The Moos Room™

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Joe: Welcome to the newsroom everybody. It's supposed to be the OG three, it will be soon. Brad is on his way. As always, he's got farmer meetings, trying to get grant money, all that kind of stuff that takes precedence over the podcast as usual. Emily is here and she can--
Emily: That's what really matters.
Joe: That's most of what matters. In addition, to what will eventually be the OG three, Joleen is here. Joleen Hadrich, who is an economist that is a former colleague of ours at Extension, who's done a ton of research looking at all sorts of things when it comes to cows. Today we're talking mostly dairy. Eventually, I'd love to have Joleen back to talk beef, so that's in the future if we can find some time in her busy schedule. Today it's all about dairy. How are you doing today, Joleen?
Joleen: I am doing great and a fun fact is Brad now reports to me for part of his time, so we can give him a hard time when he shows up late. [laughs]
Emily: Oh, I love that.
Joe: I didn't even think about that. We have Bradley's boss here today.
Emily: This is useful information. Okay.
Joe: This is great.
Joleen: I didn't think of it either until you said it and I was like, "Oh yes, I am part of Brad's reporting line, so we can give him a hard time when he comes on."
Joe: All right, well, before we do that, and while we wait for that amazing moment, let's get these super secret questions out of the way.
Emily: Super secret question number one, Joleen, what is your favorite breed of beef cattle?
Joleen: I'm going to pick Angus.
Emily: Popular choice.
Joe: Amazing choice. You might say.
Joleen: Do you want me to tell you why?
Joe: Absolutely. Yes.
Emily: Yes.
Joleen: Back in the late '90s, my father put in a milking parlor, and that was when the big Angus beef in fast food restaurants was a big push. He was like, "I'm just going to get some Angus bulls and cross-breed them with their Holstein cows and see what happens." They're just like the cutest little Holstein Angus cross calves and they're feisty when they're in the parlor. Everyone has to enjoy a feisty cow on occasion. I choose Angus. [chuckles]
Emily: All right.
Joe: That is awesome. Well, let's run down the totals quick on the beef side so we're all on the same page. We haven't done this for a while, so don't know if I'm quite ready for the end of it but--
Emily: Buckle up
Joe: Black Angus with 15 leading the pack. Herefords with 10, Black Baldies with 4, Scottish Highlander 4, Red Angus 3, Belted Galloway 2, Shorthorn 2, and all with one. Stabiliser, Gelbvieh, Brahman, Chianina, Ayrshire, Charolais, Simmental, Elora, Jersey, Normande, Belgian Blue, Brangus, Piedmontese, and White Park.
Emily: That leads us to super secret question number two, which you may have guessed. What is your favorite breed of dairy cattle?
Joleen: Well, I think I already answered that with our Holstein Angus cross on our family farm. Yes, I'll pick Holstein. It's always great to have a cow that's almost as tall as you are personally. [chuckles] My career as a veterinarian was short before I even started because I don't have the height differential for a Holstein.
Joe: Yes, I have stood on many buckets and straw bales to reach what I need to reach and that's why Jersey is the correct answer if you were wondering. With another vote for Holstein that puts Holsteins at 21, Jerseys at 14, Brown Swiss at 8, Montbeliarde at 3, Dutch Belted at 3, Normande at 2, Guernsey at 2 with a special shout out to Taffy, Milking Shorthorn at 1, and Ayrshire at 1.
Emily: Go, Taffy. Now that we're done with the hard questions, we'll get into the easy stuff. Joleen, you've become pretty well known in various circles for your work in economics as an economist and especially on the farm side, and with this principle or concept called financial resiliency. We're going to talk a little bit about a study you did about financial resiliency and lifetime break even on dairy farms. Just to kick us off, can you explain what financial resiliency is?
Joleen: Financial resiliency is a farm's ability to handle the shocks of the system coming at you. You can measure that in a number of different ways. It's really on what your goal is when you're looking at resiliency. Is it maintaining a stable profit potential? Is it maintaining your ability to add equity? There are a number of different goals, but for this project, I wanted to look at your ability to retain profit, but I wanted to look at it comparing apples to apples.
What I mean by that is when you're a different farm size, like if you have 100 cows versus 1200 cows, there's a different management strategy and there's different cost savings. I don't want to say cost negatives, but labor costs more on the larger farm compared to the smaller farm. What I did is I standardized that profit by the amount of sales that you were bringing in.
