Economic 

Research

Report

Number 82

November 2009

United States 

Department 

of Agriculture

Economic 

Research 

Service

William D. McBride

Catherine Greene

Characteristics, Costs, and 

Issues for Organic Dairy Farming

Characteristics, Costs, and 

Issues for Organic Dairy Farming
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McBride, William D.

 Characteristics, costs, and issues for organic dairy farming.

 (Economic research report (United States. Dept. of Agriculture. 

Economic Research Service); no. 82)

 1. Organic dairy farming—Economic aspects—United States.

 2. Milk trade—United States—Costs.

 3. Pastures.

 I. Greene, Catherine.

 II. United States. Dept. of Agriculture. Economic Research Service.

 III. Title.

SF246.O74

Photo credit: William D. McBride, USDA/ERS

www.ers.usda.gov www.ers.usda.gov
United States

Department

of Agriculture

www.ers.usda.gov

A Report from the Economic Research Service

Abstract

Organic milk production has been one of the fastest growing segments of organic agriculture in the United States in recent years. Despite the growing number of organic dairy 

operations, the characteristics of organic dairy operations and the relative costs of organic 

and conventional milk production have been diffi cult to analyze. This study, using 2005 

ARMS data for U.S. dairy operations, which include a targeted sample of organic milk 

producers, examines the structure, costs, and challenges of organic milk production. The 

analysis addresses economies of size, regional differences, and pasture use in organic 

milk production and compares organic and conventional milk production costs. The fi ndings suggest that economic forces have made organic operations more like conventional 

operations and that the future structure of the industry may depend on the interpretation 

and implementation of new organic pasture rules.

Keywords: dairy, organic, milk production, costs of production, pasture, Agricultural 

Resource Management Survey (ARMS)

Acknowledgments

Thanks go to Leslie Butler of the University of California-Davis, Jeremy Foltz of the 

University of Wisconsin, James MacDonald of USDA’s Economic Research Service, 

and Howard McDowell of USDA’s Agricultural Marketing Service for providing indepth 

reviews of an earlier draft. Thanks also go to our editor, Angela Anderson, and to 

Wynnice Pointer-Napper for graphic layout and design. Special thanks go to the milk 

producers who participated in the 2005 Agricultural Resource Management Survey and 

those who collected the data.

William D. McBride, wmcbride@ers.usda.gov

Catherine Greene, cgreene@ers.usda.gov

Characteristics, Costs, and 

Issues for Organic Dairy Farming

Economic

Research

Report

Number 82

November 2009
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Contents

Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . iii

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

 Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

 Dairy Farm Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

Economies of Size in Organic Milk Production . . . . . . . . . . . . . . . . . . . . 5

 Characteristics and Practices by Size . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

 Production Costs and Net Returns by Size . . . . . . . . . . . . . . . . . . . . . . . . 6

 Labor Use by Size . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

Regional Differences in Organic Milk Production . . . . . . . . . . . . . . . . . 11

 Characteristics and Practices by Region . . . . . . . . . . . . . . . . . . . . . . . . . 11

 Production Costs and Net Returns by Region. . . . . . . . . . . . . . . . . . . . . 13 

 Labor Use by Region. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

Pasture Use in Organic Milk Production. . . . . . . . . . . . . . . . . . . . . . . . . 17

 Characteristics and Practices by Level of Pasture Use . . . . . . . . . . . . . . 18

 Production Costs and Net Returns by Level of Pasture Use . . . . . . . . . . 20

 Labor Use by Level of Pasture Use. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22

Comparing Organic and Conventional Dairies. . . . . . . . . . . . . . . . . . . . 24

 Characteristics and Practices of Organic and Conventional Dairies. . . . 24

 Factors Affecting the Use of Organic Milk Production . . . . . . . . . . . . . 27

 Factors Affecting Milk Production Costs . . . . . . . . . . . . . . . . . . . . . . . . 29

 Organic Transition Costs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30

Challenges of Organic Milk Production . . . . . . . . . . . . . . . . . . . . . . . . . 32

 Farm Characteristics and Organic Production Challenges . . . . . . . . . . . 32

 Operator Characteristics and Organic Production Challenges . . . . . . . . 34

Conclusions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35

References. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37

Appendix A: Measuring Milk Production Costs . . . . . . . . . . . . . . . . . . 39

Appendix B: Modeling the Impact of Organic Participation

on Milk Production Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41

Recommended citation format for this publication:

McBride, W.D., and C. Greene. Characteristics, Costs, and 

Issues for Organic Dairy Farming, ERR-82, U.S. Department of 

Agriculture, Economic Research Service, 2009.
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Summary

Spurred by increased demand for organic milk, organic milk production has 

been one of the fastest growing segments of organic agriculture in the United 

States. Between 2000 and 2005, the number of certifi ed organic milk cows 

on U.S. farms increased by an annual average of 25 percent, from 38,000 

to more than 86,000. To meet the growing demand, the organic production 

sector has evolved much like the conventional sector. Along with primarily 

small, pasture-based organic operations located in the Northeast and Upper 

Midwest, larger organic operations, often located in the West, that use 

more conventional milk production technologies have increased in number. 

Economic incentives, driven largely by lower production costs, are behind 

much of this change. Proposed changes in USDA’s National Organic Program 

(NOP), which develops, implements, and administers national production, 

handling, and labeling standards for organic agricultural products, seek to 

clarify and stiffen pasture requirements for organic certifi cation and may 

determine how the organic production sector continues to evolve. 

What Is the Issue?

Organic milk producers usually begin as conventional dairy operators who 

go through what can be a challenging and costly transition. To qualify 

for organic certifi cation under the NOP, producers must make changes in 

animal husbandry, land and crop management, input sourcing, and certifi cation paperwork, among others. In addition to these challenges, organic milk 

producers must now contend with the impact of a weaker U.S. economy on 

the demand for organic food products. By providing information about the 

characteristics, costs, and challenges faced by organic milk producers, this 

report provides a context for producers considering the organic approach, 

processors trying to supply an expanding organic milk market, and policymakers evaluating the economic implications of organic livestock production.

What Did the Study Find?

Economic forces may have pushed organic dairies to adapt their operations to 

be more like conventional dairies in terms of size, location, and the types of 

technologies used. The relative production costs for large and small organic 

dairies, organic dairies in the East and West, and organic dairies using 

pasture-based and conventional technologies are similar to those for conventional dairies. 

Size and Costs of Organic Dairies. Farms producing organic milk most 

often have small dairy operations; 45 percent of organic dairies milk fewer 

than 50 cows, and 87 percent milk fewer than 100 cows. Large organic 

dairies with 200 cows or more are a small portion of the organic dairy 

population, but account for more than a third of organic milk production. 

Average operating costs are highest on the largest organic dairies, but total 

economic costs are nearly $14 per hundredweight (cwt) less on the largest 

than on the smallest organic dairies because of lower capital and unpaid labor 

costs. The smallest operations use much more unpaid labor, accounting for 

most of this cost difference. Large organic dairies are much more likely to 

generate returns above capital and labor costs, suggesting that organic milk 
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production will migrate toward larger operations, as has conventional production. Additional costs to comply with organic pasture requirements and for 

securing organic inputs in large volume may limit the cost advantages for 

larger organic dairies.

Region and Costs of Organic Dairies. More than 80 percent of U.S. organic 

dairies are located in the Northeast and Upper Midwest, but these operations 

are small and less productive than those in the West. Organic dairies in the 

Northeast (averaging 53 cows) and Upper Midwest (64 cows) have far fewer 

cows on average than those in the West (381 cows), which produce more 

milk per cow on average (2,700 pounds more than in the Upper Midwest and 

4,000 pounds more than in the Northeast). Average feed costs per cow are 

signifi cantly less on organic dairies in the Northeast and Upper Midwest due 

to greater use of homegrown feed and pasture. Despite higher feed costs per 

cow and greater labor and capital use, organic dairies in the West have lower 

total economic costs per cwt of milk produced. This cost advantage is the 

result of economies of size and much higher productivity per cow that may be 

attributed to the technologies used on these operations. 

Pasture Use and Costs of Organic Dairies. Almost two-thirds of organic 

dairies report that 50 percent of dairy forage comes from pasture, and a third 

indicate that 75 percent or more comes from pasture. Using pasture for dairy 

feed costs less than higher energy feed sources, and average feed costs per 

cow decline as more pasture is used for dairy forage. Organic dairies using 

the least pasture for dairy forage, however, have lower feed costs per cwt 

of milk than other organic dairies because average production per cow is 

more than 30 percent higher. Organic dairies that use conventional feeding 

methods, such as confi ning cows and feeding harvested forages, may generate 

higher returns to capital and labor than those using pasture-based feeding 

because of higher production and economies of size, and because pasturebased feeding requires more labor. 

Comparing Organic and Conventional Dairies 

• Organic dairies are smaller than conventional dairies (82 cows compared 

with 156 cows). 

• Organic dairies produce about 30 percent less milk per cow than conventional dairies (13,601 pounds per organic cow compared with 18,983 

pounds per conventional cow). 

• Organic dairies are more often located in the Northeast and Upper 

Midwest than are conventional dairies (86 percent compared with 65 

percent).

• Organic dairies use more pasture-based feeding, where more than 50 

percent of dairy forage fed is from pasture during grazing months, than 

conventional dairies (63 percent compared with 18 percent). 

• Organic dairies paid $6.37 per cwt more than conventional dairies 

in operating and capital costs, including transition costs, in 2005; the 

average price premium for organic milk was $6.69 per cwt.
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• Total economic costs of organic dairies in 2005 were $7.65 per cwt higher 

than for conventional dairies, nearly $1 per cwt higher than the average 

price premium for organic milk.

• Pasture-based organic dairies’ total economic costs were about $4 per 

cwt higher than conventional pasture-based dairies, much lower than the 

average price premium for organic milk in 2005. 

Challenges of Organic Milk Production. Certifi cation paperwork and 

compliance costs were reported by 40 percent of producers as the most challenging aspect of organic milk production, followed by fi nding new organic 

input sources (dairy replacement and feed), higher costs of production, and 

maintaining animal health. By contrast, the chief concern for large organic 

dairies seem to be fi nding organic input sources, and the chief concern for 

dairies in the Northeast seemed to be production costs; certifi cation paperwork was a lesser concern for pasture-based dairies and more educated 

operators.

How Was the Study Conducted?

This study used information from a 2005 survey of U.S. milk producers as 

part of USDA’s annual Agricultural Resource Management Survey (ARMS) 

administered by its National Agricultural Statistics Service (NASS) and 

Economic Research Service (ERS). The survey targeted dairy operations in 

24 States that accounted for more than 90 percent of national milk production 

and covered all major production areas. A subsample of the survey targeted 

organic dairies identifi ed by major organic milk processors and certifi ers. 

Surveyed organic milk producers were divided by size, region, and pasture 

use, and differences in characteristics and production costs of the groups were 

evaluated. Regression analysis, with a treatment-effect model, was used to 

measure the difference in production costs between organic and conventional 

dairies. Differences in production costs, along with estimates of organic transition costs, indicated the milk price premiums that make organic competitive 

with conventional milk production.

