UVM Theses and Dissertations
Format:
Print
Author:
Cannella, Mark P.
Dept./Program:
Community Development and Applied Economics
Year:
2009
Degree:
MS
Abstract:
Dairy farm businesses in the Northeastern United States are forced to operate under increasing uncertainty. Volatility of milk prices and the historic "cost-price squeeze" from rising costs of production contribute to an increasing risk to the financial performance and sustainability of dairy based businesses. From 2000-2007 we witnessed the unpredictability of income as the Class III milk base price for the Northeast fluctuated between a low of $8.57 per hundredweight (cwt) and a high of $21.38 per cwt. By 2008, expansion of the ethanol industry ushered in a new era of uncertainty over feedstock price and availability. Long term fuel price projections remain high as a result of concern over a limited long term supply of oil while global demand increases. Unstable financial markets and the potential of a significant economic downturn have also begun to alter the availability of credit and interest rates charged by lenders.
This research assesses the risk posed to three dairy farm systems due to these elements of uncertainty: a traditional small herd, management intensive grazing, and large modern confinement dairy (LMC). These various farm management systems have evolved over the years, each using land, management and capital in different ways to achieve profitability. A whole-farm stochastic budgeting model that accounts for the volatility of milk income, feed prices, fuel prices and interest rates was executed for the three types of farms. Monte Carlo simulations were applied to representative profiles for a traditional small herd, management intensive grazing and large modern confinement dairy.
Overall, farm profitability is most sensitive to fluctuations in milk price compared to all other variables. The representative grazing farm demonstrated the greatest likelihood to generate positive profit margins per unit of milk produced. The grazing profile, however, is projected to return a $30,000 profit for owner withdrawl only 5% of the time. Similarly, the baseline profile will only achieve this owner withdrawl 4% of the time and the LMC profile only 7% of the time. The baseline small herd demonstrated the least uncertainty for multiple profitability indicators, but unfortunately, the actual values were below acceptable industry standards for measures like net farm income, return on assets, return on equity and operating profit margin. The large modern confinement profile experiences greater uncertainty on several indicators, but it is the most likely to achieve a favorable return on assets, return on equity and operating profit margin of all profiles.
Results show that each management system will face significant consequences when subjected to uncertainty. Adherence to a particular feed system cannot be expected to insulate a farm from market based risk. Several management responses to the presence of risk are discussed for these three dairy management systems.
This research assesses the risk posed to three dairy farm systems due to these elements of uncertainty: a traditional small herd, management intensive grazing, and large modern confinement dairy (LMC). These various farm management systems have evolved over the years, each using land, management and capital in different ways to achieve profitability. A whole-farm stochastic budgeting model that accounts for the volatility of milk income, feed prices, fuel prices and interest rates was executed for the three types of farms. Monte Carlo simulations were applied to representative profiles for a traditional small herd, management intensive grazing and large modern confinement dairy.
Overall, farm profitability is most sensitive to fluctuations in milk price compared to all other variables. The representative grazing farm demonstrated the greatest likelihood to generate positive profit margins per unit of milk produced. The grazing profile, however, is projected to return a $30,000 profit for owner withdrawl only 5% of the time. Similarly, the baseline profile will only achieve this owner withdrawl 4% of the time and the LMC profile only 7% of the time. The baseline small herd demonstrated the least uncertainty for multiple profitability indicators, but unfortunately, the actual values were below acceptable industry standards for measures like net farm income, return on assets, return on equity and operating profit margin. The large modern confinement profile experiences greater uncertainty on several indicators, but it is the most likely to achieve a favorable return on assets, return on equity and operating profit margin of all profiles.
Results show that each management system will face significant consequences when subjected to uncertainty. Adherence to a particular feed system cannot be expected to insulate a farm from market based risk. Several management responses to the presence of risk are discussed for these three dairy management systems.