I knew how much of that revenue generated on your farm due to farm practices, for every dollar you brought in, how much was retained as a profit. That's what I used to define what that financial measure was for resiliency. Then what I wanted to see is how many years out of seven did you perform in the top 25% of the group in the study? That's how I define resiliency.
You had to outperform that group and be in that top 25% for four out of seven years, three out of six, or three out of five years, depending on where you were in those. Not everyone was in the study all seven years or all, four years, whatever that was.
Joe: I like that definition, and when we talk about resiliency in terms of the mental health side of things, but obviously, the two are tied together. How financially resilient is your farm and your operation and how can you weather the storm and then how it relates back as well? I think there's so much to talk about in this paper. It's really hard to figure out where to start.
Knowing that we're talking about resiliency is one piece of it, and then the other big piece of it, and I think this is what I like about this paper the most, is that we're talking about how individual cows add up to a cumulative effect on a farm, which is exactly how we think about things in the real world on farm. It makes it feel so applied because when we're on a farm, we talk at it on an individual cow basis, especially on the veterinary side or on the management side when we're talking about these things. Can you go over how we're talking about individual cow impacts in the framing of this study?
Joleen: Absolutely. I want to give a backstory of how we got to this point. I've actually had two different master's students work on this project with me. Those are the other two co-authors on the Journal of Dairy Science article. The first student who started working on it was Amber Roberts, and when I described this project to her, I thought about it at the herd level first.
I was like, "Okay, that's how we always hear about somatic cell count. What's your average herd?" She was the person who was like, "Why don't we bring it down to the cow level? Isn't that how decisions are made?" I was like, "Absolutely. How are we going to do that?" Then that was where the second graduate student really came into play because we were able to drill down to the feeding decision and we could allocate that to the cow based on her milk production. Then we could allocate those expenses based on that milk production as well.
Oftentimes, when people talk about a farm level or cow level estimate, they just take that whole farm estimate and they divide it by all the cows and their herd. That's saying that every cow is equal and we know as managers that is not true. Now one caveat is, what we did is not 100% accurate. We took whole farm expenses, we matched it up to DHIA cow records at a farm level, and we had to make some assumptions as to how to do that. I'm sure there's many other ways to do that, but this gave us our best way to look at that cumulative break-even price over the cow's lifetime. That was the other advancement that we really wanted to emphasize with this work.
Brad was a committee member on Alex's thesis, so when he gets on, we'll have to loop him into some of this conversation. When we first presented these preliminary results, Brad's first response was, "Are you telling me that if I stand in my barn and look down the aisle, you're telling me that only 30% of my cows are breaking even?" That was where we really had to make that distinction of this isn't an annual break even, this is a lifetime break even.
That I think is really the strong advancement of this work is we had the data, we had the collaborators where we could estimate that, and it took a lot of players to make that happen. In this case, we had a diversity in our sample. We had herds that had about 100 cows, we had a few herds that had less, and then we had some herds that were in that 400 cow range, 1200 cow range, and then a lot in that middle, probably more closer down to that 100 to 200 range. It wasn't just one group we were looking at. I don't know, and I've forgotten what your initial question was, Joe, so I don't know if I've answered it or not. [laughs]
Joe: Yes. I think you got it. This is great. Looking at a herd level it has its purpose and its place, but on a farm-to-farm basis, the decisions are made on an individual cow level. I love that that's how we got there. If you read this paper, and it'll be in the show notes so you can get access to it there's a lot of math going on, and we're not going to go over that on this podcast.
There was a lot of math to get to this cumulative lifetime break even, and really what we're looking at is based on the expenses of the farm and how profitable that individual cow was. When did things turn positive for that cow? We're all on the same page. That's what we're looking at when we say breakeven. When did she start to make money for that farm based on all of the expenses that she has to accommodate for? That's a big list. We can't cover it all, but Joleen, what goes into that expense side just so that we know all the laundry list of things that goes into what that cow has to account for?
Joleen: The laundry list of expenses are, I always like to break it up into two categories. We have the operating expenses, so those are the costs that would go to zero if the dairy cow didn't exist. The things that are included in there would be, feed. That was a big one. That was one that we focused on a lot because we wanted to make sure that we were matching the feed cost to her production level. Oftentimes, you just see the income over feed cost and it's at average, but we had that specific to her production.
We followed all of the NRC requirements, like we went back and it helped to have a student who had an animal science undergrad, and nutrition background. Feed was the first one. Then we had all the veterinarian breeding expenses. We had supplies, we also had hired labor. We put that in the operating cost category. We would include bedding, any type of vaccinations, or medicine that would more than likely go under a veterinarian. We keep that separate from breeding. I'm sure there's a number of other things that I've since forgot in that operating category.
