Faculty trifecta come together to tackle important question for Wisconsin dairy farmers

The Dairy Innovation Hub is known for collaboration — it is a key element to our mission of positioning Wisconsin’s dairy community for economic, environmental, and social success. UW–Madison, UW­–Platteville and UW–River Falls are the foundation of the Hub and all three of these campuses have come together to explore a phenomenon that impacts all Wisconsin dairy farms: cost of production (COP).

Chuck Nicholson, Hub-funded faculty at UW–Madison and associate professor of agricultural and applied economics and animal and dairy sciences, is the principal investigator of a project focused on assessing and analyzing the COP of Wisconsin dairy farms. Nicholson is joined by co-principal investigators Kevin Bernhardt, professor of agribusiness at UW–Platteville and UW Extension specialist, and Luis Peña-Lévano, former Hub-funded faculty at UW–River Falls and assistant professor of agricultural economics. Mark Stephenson, emeritus director of the Center for Dairy Profitability, is an advisor to the project.

This project originated from a conversation that Heather White, faculty director for the Dairy Innovation Hub, had with a local dairy farmer. He expressed concern that current ways of calculating COP weren’t sufficiently representative of what dairy farms were experiencing. White looped Nicholson into the conversation, who then looped Bernhardt in based on his previous work in the field and asked Peña-Lévano to provide an additional perspective.

Bernhardt shared some notable facts based on available data that sparked Nicholson’s interest. “From top to bottom in any given year, there is this amazingly big spread in terms of cost of production,” says Nicholson. “We don’t know if it’s always the same farms at the bottom or at the top, but what we do know is that every year we see a pattern. That got us thinking about ‘Why is there such a big spread?’ and ‘What underlies the differences?’”

Chuck Nicholson speaks at the 2023 Dairy Symposium. Photo by Nguyen Tran.

These questions, and previous data, were the catalyst for a full, Hub-funded investigation into COP of Wisconsin dairy farms.

COP is one of the important indicators of farm business performance — but what is COP? “Cost of production” is the dollar amount for producing a given quantity of a product, like a hundredweight of milk. Dairy farms often sell multiple products, which can make calculating COP complicated, but the most relevant management information is often the costs for producing milk. Costs are an important determinant of farm profitability, but it also depends on milk prices and productivity. “Some farms can target low costs to increase profits while others may have higher costs that also lead to higher production as a strategy for increasing profits,” says Bernhardt.

Since COP is related to a farm’s profits, understanding the factors that make up COP can provide important farm-level management information. That is the overarching goal of Nicholson and his collaborators’ project: to assess COP values of a subset of Wisconsin dairy farms and provide insight about how strategies to lower costs and improve productivity can help inform management strategies.

Kevin Bernhardt speaks at the 2023 Dairy Symposium. Photo by Nguyen Tran.

The team has an advantage to tackling this task. “We have different perspectives on the same problem,” says Peña-Lévano. “We’re looking into different angles, and I think that makes this a very good collaboration.”

The collaborative project has multiple moving parts and is using different data sources for a multi-pronged analysis of COP in Wisconsin.

Nicholson and Bernhardt are looking at data from the Agricultural Financial Advisor (AgFA) farm financial records system, the United States Department of Agriculture (USDA) Agricultural Resource Management Survey (ARMS), and other similar sources. Peña-Lévano is looking at data from IMPLAN, an economic modeling analysis software. The AgFA records provide farm-specific data for Wisconsin, IMPLAN provides county- and state-specific data, and the ARMS data are regional and national.

AgFA collected financial data from 178 Wisconsin farms for the years 2014 to 2018. Nicholson divided the farms into five tiers and looked closely at which farms were consistently in the lowest 20%, or who had the consistently smallest COP values. Of the 178 farms, only 15 of them were consistently in this lowest COP range. So, the team decided to compare these farms to 60% of the less-consistent farms that didn’t have the lowest 20% or highest 20% — simply put, they compared the consistently low-cost farms to those in the “middle of the pack”.

Nicholson found several differences between the two categories. The consistently lowest 20% had a smaller average herd size, lower milk per cow and milk price, owned and rented less land, and had overall lower farm operating costs. Additionally, the lowest 20% had a higher return on assets, which means a higher financial performance.

Bernhardt also divided the farms into different tiers, but by profit level instead of COP. One finding is that farms pursue profits in different ways — some target lower costs per cow while others have higher costs per cow. However, the farms that have higher costs per cow tend to produce more, resulting in an overall lower cost.

“We have some interesting initial observations. We’re going to do some more work to understand what this all means and how it can be useful,” says Nicholson. With further research, the team will be able to provide insight on better management strategies related to COP for farmers.

Peña-Lévano’s work is still in progress. “What I’m trying to do is evaluate how the cost of dairy varies,” says Peña-Lévano. “That way, we can understand the cost variations by Wisconsin counties.” To do this, he is using IMPLAN, an input-output modeling system that captures categories of input costs and labor with linkages to other agricultural industries.

Luis Peña-Lévano at the 2022 Dairy Summit. Photo by Pat Deninger/UW–River Falls.

The IMPLAN analysis, once complete, will provide additional insights into COP and management strategies.

In the early stages of the project, the team held a focus group with farmers, people who work in farm management, and academics who work with farm records, and they all saw value in the project — and the data that drives it.  A new online farm records system, FarmBench, has replaced AgFA and has collected data from 2019 to 2021, but it is still being processed. An important project goal is to highlight the usefulness of farm records data and the need to provide support for its collection and analysis. Without resources like it, future work — such as this project — won’t be possible.

“This data is an important resource for the state’s dairy farms, dairy companies, and state government,” says Nicholson. “If we lose access to that resource, we won’t be nearly as able to monitor the current financial health of farms and understand the management arrangements that are likely to be more successful.”

At the end of the project, the team plans on sharing their findings with relevant stakeholders and farmers through workshops. They also hope to learn about possible next steps, such as future research and educational efforts, to continue helping Wisconsin’s dairy farms.