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Introduction

Organic milk production has been one of the fastest growing segments of 

organic agriculture in the United States. Between 2000 and 2005, the number 

of certifi ed organic milk cows on U.S. farms increased by an annual average 

of about 25 percent, from 38,000 to more than 86,000 (USDA, Economic 

Research Service, 2007a; fi g. 1). Many of these cows were on small dairy 

operations that had switched to organic production to improve farm profi tability (Barham, Brock, and Foltz, 2006).1 While organic milk cows 

accounted for about 1 percent of all U.S. milk cows in 2005, the sector 

continues to grow. USDA estimates indicate that organic milk increased from 

2 percent of U.S. fl uid milk product sales in 2006 to 3 percent in 2008 

(computed from information reported at USDA, Agricultural Marketing 

Service, 2009c).2

Certifi ed organic milk production systems rely on ecologically based standards that prohibit the use of antibiotics and hormones in the cow herd and 

the use of synthetic chemicals in dairy feed production. Certifi ed organic 

milk production systems also attempt to accommodate the animals’ natural 

nutritional and behavioral requirements, such as ensuring that cows have 

access to pasture (Greene and Kremen, 2003). These requirements add to 

production costs and create challenges for widespread adoption, such as 

higher managerial costs and risks of shifting to a new way of farming, and 

signifi cant time and costs associated with the transition to organic production.

This report describes organic dairy farms in the United States, including 

information about farm size, location, production costs, and the types of 

technologies used, and discusses the challenges of organic milk production. 

Although the analysis focuses on organic dairy farms, a comparison with 

conventional dairy farms adds value to the discussion.

1The 2007 Census of Agriculture reports 1,617 farms with organic product 

sales among those classifi ed as dairy 

cattle and milk production according to 

the North American Industry Classifi cation System (NAICS). This is up from 

516 farms in 2002.

2One percent of organic milk cows 

can account for 2-3 percent of U.S. 

fl uid milk consumption because most 

organic milk production is sold as fl uid 

milk. In contrast, only about 36 percent 

of conventional milk is sold as fl uid 

milk. The rest is sold for cheese and 

other manufactured products (Miller 

and Blayney, 2006).

Figure 1

Number of organic milk cows on U.S. farms

Between 2000 and 2005, the number of organic milk cows increased 

by an annual average of about 25 percent

Number of milk cows (1,000)

Source: USDA, Economic Research Service, 2007a.

0

20

40

60

80

100

2000 2001 2002 2003 2004 2005
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Background

Organic milk producers usually begin as conventional dairy operators who 

then go through what can be a challenging and costly transition process. 

During the transition, organic dairies must change their animal husbandry, 

land, and crop management, source new and different inputs, and initiate the 

certifi cation process. To become a certifi ed organic dairy under current standards of USDA’s National Organic Program (USDA, Agricultural Marketing 

Service, 2008a), the pasture and cropland providing feed for organic dairies 

must be managed organically for a minimum of 36 months. Current standards also require the dairy herd to be fed 100 percent organic feed and to 

receive organic health care for 12 months before being certifi ed.3 Organic 

dairy animals may not be given hormones, such as rBST,4 or antibiotics for 

any reason. Grazing is required for all animals over 6 months of age. 

These requirements mean that products and feeds that meet organic standards must be found, and organic feeds can be priced signifi cantly higher 

than conventional feeds. Also, the approach to management must be adjusted 

on most farms as many conventional inputs, such as antibiotics, are no 

longer available (Arnold, 2007). The certifi cation process can also be time 

consuming and tedious as farmers must develop an organic systems plan that 

describes practices and substances used in production. In addition, detailed 

production records must be kept for 5 years post-certifi cation for a farm to 

be in compliance with the regulations, and access to these records must be 

provided to USDA and its certifying agents (USDA, Agricultural Marketing 

Service, 2008b).

USDA’s National Organic Program (NOP) rules state that access to pasture 

must be provided for ruminant animals, but do not indicate how much pasture 

should be allocated or how much dairy feed should be provided by pasture.5

The most common technology used on conventional dairy operations confi nes 

milk cows in large barns and limits access to pasture. Therefore, interpretation 

of the pasture rule, largely left to individual certifi ers, has important implications for land requirements and costs of organic milk production for farmers 

considering the transition. Partly in response to comments, complaints, and 

noncompliance regarding pasture use on organic dairy operations, USDA 

proposed a rule in October 2008 to clarify and strengthen the NOP pasture 

requirement. This proposed rule would amend livestock and related provisions 

of the NOP, providing better consumer assurances that the USDA organic label 

on dairy products means that cattle graze on pasture during the pasturegrowing season6 (U.S. Offi ce of the Federal Register, 2008).

Milk prices paid to U.S. producers are determined by a complex system. A 

minimum, or base price, is determined by a combination of the dairy price 

support program and Federal milk marketing orders (Manchester and 

Blayney, 2001). Quality adjustments are made to the minimum price based 

on the content of fats and other milk solids and the volume of milk sold, 

among other factors. Organic milk pricing is subject to the same minimum 

as all other milk, but processors pay a premium for the value added by the 

organic brand. Also, organic producers with cows using pasture as their 

primary forage may receive higher prices because the milk tends to have 

higher fat and other solids content (Butler, 2007). Organic milk producers 

are paid a fi xed price per hundredweight (cwt) for organic milk, according 

3Dairy farms that transitioned prior 

to June 2006 were allowed to feed a 

diet consisting of as much as 20 percent 

conventional feed, but must have fed 

at least 80 percent organic feed for 9 

months and then 100 percent organic 

feed for 3 additional months before 

they were able to sell certifi ed organic 

milk (Dimitri and Greene, 2002).

4Recombinant bovine somatotropin (rBST) is a synthetic version of 

a naturally occurring bovine growth 

hormone given to cows to increase milk 

production.

5Pasture is defi ned by the NOP as land 

used for livestock grazing that provides 

feed value and maintains or improves 

soil, water, and vegetative resources.

6The pasture-growing season is defi ned 

as from last frost to fi rst frost, and can 

be from 120 to 365 days depending on 

climate and region of the United States.
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to annual contracts with organic creameries that purchase the milk. In 

contrast, conventional milk producers are paid a blend price determined by 

spot markets for butter, cheese, nonfat dry milk, and whey, which may vary 

dramatically each month.7 The relative price stability of organic milk, 

compared with conventional milk, is a benefi t for producers who transition 

to organic.

Dairy Farm Data

Dairy farm data used in this study came from USDA’s 2005 Agricultural 

Resource Management Survey (ARMS) of U.S. milk producers. The ARMS, 

conducted annually by the National Agricultural Statistics Service (NASS) 

and Economic Research Service (ERS), provides detailed farm information 

on income, expenses, assets, and debt, as well as farm and operator characteristics. The 2005 ARMS included a version that highlights milk production 

practices and costs. This version targets dairy operations in 24 States that 

accounted for more than 90 percent of national milk production and covered 

all major production areas (fi g. 2). 

The surveyed dairy farms were chosen from a list of farm operations maintained by USDA’s National Agricultural Statistics Service (NASS). The 

target population of the dairy version included farms that were in the dairy 

business for all 12 months of 2005 and milked at least 10 cows at any time 

during the year. The dairy survey collected information to estimate average 

milk production costs. Screening out farms that milked fewer than 10 cows 

excluded farms with dairy cows for onfarm consumption and other noncommercial activities, such as youth projects.

7The blend price is a minimum 

weighted average price in Federal milk 

marketing orders based on the proportion of Grade A Milk allocated to each 

use class. Producers receive the blend 

price with adjustments for butterfat 

content and plant location if so specifi ed (Manchester and Blayney, 2001).

Figure 2

States surveyed in 2005 ARMS dairy version

Milk producers in 24 States were surveyed in the 2005 ARMS dairy version, 

including 14 States with data from organic dairies

States with dairies surveyed in ARMS

States with organic dairies surveyed in ARMS

+

Source: USDA’s 2005 Agricultural Resource Management Survey, conducted by 

the National Agricultural Statistics Service and the Economic Research Service.
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A subsample that targeted organic operations was also part of the 2005 

ARMS dairy version. Of the total 2,987 dairy farms sampled, 737 samples 

were targeted at organic operations in 19 States as identifi ed by the major 

organic milk processors and certifi ers. After accounting for nonresponse and 

missing data, information on 1,787 farms, including 352 certifi ed organic 

milk operations in 14 States, were available from the ARMS8 (fi g. 2). Among 

the organic dairies, 325 sold more than 90 percent of milk production as 

certifi ed organic, 18 were transitioning to organic production, and 9 were 

mixed operations. 

Each surveyed farm represented a number of similar farms in the population 

as indicated by the surveyed farm’s expansion factor. The expansion factor, 

or survey weight, was determined from the farm’s selection probability, 

expanding the sample to represent the target population. Farm survey weights 

ensured that the sample expanded to represent dairy operations in the 24 

States and that organic operations represented an appropriate share of the 

population despite a disproportionate representation in the sample. Organic 

farms accounted for 18 percent of the sample, but only 2 percent of the 

weighted number of farms.

8The response rate of the organic 

dairy sample was 48 percent, compared 

with 64 percent for the conventional 

dairy sample. This response difference 

was due to the challenges of building the 

list of organic dairies; in addition, some 

dairies on the organic dairy list were not 

actually organic operations.
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Economies of Size 

in Organic Milk Production

The emergence of large conventional dairy farms and the continued shift of 

production toward such farms suggest that economies of size play a major 

role in the structure of dairy farming. Economies of size and the role it takes 

in the structural changes observed in conventional milk production were 

documented by MacDonald et al. This section reports on the relationship 

between operation size and production costs in organic milk production, 

including what size and costs might mean for the structure of the industry.

To evaluate the relationship between organic milk production costs and operation size, surveyed producers were divided into groups by size, and differences 

in farm characteristics and practices, production costs and net returns, and 

labor use were compared among the groups. The size groups were defi ned by 

the largest number of cows milked on the operation during 2005: (1) fewer than 

50 cows; (2) 50-99 cows; (3) 100-199 cows; and (4) 200 cows or more.

Characteristics and Practices by Size

Data for 2005 indicated that about 45 percent of organic dairies milked 

fewer than 50 cows, while 87 percent had fewer than 100 cows (table 1). 

These small operations accounted for a disproportionately small share of 

organic milk cows and production. In contrast, about 13 percent of organic 

dairies had 100 cows or more, but they accounted for 44 percent of milk 

cows and nearly half of production. The largest organic dairies—those with 

200 cows or more—had an average herd size of almost 500 cows per farm 

and included nearly a third of organic milk cows. These large dairies had 

a higher average milk yield per cow than smaller dairies and produced 37 

percent of organic milk.

The most striking difference among organic dairies in each size group was 

their location. Northeast and Upper Midwest farms accounted for 96 percent 

of dairies with fewer than 50 cows. Farms in the West accounted for 80 

percent of dairies with 200 cows or more. Within each region, 97 percent of 

organic dairies in the Northeast, 88 percent of organic dairies in the Upper 

Midwest, and 85 percent of organic dairies in the Corn Belt had fewer than 

100 cows. In contrast, 83 percent of organic dairies in the West had 100 cows 

or more and 63 percent had 200 cows or more (fi g. 3).

The use of several milk production technologies and practices tended to 

increase with size of organic operation, but most of the differences were 

between the smallest and other organic farms. For example, use of a milking 

parlor increased from 22 percent for the smallest dairies to nearly all dairies 

with 100 cows or more (table 1). Thirty-eight percent of the smallest farms and 

over 50 percent of other farms participated in the Dairy Herd Improvement 

program. Use of regular veterinary and nutritionist services was also much 

lower on the smallest farms. Likewise, the use of business management tools, 

such as computer records, the Internet, and forward-purchasing inputs, was 

less. Pasture-based feeding was used by 70 percent of the smallest dairies and 

was also used by more than half of the largest dairies.9

9Producers surveyed in the ARMS 

were asked what percentage of the total 

forage ration milk cows obtained from 

pasture during the grazing months. 

