Finding efficiencies in grazing systems

WISCONSIN DELLS, Wis. – When Jon Winsten, agricultural economist with Winrock International, learned of dairy farms that were grazing their herds 30 years ago, he thought it was the immediate future of dairy farming in America. Winsten visited New Zealand in 1987 to learn about the grazing systems being used and returned to tell his father about it.
“When I came back and told my dad, who had a very traditional 60-cow dairy operation, about how they farmed down there, he literally slapped his hand on his forehead and said, ‘Why didn’t I think of that?’” Winsten said. “I thought the adoption to grazing would start and dairy was going to be about grazing from here forward.”
Winsten spoke about the financial efficiencies in grazing systems during his presentation, “Large Herd, Low Overhead Grazing Dairy,” Feb. 3 at the GrassWorks Grazing Conference in Wisconsin Dells.
While Winsten has not seen the significant changes in the dairy industry he thought he would, he said he believes in the benefits of a grazing system. Winsten said it is a profitable system when feed, labor and capital efficiencies are implemented.
Winsten defines feed efficiency as being able to minimize feed cost per hundredweight of milk shipped by maximizing the nutrient intake of grazed pasture.
“The more milk that is produced on pasture, the more benefit for water quality and climate mitigation,” Winsten said. “That’s part of the driving force why I think it’s such an important system.”
Labor efficiency is measured by maximizing the amount of milk shipped per worker. Winsten said this is achieved by utilizing an efficient milking system such as a swing parlor. Seasonal calving can also be a step toward efficiency by getting one chore done at a time – all the calving, then all the weaning, and so on.
Finally, Winsten said capital efficiency is trying to maximize the farm’s return on assets. It is the measure of how well the assets on a farm are able to produce a profit.
For a comprehensive financial analysis of a farm, Winsten looks at the cash flow statement, income statement and balance sheet.
The income statement calculates the net profit, which is often called net farm income from operations. Winsten said this is the best measure of farm profitability. The income statement differs from the cash flow statement, which tracks all cash inflows and outflows, including the principal portion of loan payments, but does not include depreciation. The income statement includes a realistic estimate of actual depreciation as well as changes in farm inventory, which is derived from the balance sheet.
“You are accurately estimating how much it costs you to run your farm,” Winsten said of the income statement. “Depreciation is not a cash expense necessarily, but at some point, your farm ceases to run properly, so it is a real expense.”
Winsten said the cows and land are the revenue-producing assets on the farm when considering overhead costs. Maximizing the ratio of cows and land to the value of buildings and machinery is important.
After spending time on these issues for 30 years, Winsten has seen a trend in why grazing has not taken off like he thought it would within the dairy industry. Winsten said most traditional dairy farms have money invested in buildings and machinery. Some have debt on those buildings and machinery as well.
“It’s a lot of value in assets,” Winsten said. “Most of these farms have a finite number of stalls, so a limited herd size, which leads to a high overhead cost per cow on top of your direct costs.”
Winsten said many traditional dairy farms that have high overhead costs per cow can get into a cash flow dilemma and need maximum milk production per cow, even if it would be more profitable to graze and produce less milk per cow than in a confinement system.
“Having cash flow concerns override profitability decisions is not a great position for any business to be in, but I think it’s very common in the dairy industry,” Winsten said.
Winsten said a larger-herd, low-overhead dairy grazing operation can provide a way out of this cash flow dilemma. He said to minimize the building and machinery costs per hundredweight produced by using an appropriate high-throughput milking system and an efficient feeding system. This allows a farmer to increase the number of cows and milk shipped per worker.
Achieving efficiency in feed, labor and capital leads to greater flexibility overall, Winsten said.
“If you’re not caught up in a cash flow crunch, you can make more profitable decisions when things get tough, such as low milk prices, high grain prices or both,” he said. “For example, you could back off on your grain feeding and milk production if the milk-to-feed price ratio gets too low. If needed, you could more easily pivot toward beef as well.”
A grazing system also provides options for milk price by making it easier to produce for the organic or grass-fed markets. There are additional environmental and social benefits from this system as well. Winsten said with more technical assistance and innovative financing, more dairy farmers can consider a grazing system.
Before changing to a grazing-based system, Winsten said farmers need to understand their cost of production and what drives it. That includes setting clear and consistent goals for the farm and understanding the impact of overhead costs to determine a plan for change.
“I do think this system can probably outcompete the large, modern confinement dairy on a financial basis,” Winsten said. “It needs excellent management, but I think it’s a really powerful and potentially profitable system.”