Then we have the ownership expense category. This is a category that I am pretty adamant about including. These are all of those expenses on your farm that you have to cover regardless of if the cows are there or not. That would include your depreciation on your barn and your equipment used for that dairy enterprise. I do want to emphasize that we only included those fixed costs for the dairy enterprise, so if there were machinery for corn, those types of things that was in that cropping enterprise. We also have insurance, any type of subscription fees that you would have associated with it.
Then any other type of general expenses that are just part of the farming enterprise that are focused on dairy would go in the ownership cost. Sometimes it's called a fixed cost as well. We had all of that. The main things that were tied to her production level was that fee cost, all those other costs. We didn't feel like those would differ based on her production, so then we just did a simple average across all of the cows in that herd to allocate many of those other expenses.
Joe: The only thing I can think of that might differ based on her production level would be sometimes we associate high levels of mastitis or health-related events with a higher-producing cow. That's a really hard thing to nail down, and you didn't include that in this study, right?
Joleen: No, we did not. We did have information about their somatic cell count, so we could have went back and did that, but the numbers were such that that treatment cost. We felt that that was captured with her milk yield results and that's how we did that.
Joe: Perfect. Well, one of the big questions that I wanted to ask you, and since I read this paper for the first time, it's one of the questions I wanted to get to you right away was when we look at this ownership cost and that being basically an overhead. That being such a big difference when we look at the resilience and the non-resilient farms, that cost is huge. That's the biggest difference.
I'm curious to know how you attributed that big difference and if you could somehow make it an even comparison when we're talking about a multi-generational farm that's been there for a long time, has a lot less of a debt load, and owns a lot more things versus that up and coming newer farmer that's only been at it for a generation or two and just hasn't paid for everything. Do you have a way to figure and tease that out?
Joleen: Yes. That's a good thing that you brought that up. Interest expense is something that goes in that overhead cost, and I didn't put that in that list. The way that I normally describe it is if you look at your depreciation expense, that's normally equivalent to that principal payment on that loan. Then that interest expense is the interest that you're paying. That interest expense per cow is a pretty good indicator of how much equity you have in your farm or not.
Most of our resilient dairy farms had a rather low-interest expense compared to those non-resilient. I do think we saw that situation where these were farms that had pretty low debt load. They didn't own their farm outright, but they did own more land than the non-resilient. When I say that, how old do you think these producers were in the resilient category when I say that they owned more of their land?
Joe: I would guess that they're 50 plus at least.
Joleen: Yes. It was the opposite in our study.
Joe: Interesting.
Joleen: They were actually 10 years younger than the non-resilient group. What we think was happening is that there is a transition thing happening here that we couldn't fully capture because we don't ask those questions and the type of data set that we were using in this case. It seemed like these younger producers who were considered more resilient because they were retaining more of that profit over time, they chose to go into this industry with a low input, low output model. They did not have a strategy of getting bigger necessarily.
Each farm we went back and we pulled some summary stats. We actually have a staff paper series and that applied econ AgEcon Search where we pulled out all these summary stats on a yearly basis as well. We just didn't have room in the journal article to do that, but each farm or each group increased by about 2% to 3% their herd size every year. People are increasing over time. It's just those non-resilient farms, that didn't mean they didn't make profit, it just meant that they didn't outperform their peers for the majority of the years of the study.
I think that's just the difficult thing because people hear non-resilient and they think they weren't successful. Many of these farms were making money, they just weren't outperforming their peers and that's why they were in that other category.
Joe: I was wondering that through this whole read on this paper was non-resilient, does that mean they didn't make money? Are there other factors that play into this? Does that mean that they're not successful like you said? How does expansion play into that? I think that there's a lot going on there to explain a lot of those things.
Joleen: Well, I was going to say, just to add on to that, so if you just look at the cumulative profit generated by that cow on the last day that she's in the herd, those cows that broke even in the resilient herds, they generated $1,600 in profit over their lifetime. Whereas, the cows who broke even in the non-resilient herds, they generated close to $1,300 over their lifetime.
For those cows that did break even, they were generating positive profit for that farm, whether they were in a resilient or non-resilient category. It was just at a lower level. $300 per cow is, I'm going to say relatively close. There's pretty minute differences between these two groups, but we can focus in on some of those unique characteristics.