With pasture-based feeding, pasture 

provides at least half of the forage 

fed to milk cows during the grazing 

months.
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Production Costs and Net Returns by Size

Average feed costs differed little among the dairies in each size group,10 but 

average operating costs for organic dairies increased from the smallest to 

largest size group due to the additional costs of hired labor on the largest 

farms. Total operating costs were about $2 per cwt higher on the largest organic 

dairies than on the smallest (table 2). Once capital costs were added, cost 

differences among the size groups were negligible, as lower capital costs on the 

larger operations offset the additional hired labor costs. The smallest farms, 

however, used signifi cantly more unpaid labor, mainly from farm operators and 

other family members, than did larger farms. After adding an opportunity cost 

for this unpaid labor, total economic costs for organic dairies declined with 

10Feed costs made up the largest 

share of milk production costs, accounting for 65-75 percent of operating costs and 33-50 percent of total 

economic costs.

Table 1

Dairy farm characteristics and production practices, by size of organic 

operation, 2005

 Size of organic dairy

Item Fewer than 50-99 100-199 200 cows

 50 cows cows cows or more

Percent of farms 45 42 8 5

Percent of milk cows 21 35 13 31

Percent of milk production 18 33 12 37

Milk cows (number per farm) 37 68 132 490

Milk production (pounds per cow) 11,884 12,796 12,008 16,133

 Percent of farms

Region:

 Northeast (ME, NY, PA, VT) 51 46 17 0

 Upper Midwest (MI, MN, WI) 45 39 52 20

 Corn Belt (IL, IN, IA, MO, OH) 4 12 15 0

 West (CA, ID, OR, WA) 0 3 16 80

Production practices:

 DHI program participation1 38 51 53 60

 Pasture-based feeding2 70 60 49 54

 Artifi cial insemination 70 76 71 87

 Embryo transplants or sexed semen 3 3 6 2

 Controlled breeding/calving season 38 35 36 20

 Regular veterinary services 28 41 72 55

 Nutritionist services 30 53 66 70

 Computerized milking system 1 4 4 7

 Computerized feeding system id 3 5 31

 Milking parlor 22 45 88 100

 Kept individual cow records 59 64 62 70

 Johne’s disease program participation 18 28 44 45

 Onfarm computer records 13 25 34 41

 Dairy information from Internet 30 46 56 64

 Forward-purchased inputs 4 10 22 16

 Negotiate input price discounts 18 21 33 36

id=Insuffi cient data for disclosure.

1Dairy Herd Improvement.

2Pasture-based feeding is defi ned as providing at least half of the forage fed to milk cows during 

the grazing months from pasture. Organic dairies reported an average grazing period for milk 

cows of 6.5 months in 2005.

Source: USDA’s 2005 Agricultural Resource Management Survey, conducted by the National 

Agricultural Statistics Service and the Economic Research Service.
7

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Figure 3

Share of organic dairy farms, by size group in each region

Most organic dairy farms in the Northeast, Upper Midwest, and Corn Belt had fewer than 100 cows, 

but 83 percent of farms in the West had 100 cows or more

Source: ERS calculations based on data from USDA’s 2005 Agricultural Resource Management Survey, conducted 

by the National Agricultural Statistics Service and the Economic Research Service.

West

Upper

MIdwest

Corn

Belt

Northeast

0

20

40

60

80

100

Few than 100 cows 100 cows or more

Table 2

Production costs and returns, by size of organic dairy operation, 2005

 Size of organic dairy

Item Fewer than 50-99 100-199 200 cows

 50 cows cows cows or more

 Dollars per cwt sold

Feed: 12.96 12.67 11.93 13.06

 Purchased feed 5.16 4.94 5.29 8.99

 Homegrown harvested feed 6.96 7.00 6.06 3.51

 Grazed feed 0.83 0.73 0.58 0.56

Hired labor 0.79 1.75 2.25 3.21

Capital costs 6.02 6.20 5.04 3.58

Opportunity cost of unpaid labor 13.42 7.45 4.84 1.15

Cost summary:

 Operating costs 17.65 18.25 18.10 19.66

 Operating and capital costs 23.67 24.44 23.13 23.25

 Total economic costs 38.50 33.36 29.13 24.84

Gross value of production 25.57 24.88 23.46 23.59

Returns above total economic costs -12.93 -8.48 -5.67 -1.26

Notes: Costs are defi ned in Appendix A: Measuring Milk Production Costs. The gross value 

of production includes milk sales, cull and breeding animal sales, revenue from leasing dairy 

animals or space to other operations, co-op patronage dividends, dairy assessment rebates or 

refunds, and the value of manure. The value of milk sales was determined from prices reported 

by the survey respondents.

Source: USDA’s 2005 Agricultural Resource Management Survey, conducted by the National 

Agricultural Statistics Service and the Economic Research Service.
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Characteristics, Costs, and Issues for Organic Dairy Farming / ERR-82

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size and were nearly $14 per cwt less on the largest farms than on the 

smallest (see Appendix A: Measuring Milk Production Costs).

The relationship between average production costs and operation size for 

organic dairies was similar to that for conventional dairies among the size 

groups that characterize the organic industry (fi g. 4). Average production 

costs for conventional milk production declined from about $30 per cwt on 

operations with fewer than 50 cows to about $18 per cwt on operations with 

200-499 cows (MacDonald et al., 2007). Average costs dropped to less than 

$14 per cwt on conventional operations with more than 1,000 cows. Lower 

costs among the largest conventional producers suggest that similar economies of size may be available to organic producers if they increase the size 

of their operation above the industry norm. However, the additional costs of 

complying with pasture requirements and securing organic inputs in large 

volume may limit the cost advantages for larger organic operations.

Net returns to the organic dairy enterprise were computed as the difference between the gross value of production and total economic costs. 

Average net returns in 2005 were negative for all organic dairy size 

groups (from -$12.93 per cwt among dairies with fewer than 50 cows to 

-$1.26 per cwt among dairies with 200 cows or more) (table 2).11 These 

averages, however, mask the variation in net returns among dairies. Some 

operations may be more productive because they are well managed, while 

others may pay less than average for inputs or receive above-average milk 

prices, and thus these farms may be profi table while their group, on 

average, is not. For example, 10 percent of organic dairies with fewer than 

11These estimates of net returns 

include charges for unpaid farm labor 

and homegrown feed. Charges for these 

items were determined by estimates of 

their opportunity costs, which may or 

may not refl ect the costs perceived by 

some farm operators (see Appendix A: 

Measuring Milk Production Costs).

Figure 4

Total economic costs for each type of dairy producer, by farm size

The relationship between production costs and operation size for organic dairies 

was similar to conventional dairies, only at higher costs

Dollars per cwt

Notes: Costs shown for conventional dairies of 200 cows or more are reported for 200-499 

cows by MacDonald et al., with an average size of 295 cows.The average size of organic 

dairies in the 200 cows or more group is 490 cows. 

Source: ERS calculations based on data from USDA’s 2005 Agricultural Resource 

Management Survey, conducted by the National Agricultural Statistics Service and the 

Economic Research Service.

0

10

20

30

40

50

Fewer than

50 cows

50-99 cows 100-199 cows 200 cows

or more

Size of dairy herd

Organic dairies

Conventional dairies
9

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50 cows and almost half of those with 200 cows or more generated positive returns above total economic costs (fi g. 5).

Farmers are unlikely to start or expand a dairy operation if they are unable to 

recover their investment in capital and labor. Farmers who have already made 

substantial capital investments in dairy facilities and equipment, however, see 

these costs as sunk (unrecoverable), with little or no opportunity for use 

outside the dairy operation. These costs, therefore, have no bearing on the 

decision to operate in the short term, only becoming important when these 

capital assets must be replaced.12 To better measure costs relevant to shortterm operating decisions, the share of farms with gross returns exceeding all 

costs except for capital costs was computed. About a fourth of organic dairies 

with fewer than 50 cows covered these costs, compared with almost threefourths of those with 200 cows or more (fi g. 5).

Some small organic dairy farms appeared to be earning enough to keep 

operating, but on average, farms in the smaller size groups were not covering 

the opportunity costs of their investments in capital and the operator’s 

time. In contrast, larger organic dairies were much more likely to generate 

returns above capital and labor costs. These conditions suggest that organic 

milk production may migrate toward larger operations, as has conventional 

production. This production change will likely occur over an extended period 

as existing smaller operations use up their production facilities and equipment, ultimately facing decisions about replacing capital assets or exiting 

the industry. Also, in the short term, some small operators may continue 

12If not replaced, the costs of maintaining dairy facilities and equipment are 

likely to increase over time, leading to 

higher repair and other operating costs.

Figure 5

Organic dairy operations with positive returns, by size of operation

Ten percent of the smallest and 47 percent of the largest organic dairies 

have positive returns above total costs, but many more have positive returns 

when capital costs are excluded

Percent of farms

Source: ERS calculations based on data from USDA’s 2005 Agricultural Resource 

Management Survey conducted by the National Agricultural Statistics Service and the 

Economic Research Service.

Gross returns exceed total costs less capital costs

Gross returns exceed total costs

Fewer than 50 cows

50-99 cows

100-199 cows

200 cows or more

Size of dairy herd

0

20

40

60

80
10

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producing organic milk as a lifestyle choice despite returns that fail to cover 

the opportunity cost of their time.

Labor Use by Size

Small organic dairies are at a cost disadvantage relative to larger dairies due 

to the opportunity cost assigned to the unpaid labor provided by operators, 

partners, and family members. Unpaid labor costs for organic dairies with 

fewer than 50 cows were $13.42 per cwt, compared with only $1.15 per cwt 

on dairies with 200 cows or more. If this opportunity cost is ignored, the net 

returns to organic milk production were more similar among the size groups.

Labor use by size group for organic dairies is shown in table 3. The largest 

dairies used substantially more hired labor than the smallest (11,530 hours 

versus 557 hours), but the hired labor hours per unit of production differed 

little among the size groups because of much higher production on the largest 

dairies. The difference in unpaid labor use among the farm size groups was 

much less. Organic dairy operations with 200 cows or more used about 700 

more hours of unpaid labor, about 20 percent more than those with fewer than 

50 cows. The largest dairies, however, produced about 1,700 percent more 

milk as a result of having more cows and an average productivity per cow 

that was 36 percent higher than the smallest dairies. Enhanced productivity 

for these larger dairies means that unpaid labor hours per unit of production fell dramatically across the size groups from 0.82 hour per cwt on the 

smallest organic dairies to only 0.05 hour on the largest.

Unpaid labor is an opportunity cost defi ned as the time spent working on a 

dairy operation charged at a wage rate that represents what unpaid workers 

could earn in off-farm employment (see Appendix A: Measuring Milk 

Production Costs).13 Opportunity costs of labor may vary signifi cantly among 

producers, and some producers may be willing to accept returns lower than 

they could earn in nonfarm employment because of lifestyle preferences and 

costs of switching occupations, among other reasons. The incentive to earn a 

competitive return for the time spent on the dairy operation, however, may be 

a motivating force for increasingly larger organic dairies. 

13Wage rates used to estimate unpaid 

labor costs averaged from $16.36 per 

hour among the smallest dairies to 

$23.00 per hour among the largest. 

Differences in the age, education, and 

location of farm operators in each 

group determined the wage rates.

