Many smaller scale dairy farmers are perplexed that large-scale dairies continue to grow in the Northeast. Now there's an answer why: Larger dairies are the only ones that afford the regulatory costs of meeting concentrated animal feeding operation permit requirements. That's the bottom line of a report released Monday by Farm Credit East and Cornell Pro-Dairy.
The report analyzed the financial implications of dairy farm expansion relative to the costs associated with New York environmental regulatory compliance and federal CAFO permitting. It looked at the effect on capital and managerial investments to take a dairy farm from 190 cows to 290 cows.
DAIRY CATCH 22: CAFO's regulatory cost burden may be too heavy for smaller dairies to grow to a size that can afford becoming more environmentally benign and bring in the next generation.
"At 200 cows, New York CAFO regulations kick in at a critical pinch point in the life cycle of a family dairy farm," says Mike Haycook, branch manager of the Farm Credit East Potsdam office. The report constructed a reasonable expansion and CAFO compliance scenario. CAFO added $142,000 in capital costs, $15,000 for an initial Comprehensive Nutrient Management Plan, plus $5,000 per year for annual updates.
That's not all. Ongoing compliance (records, etc.) adds significant management responsibilities to a farmer who already has a full plate of responsibility and limited financial flexibility to hire extra management resources, adds Karl Czymmek, senior extension associate with Cornell's Pro-Dairy Program. "And, managers operating CAFO-size farms tell me they've had to add cows to pay for CAFO costs."
Without cost-sharing, borrowing to cover modest capital and operational costs of CAFO regulations would make expansion difficult for a 190-cow New York dairy farm in average financial condition. Yes, top-line revenue grew substantially, but so did expenses.
With the existing debt load of an average dairy farm, the future cash flow from an expansion is insufficient to cover the extra costs of a CAFO-compliant expansion.
The study assumed a $180,000 debt for free stall barn expansion plus $202,500 to boost herd size to 290 cows. It also assumed no upgrades in a current milking parlor and that the farm would rent more crop land rather than buying land.
Based on actual farm expansions, this 290-cow operation may ultimately have to move up to 400 cows – requiring even greater expenses to make that next step. Haycook and Czymmek also didn't factor in other management responsibilities for CAFO compliance, which, they contend, may be considerable.
Debt load and milk price impacts
While farms with no debt load would fare better, only a minority of Northeast dairy farms have little to no debt, they point out. With the debt load of an average farm, future cash flow is insufficient to cover the extra debt service of the CAFO-compliant expansion.
Using a 6-year average milk price also blurs the impact that a low milk price cycle could have, according to the study. A stretch of low milk prices would put this study farm in serious financial jeopardy, declare Czymmek and Haycook.
As a typical Northeast farm family considers their future, they often contemplate an expansion to allow for a son or daughter returning to the farm. CAFOs extra costs would make that a very challenging scenario.
Check out the cost details in the study, Financial Implications of a Dairy Farm Expansion. It's available by clicking here.