A study of the Iowa State University (ISU) Extension Millionaire Model Dairy Farm project, supported by the Leopold Center at ISU, followed a beginning dairy producer in remodeling antiquated facilities with labor efficiency and low cost in mind. In addition, the financial situation was analyzed each year to help understand year-to-year growth. This Millionaire Model Dairy Farm began operations in 2003. The young producer began planning and signing contracts in the fall of 2002 for a 32-stall barn on 70 acres near Dubuque, Iowa. The producer and tenant built a swing-10 milking parlor in a lean-to on the stall barn, put 54 freestalls in the old stall barn along with an outside fence-line feed strip and a small manure pit. Much of the land was converted to rotationally grazed pasture. The producer paid half of the improvements and the landlord paid the other half and they split the labor bill as well.

Getting started
The producer started out in 2003 as a sharemilker with $0 net worth, earning 25 percent of the milk check in return for his labor in year one. In years two and three the producer took ownership of the cows on a note from a private lender. Ninety cows valued at $1,200 each at that time were purchased in 2003, along with $15,000 in machinery. The machinery line grew to $60,150 by 2008. In 2009, the producer only held $6,668 in debt.

Yes, there were some good to great milk prices during those six years averaging $16.72 per hundredweight for milk from crossbred dairy cows with a Jersey and Holstein base. There were also several poor milk price years, especially 2009. The cows produced 15,873 pounds of milk on average. The return to labor after an equity charge was taken out was $70,791 and ranged from $11,231 in 2009 to $134,080 in 2007. The variation was high but on average is above what a young person can often earn, granted they worked hard and took some financial risks.

Thanks to both the grazing and crossbreeding systems, the cull rate averaged less than 20 percent per year, which earned the producer an average of $23,033 in breeding livestock gains per year.

The producer averaged approximately 34 hours of labor per cow thanks to the semi-seasonal calving, the low-cost parlor and the grazing and feeding systems employed on the farm. The low labor cost is also credited to the purchase of much of the feed, rather than growing the crops. Labor earnings ranged from $3.12 per hour in 2009 to $44.69 per hour in 2007 and averaged $27.37 per hour.

The average milk production costs, with all labor and equity charges included was $14.03 per hundredweight over the six years. The gross income per hundredweight equivalent was $16.72 for a net profit per hundredweight of $3.08 with labor, equity and other costs already accounted for.

The producer averaged 1.2 million pounds of milk sold per Full Time Equivalent (FTE) worker. The producer began with 12,820 pounds of milk sold per acre in 2004 and grew to 24,273 pounds of milk sold per acre in 2009.

The producer began with 13,197 pounds of milk sold per cow in 2004 and grew to 18,468 pounds of milk sold per cow in 2009. Returns to assets averaged 25 percent. Borrowing money to start operations at 6.5 percent left a profit of 18.5 percent for every dollar borrowed.

The operating profit margin averaged 20 percent and the asset turnover ratio averaged 110 percent. Granted milk prices were good, but even if milk prices were at the $14.03 average cost throughout the six years, this producer would still have earned enough to pay for family living and debt service.

The feed budget employed by this 80 cow operation consisted of 70 acres of high quality rented land for legume/grass pasture; 20 acres of corn silage purchased in field; 150 tons of hay purchased; and 292 tons of grain/protein supplements purchased.

The bottom line
This dairy increased net worth from $0 to well over $300,000 in a seven year period while providing for family living and reducing debt down to below $7,000. Granted, the producer did receive rental assistance of $3,000 per year from established fair market value rental rates. But, at the same time, this young producer gave valuable sweat equity to the landlord and helped modernize a small dairy farm.

The producer also benefited $2,000 per year from a private financer who allowed the producer to begin with limited equity and took a risk. And, although 2009 was tough, the other years were good. But, even when accounting for this assistance and a tough 2009, this producer still made great strides toward becoming a millionaire dairy producer. PD

–Excerpts from Iowa State University Extension publication by Dr. Larry Tranel, Extension Dairy Specialist, Iowa State University

• Larry Tranel

• Extension Dairy Specialist
• Iowa State University
• Email Larry Tranel