Table 3

Labor use, by size of organic dairy operation, 2005

 Size of organic dairy

Item Fewer than 50-99 100-199 200 cows

 50 cows cows cows or more

Per farm

Hired labor hours 557 1,648 3,051 11,530

Unpaid labor hours 3,612 3,759 4,265 4,322

 Total labor hours 4,169 5,407 7,316 15,852

Milk production (cwt) 4,367 8,748 15,825 78,977

 Per cwt

Hired labor hours 0.13 0.19 0.19 0.15

Unpaid labor hours 0.82 0.43 0.27 0.05

 Total labor hours 0.95 0.62 0.46 0.20

Source: USDA’s 2005 Agricultural Resource Management Survey, conducted by the National 

Agricultural Statistics Service and the Economic Research Service.
11

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Regional Differences 

in Organic Milk Production

Conventional milk production has historically been concentrated in the 

Upper Midwest and Northeast, mostly in Wisconsin, Minnesota, New York, 

and Pennsylvania. In the past three decades, however, milk production has 

expanded rapidly on large operations located in nontraditional areas of the 

South and West. Most prominently, California surpassed Wisconsin during 

the early 1990s as the number one milk-producing State. The continued 

growth of dairies in these nontraditional areas is the result of a favorable 

climate, an abundance of alternative crops that can be used for dairy feed 

(e.g., citrus pulp, cottonseed, or almond hulls), their relative geographic 

isolation, and population growth (Butler, 2002).

Although more recent in nature, regional development of organic milk production has followed a path similar to that of conventional milk production. Small 

organic dairy farmers and milk cooperatives in the Northeast and Upper 

Midwest, along with a major organic milk processor with its own large dairy 

farm in the West, pioneered organic milk production during the 1990s. Organic 

milk production was a good fi t for the small, pasture-oriented operations in 

the Northeast, in Wisconsin, and in other parts of the Midwest. Expansion in 

the West, where California and Oregon have become leading organic milkproducing States, was motivated by many of the same factors that spurred 

expansion of conventional milk production in this area. Figure 6 illustrates the 

dramatic growth of organic milk production in the West, where the number of 

organic milk cows more than tripled between 2000 and 2005. 

Characteristics and Practices by Region

More than 40 percent of organic dairies were located in both the Northeast 

and Upper Midwest, but these operations were small and less productive than 

Figure 6

Number of organic milk cows, by region

Between 2000 and 2005, the number of organic milk cows more than tripled 

in the West

1,000 milk cows

Source: Economic Research Service, 2007a.

Upper Midwest

Northeast

0

10

20

30

40

2000 2001 2002 2003 2004 2005

West
12

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those in the West (table 4). The Northeast includes organic dairies surveyed 

in New York, Pennsylvania, Maine, and Vermont; the Upper Midwest 

includes dairies in Wisconsin, Minnesota, and Michigan; and the West 

includes those in California, Oregon, Washington, and Idaho. Despite their 

large number, Northeast and Upper Midwest dairies accounted for a disproportionately small share of organic milk cows, 29 and 33 percent, respectively 

(fi g. 7). Operations in the Northeast averaged 53 cows; the Upper Midwest, 

64 cows; and the West, 381 cows. Organic dairy cows in the West averaged 

nearly 16,000 pounds of annual milk production per cow, 2,700 pounds more 

than in the Upper Midwest and 4,000 pounds more than in the Northeast.14

Organic dairies in the Northeast and Upper Midwest were more likely than 

dairies in the West to produce crops used for dairy cattle feed. Nearly all 

farms in these regions produced hay for cattle feed, and nearly 80 percent of 

Table 4

Characteristics and production practices of organic dairies, 

by region, 2005

Item Northeast Upper Midwest West

Percent of farms 44 42 7

Percent of milk cows 29 33 31

Percent of milk production 25 32 37

Milk cows (number per farm) 53 64 381

Milk production (pounds per cow) 11,831 13,195 15,902

 Percent of farms

Feed crops produced:

 Corn (grain and silage) 27 79 16

 Hay (alfalfa and other) 96 93 55

Operator education:

 Less than high school 37 14 5

 Completed high school 43 69 48

 Some college 20 17 47

Production practices:

 DHI program participation1 40 60 66

 Pasture-based feeding2 71 57 65

 Artifi cial insemination 67 77 82

 Embryo transplants or sexed semen 3 2 2

 Controlled breeding/calving season 31 39 19

 Regular veterinary services 36 38 46

 Nutritionist services 42 44 54

 Computerized milking system 2 2 6

 Computerized feeding system 3 1 27

 Milking parlor 28 39 100

 Kept individual cow records 59 65 63

 Johne’s disease program participation 14 32 35

 Onfarm computer records 18 24 34

 Dairy information from Internet 30 48 72

 Forward-purchased inputs 9 7 21

 Negotiate input price discounts 30 13 31

1Dairy Herd Improvement.

2Pasture-based feeding is defi ned as providing at least half of the forage fed to milk cows during 

the grazing months from pasture. Organic dairies reported an average grazing period for milk 

cows of 6.5 months in 2005.

Source: USDA’s 2005 Agricultural Resource Management Survey, conducted by the National 

Agricultural Statistics Service and the Economic Research Service.

14Information about the Corn Belt is 

not presented in this section due to the 

small sample of Corn Belt farms available in the ARMS data.
13

Characteristics, Costs, and Issues for Organic Dairy Farming / ERR-82

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farms in the Upper Midwest produced corn. Only 16 percent of operations 

in the West grew corn, and just over half produced hay. As a result, the large 

organic dairies in the West purchased more dairy feed items than those in 

other regions. The percentage of farms using pasture-based feeding for dairy 

cattle varied little among the regions.

Operators of organic dairies in the West were, on average, more educated 

than those in other regions. Nearly half of farm operators in the West 

attended college, compared with 20 percent or less in the other regions. More 

education may explain why the use of some production practices was more 

common on dairies in the West. Operators of organic dairies in the West 

were more likely to participate in the Dairy Herd Improvement program, use 

artifi cial insemination, use regular veterinary and nutritionist services, use 

computerized milking and feeding systems, access dairy information from 

the Internet, and forward-purchase inputs. Higher education may contribute 

to a greater awareness of these practices and ease the adoption process. Also, 

the larger dairies in the West were able to spread the fi xed costs of the investments required by some of these practices over more units of production.

Production Costs and Net Returns by Region

Average operating costs were lowest for dairies in the Upper Midwest by more 

than $1 per cwt than in the other regions (table 5). Lower operating costs in the 

Upper Midwest resulted from feed costs that were about $1 per cwt less than in 

the Northeast and hired labor costs that were nearly $1.70 per cwt less than in 

the West. Once capital costs are added, the cost difference between the Upper 

Figure 7

Share of organic dairy farms and milk cows in each region

Only 7 percent of organic dairy farms were in the West region, but these farms held 31percent of organic milk cows

Source: ERS calculations based on data from USDA’s 2005 Agricultural Resource Management Survey, conducted 

by the National Agricultural Statistics Service and the Economic Research Service.

West

Upper

MIdwest

Corn

Belt

Northeast

44%

42%

7%

7%

33%

7%

31% 29%

Cows

Farms
14

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Midwest and West were minimal due to the impact of size economies for the 

larger operations in the West. Size economies were the predominant factor 

in the difference between total economic costs in each region, ranging from 

$37.59 per cwt on the small Northeast operations to $25.13 per cwt on the large 

operations in the West. Most of the difference in total economic costs in the 

West came from unpaid labor charges that were more than $9 per cwt less than 

in the Northeast and about $5 per cwt less than in the Upper Midwest.

A breakdown of annual feed costs per cow in each region reveals costs 

that were signifi cantly less in the Northeast ($400 per cow less) and Upper 

Midwest ($500 per cow less) than in the West (fi g. 8). More than half of total 

feed costs on organic dairies in the Northeast stemmed from homegrown feed 

and grazed forages, while these sources accounted for more than 70 percent 

of feed costs in the Upper Midwest. Organic dairies in these regions may 

have incurred lower feed costs than those shown here if their production costs 

were lower than the market prices charged for these inputs. In contrast, more 

than three-fourths of the total feed cost on organic dairies in the West was 

from purchased feed items.

Despite higher feed costs per cow on organic dairies in the West, feed costs 

per cwt were competitive with organic dairies in other regions. Total labor 

and capital usage were also much higher on dairies in the West, but total 

costs per cwt were signifi cantly less. The cost advantage of organic dairies in 

the West resulted from economies of size on larger dairies and higher productivity. Almost 50 percent of organic dairies in the West had an average milk 

production per cow of 15,000 pounds or more, and only 12 percent of organic 

dairies were producing less than 10,000 pounds (fi g. 9). In the Northeast and 

Table 5

Production costs and returns of organic dairies, by region, 2005

Item Northeast Upper Midwest West

 Dollars per cwt sold

Feed: 13.48 12.52 12.80

 Purchased feed 6.66 3.36 9.69

 Homegrown harvested feed 5.92 8.62 2.47

 Grazed feed 0.90 0.55 0.64

Hired labor 1.60 1.61 3.28

Capital costs 6.31 5.44 3.67

Opportunity cost of unpaid labor 10.75 6.76 1.64

Cost summary:

 Operating costs 19.03 17.92 19.46

 Operating and capital costs 25.34 23.36 23.13

 Total economic costs 37.59 31.47 25.13

Gross value of production 26.83 23.56 23.47

Returns above total economic costs -10.76 -7.91 -1.66

Notes: Costs are defi ned in Appendix A: Measuring Milk Production Costs. The gross value 

of production includes milk sales, cull and breeding animal sales, revenue from leasing dairy 

animals or space to other operations, co-op patronage dividends, dairy assessment rebates or 

refunds, and the value of manure. The value of milk sales was determined from prices reported 

by the survey respondents.

Source: USDA’s 2005 Agricultural Resource Management Survey, conducted by the National 

Agricultural Statistics Service and the Economic Research Service.
15

Characteristics, Costs, and Issues for Organic Dairy Farming / ERR-82

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Upper Midwest, only a quarter of producers were producing 15,000 pounds 

or more, and 25 percent of Upper Midwest producers and more than a third of 

producers in the Northeast had average production less than 10,000 pounds. 

This difference in milk yield may be due to productivity-enhancing technologies and practices more common on organic dairies in the West. Due to this 

cost advantage, net returns for dairies in the West were signifi cantly greater 

than in the other regions.

Labor Use by Region

Charges for unpaid labor accounted for most of the differences in total 

costs for organic dairies in each region. Unpaid labor costs were nearly 

$11 per cwt in the Northeast, nearly $7 per cwt in the Upper Midwest, but 

only about $2 per cwt in the West (table 5). Without these charges, the 

difference in total economic costs among the regions would be less than 

$3.50 per cwt.

Total labor use for organic milk production was signifi cantly higher in the 

West due to the larger operations, but labor use per cwt was much less (table 

6). Total labor use per cwt in the West (0.23 hour) was less than half that in 

the Upper Midwest (0.53 hour) and less than a third of that in the Northeast 

(0.84 hour). Part of this difference in labor use per cwt was due to higher 

productivity in the West, but labor use per cow was also signifi cantly less. 

Organic dairies in the West used 38 hours of labor per cow, compared with 

100 hours in the Northeast and 70 hours in the Upper Midwest. Less labor 

use per cow was due, in part, to the labor-saving practices more often used on 

dairies in the West and to economies of size.

Figure 8

Organic dairy feed costs per cow, by region

Total feed costs per cow were highest for organic dairies in the West, where a much

higher proportion of dairy feed was purchased than in the other regions

Dollars per milk cow

Source: ERS calculations based on data from USDA’s 2005 Agricultural Resource 

Management Survey, conducted by the National Agricultural Statistics Service 

and the Economic Research Service.

Homegrown feed

Grazed feed

Purchased feed

0

500

1,000

1,500

2,000

2,500

Northeast Upper Midwest West
16

Characteristics, Costs, and Issues for Organic Dairy Farming / ERR-82

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Table 6

Labor use of organic dairies, by region, 2005

Item Northeast Upper Midwest West

 Per cow

Hired labor hours 24 17 26

Unpaid labor hours 76 53 12

 Total labor hours 100 70 38

 Per cwt

Hired labor hours 0.20 0.13 0.16

Unpaid labor hours 0.64 0.40 0.07

 Total labor hours 0.84 0.53 0.23

Source: USDA’s 2005 Agricultural Resource Management Survey, conducted by the National 

Agricultural Statistics Service and the Economic Research Service.

