Competitiveness versus environmental impacts
Conventional dairy farms are in general increasing the use of external inputs like concentrates, fertilizers and pesticides. The primary aim of these high-input methods is to increase productivity and thereby obtain a better economic performance. Yet, abundant input use also results in environmental problems like nutrient imbalances, water and air pollution and loss of biodiversity.
Farming systems with lower external input and organic farming can better cope with these problems, but it is not always clear whether they are sufficiently profitable to compete with high-input productions systems.
The challenge of the SOLID project was to examine the main drivers for improving profitability in low-input and organic dairy systems.
Read more in the SOLID Technical Note:
Profit on low-input and organic dairy farms
Defining low-input dairying
In order to analyze the profitability of the low-input dairy production system, the system itself must first be defined, and this is not an easy task. Whereas the organic production system is easy to assign and described in details in EU regulations, no clear definition exists for low-input farming.
Thus the SOLID project has put an effort into describing what low input dairy farming looks like throughout Europe, what the low-input farmers produce on their farms and how they use their production factors. The description is based on information from the European Farm Accountancy Network.
Low-input farming does not look the same all over Europe. What is considered low-input in Denmark or Belgium might be high-input in some parts of Greece or Romania. Consequently, it makes sense to look at the low-input systems at country level or at regional level.
The SOLID analysis builds on a definition of low-input farming based on an indicator that relates the external input used to the number of grazing cows – livestock units – on the farm.
At country level, 25 % of the farms with lowest input are defined as low-input farms while the 25 % of farms with the highest input are defined as high-input farms. Organic farms were examined as a separate group.
The definition of the SOLID indicator:
The sum of economic costs of purchased concentrated feed and fodder for grazing livestock, costs for fertilizers, crop protection, energy and fuel divided by grazing livestock units.
Characteristics of European low-input farms
When low-input, high-input and organic dairy farms are compared throughout Europe there are general differences in regard to farm scale, land use, feed production and the use of labour. These factors are crucial for determining the economic profitability of the farming system.
Low-input farms in EU
- Smallest size
- Lowest number of dairy cows
- Lowest milk yield per cow
- Lowest price per liter milk
- Smallest utilizable agricultural area
- Highest percentage of land used for forage
- Smallest use of labour per unit
- Lowest economic profit
Farm scale in the three different systems
The SOLID project has evaluated and compared low-input, high-input and organic dairy farming in Finland, Spain and United Kingdom.
While the number of dairy cows is about the same on high-input and organic dairy farms, the utilizable agricultural area is smaller on the high-input farms compared to organic farms. This indicates that these farms have the most intensive farming system of the three systems analyzed.
At country level, these results differ. In Spain and Finland the number of dairy cows is the same on all three types of farms, while in the UK high-input and organic farms have more dairy cow than the low-input farms.
When it comes to the utilizable agricultural area it is smallest on low-input farms compared to the two other farming systems in Spain and the UK, while in Finland there is no statistical difference.
Land use for forage in the three different systems
In regard to land use and feed production, there are significant differences between high- and low-input dairy farming. High-input farms use the lowest share of their land for feed production while low-input use the highest. Organic dairy farms are closer to high input dairy farms but have different cropping patterns.
This leads to the conclusion that land use on high-input dairy farms is more intensive than on organic and low-input farms. This is also confirmed by the fact that these high-input farms purchase more concentrates and fodder crops per dairy cow and have a higher percentage of fodder maize in their rotation.
Low-input and organic farms have more permanent pasture and rough grazing. Organic dairy farmers also grow alternative forage crops like e.g. lucerne.
Labour use in the three different systems
Throughout Europe, low-input dairy farms have the lowest employment rate – expressed in annual working units – on their farm and the highest percentage for family labour. On high-input farms it is exactly opposite and organic dairy farms are in between.
In Finland, however, this is not the case, as low-input dairy farms employ the same amount of labour and have the same percentage of family labour as the two other farm types.
In the UK, organic and high-input farms are even more work intensive and hire more paid labour in comparison with low-input farms. Finally in Spain, low-input and high-input farms use the same amount of labour, but high-input dairy farms employ less family labour.
How is the economic profit on low-input farm and organic farms?
In general, at a European level, low-input farms have the lowest and high-input farms the highest milk productivities. This observation holds no matter whether productivity is expressed per cow, per hectar of land, per unit of labor or by capital input.
However, the maximum productivity does not necessarily coincides with optimal profitability.
Productivity and profitability
- Productivity: The amount of milk produced per unit input.
- Profitability: Measures whether the economic revenues – quantity of products multiplied with price – is sufficient to cover all costs – inputs multiplied with prices.
However, many drivers results in profitability performances of low-input farming that are less bad than mere productivity figures indicate. At country level the SOLID analysis showed that low-input dairying can also be more efficient economically than high-input production. That is e.g. the case both in Finland and in Spain. At country level, only organic dairy farmers in United Kingdom proved to have a positive economic profit.
In addition, as low-input farming relies more on the farmers own family production factors, they are less vulnerable to price shocks.
In Europe, milk production per dairy cow is lowest on low-input dairy farms and highest on high-input dairy farms. Organic farms are in between.
The milk price is highest on organic farms and lowest on low-input farms. The percentage economic milk output on total economic output is lowest for low-input and organic dairy farming.
These European conclusions are partially confirmed when comparing the different countries.
Total output, farm net income and economic profit
Total economic output on dairy farms includes the economic value of sales of milk and meat including farmhouse consumption.
This value needs to be corrected with the purchase of animals during the accounting year and the value change of milk and meat stocks. As some dairy farms have also some other smaller branches, like cash crop production, the output from these branches is also added to the total output.
Total output in the different production systems
- Low-input farms have the lowest total economic output
- High-input farms have the highest total economic output
- Organic farms are in between.
However, to evaluate the profitability of the production it takes more than examining the total output. The costs of production must be taken into account.
Farm net income is a profitability indicator indicating the profit before the unpaid costs of the family factor costs are valued. Economic profit, on the other hand, is the profit after deduction of these “own factor costs” – that is the costs of own labour, own land and own capital.
Net income in the different production systems
The big differences in total output are reduced significantly when deducting all the production cost while calculating the farm net income. This of course indicates that high-input and organic farms have higher production costs than low-input dairy farms.
Organic dairy farms have the highest net income compared to the two other dairy systems. Yet, farm net income is still not the bottom line. The family factor costs – own labour, land and capital – has to be deducted before the economic profit is revealed.
Economic profit at European level
- Lowest on low-input farms
- Highest on high-input farms
- Organic farms are in between
Although high-input farms have the highest economic output on average in Europe, both net income and economic profit vary remarkably for the different groups in the different countries.
In Spain the economic profit is negative for both high- and low-input farming, but the deficit is a little smaller on low-input farms compared to high-input farms. In Finland, low-input farmers are doing better when it comes to economic profit than the two other groups while organic organic dairy farmers in the UK are doing best at country level and low-input farmers are having the largest negative result.
From an over all perspective it is worth noting, that at European level, economic profit is negative for all types of dairy farms as there is not enough output to pay for the family production factors.
Read more in the SOLID Technical Note:
Profit on low-input and organic dairy farms