Missouri 700-Cow Dairy Model. A Value Added Enterprise for Missouri Crop Producers

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1 Missouri 700-Cow Dairy Model A Value Added Enterprise for Missouri Crop Producers Prepared by: Dairy Focus Team Commercial Agriculture Program September 2005

2 1. INTRODUCTION ECONOMIC FACTORS FOR THE LOCAL COMMUNITY, COUNTY AND STATE ECONOMIC IMPACT OF THE 700-COW DAIRY CONSTRUCTION FARM LEVEL ANNUAL ECONOMIC IMPACT OF THE 700-COW DAIRY OPERATION STATE LEVEL ANNUAL ECONOMIC IMPACT OF THE 700-COW DAIRY OPERATION OPPORTUNITIES TO ADD VALUE THROUGH A DAIRY FARM KEYS TO CREATING PROFITABLE NEW CONFINEMENT DAIRY FARMS THE DAIRY FACILITIES THE DAIRY BUSINESS THE DAIRY LABOR FEED CROP LOGISTICS FERTILIZER SAVINGS TO CROP PRODUCERS FROM USING DAIRY MANURE INCOME STATEMENT, CASH FLOW AND DAIRY ENTERPRISE BUDGET SENSITIVITY OF KEY FINANCIAL MEASURES CHANGES IN KEY PRODUCTION MEASURES CHANGES IN FINANCIAL LEVERAGE MANURE NUTRIENT MANAGEMENT REQUIREMENTS FACTORS INFLUENCING SITE SELECTION LOCATION FRESH WATER SUPPLY SOCIAL ASPECTS IDEAL COUNTIES FOR SITING NEW DAIRY CONFINEMENT FACILITIES

3 1. Introduction Establishing a modern confinement dairy offers nearby crop producers the opportunity to create a profitable new business that can also increase the profitability of their existing cropping operations. By marketing their crops through a dairy, grain and silage producers can improve their margins while profitably producing a valuable commodity that is increasingly in short supply in Missouri and other southeastern states. The model dairy presented here details the basic strategic, financial, and production framework for a 700-cow dairy situated on 40 acres of land. Surrounding the dairy are crop producers selling feed to the dairy and taking manure nutrients under manure spreading easements. 700-Cow Confinement Dairy Snapshot Total capital needed to create the dairy $4,433,000 Total owned acreage needed for dairy facilities 40 Direct dairy jobs created (full time equivalents) Gross Revenue $2,400,343 $2,493,944 $2,579,417 $2,365,690 $2,365,690 Net Income $285,330 $363,946 $434,667 $209,021 $198,684 Net Cash Flow $432,038 $510,652 $581,373 $355,727 $345,390 Rate of return on assets 1 6.8% 8.6% 10.1% 5.1% 5.1% Annual Feed Usage for Dairy: To be Purchased from Local Crop Producers Crop Tons Bushels Estimated Crop Acreage Needed Needed Yield Needed Corn Silage 6, Tons 384 Alfalfa Silage 1,997 9 Tons 222 Alfalfa Hay 1, Tons 243 Grass Hay Tons 193 Corn 1,543 55, Bushels 424 Total crop acreage needed to supply the dairy with feed 1,466 Additional crop acreage needed by the dairy for nutrient management 160 Total minimum acres needed for manure spreading easements 1,626 1 The projected rate of return on assets increases in year 2007 and 2008 due to rising milk production as the dairy herd matures and management gains experience. In the year 2008 and 2009, the rate of return declines due to the end of the three year milk production incentive for new milk, paid by the milk marketing cooperatives in the Southeast Milk Marketing Order. 3

