Joe L. Horner
State Specialist, Agricultural Business and Policy Extension

Ryan Milhollin
State Specialist, Agricultural Business and Policy Extension

Stacey A. Hamilton
State Dairy Specialist

This guide examines the financial feasibility of converting an existing conventional dairy to a 75-cow intensive rotational grazing dairy in Missouri. Data presented here reflect costs and conditions as of June 2020. This model was developed using assumptions, costs and benchmarking information from existing Missouri pasture-based dairies and dairy industry experts. While this farm was customized specific to Missouri, it could be adapted to conditions elsewhere.

The model assumes the farm buyer is able to purchase a dairy without paying anything extra for the fact that it contains an obsolete double-4 herringbone parlor. Using a low-cost retrofit parlor, the new dairy producer is able to increase labor efficiency without committing a large amount of additional capital. This model allows the new dairy producer to overcome the capital threshold that is a barrier to entry for most new smaller dairies.

Farm description

In this model dairy, the farm is a carefully selected 100-acre piece of land purchased specifically for developing a grazing dairy. It is to be located in an area where winter weather conditions and soil types allow cattle to be housed outside all year. The farm is purchased for $3,500 per acre.

• 90 acres for paddocks
  • 1 cow per acre for 75 cows
  • 15 acres for raising heifers
• 10 acres for farmstead and facilities
• Permanent lanes, water lines and paddocks are established
• An existing double-4 herringbone parlor (cows are placed at about a 45-degree angle) is converted into a 12-unit swingline parabone parlor (cows are placed at about a 70-degree angle; see Figure 1).
• The farm is replanted with improved pasture species.

Herd management

The beginning herd for this dairy is assumed to include purchased crossbred dairy heifers. The heifers will be purchased with an eye to selecting cattle types best suited for grazing.

Cows are expected to be culled from the herd based on involuntary factors (e.g., death, disease, problem breeders) and voluntary factors (e.g., low milk production, disposition). Projected cow culling rates, death losses and the calving interval for the next five years are listed in Table 1. It is assumed that the average cull rate (excluding deaths) would be 25 percent in the first year and fall to 22 percent in year two. Death loss rate would be 4 percent in all years. The total herd turnover rate would be 29 percent in year one and 26 percent in the remaining years.

Table 1. Herd turnover and mortality rates.

The entire dairy system is built around a seasonal grass-based dairy concept with a 12-month calving interval. However, higher cull rates in early years are expected when starting a dairy, which reflect the realities of beginning with commingled purchased heifers. The whole herd calving interval will drop as the hard breeders are selected out of the herd. By year four, the calving interval is expected to be 12.5 months.  

Crossbred dairy cows are specified in this grazing dairy system because of their ability to make better use of pasture and their higher reproductivity and overall hybrid vigor. They typically can be purchased for lower prices than Holsteins that are traditionally selected for their high milk production traits. In the model, replacement heifers will be raised on-farm. One-third of the heifers and cows will be bred to beef genetics. Beef cross heifers are sold for $145 each. All bull calves will be sold for $120 each, reflecting a price of mixed crossbred bull calves from dairy and beef sires.

Table 2 shows annual milk production estimates and estimated rolling herd average. In the model, 97.5 percent of the total volume of milk is sold, and 2.5 percent from fresh or treated cows is discarded or consumed by calves.

Table 2. Milk production.

Supplementary feeds are designed to complement the characteristics of the pasture forage at a reasonable cost (see Tables 3 and 4). Hay and concentrate are purchased in the dairy model. Ten pounds of concentrate costing $280/ton delivered is fed to each cow in the parlor for the milking group. Five pounds of purchased hay or silage costing $0.10/lb of dry matter is fed as needed throughout the year to the milking group. The dry cow group is being fed 5 pounds of concentrate costing $280/ton and 20 pounds of purchased hay at $0.045/lb as needed throughout the year. Heifer feed costs vary by age, see Table 5 for more detail. Milk replacer and calf starter are used in the initial months before receiving other concentrates, pasture and hay after month 2.

Table 3. Daily milking period feed costs (Cost/cow/day).

Table 4. Daily dry cow period feed costs (Cost/cow/day).

Table 5. Daily youngstock feed costs (Cost/animal/day).

