Revised

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 starting 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 dairy farm is designed to use labor and capital as efficiently as possible.

Continued interest in the feasibility of starting a 75-cow grazing dairy operated by a husband and wife team instigated the development of this model farm. Users are cautioned to carefully examine the long term viability of this sized farm in their region. Rapid consolidation in dairy farming, reduced market access and increased milk hauling costs may limit long term viability of this sized model.

Farm description

A dairy cow grazing.
Figure 1. The farm should be planted with annual forage and improved perennial forage varieties.

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
  • No irrigation or winter housing is planned
  • A new swing-12 parabone parlor is built near the center of the farm

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.

Description Year 1 Year 2 Year 3 Year 4 Year 5
Target herd size (head) 75 75 75 75 75
Annual cull rate, excluding deaths (%) 25 22 22 22 22
Annual death loss (%) 4 4 4 4 4
Calving interval (months) 14.0 13.5 12.8 12.5 12.5

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.

Description Year 1 Year 2 Year 3 Year 4 Year 5
Pounds per day 40.0 42.0 45.0 46.0 46.0
365-day rolling herd average 12,289 12,903 13,683 13,920 13,920

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).

Description Cost/cow/day
Purchased concentrates $1.40
Purchased hay $0.50
Total feed cost $1.90

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

Description Cost/cow/day
Purchased concentrates $0.70
Purchased hay $0.90
Total feed cost $1.60

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

Description 0–2 months 2–6 months 6–12 months 12–24 months
Purchased concentrates $1.70 $0.48 $0.60 $0.72
Purchased hay $0.00 $0.06 $0.35 $0.49
Total feed cost $1.70 $0.54 $0.95 $1.21

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.

Description Year 1 Year 2 Year 3 Year 4 Year 5
Full-time equivalents (FTEs) (from labor hours) 2.1 2.1 2.1 2.1 2.1
Pounds milk per FTE 430,791 449,313 476,455  484,700 484,700
Annual benefits 3,213 3,277 3,343 3,410 3,478
Total salaried labor 42,000 42,840 43,697 44,571 45,462
Total labor cost 45,213 46,117 47,040 47,980 48,940

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 $851,005 ($11,347 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 a milking parlor, milking equipment, holding area, utility room, milk room, rest rooms and tanks. 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 parlor is assumed to be a swing-12 parabone parlor with automatic take-offs. 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.

Description Quantity Cost/Unit Total
Land 100 acres $3,500 $350,000
Dairy cows 75 cows $1,100 $82,500
Heifers (1 year old) 22 heifers 400 8,800
Buildings and farm setup
Milking parlor, equipment, tank, holding area and office 24 stalls $7,000 $168,000
Manure storage for parlor and holding area   $40,000 $40,000
Feed bins (15 tons each) 2 bins $7,000 $14,000
Hay barn and equipment storage 5,000 ft $10 $50,000
Lanes 5,703 ft $2.00 $11,406
Watering system (without well and pump) 5,703 ft

$2.00

$11,406

Fencing and paddock setup 25,992 ft

$0.90

$23,393

Establishing new forages (fertilizer, seed, tillage) 90 acres

$150.00

$13,500

Machinery and equipment
Tractor (100 HP with loader) 1 $28,500 $28,500
Pickup truck 1 $15,000 $15,000
ATV 1 $5,000 $5,000
Clipper mower 1 $5,000 $5,000
Silage feeding equipment 1 $12,000 $12,000
Other farm equipment     $12,500
Total investment     $851,005
Investment per cow     $11,347

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 loss of $10,260 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 loss of $137 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. Adding net income from operations plus the building and machinery depreciation yields a free cash flow of $21,336 available for principal and interest payments (-$10,260 net loss + $31,596 depreciation). On a per cow basis, this is equivalent to $284 of cash available for principal and interest payments. This free cash flow estimate assumes no additional cash will be used for family living expenses other than what is already used to pay labor in the dairy.