4 2. Economic Factors for the Local Community, County and State 2.1 Economic Impact of the 700-cow Dairy Construction Overall construction cost will be $2,483,000. These costs represent investments in construction of a milking parlor, freestall barn, holding area, bunker silo, manure storage and water supply. Additionally, at least $250,000 worth of machinery will be purchased for the dairy operation. A significant portion of these dollars will be spent locally for contractors, specialized labor, building supplies for constructing the dairy and for purchasing equipment. 2.2 Farm Level Annual Economic Impact of the 700-cow Dairy Operation The dairy will generate at least $2.4 million in gross revenue per year for over the next 20 or more years An estimated six million dollars in economic activity will be generated annually in the state due to the multiplier effect of the annual expenditures of the dairy. Most of that economic activity will be generated in the surrounding rural area. For every dollar spent by the dairy, approximately $2.50 in business purchases and wages are created in the state s economy. The dairy will generate $10,000 per year in real estate and property taxes. The dairy will spend $10,000 per year in insurance fees The dairy will spend $60,000 per year in utilities, fuel and oil The dairy will provide direct employment to 11 full-time positions such as a dairy manager, herdsman, milkers, feeders and others. Total labor expenses including benefits for the dairy operation will be $260,000. Indirect jobs in the community supported by dairy operation include: equipment repair and maintenance, insurance, banking, custom manure hauling, dairy supplies, and veterinary services. The dairy will provide local crop producers with a new market for their crops; total crop acreage needed for the dairy will be 1,466 acres. Corn silage, alfalfa silage, alfalfa hay, grass hay and corn will be needed to supply feed to the dairy. Nutrient management from the dairy will help local landowners save $32 - $56 per acre in reduced fertility costs by the use of dairy manure. A minimum of 1,626 acres will be needed for accepting manure 4

5 2.3 State Level Annual Economic Impact of the 700-cow Dairy Operation 2 When the economic impact of dairy processing and manufacturing and all the multiplier effects of those industries are considered along with the farm level, the total annual economic impact on the state of Missouri is more than $9.6 million, or $13,737 per cow, according to a University of Wisconsin study. 2 Conlin, J Dairy cows are rural economic development engines. Dairy Initiatives Newsletter 12:1 Department of Animal Science, University of Minnesota Wisconsin Center for Dairy Profitability Rethinking dairyland: background for decisions about Wisconsin's dairy industry. Paper 78A, College of Agricultural and Life Sciences, University of Wisconsin-Madison. 5

6 3. Opportunities to Add Value through a Dairy Farm 3.1 Keys to Creating Profitable New Confinement Dairy Farms Facilities are built for cow comfort, cow cooling and high labor efficiency Scale large enough to attract top quality experienced dairy management Scale large enough to fill tractor-trailer tankers of milk daily to interest milk buyers Milk market incentives in place to enhance returns and reduce risks during start-up Situated in areas with multiple markets to ensure long term competitive pricing Situated in areas with easy access to the interstate highway system High quality land nearby with irrigation potential to lower forage production risks Community supportive of economic development through agriculture. 3.2 The Dairy Facilities System Parlor Freestalls Feeding system Waste System Description Double 12 parallel parlor with rapid exits and automation, suitable for milking with one person or two. 4-row barn, with 8 stalls with mattresses, 14 eaves, open ridge cap, cow groups of 108 cows each, misters and fans for optimal cooling in summer. Dry cow and transition housing under the same roof as freestall barn. A total mixed ration (TMR) using high amounts of corn silage from a bunker silo, alfalfa hay, alfalfa haylage from bags, whole cotton seed, corn and byproducts delivered in truckload lots and mixed on-site with TMR mixer. Manure is scraped to concrete storage area, until spreading or knifing to cropland. Parlor water is held separately and applied via irrigation. Investments Quantity Cost/Unit Dairy Investment Site Prep and Water Supply 1 $175,000 $175,000 Manure and Parlor Water Storages (Net of EQIP Cost Sharing) 3 1 $250,000 $250,000 Freestall Barn (loops, mats, and cooling) 630 $1,600 $1,008,000 Special Needs Barn 1 $200,000 $200,000 Milking Parlor and Equipment; Holding Area and Office 1 $650,000 $650,000 Machinery 1 $250,000 $250,000 Commodity Storage and Silage Pad 1 $200,000 $200,000 Dairy cows 700 $2,000 $1,400,000 Land 40 $2,500 $100,000 Working Capital for Year 1 1 $200,000 $200,000 Total Investment $4,433,000 Investment/cow (milking cows, year 3) $6,333/cow 3 Manure and parlor wastewater storage units are estimated to cost $500,000, with the USDA-NRCS Environmental Quality Incentive Program (EQIP) paying for fifty percent of the cost. 6