Milk marketing

Financial projections in this model use a farm-level gross milk price of $18.30 per hundredweight (cwt) in the first two years and $18.44 per cwt in the remaining years, including Dairy Margin Coverage payments during low price months. These price levels are considered realistic based on long-term historical milk prices, component levels and expected premiums in Missouri. Marketing costs that are deducted from the gross milk price in the model include DMC insurance ($0.15/cwt), dairy checkoff ($0.15/cwt), co-op fee ($0.20/cwt) and hauling ($0.85/cwt).

Labor management

A grazing dairy that milks two times daily will ideally plan to spend no more than 2.5 hours in the parlor per milking. Outsourcing of any necessary forage harvest is used to keep labor costs low. A husband and wife team will be employed at a salary of $42,000 per year, and no additional labor will be hired. Benefits cost for labor include only the employer’s share of Social Security and Medicare taxes. Table 6 presents a labor summary for the 75-cow model dairy. A 2 percent inflation rate is built into labor and select operating expenses in the model.

Table 6. Labor summary.

Capital investments

Capital investments for this start-up operation are listed in Table 7. These investments include land, real estate, machinery, equipment and livestock. The total capital invested in the dairy will be $693,005 ($9,240 per cow). This includes all the minimum components necessary to make the dairy operational.

The financial success of grazing dairies depends upon keeping the capital investment and the operating expenses low. Careful farm selection is critical to minimize the investment needed and to enable low operating costs. To avoid investments in livestock housing, the farm site must have well-drained soils. To keep feed costs low, the dairy needs mostly open ground with productive soils that can be managed for high-producing pastures that can be planted with annual forage and improved perennial forage varieties.

Investments in the milking center include converting an existing double-4 herringbone parlor to a swing-12 parabone parlor. Milking equipment includes parabone stalls designed for rapid cow flow, a flush system for the parlor, automatic take-offs, plate cooler with chilled water and a heater. The basic philosophy of most graziers carries over to the milking parlor. They want a facility that is both inexpensive and efficient and can be updated or improved as cash flow permits. Parabone swing parlors were used to promote production efficiency by emphasizing cow comfort, cow movement and efficient use of labor. This does not suggest other parlors will not work, but cost and efficiency must always be always considered.

Table 7. Capital investments.

Permanent lanes, water lines and paddocks are established in this dairy. Lanes are essential in a pasture-based dairy to move cows easily from pasture to parlor, whether the grazing cell design is fixed or flexible. Constructing raised lanes with adequate drainage capacity and using crushed rock, lime screenings or other stabilizing material reduces annual maintenance needs and keeps cows cleaner and healthier. Electrified 12.5-gauge high-tensile wire is used for perimeter fence and permanent paddock fencing in this dairy system. Water systems include buried water lines and permanently installed stock tanks.

Initial expenses of forage establishment are included in the capital investments. These expenses include fertilizer, seed and tillage. Pastures can be seeded either on a prepared seedbed or no-till drilling, depending on site conditions and crop requirements. Machinery investments include a tractor, pickup, ATV, clipper/rotary mower, silage feed wagon and other farm equipment. Other facility investments include equipment storage, hay barn and feed bins.

Financial analysis and statements

The 75-cow model dairy will gross $186,373 per year in milk and young stock sales. This farm will have a net of $685 after all operating costs, labor and depreciation are deducted (see Tables 8–11 for financial measurements and statements). On a per cow basis, this is a gross operating income of $2,485 per cow and a net operating income of $9 per cow, after labor and depreciation are deducted.

The model represents a dairy using 100 percent equity financing with no debt. Although unrealistic, this simplifying assumption helps lenders analyze the free cash flow to determine how much debt the operation will support. Family living is assumed to be taken out of the labor charges. Net income from operations plus the building and machinery depreciation yields free cash flow available to pay principal and interest payments. The five-year cash flow statement indicates this operation has an average net cash flow of $24,725 per year.

Table 8. Financial measurements.

The character of the investments in the dairy reduces a lender’s risk because a high percentage of the initial investment is concentrated in appreciating land and reproducing cattle rather than specialized assets that are harder to liquidate at full value.

Table 9. Dairy enterprise budget for the 75-cow grazing dairy model (5-year average).

Table 10. Pro forma income statement for the 75-cow grazing dairy model.

Table 11. Pro forma cash flow statement for the 75-cow grazing dairy model.

Original authors
Joe Horner, Ryan Milhollin, Stacey Hamilton, Wayne Prewitt and Tony Rickard