From zero to $300,000 in five years

Young couple shows there’s money in start-up grass dairy

By Larry Tranel, Kieler, Wisconsin —There is no money in dairying. Dairying is too much work. It takes too much capital to start dairying. You can’t graze dairy cows profitably. You cannot outwinter dairy cattle and survive. You can’t crossbreed dairy cows. You can’t start dairying with high-priced land and cows.

You can’t be profitable with 15,000 pounds of milk per cow. One person cannot handle 80 cows. Profits of $1,000 per crop acre or $1,000 per cow for return to labor cannot be done. Earning $30-$50 per labor hour milking cows is impossible. Landlords are better off getting rid of the dairy cows and cash cropping the farm. You can’t earn a 20% return on assets from dairying. You need more than 80 cows or 80 acres to make it dairying. The naysayers go on and on.

Enough is enough! There is money in dairying! All the negative statements above can be translated to realistic, positive statements, as all these things are being done on dairy farms.

And they can be accomplished by young, start-up farmers if they can find the right opportunity. By following some basic principles for production and labor efficiencies, a young dairy farm family can leverage the advantages offered by management-intensive grazing to make an excellent family living and rapidly accumulate business equity.

Eric and Amanda Gaul, who are renting my farm in southwestern Wisconsin, are a shining example of this. In just five years, and without any off-farm income, Eric and Amanda have gone from virtually zero net worth to more than $300,000 in net equity through astute use of the tools offered by grazing.

Many of the details of that farm and our progress to that point were included in the October 2005 edition of Graze. What follows is a brief review of those details, along with an update on the progress Eric and Amanda have made since then.

The Gauls and I began planning and signing contracts in the fall of 2002 for a 32-stall barn on 70 acres. Together we built a swing-10 milking parlor in a lean-to (just over 15 feet wide) off the stall barn at a total cost of $12,000, plus a few thousand dollars more for used milkhouse equipment. We replaced the old stanchions and a maternity area with sand-bedded freestalls. The alley floors were lowered to the depth of the barn cleaner gutters to allow skid-steer cleaning. With sweat equity and used stall dividers, the capacity of the old barn was increased by 50% at a cost of $2,500, while labor demands in the barn were actually decreased despite the additional cows.

We added a fence-line feeder (about $1,000) and a small manure pit. For more cattle housing, we added six “cow-tel” freestalls under another lean-to at a total cost of less than $50 per stall. In the following three years, 33 more cow-tels were added in a new single-row, open-sided shed along a concrete cattle lane. The per-stall cost for this housing averaged less than $200.

The property had been in grass, but was re-seeded to boost productivity. This is highly productive and well-drained land that is capable of handling more than a cow per acre with proper grazing management and moderate levels of supplemental feed.

All told, about $35,000 was spent on facilities and pasture upgrades to triple this farm’s capacity from the original 32 cows, with the Gauls paying about one-third the total along with half the labor to install the improvements. In doing so, we improved labor efficiencies enough to allow the Gauls to operate a 90-cow dairy with no more labor than they would have needed with the old 32-stall set-up.

In year one, Eric started out as a sharemilker earning 25% of the milk check in return for his labor. In years two and three, the Gauls took ownership of the cows on a note from a private lender. In 2003 they purchased 90 cows valued around $1,200 apiece, along with $15,000 in machinery. The value of the machinery line grew to $48,000 by 2007. By 2007, Eric and Amanda held just $35,000 in debt.

The Gauls and I had developed a projected budget, and that budget has been more than matched, according to analyses through my Dairy TRANS financial monitoring program.

Yes, there were some good to great milk prices during those four years: the Gauls averaged $17.11 per hundredweight for milk from crossbred dairy cows with a Jersey and Holstein base, shipping just over 15,000 pounds of milk per cow. About two-thirds of the herd is calved in the spring.

The average return to labor after an equity charge was taken out was $84,277 over that period, ranging from $55,577 in 2006 to $134,080 in 2007. Not too bad for a young guy who didn’t go to college! While there are financial risks with this, where else can a young person earn that much?

Thanks to the grazing and crossbreeding, the culling rate has averaged under 20% per year, which earned the Gauls an annual average of $24,150 in breeding livestock gains. The Gauls have about 31 hours of annual labor per cow thanks to the seasonal calving, the low-cost parlor, and the grazing and feeding systems. Purchasing feed rather than growing it also contributes to this low labor cost. Labor earnings per hour ranged from $25.26 to $44.69, and averaged $34.99. Again, not bad!

Average milk production cost, with all labor and equity charges included, was $12.97 per hundredweight over the four years. The gross income per hundredweight equivalent (including cattle sales and other non-milk income) was $17.11, producing a net profit per hundredweight of $4.14 with labor, equity and all other costs already included.

Eric began with 1.1 million pounds of milk sold per worker in 2004 and grew to 1.4 million pounds of milk sold per worker in 2007. He sold 12,820 pounds of milk per acre in 2004, and grew to 20,838 pounds of milk per acre in 2007. Milk sold per cow grew from 13,197 pounds in 2004 to 16,208 pounds in 2007.

Return to assets has averaged 34.31%, which means that borrowing money at 6.5% interest to start the operation leaves a profit of 27.81% for every dollar borrowed. That seems like a good use of borrowed money.

The operating profit margin was 27.97% and the asset turnover ratio on their assets (not including my land and buildings) averaged 120.36%. Thus, the operation profited about 28 cents for every dollar of gross income, and in about 10 months grossed enough income to pay for all the assets being used.

Granted, milk prices were good, but even if milk prices had been at the $12.97 average cost throughout the four years, the Gauls would have earned enough to pay for family living and debt service.

Again, not bad for a dairy with just 70 available acres! Increasing net worth from $0 to over $300,000 over a five-year period on a rented farm, while providing for family living and reducing debt to $35,000, is no small task. Yet that is what Eric and Amanda did. This past winter, they paid $18,000 for a hoop shed that will provide enough housing to allow for 120 cows on this farm. We’re not sure what arrangement will be made for this when the Gauls leave, but we’ll figure that out when the time comes.

Granted, I did give them an annual rent subsidy of $2,000 to $3,000 compared to established fair market rates. (Their rent is going up this year.) But Eric provided sweat equity in helping modernize the farm. The Gauls also effectively gained $1,000 to $2,000 per year from a private financier who took a risk by allowing them to begin with limited equity.

But even discounting for the fairly modest financial breaks, Eric and Amanda still made great strides toward becoming what I call a “millionaire dairy producer.”

They just needed a little help. Other young people need help, too. For the sake of the future of agriculture and the dairy industry, we need to encourage landlords and bankers to assist young producers in putting this model in place. What can we do as an industry to get young producers started?

The retiring generation is best able to help these people, and needs to take steps to do so. Imagine having two or three profitable young farm families in your neighborhood spending $200,000 annually in the local economy. Imagine the economic multiplier provided to the community by this farming and the accompanying dairy processing. Would your local school district appreciate having a few more kids?

All of us in rural America have a vested interest in helping young dairy producers get started. The model I’ve just described is the best one I know.

Dr. Larry Tranel is an extension dairy field specialist with Iowa State University.