7 3.3 The Dairy Business To be as flexible as possible to potential users, this generic model depicts the projections of the dairy as a business entity without specifying which type of legal entity would be used by crop producers to own the dairy. Legal entity options include: sole proprietorship, partnership, limited liability company (LLC), new generation cooperative, S corporation or C corporation. Tax treatment will be different depending upon the entity chosen. Also to be as flexible as possible to potential users, the financial projections in this generic model assume no leverage is used in the dairy. This dairy could support significant leverage; a sensitivity analysis was created in section 5.2 to demonstrate different levels of debt for the dairy operation. A brief summary of profitability and financial efficiency is presented below. For this summary, the following assumptions were incorporated: Cull Rate: Cull Cow Value: Calving Interval: Hauling Costs: Advertising Fee: Coop Fee: Lactating Ration Dry Cow Ration 30% voluntary + 5 % death rates $650 each 14.6 month $.60/cwt $.15/cwt $.10/cwt $3.50/cow/day $1.76/cow/day Bull calves sold at birth for $100 each Heifer calves sold at birth to a custom contract raiser for $450 each Heifers purchased into the herd as needed for $2,000 each Detailed projected income statements, cash flow statements, and enterprise summaries are provided in section Profitability 1. Rate of Return on Assets 6.8% 8.6% 10.1% 5.1% 5.1% 2. Operating Profit Margin Ratio 11.9% 14.6% 16.9% 8.8% 8.4% Financial Efficiency 3. Asset Turnover Ratio 57.5% 58.7% 60.0% 57.5% 60.3% 4. Operational Ratios a. Operating Expense Ratio 71.8% 69.7% 68.0% 74.6% 75.0% b. Depreciation Expense Ratio 16.3% 15.7% 15.2% 16.6% 16.6% c. Interest Expense Ratio 0.0% 0.0% 0.0% 0.0% 0.0% d. Net Farm Income from Operations Ratio 11.9% 14.6% 16.9% 8.8% 8.4% 7

8 Milk Production and Milk Prices* Pounds per cow per day Implied 365 day Rolling Herd Average 22,519 23,452 24,304 24,624 24,624 Gross Milk Price ($/cwt) $15.00 $15.00 $15.00 $13.50 $13.50 *Assumes cows are milked 3 times/day. 8

9 3.4 The Dairy Labor A modern dairy that milks three times daily will operate twenty-four hours per day. To milk, feed, care for the cattle, breed, maintain the freestalls and scrape manure in the most labor efficient manner, a two-man crew is used in three separate shifts, seven days a week. Maximum use of outsourcing is used to keep labor costs low. A general manager oversees the business and the overall production operation of the dairy. The herdsman oversees the management of the herd and the parlor. Hourly Labor - Weekly Work Schedule 4 Employee Wage Rate Sunday Monday Tuesday Wednesday Thursday Friday Saturday Worker 1 $ Worker 2 $ Worker 3 $ Worker 4 $ Worker 5 $ Worker 6 $ Worker 7 $ Worker 8 $ Salaried Labor -Weekly Work Schedule 5 Employee Salary Level Sunday Monday Tuesday Wednesday Thursday Friday Saturday Manager $50, Herdsman $35, Labor schedule includes 3 worker pairs working 40 hours per week and one worker pair working 48 hours. The 48 hour working pair would shift every week allowing one crew to work 48 hours per week one time per month 5 Manager and herdsman may schedule weekends to allow one or the other to be off work every other weekend. 9

