and costs of additional nutrient loads will be reported in future Research Briefs.
Setting up the scenarios
The UW team simulated three grass-based dairy systems based on budget estimates from similar year-round, 150-acre, 70-cow farms in Wisconsin. The three farms differ only in the type and condition of existing buildings-from minimal investment in buildings to higher levels of investment. The amount invested in cows, equipment, and land is assumed to be the same for all three farms.
The low investment farm has $62,000 invested in buildings, including a dairy barn, milk house, milking equipment, feed and manure storage, and a machine shed. This farm’s buildings, while in good repair, have not been upgraded in the last ten years. The medium investment farm has $112,000 invested in buildings. It is similar to the low investment farm but has a remodeled barn and a larger machine shed. The high investment farm has building investments of $165,000, including a heifer housing facility, grain unit, larger machine shed and better manure storage, compared to the other farms. The heifer facility on this farm can be converted to a double-12 swing parlor. Based on these scenarios, researchers compared how well a farm could shoulder expansion based on increasing levels of investment. (See the table below.)
|Building/equipment investment by herd size|
|Existing investment||Additional investment|
|Number of cows||70||100*||125**|
|Low investment farm||$62,000||$108,000||$128,000|
|Medium investment farm||112,000||93,000||113,000|
|High investment farm||165,000||53,000||73,000|
|*An additional $36,000 is required to purchase livestock.|
|**An additional $66,000 is required to purchase livestock.|
Capital costs of expansion
The researchers considered two expansion scenarios within a modified seasonal system. In one scenario, the farm expands to 100 milk cows with 20 to 30 cows milked over winter; in the other, the farm expands to 125 cows with 30 to 40 being milked over winter.
Several assumptions about the requirements for the expansion are reflected in the table above. “We purposely over-capitalized the expansion, allowing flexibility to milk and house cows through the winter,” Klemme says, “because in most cases, variable winters (particularly mud seasons) will necessitate some winter cow housing.” Cow housing is a bedded pack in a machine shed, costing $13,000 at 100 cows and $18,000 at 125 cows. Heifers are assumed to be outwintered with the expanded herd, so heifer housing costs drop to zero.
The parlor included in the expansion scenario is a double-12 swing parlor costing $50,000. At the high investment farm, the parlor is constructed in the existing heifer building at a cost of $25,000. The bulk tank is purchased for $5,000 used at 100 cows and $20,000 new at 125 cows.
A skid steer is added at a cost of $10,000 at the 100- and 125-cow level for drive-by feeding, and horizontal feed storage is added for both levels of expansion at the low and medium investment farms. Manure storage is increased at the low and medium investment farms at a cost of $20,000 and $10,000, respectively. Existing feed and manure storage is sufficient for the expansion at the high investment farm. At 100 cows, 30 cows are added the first year and six the second, at a total cost of $36,000; at 125 cows, 55 cows are added the first year and 11 the second, costing $66,000.
In these scenarios, annual income for each farm is based on a herd average of 15,000 pounds of milk per cow, $12 per hundredweight milk income, and $282.50 per cow income from cull cow and calf sales, and miscellaneous sources. The three farms were assumed to have similar labor and operating costs. The 70-cow milking herd brings in a gross income of $145,775; the 100-cow herd, $208,250; and the 125-cow herd, $260,307. At each size, labor costs are the same for all three farms. But operating costs diverge with different levels of additional investment required.
Before the expansion, the low investment farm has the highest return over costs. Return over costs takes into account opportunity interest charged on all investments and depreciation, and is highest in the lowest capital cost situation. The low investment farm has the lowest capital costs, but the medium and high investment farms have better physical structures and lower costs for future dairying.
The table below shows that the returns to labor and management are very similar for the 70- and 125-cow levels for the low and medium investment farms, meaning that for them, the 125-cow expansion is basically a break even proposition. The 100-cow level does not provide enough returns to cover the relatively high investment levels on these farms. Assuming the parlor and modified seasonal system saves labor, an expansion would increase the returns to labor and management per hour. (See CIAS Research Brief #19 for a discussion of labor savings with a pasture-based seasonal herd). The high investment farm makes more gains than either of the other farms in returns to labor and management at both 100 and 125 cows, because existing facilities can be used for the expansion.
|Returns to labor and management by herd size, at different investment levels|
|Number of cows||Low||Medium||High|
|Profits can be calculated by deducting a labor and management charge from the returns to labor and management. The labor charge is $39,369 at 70 cows, $37,455 at 100 cows, and $43,193 at 125 cows. Labor savings due to the swing-over parlor and reduced acreage under cultivation make the 100-cow level labor charge lower than the 70-cow level.|
So, does it pay to expand?
An expansion from 70 to 100 or 125 cows can pay for a parlor and a move to a modified seasonal calving system, increasing the farmer’s quality of life and increasing the resale value of the farm. “Given the decision to add a parlor and winter housing, it makes the most sense to expand to 125 cows, rather than 100,” notes Klemme, citing the larger returns to labor and management from the 125-cow expansion and the minimal increase in labor required for 25 more cows.
For those in situations like the high investment farm with existing facilities to handle additional cows, the expansion is even more attractive, adding even more to returns to labor and management. And perhaps even more significantly, the parlor reduces labor hours and stress, and the expansion allows more long-term options for the farm, like adding cows and land.
Contact CIAS for more information about this research.
Published as Research Brief #30