Figure 9

Milk production, by region

Nearly half of organic dairies in the West had milk cows that produced more than 

15,000 pounds per year, compared with less than 30 percent in the other regions

Percent of farms

Source: ERS calculations based on data from USDA’s 2005 Agricultural Resource 

Management Survey, conducted by the National Agricultural Statistics Service 

and the Economic Research Service.

10,000-14,999 pounds per cow

Less than 10,000 pounds per cow

15,000 pounds or more per cow

0

20

40

60

80

Northeast Upper Midwest West
17

Characteristics, Costs, and Issues for Organic Dairy Farming / ERR-82

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Pasture Use in Organic Milk Production

The most common technology used on conventional dairy operations 

confi nes milk cows in large barns and limits access to pasture. This 

means that forage from grazing comprises very little of the forage fed to 

dairy cows on most conventional dairies. Access to pasture is a requirement for the organic certifi cation of dairy operations. Forage from 

grazing is also an important element of the feeding program on many 

organic dairies. Milk producers may fi nd it easier and less expensive to 

maintain organic pastures for grazing dairy cows than to either purchase 

or produce and harvest organic crops and forage for dairy feed. Also, 

grazing systems may be less stressful for dairy cattle and contribute to 

lower veterinary expenses. Pasture-based production may also have environmental benefi ts, such as improved soil quality and reduced soil erosion 

(Boody et al., 2005; Weil and Gilker, 2003).

Pasture use for dairy feed on organic dairies, relative to conventional dairies, 

is illustrated in fi gure 10. More than 60 percent of organic milk producers 

reported that at least half of their total forage ration came from pasture during 

the grazing months (an average of 6.5 months per year), compared with 18 

percent of conventional dairies. Nearly 90 percent of organic dairies sourced 

at least 25 percent of their total forage ration from pasture. In contrast, 70 

percent of conventional dairies reported that less than 25 percent of their total 

forage ration fed to dairy cows came from pasture, while 40 percent obtained 

none from pasture.

Figure 10

Producer type, by share of dairy forage fed from pasture

More than 60 percent of organic dairies obtained at least 50 percent of the forage fed 

to dairy cows from pasture, while nearly 70 percent of conventional dairies obtained 

less than 25 percent

Percent of farms

Source: ERS calculations based on data from USDA’s 2005 Agricultural Resource 

Management Survey, conducted by the National Agricultural Statistics Service 

and the Economic Research Service.

Organic dairies

Conventional dairies

0

20

40

60

80

0-24 percent 25-49 percent 50-74 percent 75-100 percent

Forage fed from pasture during grazing months
18

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To evaluate the role of pasture grazing in organic milk production, surveyed 

producers were divided into groups that indicate the level of pasture grazing 

as a source of dairy cow forage during the grazing months: (1) 0-24 percent; 

(2) 25-49 percent; (3) 50-74 percent; and (4) 75-100 percent.

Characteristics and Practices 

by Level of Pasture Use

Almost two-thirds of organic milk producers reported that at least 50 percent of 

the forage fed to dairy cattle during the grazing months came from pasture, and 

a third reported that 75 percent or more came from pasture (table 7). Only 12 

percent of organic milk producers reported that less than 25 percent of forage 

fed came from pasture. Differences between organic dairies where pasture use 

was highest (75-100 percent of forage fed) and lowest (0-24 percent of forage 

fed) were signifi cant and are emphasized in this section. Farm characteristics 

among organic dairies in the middle groups (25-49 percent and 50-74 percent 

of forage fed from pasture) showed little difference.

Operations that relied on pasture use the most were the smallest in size and 

produced the least milk per cow. Organic dairies with 75-100 percent of 

forage fed from pasture had an average of 64 milk cows that averaged 11,289 

pounds of milk per cow. In contrast, dairies with 0-24 percent of forage from 

Table 7

Characteristics and production practices, by level of pasture use 

on organic dairy operations, 2005

 Forage fed from pasture during grazing months

Item 0-24 25-49 50-74 75-100

 percent percent percent percent 

Percent of farms 12 24 32 31

Percent of milk cows 21 23 31 25

Percent of milk production 25 23 31 21

Milk cows (number per farm) 135 79 78 64

Milk production (pounds per cow) 16,560 13,594 13,319 11,289

Region: Percent of farms

 Northeast (ME, NY, PA, VT) 21 42 43 55

 Upper Midwest (MI, MN, WI) 58 44 40 35

 Corn Belt (IL, IN, IA, MO, OH) 13 8 5 9

 West (CA, ID, OR, WA) 8 6 12 2

Region: Percent of cows

 Northeast (ME, NY, PA, VT) 9 29 28 45

 Upper Midwest (MI, MN, WI) 30 46 28 29

 Corn Belt (IL, IN, IA, MO, OH) 10 9 4 8

 West (CA, ID, OR, WA) 51 16 40 18

In dairy business: Percent of farms

 Less than 10 years 11 18 19 27

 10 years or more 89 82 81 73

Pasture rotation:

 At least once a day 39 48 58 72

 Every 2-7 days 30 33 38 26

 Less than weekly 4 1 id 1

 Never 24 18 3 1

 Pasture not used for feed 4 0 0 0

id=Insuffi cient data for disclosure.

Source: USDA’s 2005 Agricultural Resource Management Survey, conducted by the National 

Agricultural Statistics Service and the Economic Research Service.
19

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pasture averaged more than twice the number of milk cows (135) and more 

than 5,000 pounds more milk production per cow (16,560 pounds). Thus, 

operations that relied less on pasture use (12 percent) had a disproportionately 

large share of milk cows (21 percent) and milk production (25 percent), while 

a third of operations that relied most on pasture use accounted for only 25 

percent of milk cows and 21 percent of production.

Organic dairies with the highest pasture use for feed were located in the 

Northeast. More than half of these farms were in the Northeast and operated 

with 45 percent of the organic milk cows in this group. Operations in the 

Upper Midwest accounted for the majority of farms using the least pasture 

(0-24 percent) and 35 percent of farms using the most (75-100 percent). 

Organic dairies in the West accounted for only 8 percent of the farms using 

the least pasture, but these large operations held 51 percent of the milk cows 

in this group. Large operations relied less on pasture as a forage source 

because of the signifi cant land requirements necessary to supply pasture for 

large herds. However, some large operations in the West used pasture as an 

important dairy feed source. Among the farms with the highest pasture use, 

the West (at 2 percent) included 18 percent of the milk cows.

Organic dairies that relied the most on pasture use were in business relatively less time than other organic dairies. Twenty-seven percent of dairies 

that relied on pasture for 75-100 percent of their forage feed had been in 

business less than 10 years, compared with only 11 percent that relied on 

pasture for 0-24 percent of their forage feed (table 7). Also, farm operators 

who relied the most on pasture forage were younger than other farm operators. Sixteen percent of these farm operators were younger than 35 and only 

4 percent were older than 65, compared with 6 and 10 percent, respectively, 

of the operators who used the least pasture (fi g. 11). Younger farm operators 

Figure 11

Farm operator age, by the share of dairy forage fed from pasture

Among organic farm operators that used the most pasture for dairy feed, 

16 percent were younger than 35 and only 4 percent were older than 65

Percent farm operators

Source: ERS calculations based on data from USDA’s 2005 Agricultural Resource 

Management Survey, conducted by the National Agricultural Statistics Service 

and the Economic Research Service.

Forage fed from pasture during grazing months

Older than 65

Younger than 35

0

5

10

15

20

0-24 percent 25-49 percent 50-74 percent 75-100 percent
20

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on relatively new dairies were more likely to use pasture-based feeding for 

organic milk production.

Pasture as a source of forage on organic dairies was closely related to the intensity of pasture management. Rotating pastures is a management strategy that 

can increase the total volume and quality of dry matter produced on pastures 

by allowing cows to graze for specifi ed periods before moving them to new 

pastures. Seventy-two percent of organic dairies that reported the highest use 

of pasture forage rotated pastures at least once a day, compared with less than 

40 percent of dairies that used pasture forage the least. Among dairies that used 

pasture the least, 24 percent reported that pastures were never rotated and 4 

percent indicated that pasture was not a source of dairy feed.

Production Costs and Net Returns 

by Level of Pasture Use

Substituting pasture for more expensive feed sources may appear to be an 

effi cient way to lower dairy feed costs. Average feed costs per cwt of milk, 

however, were lowest on the organic operations using the least pasture for 

dairy forage (0-24 percent), between $1 and $2 per cwt less than on the 

operations using more pasture (table 8). This relationship changes little even 

if charges for pasture resources are excluded from the feed costs.

Average feed costs per cow declined as pasture use for dairy forage increased 

(fi g. 12). Total feed costs were $1,902 per cow on organic dairies that relied 

on pasture for 0-24 percent of forage fed, compared with only $1,409 on 

Table 8

Production costs and net returns on organic dairy operations, 

by level of pasture use, 2005

 Forage fed from pasture during grazing months

Item 0-24 25-49 50-74 75-100

 percent percent percent percent 

 Dollars per cwt sold

Feed: 11.61 13.14 13.42 12.90

 Purchased feed 7.43 5.15 7.19 6.09

 Homegrown harvested feed 3.89 7.51 5.41 5.69

 Grazed feed 0.29 0.48 0.82 1.13

Hired labor 2.44 1.85 2.17 2.27

Capital costs 4.11 5.36 4.48 6.70

Opportunity cost of unpaid labor 2.82 6.47 6.24 8.36

Cost summary:

 Operating costs 17.74 18.55 18.99 19.44

 Operating and capital costs 21.85 23.91 23.47 26.14

 Total economic costs 25.33 31.53 30.64 35.99

Gross value of production 24.10 24.49 23.59 25.63

Returns above total economic costs -1.22 -7.04 -7.05 -10.36

Notes: Costs are defi ned in Appendix A: Measuring Milk Production Costs. The gross value 

of production includes milk sales, cull and breeding animal sales, revenue from leasing dairy 

animals or space to other operations, co-op patronage dividends, dairy assessment rebates or 

refunds, and the value of manure. The value of milk sales was determined from prices reported 

by the survey respondents.

Source: USDA’s 2005 Agricultural Resource Management Survey, conducted by the National 

Agricultural Statistics Service and the Economic Research Service.
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organic dairies that relied on pasture for 75-100 percent of forage fed, a 

savings of about 25 percent. As shown previously, however, average production per cow was more than 30 percent lower on the organic dairies that used 

the most pasture, thus total costs per cwt were higher.

Breaking down the distribution of milk production per cow for each group 

provides an indication of how milk yields declined as pasture was substituted 

for higher energy feed in the dairy ration. Nearly half of organic dairies 

feeding 0-24 percent of forage from pasture had annual milk yields at 15,000 

pounds per cow or more, compared with just 10 percent of dairies feeding 

75-100 percent (fi g. 13). In contrast, more than 40 percent of dairies using the 

most pasture had an annual milk yield of less than 10,000 pounds per cow, 

compared with 19 percent of those using the least pasture. This suggests that 

improving pasture quality to achieve higher milk production can contribute to 

the success of organic dairies using pasture-based feeding.

The relationship between pasture use and total production costs follows much 

the same pattern as seen for size and production costs on organic dairies. 

That is, the operations using less pasture were much larger and had lower 

average costs per cwt than the smaller operations using more pasture. Capital 

costs were more than $2 per cwt higher and the charge for unpaid labor 

was more than $5 per cwt higher on the operations where pasture forage 

accounted for 75-100 percent of forage fed than on those where pasture forage 

accounted for 0-24 percent of forage fed (table 8). Larger operations were 

able to spread the fi xed costs for capital and labor over production from more 

cows, and each cow was more productive on the larger operations using the 

least pasture for dairy forage.