10 3.5 Feed Crop Logistics 6 Feed Feed Planning: Estimated Annual Usage of Feedstuffs Lbs Tonnage % Tonnage Lbs Needed Needed Consumed Storage Used Per 700 Cows Per Cow Per Year Loss Year Tons per Truck Corn Silage 14,628 10,239,600 5, Alfalfa Silage 5,434 3,803,800 1, Alfalfa Hay 2,977 2,083,900 1, Grass Hay 1, , Corn 4,321 3,024,700 1, Soybean Meal 2,079 1,455, Whole Cotton Seed 1, , Byproduct Feeds 2,689 1,882, Minerals/Vitamins , Acreages of Crops Needed for Dairy Crop Tons Bushels Acreage Expected Yield Needed Needed Needed Corn Silage 6, Tons 384 Alfalfa Silage 1,997 9 Tons 222 Alfalfa Hay 1, Tons 243 Grass Hay Tons 193 Corn 1,543 55, Bushels 424 Total crop acreage needed to supply feed for the dairy 1,466 Additional corn grain acreage needed by dairy for nutrient management 160 Total minimum acres needed for manure spreading easements 1,626 6 Feed planning does not include the feed needed for replacements. In this model, replacements are assumed to be raised off-site by a contract grower. 10

11 3.6 Fertilizer Savings to Crop Producers From Using Dairy Manure 7 Crop producers using manure from the dairy may expect to reduce their fertilizer costs per acre by the following rates. These reduced costs should enhance the margins of the nearby crop producers. Crop Reduced Fertility Costs per Acre of Crop Corn Silage $ Alfalfa Silage $ Alfalfa Hay $ Grass Hay $32.23 Corn $ Fertilizer savings were calculated by assuming that manure was applied at a rate that would meet all of the growing crop s need for phosphorous and potassium and up to one third of the crops nitrogen needs. 11

12 4. Income Statement, Cash Flow and Dairy Enterprise Budget All the projected statements assume 0% debt in the dairy operation 700-Cow Dairy Model Projected Income Statement Year 1 Year 2 Year 3 Year 4 Year 5 5-Year Average GROSS REVENUE $2,400,343 $2,493,944 $2,579,417 $2,365,690 $2,365,690 $2,441,017 Milk sales $2,245,288 $2,338,889 $2,424,362 $2,210,636 $2,210,636 $2,285,962 Crops sold $0 $0 $0 $0 $0 $0 Calves & heifers sold $155,055 $155,055 $155,055 $155,055 $155,055 $155,055 Government payments $0 $0 $0 $0 $0 $0 Other farm income $0 $0 $0 $0 $0 $0 Patronage dividends $0 $0 $0 $0 $0 $0 OPERATING EXPENSES: Purchased Feed: Feedstuffs $881,149 $881,149 $881,149 $881,149 $881,149 $881,149 Total feed $881,149 $881,149 $881,149 $881,149 $881,149 $881,149 HERD REPLACEMENT COSTS $310,625 $310,628 $310,625 $310,625 $310,625 $310,626 Depreciation--dairy cows $202,125 $202,126 $202,125 $202,125 $202,125 $202,125 Loss on sale of cows $108,500 $108,502 $108,500 $108,500 $108,500 $108,500 OTHER OPERATING EXPENSES Seed expenses $0 $0 $0 $0 $0 $0 Fertilizer and chemicals $0 $0 $0 $0 $0 $0 Hired labor (includes benefits and SS) $260,780 $267,299 $273,982 $280,832 $287,852 $274,149 Marketing 1/ $127,233 $132,537 $137,381 $139,188 $139,188 $135,105 DHI testing $10,500 $10,500 $10,500 $10,500 $10,500 $10,500 Artificial insemination $17,500 $17,500 $17,500 $17,500 $17,500 $17,500 Vet. Medicine, bst, Hoof Trimming $137,480 $137,480 $137,480 $137,480 $137,480 $137,480 Supplies $43,000 $44,075 $45,177 $46,306 $47,464 $45,204 Fuel & oil $16,400 $16,400 $16,400 $16,400 $16,400 $16,400 Utilities $42,000 $43,050 $44,126 $45,229 $46,360 $44,153 Repairs--Buildings $10,000 $10,000 $10,000 $10,000 $10,000 $10,000 Repairs--Machinery and equipment $10,000 $10,000 $10,000 $10,000 $10,000 $10,000 Farm taxes (R.E. & personal prop) $10,000 $10,250 $10,506 $10,769 $11,038 $10,513 Farm insurance $10,000 $10,250 $10,506 $10,769 $11,038 $10,513 Legal & professional fees $2,500 $2,563 $2,627 $2,692 $2,760 $2,628 Custom hire $10,000 $10,250 $10,506 $10,769 $11,038 $10,513 Car and truck costs $2,400 $2,400 $2,400 $2,400 $2,400 $2,400 Other expenses $0 $0 $0 $0 $0 $0 Miscellaneous $23,864 $24,086 $24,304 $24,480 $24,633 $24,273 Depreciation (buildings and equipment) $189,581 $189,581 $189,581 $189,581 $189,581 $189,581 Less other expenses for raising heifers $0 $0 $0 $0 $0 $0 Total other operating expenses $923,238 $938,221 $952,975 $964,895 $975,232 $950,912 TOTAL OPERATING EXPENSES $2,115,012 $2,129,997 $2,144,750 $2,156,669 $2,167,006 $2,142,687 INCOME BEFORE FINANCING COSTS $285,330 $363,946 $434,667 $209,021 $198,684 $298,330 1/ Includes milk hauling, state and federal promotion, coop/marketing fees, and the cost of marketing beef. 12

