Sarah Roth – Extension Associate

This week I will review another recent article from the Journal of Dairy Science. The authors used data from Cornell’s 2000 dairy farm business summary to estimate return on assets (ROA) for grazing and nongrazing/confinement dairy systems. Their goal was to compare the profitability of farms utilizing grazing versus farms that mechanically harvested forage.

In the study, grazing farms were those that grazed the herd at least three months of the year, rotated animals to different paddocks at least every three days, and obtained at least 30 percent of the herd’s forage needs from grazing. Of the 294 participating farms, 57 were classified as grazing and 237 fell into the nongrazing category. The table below shows the characteristics of the two groups on an average basis.

Table 1. Selected characteristics of 237 nongrazing and 57 grazing New York dairy farms, 2000.

¹ Grazing farms were defined as farms that received 30% of their annual forage needs for grazing.
² Calculated only for 194 non-grazing and 39 grazing farms that hired labor in 2001.

The table shows that grazing farms tend to be smaller in terms of cow numbers and produce less milk than their nongrazing counterparts. However, grazing farms did generate a higher net income per cow and milk receipts per kilogram (milk price).

Since the choice to graze is made by the farmer, the authors used an appropriate estimation technique that would control for this self-selection. This was done to make it possible to compare profitability with all else being equal. The first step in this process involved modeling the decision to graze. From this, it was found that herd size appeared to be the most important factor influencing a farmer’s decision to graze. That is, producers with smaller herds were more likely to utilize grazing.

When controlling for grazing selection, it was found that the following variables had significant impact on ROA:

• Herd size
• Milk price
• Milk production per cow
• Regional location

The first three explanatory variables seem obvious. It can be reasonably expected that a farm with more cows producing more milk and receiving a higher milk price could generate a higher return on assets.

The fact that regional location makes a significant impact is an interesting result. For New York, the authors found that dairying in the Northern region increased ROA. They attributed this result to the fact that the farms in that region tended to have the lowest cost of production. In addition, land in the northern part of the state was not suited to other types of agricultural production, resulting in less competition for land. This result, that land values/regional location impacts profitability, is something that producers should keep in mind when they examine the profitability of their businesses.

In all, the authors determined from their results that all else being equal, farms that utilize grazing generate an average ROA 1.9 percent greater than the nongrazing farms. This result is important for farmers who may be thinking of grazing their herds. It indicates that running a grazing operation doesn’t mean that they will necessarily take an income loss. As long as the farm owner/manager is dedicated in their management, they should be able to run a profitable business under either forage harvesting system.

The authors also correctly make the point that their results were for just one year’s data and that the decision to graze or not has long-term implications as well. One such implication being the ability to expand the operation.

The result that grazing farms generate a ROA 1.9 percent greater than nongrazing farms should not be the point taken away from this article. Rather, the underlying result is what readers should keep in mind. That is, farmers who perceive lifestyle or managerial benefits from grazing do not have to pay an income penalty for making the decision to graze.

Resources:

Journal Articles

Gloy B.A., L.W. Tauer, and W. Knoblauch. “Profitability of Grazing Versus Mechanical Forage Harvesting on New York Dairy Farms.” Journal of Dairy Science. 85:2215-2222.

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