ERS Report Summary - Organic Dairy Farming

ERSReport Summary
Economic Research Service
United States
Department
of Agriculture

Characteristics, Costs, and
Issues for Organic Dairy Farming

Economic
Research
Service

Economic
Research
Report
Number 82

William D. McBride
Catherine Greene

November 2009

November 2009

U.S. Department of Agriculture

Characteristics, Costs, and Issues
for Organic Dairy Farming
William D. McBride and Catherine Greene

This is a summary
of an ERS report.
Find the full report at
www.ers.usda.gov/
publications/err82

Spurred by increased demand for organic milk, organic milk production has been one of the fastest
growing segments of organic agriculture in the United States. Between 2000 and 2005, the number of
certified organic milk cows on U.S. farms increased by an annual average of 25 percent, from 38,000
to more than 86,000. To meet the growing demand, the organic production sector has evolved much
like the conventional sector. Along with primarily small, pasture-based organic operations located in
the Northeast and Upper Midwest, larger organic operations, often located in the West, that use more
conventional milk production technologies have increased in number. Economic incentives, driven
largely by lower production costs, are behind much of this change. Proposed changes in USDA’s
National Organic Program (NOP), which develops, implements, and administers national production,
handling, and labeling standards for organic agricultural products, seek to clarify and stiffen pasture
requirements for organic certification and may determine how the organic production sector continues
to evolve.

What Is the Issue?
Organic milk producers usually begin as conventional dairy operators who go through what can be a
challenging and costly transition. To qualify for organic certification under the NOP, producers must make
changes in animal husbandry, land and crop management, input sourcing, and certification paperwork,
among others. In addition to these challenges, organic milk producers must now contend with the impact
of a weaker U.S. economy on the demand for organic food products. By providing information about
the characteristics, costs, and challenges faced by organic milk producers, this report provides a context
for producers considering the organic approach, processors trying to supply an expanding organic milk
market, and policymakers evaluating the economic implications of organic livestock production.

What Did the Study Find?
Economic forces may have pushed organic dairies to adapt their operations to be more like conventional dairies in terms of size, location, and the types of technologies used. The relative production
costs for large and small organic dairies, organic dairies in the East and West, and organic dairies using
pasture-based and conventional technologies are similar to those for conventional dairies.
ERS is a primary source
of economic research and
analysis from the U.S.
Department of Agriculture,
providing timely information on economic and policy
issues related to agriculture,
food, the environment,
and rural America.

Size and Costs of Organic Dairies. Farms producing organic milk most often have small dairy operations; 45 percent of organic dairies milk fewer than 50 cows, and 87 percent milk fewer than 100
cows. Large organic dairies with 200 cows or more are a small portion of the organic dairy population, but account for more than a third of organic milk production. Average operating costs are highest
on the largest organic dairies, but total economic costs are nearly $14 per hundredweight (cwt) less on
the largest than on the smallest organic dairies because of lower capital and unpaid labor costs. The

www.ers.usda.gov

smallest operations use much more unpaid labor, accounting for most of this cost difference. Large organic dairies are much
more likely to generate returns above capital and labor costs, suggesting that organic milk production will migrate toward
larger operations, as has conventional production. Additional costs to comply with organic pasture requirements and for
securing organic inputs in large volume may limit the cost advantages for larger organic dairies.
Region and Costs of Organic Dairies. More than 80 percent of U.S. organic dairies are located in the Northeast and Upper
Midwest, but these operations are small and less productive than those in the West. Organic dairies in the Northeast (averaging 53 cows) and Upper Midwest (64 cows) have far fewer cows on average than those in the West (381 cows), which
produce more milk per cow on average (2,700 pounds more than in the Upper Midwest and 4,000 pounds more than in the
Northeast). Average feed costs per cow are significantly less on organic dairies in the Northeast and Upper Midwest due
to greater use of homegrown feed and pasture. Despite higher feed costs per cow and greater labor and capital use, organic
dairies in the West have lower total economic costs per cwt of milk produced. This cost advantage is the result of economies
of size and much higher productivity per cow that may be attributed to the technologies used on these operations.
Pasture Use and Costs of Organic Dairies. Almost two-thirds of organic dairies report that 50 percent of dairy forage comes
from pasture, and a third indicate that 75 percent or more comes from pasture. Using pasture for dairy feed costs less than
higher energy feed sources, and average feed costs per cow decline as more pasture is used for dairy forage. Organic dairies
using the least pasture for dairy forage, however, have lower feed costs per cwt of milk than other organic dairies because
average production per cow is more than 30 percent higher. Organic dairies that use conventional feeding methods, such as
confining cows and feeding harvested forages, may generate higher returns to capital and labor than those using pasture-based
feeding because of higher production and economies of size, and because pasture-based feeding requires more labor.
Comparing Organic and Conventional Dairies
• Organic dairies are smaller than conventional dairies (82 cows compared with 156 cows).
• Organic dairies produce about 30 percent less milk per cow than conventional dairies (13,601 pounds per organic cow
compared with 18,983 pounds per conventional cow).
• Organic dairies are more often located in the Northeast and Upper Midwest than are conventional dairies (86 percent
compared with 65 percent).
• Organic dairies use more pasture-based feeding, where more than 50 percent of dairy forage fed is from pasture during
grazing months, than conventional dairies (63 percent compared with 18 percent).
• Organic dairies paid $6.37 per cwt more than conventional dairies in operating and capital costs, including transition
costs, in 2005; the average price premium for organic milk was $6.69 per cwt.
• Total economic costs of organic dairies in 2005 were $7.65 per cwt higher than for conventional dairies, nearly $1 per
cwt higher than the average price premium for organic milk.
• Pasture-based organic dairies’ total economic costs were about $4 per cwt higher than conventional pasture-based
dairies, much lower than the average price premium for organic milk in 2005.
Challenges of Organic Milk Production. Certification paperwork and compliance costs were reported by 40 percent of
producers as the most challenging aspect of organic milk production, followed by finding new organic input sources (dairy
replacement and feed), higher costs of production, and maintaining animal health. By contrast, the chief concern for large
organic dairies seem to be finding organic input sources, and the chief concern for dairies in the Northeast seemed to be
production costs; certification paperwork was a lesser concern for pasture-based dairies and more educated operators.

How Was the Study Conducted?
This study used information from a 2005 survey of U.S. milk producers as part of USDA’s annual Agricultural Resource
Management Survey (ARMS) administered by its National Agricultural Statistics Service (NASS) and Economic Research
Service (ERS). The survey targeted dairy operations in 24 States that accounted for more than 90 percent of national milk
production and covered all major production areas. A subsample of the survey targeted organic dairies identified by major
organic milk processors and certifiers. Surveyed organic milk producers were divided by size, region, and pasture use, and
differences in characteristics and production costs of the groups were evaluated. Regression analysis, with a treatment-effect
model, was used to measure the difference in production costs between organic and conventional dairies. Differences in
production costs, along with estimates of organic transition costs, indicated the milk price premiums that make organic
competitive with conventional milk production.

www.ers.usda.gov