13 700-Cow Dairy Model Projected Cashflow Statement Year 1 Year 2 Year 3 Year 4 Year 5 5-Year Average CASH INFLOWS Farm cash receipts Milk sales $2,245,288 $2,338,889 $2,424,362 $2,210,636 $2,210,636 $2,285,962 Livestock sales $291,555 $291,555 $291,555 $291,555 $291,555 $291,555 Crop sales $0 $0 $0 $0 $0 $0 Government payments $0 $0 $0 $0 $0 $0 Other farm income $0 $0 $0 $0 $0 $0 Patronage dividends $0 $0 $0 $0 $0 $0 Sale of assets: Machinery $0 $0 $0 $0 $0 $0 Money borrowed $0 $0 $0 $0 $0 $0 TOTAL $2,536,843 $2,630,444 $2,715,917 $2,502,190 $2,502,190 $2,577,517 CASH OUTFLOWS Purchased feedstuffs $881,149 $881,149 $881,149 $881,149 $881,149 $881,149 Labor (includes benefits & SS) $260,780 $267,299 $273,982 $280,832 $287,852 $274,149 Marketing 1/ $127,233 $132,537 $137,381 $139,188 $139,188 $135,105 DHI testing $10,500 $10,500 $10,500 $10,500 $10,500 $10,500 Artificial insemination $17,500 $17,500 $17,500 $17,500 $17,500 $17,500 Veterinary, hoof trimming & BST $137,480 $137,480 $137,480 $137,480 $137,480 $137,480 Medicine $0 $0 $0 $0 $0 $0 Farm supplies $43,000 $44,075 $45,177 $46,306 $47,464 $45,204 Fuel & oil $16,400 $16,400 $16,400 $16,400 $16,400 $16,400 Utilities $42,000 $43,050 $44,126 $45,229 $46,360 $44,153 Repairs Buildings $10,000 $10,000 $10,000 $10,000 $10,000 $10,000 Repairs--Machinery & equipment $10,000 $10,000 $10,000 $10,000 $10,000 $10,000 Farm taxes (R.E. & personal prop) $10,000 $10,250 $10,506 $10,769 $11,038 $10,513 Farm insurance $10,000 $10,250 $10,506 $10,769 $11,038 $10,513 Interest $0 $0 $0 $0 $0 $0 Legal & professional fees $2,500 $2,563 $2,627 $2,692 $2,760 $2,628 Custom hire $10,000 $10,250 $10,506 $10,769 $11,038 $10,513 Car and truck costs $2,400 $2,400 $2,400 $2,400 $2,400 $2,400 Miscellaneous $23,864 $24,086 $24,304 $24,480 $24,633 $24,273 Total Cash Farm Expenses $1,614,806 $1,629,789 $1,644,544 $1,656,463 $1,666,800 $1,642,480 Capital purchases: Breeding livestock $489,998 $490,004 $490,000 $490,000 $490,000 $490,000 Machinery & equipment $0 $0 $0 $0 $0 $0 Buildings & land $0 $0 $0 $0 $0 $0 Principal payments $0 $0 $0 $0 $0 $0 TOTAL $2,104,804 $2,119,793 $2,134,544 $2,146,463 $2,156,800 $2,132,481 NET CASH FLOW $432,038 $510,652 $581,373 $355,727 $345,390 $445,036 1/ Includes milk hauling, state and federal promotion, coop/marketing fees, and the cost of marketing beef. 13

