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Organic Dairy Farming Tough But Profitable

Last updated Saturday, March 22, 2008 6:26 PM CDT in Business

By Kim Souza
The Morning News

 

Facing near starvation in the summer of 2006, Wayne Hale of Evansville and John Robert and Carolyn Hart of Prairie Grove, looked to the organic dairy sector for greener financial pastures.

After more than three decades of operation, both dairies were facing extinction with fluid milk prices below $8.50 per hundred-weight, or cwt. (Hundred-weight is the standard measurement for milk in pounds; 1 cwt. equals 8.6 gallons.)

When Larry Hale, director of Central Organic Milk Producers, offered to pay the farmers a 3-year base rate of $24.50 per cwt. with a $2 quality premium, Wayne Hale and Hart took notice.

"I saw this move to organic as a way to keep the dairy open, at a time when dairies were closing all over the state," said Wayne Hale, who has owned and operated his 360-acre dairy farm south of Lincoln since 1976.

The Harts found themselves in a similar situation. The couple has operated their 250-acre dairy farm for 38 years, transitioning to organic production in June 2006. The Harts were the first certified organic dairy in the state.

GROWING TREND

The conversion of the two dairy farms are part of growing U.S. trend to produce organic milk to supply a consumer market growing at an annual rate of 20 percent.

The two Washington County dairies and seven other dairies in the state joined the Central Organic Milk Producers Cooperative in 2006. The cooperative has 21 organic dairies under contract and four others in transition. Almost half of the cooperative's 186,046 gallons of milk collected in February came from Arkansas organic dairy farms. Other farms in the group are located in Illinois, Kansas, Missouri and Oklahoma.

Larry Hale said while the move to organic dairy producing is a popular trend in the northern U.S., southern dairymen have been slower to make the move.

"When the organizational meetings started up in early 2006 there was a great deal of interest among all Arkansas dairymen, as record low milk prices had most looking for any alternative to help them stay in business," Wayne Hale said.

He said the aging population of Arkansas dairymen and their need to retain health insurance through Dairy Farmers of America kept many from making the move to organic.

Larry Hale agreed higher organic prices created interest, but the three-year land transition and one-year cow transition to organic standards meant a cash outlay at least a year before the higher organic prices could be collected.

The Hales and Harts participated in a 2006 federal 20/80 rule that allowed them to feed 20 percent conventional grain and 80 percent organic feed for nine months, the last three months converting to 100 percent organic. During this transition period the milk was not sold as organic, but the farmers got a $2 per cwt. stipend to help with conversion expenses.

Both farmers said their fields were close to organic regulation, which disallows commercial fertilizers or pesticide applications for three years.

As nitrogen fertilizer became more expensive these farmers relied solely on poultry litter for fertilizer. Poultry litter is about the only fertilizer allowable under the U.S. Department of Agriculture organic guidelines, Wayne Hale said.

HIGHER COSTS

Both farmers were looking forward to the better financial returns from organic milk production. What they hadn't counted on were the higher prices to produce organic milk.

The federal mandate for alternative fuels has driven the costs of grains used to feed animals to all time highs.

Organic dairy feed has escalated past $500 per ton, almost double the cost of a conventional dairy feed.

With conventional corn costing more than $5 per bushel, there is not a financial incentive to grow organic corn, leaving the grain in short supply relative to demand, forcing prices up to $8.70 per bushel. Organic pastures can't be sprayed for insects or fertilized with nitrogen-based compounds which means they produce far less yields than conventional acreage, Wayne Hale said.

Caldwell Milling in Damascus is the only Arkansas source for organic dairy feed.

"We order our mixed feed from Caldwell and it's trucked in from Damascus by the ton. We had to purchase a second grain silo costing about $4,000 to handle the larger grain shipments. Because of the distance, only large orders - 3-ton minimum - are accepted," Carolyn Hart said.

The most popular organic dairy blend sold by Caldwell costs $517 per ton. The three-grain blend consists of corn, grounded roasted soy beans, milo and a certified organic mineral, said Becky Bradford, general manager for Caldwell Milling.

When organic wheat becomes available most dairy farmers will likely change to a four-grain blend that is priced a little lower, she said.

The Central Organic Milk Producers Cooperative has approved a 40-cent per cwt. payment to its producers effective in April to help offset grain prices, Larry Hale said.