Figure 12

Feed costs, by share of dairy forage fed from pasture

Average feed costs per cow on organic dairies were about 25 percent 

less on operations using the most pasture

Dollars per milk cow

Source: ERS calculations based on data from USDA’s 2005 Agricultural Resource 

Management Survey, conducted by the National Agricultural Statistics Service 

and the Economic Research Service.

Forage fed from pasture during grazing months

Homegrown feed

Grazed feed

0

500

1,000

1,500

2,000

2,500

0-24 percent 25-49 percent 50-74 percent 75-100 percent

Purchased feed
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Average returns net of total economic costs were negative for dairies in each 

of the pasture use groups, but were signifi cantly higher among the dairies 

using the least pasture. This disparity suggests that organic operations using 

conventional dairy feeding methods, such as confi ning cows and feeding 

higher energy feed, were more likely to generate higher returns to capital and 

labor resources than those relying more on pasture-based feeding. Thus, the 

technologies and production methods used on organic dairies could become 

more like those used on conventional dairies. Changing technologies and 

production methods may depend on the extent to which pasture requirements 

for organic dairies must include pasture as part of the dairy feeding program.

Labor Use by Level of Pasture Use

The biggest difference in organic dairy costs between those using the most 

and the least pasture for dairy forage was the unpaid labor charge. The labor 

charge on organic dairies feeding 75-100 percent of forage from pasture was 

more than $8 per cwt, compared with less than $3 per cwt on dairies feeding 

0-24 percent of forage from pasture (table 8). The labor charge contributed 

about half the difference in total costs that were more than $10 per cwt higher 

for dairies using the most pasture.

Table 9 includes labor use per cow and per cwt for each level of pasture 

feeding. Unpaid labor use per cwt on organic dairies feeding 75-100 percent of 

forage from pasture was about three times that for those feeding 0-24 percent 

of forage from pasture. Part of this difference came from fi xed amounts of 

labor being spread over more output on the larger operations that used the least 

amount of pasture. Some of the labor difference, however, may be due to the 

pasture feeding system’s being more labor intensive than handling dairy cows 

Figure 13

Milk production, by share of dairy forage fed from pasture

Nearly half of organic dairies feeding the least pasture forage had milk yields above

15,000 pounds per cow, compared with only 10 percent of those feeding the most pasture

Percent of farms

Source: ERS calculations based on data from USDA’s 2005 Agricultural Resource 

Management Survey, conducted by the National Agricultural Statistics Service 

and the Economic Research Service.

10,000-14,999 pounds

Less than 10,000 pounds

15,000 pounds or more

Forage fed from pasture during gnazing months

0

10

20

30

40

50

60

0-24 percent 75-100 percent
23

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in confi nement. Among farms with fewer than 100 cows, the unpaid labor use 

on dairies feeding the least forage from pasture was still about a third less than 

on those feeding the most forage from pasture (0.45 hour versus 0.65 hour). In 

addition, total labor use among these small dairies increased steadily as more 

pasture was used for dairy feed. This increase suggests that pasture-based 

feeding systems are inherently more labor intensive than the conventional practice of handling dairy cows in confi nement, possibly due to the labor required 

for moving cows to, from, and between pastures.

Table 9

Organic dairy labor use, by level of pasture use, 2005

 Forage fed from pasture during grazing months

Item 0-24 25-49 50-74 75-100

 percent percent percent percent 

 Per cow

Hired labor hours 30 20 22 17

Unpaid labor hours 27 52 48 56

 Total labor hours 57 72 70 73

 Per cwt

Hired labor hours 0.18 0.15 0.17 0.15

Unpaid labor hours 0.16 0.39 0.36 0.49

 Total labor hours 0.34 0.53 0.52 0.65

 Per cwt—dairies with fewer than 100 cows

Hired labor hours 0.15 0.18 0.17 0.16

Unpaid labor hours 0.45 0.52 0.59 0.65

 Total labor hours 0.60 0.70 0.76 0.81

Note: Totals may not equal the sum of items due to rounding.

Source: USDA’s 2005 Agricultural Resource Management Survey, conducted by the National 

Agricultural Statistics Service and the Economic Research Service.
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Comparing Organic and 

Conventional Dairies

Organic dairy operations usually begin as conventional dairies that undergo 

the transition to become certifi ed organic operations. Differences in farm and 

operator characteristics and production practices of organic and conventional 

dairies were identifi ed and used to measure differences in milk production 

costs. These cost differences, along with estimates of organic transition costs, 

indicate milk price premiums that organic dairies need to be competitive with 

conventional milk production (see box, “What Other Studies Indicate”).

Research models were specifi ed to describe farms that use organic production and the difference in costs between organic and conventional farms. The 

models accounted for the myriad of factors that infl uence milk production 

costs, such as size of operation, region, and production practices, to isolate the 

cost difference attributed to an organic operation. The models also accounted 

for the fact that organic producers are not randomly assigned among the dairy 

population, but instead self-select. Self-selection could bias the cost comparison 

if unmeasured factors, such as the level or type of management, were correlated with both organic participation and milk production costs (see Appendix 

B: Modeling the Impact of Organic Participation on Milk Production Costs or 

McBride and Greene, 2009). 

This research was also designed to examine whether organic systems are 

more or less competitive in different segments of the U.S. dairy sector. The 

models were used to evaluate the competitiveness of organic and conventional milk production for farms located in the Northeast and Upper Midwest, 

those using pasture-based feeding, and among small dairies, segments of 

the U.S. dairy sector where organic production is most common. The results 

provide an indication of when organic milk production was most economical 

compared with conventional production.

Characteristics and Practices 

of Organic and Conventional Dairies

Organic dairies were smaller than conventional dairies, averaging 82 cows per 

organic farm compared with 156 cows per conventional farm (table 10). The 

average milk production per cow was also lower on organic operations, nearly 

30 percent less. Organic operations averaged about 13,600 pounds of milk per 

cow, compared with nearly 19,000 pounds per cow on conventional operations. 

More than 80 percent of organic dairy operations were located in the Northeast 

or Upper Midwest, compared with 65 percent of conventional operations. These 

regions also included 62 percent of all organic milk cows, compared with 42 

percent of conventional milk cows. In contrast, only 7 percent of organic dairies 

were located in the West, but these operations held about a third of total U.S. 

organic milk cows, the same as conventional operations. Organic dairies in the 

West (381 cows) were much larger than those in other regions and similar in 

average size to conventional operations (431 cows). The average size of organic 

dairies in the Northeast was half that of conventional dairies (52 cows versus 104 

cows), and those in the Upper Midwest were about two-thirds the size of conven-
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What Other Studies Indicate

Butler (2002)

Measured the differences between organic and conventional dairy production 

costs in California based on 1999 data. The primary cost differences between 

organic and conventional operations included: reduced milk production, slightly 

higher feed and labor costs, and signifi cantly higher herd replacement and transition costs. Net returns from organic production in 1999 appeared to be more than 

twice those from conventional production on similar dairies, but less than for the 

State average of conventional production.

Dalton et al. (2005)

Reported average production costs and returns from a 2004 sample of 30 organic 

dairy farms in Vermont and Maine. Total costs for organic milk production came 

in at $22.58 per cwt, before a deduction for unpaid operator labor and management. Organic milk production did not generate any return to unpaid labor and 

management nor did it produce a positive return to farm assets or equity. To do 

so, an organic milk price of at least $25.00 per cwt would have been needed in 

2004 to break even on returns to assets, and $28.05 per cwt would have been 

needed to earn a 5 percent return—9 and 24 percent, respectively above the 

average 2004 organic milk price.

Dalton et al. (2008)

Reported the fi nancial performance of Maine and Vermont organic dairies over 

3 years, 2004 through 2006. Financial performance improved in each year 

(2005 and 2006), following low returns reported for 2004. Higher returns to 

organic milk production were primarily due to increasing milk prices during this 

period. Compared with a similar sample of small conventional farms, organic 

milk revenues were similar to those for conventional farms in 2004 and 2005, 

but 36 percent higher on organic farms in 2006. The cost structures of organic 

and conventional dairies were found to be similar, differing only in items that 

contributed 7 percent or less to the total cost of production.

Barham, Brock, and Foltz (2006)

Described organic dairy farming in Wisconsin using 2003 and 2004 survey data 

from organic, management intensive grazing, and conventional milk operations. 

Few differences existed between organic and other dairies in terms of farm 

operator characteristics, but organic operators expressed greater satisfaction and 

optimism about the dairy business. Organic operations were generally smaller 

than conventional operations, but larger than grazing operations, and were more 

similar to conventional operations in terms of their technology use. Organic 

operations seemed to be modernizing more rapidly than other dairies.

Rotz et al. (2007)

Examined the environmental and economic performance of organic grass and 

organic crop dairies in Pennsylvania. Results showed an economic advantage 

for organic over conventional milk production that depended on relative organic 

and conventional milk prices and levels of milk production. Based on the relative milk prices for 2006, organic production seemed to provide an option for 

improving the economic viability of dairy operations of a similar scale.
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tional dairies (64 cows versus 98 cows). The ARMS includes no data for organic 

dairy operations in the Southeast or Southwest.

Most farm operator characteristics were similar among conventional and 

organic dairies. Nearly all farm operators in both groups reported farming 

as their primary occupation, common for dairy operations due to their 

substantial onfarm labor requirements. The distribution of operator education 

suggests that those in the organic group were neither more nor less educated 

than operators of conventional dairies. The average age of farm operators 

on conventional and organic dairies was similar. Most organic operations 

converted to organic production after years of conventional production. Of 

the 21 years that organic operators reported being in business, organic milk 

was produced for only 5 years. Organic producers were more optimistic about 

Table 10

Characteristics of organic and conventional dairy operations, 2005

 Type of dairy

Item Conventional Organic

Milk cows (number per farm) 156 82

Milk production (pounds per cow) 18,983 13,601

 Percent of farms/cows

Region:

 Northeast (ME, NY, PA, VT) 26/17 44/29

 Upper Midwest (MI, MN, WI) 39/25 42/33

 Corn Belt (IL, IN, IA, MO, OH) 15/10 7/7

 Southeast (FL, GA, KY, TN, VA)1 6/6 0/0

 Southwest (AZ, NM, TX)1 2/10 0/0

 West (CA, ID, OR, WA) 11/32 7/31

 Milk cows per farm

Region:

 Northeast (ME, NY, PA, VT) 104 52

 Upper Midwest (MI, MN, WI) 98 64

 Corn Belt (IL, IN, IA, MO, OH) 108 75

 Southeast (FL, GA, KY, TN, VA)1 152 0

 Southwest (AZ, NM, TX)1 781 0

 West (CA, ID, OR, WA) 431 381

 Percent of farms

Farm operator:

 Off-farm occupation 2 4

 Education:

 Less than high school 18 26

 Completed high school/some college 66 54

 Graduated from college 16 20

 Age (years) 51 49

 In dairy business (years) 23 21

 Selling certifi ed organic milk (years) na 5

 Exit dairy business:

 5 years or less 25 16

 10 years or less 51 33

 20 or more years 30 47

na=Not applicable. 

1Organic dairies were not surveyed in the Southeast and Southwest regions.

Source: USDA’s 2005 Agricultural Resource Management Survey, conducted by the National 

Agricultural Statistics Service and the Economic Research Service.
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their future, as signifi cantly fewer planned to exit in the next 10 years and 

signifi cantly more planned to be in business for 20 or more years (fi g. 14).