14 700-Cow Dairy Model Projected Dairy Enterprise Budget (5-year Avg.) Herd Per Cow Per CWT Percent INCOME FROM OPERATIONS: Milk sales $2,285,962 $3,266 $ % Sales of young stock & calves $155,055 $222 $ % Other farm income $0 $0 $ % Patronage dividend $0 $0 $ % Total Gross Receipts $2,441,017 $3,487 $ % OPERATING EXPENSES: Feed: Feedstuffs $881,149 $1,259 $ % Less feed for heifers $0 $0 $ % Total feed $881,149 $1,259 $ % Herd replacement costs: Depreciation--dairy cows $202,125 $289 $ % Loss on sale of cows $108,500 $155 $ % Total herd replacement costs $310,626 $444 $ % Other operating expenses: Labor (includes benefits & SS) $274,149 $392 $ % Marketing 1/ $135,105 $193 $ % DHI testing $10,500 $15 $ % Artificial insemination $17,500 $25 $ % Veterinary $137,480 $196 $ % Medicine $0 $0 $ % Supplies $45,204 $65 $ % Fuel & oil $16,400 $23 $ % Utilities $44,153 $63 $ % Repairs--Buildings $10,000 $14 $ % Repairs--Machinery & equipment $10,000 $14 $ % Rent $0 $0 $ % Farm taxes (R.E. & personal prop) $10,513 $15 $ % Farm insurance $10,513 $15 $ % Legal & professional fees $2,628 $4 $ % Custom hire $10,513 $15 $ % Car and truck costs $2,400 $3 $ % Other $0 $0 $ % Interest $0 $0 $ % Depreciation $189,581 $271 $ % Less other expenses for raising heifers $0 $0 $ % Total other operating expenses $926,639 $1,324 $ % TOTAL OPERATING EXPENSES $2,118,414 $3,026 $ % NET INCOME FROM OPERATIONS $322,603 $461 $2.03 1/ Includes milk hauling, state and federal promotion, coop/marketing fees, and the cost of marketing beef. 14

