Characteristics, Costs, and Issues for Organic Dairy Farming
by William McBride
and Catherine Greene
Economic Research Report No. (ERR-82) 50 pp, November 2009
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.
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 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
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
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
• 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
• 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.