The primary difference in the production practices used by organic and 

conventional dairies was found in their feeding systems. More then 60 

percent of organic operations reported using pasture-based feeding that 

provided more than 50 percent of seasonal forage from pasture (during 

the grazing months), compared with just 18 percent of other operations 

(table 11). Although not available to organic producers, rBST was used by 

17 percent of conventional operations that were also more likely to utilize 

regular veterinary services and a nutritionist to formulate dairy rations (fi g. 

15). Differences in production practices may have contributed to the higher 

production per cow on conventional versus organic operations.

Labor use also distinguished conventional from organic dairies. Organic 

operations used nearly twice the hours of total labor per cwt, on average, 

than did conventional operations (0.50 hour versus 0.26 hour). Most of the 

labor difference came from signifi cantly more unpaid labor hours worked 

on organic dairies and was infl uenced by the smaller average size and lower 

productivity of organic dairies. Fixed labor inputs were spread over fewer 

units of production on the smaller organic dairies.

Factors Affecting the Use 

of Organic Milk Production

Several operator and farm characteristics were statistically associated with the 

organic approach to milk production. Among operator characteristics, education and planning horizon were important. Dairy farmers graduating from 

college were more likely to be organic producers. Dairy operations planning to 

Figure 14

Plans to exit the dairy business, by type of producer

Operators of organic dairies were more optimistic about their future

Percent of farms

Source: ERS calculations based on data from USDA’s 2005 Agricultural Resource 

Management Survey, conducted by the National Agricultural Statistics Service 

and the Economic Research Service.

Years planning to remain in dairy business

Organic dairies

Conventional dairies

0

10

20

30

40

50

60

5 or less 10 or less 20 or more
28

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exit the industry in the next 10 years were less likely to be organic, indicating 

that operations with a longer planning horizon were more likely to use the 

organic approach.15 More educated dairy farmers with long-term plans to 

remain in business are probably more willing and able to make the necessary 

investments or take the additional risks associated with organic production.

Size and location of dairy operations were also important factors infl uencing 

operators to go organic. The likelihood of being organic decreased as the 

number of milk cows on a farm increased. Larger operations had less incentive to go organic because of economies of size in milk production, pasture 

requirements for organic certifi cation, and possible diffi culties sourcing large 

quantities of organic inputs. The proximity and accessibility of grazing land 

to the operation may also have been important because barriers, such as 

highways and streams, may limit available pasture. Location in the Northeast 

or Upper Midwest was also associated with a higher probability of being 

organic. The organic dairy industry began in these areas and may offer a 

more developed infrastructure for handling organic milk.

15Some farm operators may have 

revised their planning horizon to be 

more optimistic after their experience 

as organic milk producers.

Table 11

Production practices and labor use on organic and conventional dairy 

operations, 2005

 Type of dairy

Item Conventional Organic

 Percent of farms

Production practices

 DHI program participation1 45 46

 Pasture-based feeding2 18 63

 Milking three times or more daily 7 1

 rBST (recombinant bovine somatotropin) 17 0

 Artifi cial insemination 82 73

 Embryo transplants or sexed semen 10 3

 Controlled breeding/calving season 25 35

 Regular veterinary services 69 38

 Nutritionist services 72 45

 Computerized milking system 5 2

 Computerized feeding system 7 3

 Milking parlor 50 41

 Keep individual cow records 61 62

 Johne’s disease program participation 20 26

 Onfarm computer records 26 21

 Dairy information from Internet 38 41

 Forward-purchased inputs 20 8

 Negotiate input price discounts 35 21

 Hours per cwt

Labor use:

 Paid labor 0.12 0.16

 Unpaid labor 0.13 0.34

 Total labor 0.26 0.50

1Dairy Herd Improvement.

2Pasture-based feeding is defi ned as providing at least half of the forage fed to milk cows during 

the grazing months from pasture. Organic dairies reported an average grazing period for milk 

cows of 6.5 months in 2005.

Source: USDA’s 2005 Agricultural Resource Management Survey, conducted by the National 

Agricultural Statistics Service and the Economic Research Service.
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Operations with a pasture-based feeding program were more likely to be 

organic, possibly because the land base enabled them to meet organic pasture 

requirements and pasture was more easily managed organically than fi eld 

crops. Results suggest that using pasture as a signifi cant source of dairy feed 

was one of the best predictors of being an organic dairy. Location in counties 

with a greater concentration of farms with milk cows included more organic 

production, potentially as a result of organic processors who chose to locate 

and recruit in areas with a large concentration of producers in order to reduce 

milk transportation and other transaction costs.

Factors Affecting Milk Production Costs

This section of the report examines the relationship between farm and operator 

characteristics and three levels of production costs—operating costs, operating 

and capital costs, and total economic costs (see Appendix A: Measuring Milk 

Production Costs). Older farm operators had higher costs than younger operators. Operating, operating and capital, and total economic costs all declined as 

farm size increased, consistent with economies of size. Costs declined as size 

increased, at a decreasing rate, as fi xed capital and labor costs were spread over 

more units of output. Signifi cant economies of size with respect to capital and 

labor were expected, but operating costs also declined with size, possibly due to 

greater feed effi ciency or lower prices paid for feed items on larger farms.

Farm location infl uenced production costs as dairies in most other regions 

had lower costs than those in the Northeast. Technology use was also an 

important determinant of production costs. Farms using more technology 

had lower per unit capital and labor costs, possibly by increasing their 

Figure 15

Production practices, by type of producer

Organic operations used pasture-based feeding more often, while conventional 

operations used regular veterinary and nutritionist services more often

Percent of farms

Source: ERS calculations based on data from USDA’s 2005 Agricultural Resource 

Management Survey, conducted by the National Agricultural Statistics Service 

and the Economic Research Service.

Production practices

Organic dairies

Conventional dairies

Pasture-based 

feeding

Regular veterinary 

services

Nutritionist services

0

20

40

60

80

100
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productivity. Pasture-based feeding had a negative, but insignifi cant, effect 

on operating costs. Feed costs were lower for organic dairies that substituted 

pasture for other feed items, but lower production from pasture-fed cows 

offset the cost savings. Pasture-based feeding was associated with higher total 

economic costs due to higher labor requirements. 

After accounting for factors that infl uence production costs, operating costs 

for organic production were $4.78 per cwt higher, operating and capital 

costs were $5.65 per cwt higher, and total economic costs were $6.79 per 

cwt higher than for conventional production among all U.S. dairies (table 

12). Results were similar for dairies in the Northeast and Upper Midwest 

and among small farms (less than 150 cows). The estimated difference in 

production costs between pasture-based organic and pasture-based conventional farms, however, was much less than among all dairies ($2.87 per cwt 

for operating costs, $3.00 per cwt for operating and capital costs, and $3.57 

per cwt for total economic costs). Therefore, it is not surprising that many 

pasture-based dairies use organic production. 

Organic Transition Costs

The estimated cost differences indicate the additional costs incurred by operations producing organic milk relative to conventional operations but do not 

include the costs associated with the transition period. Data from the ARMS 

did not indicate the actual costs incurred during transition, so the estimated 

cost differences between organic and conventional milk production were 

approximated for the transition period. Before an operation is certifi ed to sell 

Table 12

Estimated additional costs incurred by organic dairy farms compared 

with conventional dairy farms, 2005

 Operating Operating and Total economic

 costs capital costs costs

 Dollars per cwt sold

All farms:

 Producing organic 4.78 5.65 6.79

 Transitioning to organic na 0.72 0.86

 Total additional costs 4.78 6.37 7.65

Northeast and Upper Midwest farms: 

 Producing organic 4.51 5.43 6.77

 Transitioning to organic na 0.69 0.86

 Total additional costs 4.51 6.12 7.63

Pasture-based farms: 

 Producing organic 2.87 3.00 3.57

 Transitioning to organic na 0.38 0.45

 Total additional costs 2.87 3.38 4.02

Small farms (fewer than 150 cows):

 Producing organic 4.67 5.78 7.82

 Transitioning to organic na 0.73 0.99

 Total additional costs 4.67 6.51 8.81

na=Not applicable.

Notes: Transition costs were treated as a capital investment necessary to return the higher 

organic milk price over the expected life of the operation and thus were not part of annual operating costs. Costs are defi ned in Appendix A: Measuring Milk Production Costs.

Source: ERS calculations based on data from USDA’s 2005 Agricultural Resource 

Management Survey, conducted by the National Agricultural Statistics Service and the 

Economic Research Service.
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organic milk, pasture and cropland for dairy feed must be managed organically for a minimum of 36 months, and the dairy herd must be fed and 

managed organically during the last 12 months of that period. As a result, 

organic operations must undergo 3 years of higher costs before the higher 

organic milk prices are received.16

Higher costs for 3 years are a necessary investment to return higher milk 

prices over the expected life of the operation. This initial investment is determined by the estimated additional costs incurred by organic operations over 

the 3-year transition period. During year 3, when both the land and dairy herd 

must be managed organically, the total additional costs were charged. During 

years 1 and 2, when only the land is managed organically, 50 percent of the 

additional costs were charged. This corresponds with about half of the feed 

cost on organic dairies from homegrown supplies, which would be managed 

organically during the full 3 years. The annualized cost of this investment 

was computed by spreading it over an expected operating life of 20 years.

The estimated transition costs and total additional costs on organic operations 

are shown in table 12. Transition costs were $0.72 per cwt for operating and 

capital costs and $0.86 per cwt for total economic costs. Thus, the total estimated additional costs among U.S. dairy farms for producing organic relative 

to conventional milk were estimated at $4.78 per cwt for operating costs, $6.37 

per cwt for operating and capital costs, and $7.65 per cwt for total economic 

costs. Among pasture-based dairies, the cost differences were much lower at 

an estimated $2.87 per cwt for operating costs, $3.38 per cwt for operating and 

capital costs, and $4.02 per cwt for total economic costs (fi g. 16). 

16Current NOP transition rules were 

used to estimate the transition costs 

even though many of the surveyed 

farms likely transitioned under the old 

rules. The current rules are used to 

refl ect the costs faced by conventional 

farms considering the transition to 

organic production.

Figure 16

Additional costs of organic versus conventional milk production

The additional costs of organic compared with conventional milk production were 

much lower among pasture-based dairies than for all dairies

Additional dollars per cwt 

Source: ERS calculations based on data from USDA’s 2005 Agricultural Resource 

Management Survey, conducted by the National Agricultural Statistics Service 

and the Economic Research Service.

Pasture-based dairies (organic versus conventional)

Operating costs Operating and 

capital costs

Total economic costs

All dairies (organic versus conventional)

0

2

4

6

8
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Challenges of Organic Milk Production

Organic milk producers were asked in the ARMS what they considered the 

most diffi cult aspect of organic milk production. Forty percent of producers 

reported that certifi cation paperwork and compliance cost were the most challenging (fi g. 17). Sourcing organic inputs, including grains and forages, feed 

supplements, and replacement heifers, was the most diffi cult aspect reported 

by 23 percent of organic producers. High costs of production and maintaining 

animal health were challenging aspects reported by 17 and 13 percent of 

producers, respectively.

In this section, the challenges of organic milk production are explored by 

examining how reported challenges to organic milk production varied across 

the sector. Producer reports were summarized by operation size, region, level 

of pasture use, and operator characteristics to see what factors may constrain 

the adoption and growth of organic milk production.