15 5. Sensitivity of Key Financial Measures 5.1 Changes in Key Production Measures Milk production, milk price, and feed costs drive the financial performance of this 700-cow model dairy. The sensitivity of key financial measures to those drivers is detailed below. Sensitivity to Milk Production Levels** lbs milk per cow per day Decrease 4.0 lb Decrease 2.0 lb Current production Increase 2.0 lb Increase 4.0 lb Cash Flow (Year 1) $311,779 $371,909 $432,038 $492,168 $552,297 Cash Flow (Year 2) $390,393 $450,522 $510,652 $570,781 $630,911 Cash Flow (Year 3) $461,114 $521,244 $581,373 $641,503 $701,632 Cash Flow (Year 4) $248,228 $301,977 $355,727 $409,477 $463,226 Cash Flow (Year 5) $237,891 $291,640 $345,390 $399,140 $452,889 Net Income (5-Year Avg.) $183,175 $240,752 $298,330 $355,907 $413,485 Net Income per Cow (5-year Avg.) $ $ $ $ $ Total Operating Expenses Per Cwt. $12.77 $12.45 $12.14 $11.84 $11.56 (excluding depreciation) ** Based on $15 milk price for years 1-3 and $13.50 for years 4-5, 0% Debt Sensitivity to Milk Price Levels** Milk Prices $11.00 $11.50 $12.00 $12.50 $13.00 $13.50 $14.00 $14.50 $15.00 $15.50 $16.00 Cash Flow (Year 1) ($166,705) ($91,862) ($17,019) $57,824 $132,667 $207,510 $282,353 $357,196 $432,038 $506,881 $581,724 Cash Flow (Year 2) ($113,052) ($35,089) $42,874 $120,837 $198,800 $276,763 $354,726 $432,689 $510,652 $588,615 $666,578 Cash Flow (Year 3) ($65,123) $15,689 $96,501 $177,313 $258,125 $338,937 $419,749 $500,561 $581,373 $662,185 $742,997 Cash Flow (Year 4) ($53,650) $28,225 $110,101 $191,976 $273,852 $355,727 $437,602 $519,478 $601,353 $683,229 $765,104 Cash Flow (Year 5) ($63,987) $17,889 $99,764 $181,639 $263,515 $345,390 $427,265 $509,141 $591,016 $672,892 $754,767 Net Income (5-Year Avg.) Net Income per Cow (5-year Avg.) Total Operating Expenses Per Cwt. (excluding depreciation) ($239,210) ($159,736) ($80,262) ($788) $78,685 $158,159 $237,633 $317,107 $396,580 $476,054 $555,528 ($307.05) ($193.52) ($79.98) $33.55 $ $ $ $ $ $ $ $12.14 $12.14 $12.14 $12.14 $12.14 $12.14 $12.14 $12.14 $12.14 $12.14 $12.14 ** Based on $15 milk price for years 1-3 and $13.50 for years 4-5, 0% Debt Sensitivity to Feed Costs** Feed Cost (Per Day for Milking Group) $2.75 $3.00 $3.25 $3.50 $3.75 $4.00 $4.25 $4.50 $4.75 $5.00 Cash Flow (Year 1) $610,969 $551,326 $491,682 $432,038 $372,395 $312,751 $253,107 $193,464 $133,820 $74,176 Cash Flow (Year 2) $689,583 $629,939 $570,295 $510,652 $451,008 $391,364 $331,721 $272,077 $212,433 $152,790 Cash Flow (Year 3) $760,304 $700,661 $641,017 $581,373 $521,730 $462,086 $402,442 $342,799 $283,155 $223,511 Cash Flow (Year 4) $534,658 $475,014 $415,371 $355,727 $296,083 $236,440 $176,796 $117,152 $57,509 ($2,135) Cash Flow (Year 5) $524,321 $464,677 $405,034 $345,390 $285,746 $226,103 $166,459 $106,815 $47,172 ($12,472) Net Income (5-Year Avg.) Net Income per Cow (5-year Avg.) Total Operating Expenses Per Cwt. (excluding depreciation) $477,261 $417,617 $357,973 $298,330 $238,686 $179,042 $119,399 $59,755 $111 ($59,532) $ $ $ $ $ $ $ $ $41.13 ($42.82) $11.03 $11.40 $11.77 $12.14 $12.50 $12.87 $13.24 $13.61 $13.98 $14.35 ** Based on $15 milk price for years 1-3 and $13.50 for years 4-5, 0% Debt 15

16 5.2 Changes in Financial Leverage This model dairy could support significant leverage, if desired. In the following table, various levels of debt equity in the dairy capital investments are displayed to demonstrate their effect on years 1 through 5 cash flow for the dairy operation. Sensitivity to Financing Dairy Capital Investments** Percentage Debt in Dairy Operation 0% 10% 20% 30% 40% 50% Cash Flow (Year 1) $432,038 $385,312 $337,017 $288,804 $240,348 $192,164 Cash Flow (Year 2) $510,652 $463,942 $415,666 $367,472 $319,035 $270,869 Cash Flow (Year 3) $581,373 $534,682 $486,426 $438,252 $389,835 $341,690 Cash Flow (Year 4) $355,727 $309,056 $260,821 $212,669 $164,273 $116,150 Cash Flow (Year 5) $345,390 $298,740 $250,528 $202,399 $154,027 $105,926 ** All loans were based on a 7% interest rate. Terms varied depending on type of loan; 20 years for land, 15 years for building or other structures, 7 years for machinery and 5 years for working capital and dairy cows. 16