Table 8. Financial measurements.

  Year 1 Year 2 Year 3 Year 4 Year 5
Current ratio 1.51 4.67 4.67 4.67 4.67
Return on assets -2.7% -1.9% -0.8% -0.4% -0.6%
Operating expense ratio 89.7% 86.8% 82.9% 81.6% 82.3%
Depreciation expense ratio 23.0% 21.7% 20.5% 20.0% 20.0%
Net farm income from operations ratio -12.6% -8.5% -3.4% -1.6% -2.3%

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).

  Dollars
per herd
Dollars
per cow
Dollars
per cwt
Percent
INCOME FROM OPERATIONS
Milk sales 179,343 2,391 18.36 96.2%
Sales of young stock and calves 7,029 94 0.72 3.8%
Total gross receipts 186,373 2,485 19.08 100.0%
OPERATING EXPENSES
Feed
• Feedstuffs 67,166 896 6.88 34.2%
• Less feed for heifers -16,500 -220 -1.69 -8.4%
Total feed costs 50,666 676 5.19 25.8%
Herd replacement costs
• Depreciation—dairy cows 7,510 100 0.77 3.8%
• Loss on sale of cows 3,959 53 0.41 2.0%
Total herd replacement costs 11,469 153 1.17 5.8%
Hired labor (including benefits) 47,058 627 4.82 23.9%
DHIA1 testing 1,950 26 0.20 1.0%
Semen/breeding 1,875 25 0.19 1.0%
Real estate/personal property taxes 2,214 30 0.23 1.1%
Milk marketing2 13,188 176 1.35 6.7%
Repairs 7,350 98 0.75 3.7%
Vet/medicine 4,875 65 0.50 2.5%
Parlor supplies 2,732 36 0.28 1.4%
Utilities 3,903 52 0.40 2.0%
Insurance 3,122 42 0.32 1.6%
Fertilizer 5,831 78 0.60 3.0%
Seed/spray 2,592 35 0.27 1.3%
Custom hire 2,082 28 0.21 1.1%
Truck and fuel 2,000 27 0.20 1.0%
Fence/water 2,000 27 0.20 1.0%
Other expenses 1,500 20 0.15 0.8%
Depreciation 31,596 421 3.23 16.1%
Less other expenses for raising heifers -1,371 -18 -0.14 -0.70%
Total operating expenses 196,632 2,622 20.13 100.0%
NET INCOME FROM OPERATIONS -10,260 -137 -1.05  

Notes
1 Dairy Herd Improvement Association
2 Includes milk hauling, Dairy Margin Coverage (DMC) insurance, federal promotion and cooperative fees.