The outlook for organic dairy farming is beginning to look better relative to conventional dairying, given downward pressure on conventional milk prices, said Jodie Pennington, dairy specialist for the University of Arkansas Cooperative Extension in Little Rock. Higher non-organic milk prices have resulted in more milk production, which has created an oversupply Pennington believes will soon result in lower prices paid to conventional dairy farmers.

He said organic dairy farms still have a slight financial advantage because higher prices for organic milk help offset a $5 per cwt. higher cost for organic milk production than conventional production.

LOWER PRODUCTION

As the new organic farmers quickly calculated profits in their heads from higher contract milk prices in 2006, they failed to realize the other side of the equation - decreasing milk production levels.

"Before I transitioned to organic methods, I fed a mixed corn blend almost exclusively and my cows ate non-stop. They produced high levels of milk and burned themselves out in three to four years time," Wayne Hale said.

Using the organic method, Hale said, his herd of 100 Holstein went through an amazing physical transformation.

"They are giving far less milk because I am feeding them only a fraction of the grain, given its high costs," he said.

Hale has instead put more emphasis on pasture grazing, planting red clover and other types of grain proteins this winter and spring. He said the cows are thinner, but healthier overall.

He has seen his milk production in cows freshening - just starting to milk - down as much as 50 percent. On average last year Hale said his production was off 38 percent in his first year of organic production.

Organic experts say milk production decreases after the transition because the cows are getting less corn.

While the Harts said their production is down only a fraction, they attribute the steady production levels to the fact they feed each cow 18 pounds of corn and soybean meal per day. In contrast, only half of Hale's cows are getting a 10-pound grain ration and the other half subsist on grazing, hay and oat supplements.

This spring, Hale plans to plant 60 acres of organic corn, which he will feed through the fall and winter in hopes of raising his production levels.

"I feel like my grandfather must have felt when he ran a dairy two generations back. He fed what he could grow and took the milk the he got," Hale said. "Of course, he didn't have my bills."

Hart said he would rather buy the grain feed than invest in the equipment and additional manpower he would need to grow corn. The Harts also operate five poultry houses to grow Cornish game hens for Tyson Foods Inc.

NEW THINKING

Both farmers said the transition to organic was a change in mindset as well as farm operations.

The emphasis shifted from maximum milk production in the conventional dairy to an overall farm economy on the organic side.

The farmers do not worry about milk prices. Their contracts are fixed for three years, unlike the monthly fluctuation of a conventional month-to-month contract.

"More emphasis is put on animal welfare and strong environmental policies," Carolyn Hart said.

The Harts experienced a high calf mortality as a conventional dairy. She said none of the local animal experts could explain why they lost so many calves.

Since the transition, the Harts report healthier calves and mothers. They leave the calves with the mother longer and even though that comprises milk production, they said its worth it to have the healthy calves and build a stronger herd.

Although the milk business lost money last year, a healthier milking herd allowed the Hales to sell excess calves and heifers which brought good prices. When these receipts were added to the farm's overall revenue, he said the year wasn't bad.

Both farmers said healthier animals also result in fewer veterinarian bills.

Hale said he made a trip to Amish country last year and learned of some homeopathic remedies used by Amish dairy farmers.

He gives the cows organic sea salt for extra minerals and uses only herb treatments for the rare ailments that arise.

TRAVELING MILK

Despite a local demand - pushing prices to more than $7 a gallon - for organic milk, the milk produced by Hart and Hale is shipped to Winchester, Va., where it's processed by H.P. Hood, one of three major organic dairy producers in the nation.

This 1,200 mile journey from the farm to processing factory and distribution to a grocery on the East Coast adds about $2 per gallon to the retail cost of organic milk, Pennington said.

Ozark Natural Foods in Fayetteville sells organic milk, trucked in from either Texas or Iowa under the Organic Valley Brand, said Matt Smith, a dairy buyer for the store. He said if there was a local organic dairy processor the store would offer milk from local producers.

Larry Hale said low volume levels of local organic milk production does not justify start-up or operating costs for a local dairy processor.

As more dairy farms transition to organic and local production levels increase, the demand for a regional processor could follow.

While Larry Hale doesn't anticipate a surge in transition among Arkansas dairies, he said several Missouri dairies are interested in conversion, with four new farms in already in transition.