Joe: This concept of breaking even over a lifetime is something that I think works really well when you're looking long-term on should the cow stay or should she go. What adds a little, I'll say spice to this whole discussion when we're talking about, [unintelligible 00:19:21] she go, is when do cows break even? That number surprised me. Run through that discussion and how was it surprising for you because it surprised me a lot.
Joleen: When we split it out, you go into this and you don't really know what the numbers are going to tell you, and we were actually shocked about how low some of the numbers were in some respects. If we just looked at the cows that were at the end of their first lactation, how many of those broke even? In our resilient herd, that means 20% of those cows hit their break-even in their first lactation whereas only 11% hit that in the non-resilient.
You have a rotation of cows coming in. We were very particular about matching up cows based on their lactation and like Joe mentioned, we did a lot of math to make sure that we were capturing the lactations apples to apples across the multiple years to make sure the finances were allocated appropriately.
There was a lot going on.
When we go to lactation two, again, we see those resilient herds close to 30% of those cows, so those are just of lactation two, so you have to pull out the lactation one. Now we're just looking at that category. 30% of those cows hit it, whereas, only 18% in the non-resilient herd. Then when you get to lactation three, those percentages are pretty close. It's 12% and 10% between those two groups.
We just had a much smaller number of cows in that third lactation or higher. It depends because they may have already hit their break-even by that point, or they had been pulled because they weren't hitting it. I quite honestly thought the non-resilient farms would've had more cows hit break-even in their first lactation because many of those herds only bred back those cows one year and then they were out.
As an economist, I would've assumed that they were hitting their break-even, but most of the cows that left those herds never achieved their break-even. That's where when you compare that between the resilient and non-resilient groups, like if you never hit your break even. In the resilient farms, that cow lost about $1,500 over her lifetime. In the non-resilient group, she lost close to $2,600, and that is where you're seeing that differential. They're pretty tight on the cows that break even, but it's the number of cows that are not breaking even, and that magnitude of how much that differential is.
Joe: That's a huge difference. Even on the resilience side, they lost $1,500 if they didn't break even on average, but compared to the cows that did break even, that's not just $1,500 more. They made $1,500 again on top of it, so that's a difference of $3,000 between not breaking even and breaking even. That difference just gets bigger on the non-resilient side. That's massive. The number that we've glanced over and was most surprising is in this seven-year time period, 27% of the cows broke even. That's both resilient and non-resilient, which means that 73% of the cows in that seven-year time period did not break even. It scares me. Does it scare you as an economist?
Joleen: Absolutely. [chuckles] This is why I really loved this project because I often meet with farmers that are like-- The two questions I get all the time is, how can I make more money and not have more cows? [chuckles] I always get that. Then the second question is, how do I stop hemorrhaging money? The caveat there is, I started at Minnesota in 2017 and if anyone remembers, the dairy industry was not doing so well my first few years here.
We were trying to identify ways to effectively manage expenses, knowing the obstacles that were facing them. I think that's an important point with the study, but we did is we pulled the sample from 2012 to 2018 so that we could get the price run-up in 2014, and when it went down. That was really where you saw the difference in these managers. The swings were pretty narrow for our resilient dairy farms.
Their revenue and their expenses didn't fluctuate that much over this time period, whereas, our non-resilient prices are good, they go gangbusters, but when prices tanked, they could not readjust quick enough and they lost a lot of money. That's what you're seeing in some of these numbers as well, is that trade-off. All of these strategies are appropriate.
I'm a big proponent of there's not a one size fits all strategy. You need to figure out what works for you and own that, but in the process, you also have to recognize where you can improve. That's where I think we get in trouble at times.
Joe: What your study here is showing that is low input, low output, potentially over the long term is more financially resilient than a different strategy.
Joleen: Yes. That is what this shows.
Joe: Is this a Tortoise versus the Hare situation where we have farms that are pushing it too far one direction in terms of trying to advance? I'm trying to get my head wrapped around what it means on the really big picture.
Joleen: I think it depends on the management style. I have this friend whose family has a dairy operation factory offering [inaudible 00:25:27]
Joe: What's up everybody? This is Dr. Joe Armstrong. Just way too much to talk about with Joleen, so many things we wanted to get to and we had to split it into two episodes. Please, come back next week. We'll have the rest of our conversation with Joleen. You don't want to miss it. Check out our website extension.umn.edu. Catch us on Twitter @UMNmoosroom, @UMNFarmSafety. Check out Bradley on Instagram @umnwcrocdairy. Email us if you have questions, comments, scathing rebuttals, themoosroom@umn.edu. That's themoosroom@umn.edu. Thanks for listening everybody. Bye.
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