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

  Year 1
(dollars)
Year 2
(dollars)
Year 3
(dollars)
Year 4
(dollars)
Year 5
(dollars)
5-year average
(dollars)
GROSS REVENUE
Milk sales 165,553 172,671 183,102 187,695 187,695 179,343
Calves and heifers sold 6,544 6,786 7,158 7,402 7,547 7,087
Total gross revenue 172,097 179,457 190,259 195,097 195,242 186,431
OPERATING EXPENSES
Feed
• Purchased concentrates 46,722 45,957 46,287 46,635 46,764 46,473
• Purchased hay 20,762 20,292 20,594 20,866 20,954 20,693
• Less feed for heifers -16,725 -15,536 -16,240 -16,892 -17,109 -16,500
Total feed costs 50,759 50,713 50,641 50,609 50,609 50,666
Herd replacement costs
• Depreciation—dairy cows 7,929 7,406 7,405 7,405 7,405 7,510
• Loss on sale of cows 4,339 3,864 3,863 3,863 3,863 3,959
Total herd replacement costs 12,268 11,270 11,268 11,268 11,268 11,469
Hired labor (includes benefits) 45,213 46,117 47,040 47,980 48,940 47,058
DHIA1 testing 1,950 1,950 1,950 1,950 1,950 1,950
Semen/breeding 1,875 1,875 1,875 1,875 1,875 1,875
Real estate/personal property taxes 2,128 2,170 2,213 2,258 2,303 2,214
Milk marketing2 12,213 12,738 13,508 13,741 13,741 13,188
Repairs 7,350 7,350 7,350 7,350 7,350 7,350
Vet/medicine 4,875 4,875 4,875 4,875 4,875 4,875
Parlor supplies 2,625 2,678 2,731 2,786 2,841 2,732
Utilities 3,750 3,825 3,902 3,980 4,059 3,903
Insurance 3,000 3,060 3,121 3,184 3,247 3,122
Fertilizer 5,603 5,715 5,829 5,945 6,064 5,831
Seed/spray 2,490 2,540 2,591 2,642 2,695 2,592
Custom hire 2,000 2,040 2,081 2,122 2,165 2,082
Truck and fuel 2,000 2,000 2,000 2,000 2,000 2,000
Fence/water 2,000 2,000 2,000 2,000 2,000 2,000
Other expenses 1,500 1,500 1,500 1,500 1,500 1,500
Depreciation (buildings and equipment) 31,596 31,596 31,596 31,596 31,596 31,596
Less other expenses for raising heifers -1,356 -1,294 -1,354 -1,406 -1,422 -1,371
Total operating expenses 193,817 194,716 196,716 198,255 199,657 196,632
NET INCOME (LOSS) -21,720 -15,259 -6,457 -3,158 -4,415 -10,202

Notes
1 Dairy Herd Improvement Association
2 Includes milk hauling, Dairy Margin Coverage (DMC) insurance, federal promotion and cooperative fees.

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

  Year 1
(dollars)
Year 2
(dollars)
Year 3
(dollars)
Year 4
(dollars)
Year 5
(dollars)
5-year average
(dollars)
CASH INFLOWS
Milk sales 165,553 172,671 183,102 187,695 187,695 179,343
Livestock sales 16,857 15,862 16,233 16,477 16,622 16,410
Total cash inflows 182,410 188,533 199,334 204,172 204,317 195,753
CASH OUTFLOWS
Purchased concentrates 46,722 45,957 46,287 46,635 46,764 46,473
Purchased hay 20,762 20,292 20,594 20,866 20,954 20,693
Hired labor (including benefits) 45,213 46,117 47,040 47,980 48,940 47,058
DHIA1 testing 1,950 1,950 1,950 1,950 1,950 1,950
Semen/breeding 1,875 1,875 1,875 1,875 1,875 1,875
Real estate/ personal property taxes 2,128 2,170 2,213 2,258 2,303 2,214
Milk marketing2 12,213 12,738 13,508 13,741 13,741 13,188
Repairs 7,350 7,350 7,350 7,350 7,350 7,350
Vet/medicine 4,875 4,875 4,875 4,875 4,875 4,875
Parlor supplies 2,625 2,678 2,731 2,786 2,841 2,732
Utilities 3,750 3,825 3,902 3,980 4,059 3,903
Insurance 3,000 3,060 3,121 3,184 3,247 3,122
Fertilizer 5,603 5,715 5,829 5,945 6,064 5,831
Seed/spray 2,490 2,540 2,591 2,642 2,695 2,592
Custom hire 2,000 2,040 2,081 2,122 2,165 2,082
Truck and fuel 2,000 2,000 2,000 2,000 2,000 2,000
Fence/water 2,000 2,000 2,000 2,000 2,000 2,000
Other expenses 1,500 1,500 1,500 1,500 1,500 1,500
Total cash outflows 168,055 168,681 171,445 173,689 175,324 171,439
NET CASH FLOW 14,355 19,852 27,889 30,483 28,993 24,314

Notes
1 Dairy Herd Improvement Association
2 Includes milk hauling, Dairy Margin Coverage (DMC) insurance, federal promotion and cooperative fees.

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