17 6. Manure Nutrient Management Requirements The manure nutrients will need to be assimilated into a cropping system that is part or associated with a dairy operation. Having this cropping system relatively close to the operating dairy site will help reduce manure hauling and spreading costs. The following assumptions and recommendations are used for manure and wastewater of the model dairy operations. 1. The manure from the freestall facilities will be scraped and stored in a manure slurry storage structure and spread on land for crop and forage production. A 700-cow dairy will annually produce about 5 million gallons of manure to be stored in a slurry type manure storage located near the freestall barns. 2. Annually, a 700-cow dairy will provide sufficient phosphorus, as P 2 0 5, to fertilize all acreage needed for corn and forage production. There will be an excess of phosphorus, in the amount of 6,400 lb in this scenario, enough to fertilize an additional 160 acres of corn for grain. 3. The wastewater from the milking center will be stored as liquid effluent in a liquid storage structure that is separate from the slurry storage used with the freestall barns and will be irrigated on land for alfalfa production. 4. The milking center wastewater volume will vary depending upon the water management procedures used within the milking center. The amount of wastewater generated by the milking center will range from 5 to 25 million gallons for a 700-cow dairy. 5. The nutrient concentration will tend to be low for the milking center wastewater but needs to be applied to growing crop. This wastewater is assumed to be applied to land growing alfalfa by using center pivot irrigation systems. To have reasonable hydraulic loading of wastewater on alfalfa, a 700-cow dairy should have access to at least 240 acres of irrigated alfalfa. 17

18 7. Factors Influencing Site Selection 7.1 Location A number of technical factors need to be integrated when selecting a site for a dairy operation. The natural resource base to provide the needed water supply and the land base for manure nutrient assimilation and forage production must be available or must have the potential to develop these resources. The web site entitled Permitting Animal Feeding Operations in Missouri, which can be found at provides a guide to regulatory and environmental considerations for locating a new dairy operation in Missouri. Other site selection criteria to incorporate include isolation, utility access and public road access. Site isolation needs to be balanced with utility access and road access. Often some additional utility development and road access costs are a wise investment when developing a dairy operation that has adequate isolation. 7.2 Fresh Water Supply A fresh water supply is needed to provide water for cow drinking, equipment and facility washing and cow cooling. The water supply needs can be as high as 200 gallons per cow during hot weather. Therefore, a 700-cow dairy may need up to 140,000 gallons per day. If water wells are used to provide the necessary fresh water, the well system will need to produce about 200 gpm to provide the daily fresh water supply. Intermediate fresh water storage is often used in conjunction with a water well system to deliver the peak water flow rates to the various parts of the dairy operation. If a surface water system is used to collect and store the required fresh water, a water impoundment system will be needed to hold about 630 acre-feet of water for a 700-cow dairy. The drainage area needed to collect surface water to refill the water impoundments should be about 1,260 acres for a 700-cow dairy. 7.3 Social Aspects The social aspects of a site should be considered along with the technical aspects. The local community should be accepting of large dairy operations, and this acceptance tends to minimize negative publicity of the dairy operation. Finally, the community should have or be willing to help develop the social infrastructure to accommodate the social needs and desires of the people who will be operating the new dairy farm. 18

19 8. Ideal Counties For Siting New Dairy Confinement Facilities The Missouri map below depicts counties that have some constraints toward building larger scale confinement dairies. Some counties indicate some natural resource constraints to the growth of larger dairies. Careful attention to siting may, however, allow dairies to be built in those counties. The following criteria were used to identify four ideal counties for developing larger confinement dairies in conjunction with crop producers in Missouri: A top 10 corn producing county in Missouri A top 10 irrigation county in Missouri Interstate or major highway through the county. The dairy would be located in the Southeast Federal Milk Market (F.O. 7) to allow the new dairy to use Dairy Farmers of America (DFA) or another SMA Coop s new producer incentive program which adds $1.50/cwt to the milk price for new milk, with a $13.00 floor for year 1 thru year 3. Both DFA and Prairie Farms procure milk in the area, to ensure long term competitive pricing of farm level milk. The four counties (with stars) meeting these criteria for ideal locations to locate new dairies include: Stoddard, Scott, Mississippi, and New Madrid Counties. 19