Farm Characteristics and 

Organic Production Challenges

The challenges reported for organic production varied little among dairy size 

groups, except for the largest dairies (table 13). About a third of the largest 

organic dairies, those with 200 cows or more and an average size of nearly 

500 cows (see table 1), reported sourcing inputs as the most diffi cult aspect, 

compared with 20-25 percent of smaller dairies. This indicates that sourcing 

organic inputs in volume may be diffi cult for some large organic producers 

and may be a factor constraining the size of organic operations. Smaller 

Figure 17

Challenges of organic milk production

40 percent of organic dairies cited certification paperwork and compliance 

costs as the most difficult aspect of organic production

Percent of farms

Source: ERS calculations based on data from USDA’s 2005 Agricultural Resource 

Management Survey, conducted by the National Agricultural Statistics Service 

and the Economic Research Service.

Production challenges

Sourcing

inputs

Maintaining High costs Other

animal health

Certification/

compliance

0

10

20

30

40

50
33

Characteristics, Costs, and Issues for Organic Dairy Farming / ERR-82

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dairies reported certifi cation/compliance as the most diffi cult aspect, and the 

smallest dairies, those with fewer than 50 cows, were the least likely to report 

animal health and production costs as most challenging.

Organic milk production challenges were different in each region. The 

most diffi cult aspect for organic dairies in the Northeast was split between 

certifi cation/compliance and production costs at a third each. Dairies in the 

Northeast were the least likely to report sourcing inputs as most challenging, 

possibly because these small dairies often produce organic dairy feed or can 

buy it locally. Half of Upper Midwest dairies reported certifi cation/compliance, while half of organic dairies in the West indicated sourcing inputs as 

the most diffi cult aspect of organic milk production. The volume of organic 

inputs needed on large farms in the West may account for the level of concern 

with sourcing inputs.

Table 13

Most diffi cult aspect of organic milk production, 

by farm and operator characteristics, 2005

 Most diffi cult aspect

 Maintaining 

 Sourcing Certifi cation/ animal High costs

Item inputs compliance health of production Other

 Percent of farms reporting aspect

Size:

 Fewer than 50 cows 25 44 10 13 8

 50-99 cows 20 36 15 21 8

 100-199 cows 20 41 19 20 0

 200 cows or more 34 30 17 17 2

Region:

 Northeast 19 32 13 30 6

 Upper Midwest 24 51 10 6 9

 West 51 id 14 20 id

Pasture use:

 0-24 percent 13 43 15 16 13

 25-49 percent 22 47 id 17 id

 50-74 percent 26 42 14 13 5

 75-100 percent 24 31 13 21 11

Operator age:

 Younger than 50 years 20 43 16 14 8

 50 years or older 26 37 10 21 6

Operator education:

 Less than high school 17 54 4 18 8

 Completed high school 22 40 17 15 7

 Some college 33 22 16 21 8

Organic experience:1

 1 year 26 33 25 11 5

 2-4 years 26 43 12 13 7

 5 or more years 19 39 12 22 8

id = Insuffi cient data for disclosure.

1Number of years an operator has produced organic milk.

Source: USDA’s 2005 Agricultural Resource Management Survey, conducted by the National 

Agricultural Statistics Service and the Economic Research Service.
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Characteristics, Costs, and Issues for Organic Dairy Farming / ERR-82

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The most diffi cult aspect of organic milk production did not differ much 

among the pasture use groups, except for those using the most pasture. 

Dairies that relied on pasture for 75-100 percent of forage during the grazing 

months were less likely to report certifi cation/compliance as the most diffi cult 

aspect of organic production. Certifi cation/compliance may be less diffi cult 

for these dairies because the feeding program satisfi es the pasture requirement for organic certifi cation. More than 40 percent of the dairies in each of 

the other pasture use groups reported certifi cation/compliance as the most 

diffi cult aspect of organic milk production.

Operator Characteristics and 

Organic Production Challenges

Responses based on operator age varied by 6-7 percentage points (table 13). 

Operators younger than 50 years of age were more concerned with certifi cation/compliance and maintaining animal health. Those older than 50 years 

of age reported sourcing inputs and production costs as the most diffi cult 

aspects of organic milk production.

Certifi cation/compliance was reported as the most diffi cult aspect of organic 

milk production by more than half of farm operators with less than a high 

school education. As operator education increased, certifi cation/compliance 

was less of a concern. Forty percent of operators with a high school education, 

compared with only 22 percent of those with some college, reported certifi cation/compliance as the most diffi cult aspect. Results suggest that education may 

ease the certifi cation process. In contrast, sourcing inputs was reported as most 

challenging with more frequency as operator education increased.

The relationship between organic experience and the challenge of organic 

production was examined by grouping farm operators by the number of years 

they had produced organic milk. Dairy farm operators in their fi rst year of 

organic production were more likely to indicate that maintaining animal 

health was most challenging, reported by 25 percent of operators. Organic 

milk producers may have learned quickly to manage animal health as these 

concerns fell to 12 percent by year 2 and beyond. High production costs were 

an increasing concern as organic operators became more experienced, but 

certifi cation/compliance issues were still the primary concern for organic 

dairy operators regardless of their experience.
35

Characteristics, Costs, and Issues for Organic Dairy Farming / ERR-82

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Conclusions

Unique and detailed data from a 2005 survey of U.S. dairy operations were 

used to characterize organic dairies and to compare them with conventional 

dairies. The dataset is unique in that it includes a targeted sample of organic 

producers at a much higher rate than their occurrence in the population of all 

dairy farms. This targeted sample allows for an examination of the structure 

and costs associated with organic milk production and an analysis of differences between the conventional and organic sectors. 

Operation size was a primary determining factor for a dairy operation being 

organic. Small farms may view the organic approach as an alternative by which 

to reorganize current resources to improve farm returns and the odds of economic 

survival. Small-scale production may also be more conducive to sourcing organic 

inputs, which may be limited in some areas. Large dairies have more invested 

in production technologies that typically confi ne milk cows to large barns and 

limit access to pasture and are able to take advantage of economies of size. Thus, 

large farms may have less incentive to consider production alternatives. Further, 

large farms may have greater diffi cultly sourcing suffi cient quantities of organic 

inputs, and transitioning to organic production may require more adjustments due 

to pasture certifi cation requirements. Large organic dairies more often reported 

sourcing inputs and organic certifi cation/compliance requirements as the most 

challenging aspects of organic milk production.

Dairies were more likely to produce milk organically if they were located in 

the Northeast or Upper Midwest. These areas have a long history of small 

dairies and thus a successful infrastructure to provide inputs and manage 

output from several small operations. The largest U.S. organic milk cooperative pioneered organic milk production in the Northeast and Upper Midwest 

during the mid-1990s. Proximity to markets with highly affl uent consumers 

also made these regions attractive to organic milk operations. Access to 

pasture for dairy feed also had a strong infl uence on whether a dairy becomes 

organic. Operations using pasture-based feeding satisfy the pasture requirements for organic certifi cation, and organic pasture management is generally 

easier than organic crop management and less costly than purchasing organic 

dairy feed. Fewer small, pasture-based organic dairies were as concerned 

about certifi cation/compliance requirements as other organic dairies.

Results from a statistical model comparing conventional and organic milk 

production costs indicated that average operating costs for organic dairies 

were $4.78 per cwt higher, and operating and capital costs were $5.65 per 

cwt higher after accounting for other factors that infl uence production costs. 

Including an estimate of the additional costs incurred during transition, 

average organic milk production costs were $4.78 and $6.37 per cwt higher, 

respectively. With an average price premium of $6.69 per cwt for organic 

milk, organic milk producers, on average, covered the additional operating 

and capital costs of organic production in 2005. 

Most organic dairies were small operations that used primarily unpaid operator 

and family labor. Returns above operating and capital costs on these small 

organic operations compared favorably with those of small conventional operations, suggesting that there may be economic incentives for some small existing 
36

Characteristics, Costs, and Issues for Organic Dairy Farming / ERR-82

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dairies that have already committed much of the fi xed investment to consider 

the transition to organic milk production. Additional economic costs for organic 

production averaged nearly $1 per cwt more than the organic milk price 

premium in 2005. Thus, low returns to unpaid labor and management may limit 

startup organic dairies unless they can enter the industry at a much larger scale 

of production than the current norm. 

Even though most organic dairies were much smaller than conventional 

dairies, economic forces suggest that similar economies of size were available to organic producers. Some small organic dairies were earning enough 

to operate, but many were not able to cover the opportunity costs of investments in capital and the operator’s time compared with larger operations. 

These economic conditions suggest that organic milk production may migrate 

toward larger operations, as has conventional production. This production 

shift will likely occur over an extended period as many existing small organic 

operations either choose to replace their capital assets with larger production units or exit the industry. In the short term, some small operators may 

continue producing organic milk as a lifestyle choice, despite generating 

returns that do not cover the opportunity cost of their time.

Organic milk farms able to use pasture resources for a signifi cant portion of 

dairy feed were very competitive with pasture-based conventional producers. 

Average operating costs for pasture-based organic milk production were 

estimated to be about $3 per cwt higher than those for pasture-based conventional production, and total economic costs for organic pasture-based milk 

production were about $4 per cwt higher than for pasture-based conventional 

production, signifi cantly less than the average organic milk price premium in 

2005. Economic incentives appear to favor pasture-based dairies transitioning 

to organic production, and possibly startup organic dairies that can take 

advantage of pasture resources suitable for organic dairy feed. 

While the economics of pasture-based organic milk production compared favorably with that of pasture-based conventional production, pasture-based organic 

dairies had lower average milk production per cow and higher per unit costs than 

other organic dairies. This suggests that organic operations using conventional 

dairy feeding methods, such as confi ning cows and feeding harvested forages, 

are more likely to generate higher returns to capital and labor than those using 

pasture-based feeding. Thus, the technologies and production methods used 

on organic dairies may become more like those used on conventional dairies. 

Interpretation and implementation of revised organic pasture rules may shape the 

future structure of the organic industry. If pasture rules become more stringent, 

the challenges of certifi cation/compliance could have a major impact on the sizes 

and types of farms able to produce certifi ed organic milk.

This report attempts to shed light on the structure of organic milk production, 

factors affecting whether a dairy becomes organic, and the relative costs and 

returns of conventional and organic milk production. Based on these fi ndings, implications for the structure of organic milk production were developed. 

However, conclusions derived from the analysis were based on 2005 organic 

and conventional milk and feed price relationships and could change with 

adjustments in relative milk prices, markets for conventional and organic 

inputs, technological improvements in dairy farming, and new organic pasture 

regulations.
37

Characteristics, Costs, and Issues for Organic Dairy Farming / ERR-82

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References

American Agricultural Economics Association. Commodity Costs and 

Returns Estimation Handbook, report of the AAEA Task Force on 

Commodity Costs and Returns, Ames, Iowa, February 2000.

Arnold, K. Making the Leap to Organic Dairy Production, Northeast 

Organic Dairy Producers Alliance, Deerfi eld, MA, December 2007. 

Barham, B.L., C. Brock, and J. Foltz. Organic Dairy Farms in Wisconsin: 

Prosperous, Modern, and Expansive, PATS Research Report No. 16, 

University of Wisconsin-Madison, College of Agricultural and Life 

Sciences, June 2006.

Boody, George, Bruce Vondracek, David A. Andow, Mara Krinke, 

John Westra, Julie Zimmerman, and Patrick Welle. “Multifunctional 

Agriculture in the United States,” BioScience 55, no. 1, January 2005.

Butler, L.J. Dairy Industry Trends in the West, paper presented at the Annual 

Meeting of the American Agricultural Economics Association, Portland, 

OR, July 2007.

Butler, L.J. “Survey Quantifi es Cost of Organic Milk Production in 

California,” California Agriculture 56(2002):157-62. 

Dalton, T.J., L.A. Bragg, R. Kersbergen, R. Parsons, G. Rogers, D. Kauppila, 

and A. Wang. Cost and Returns to Organic Dairy Farming in Maine and 

Vermont for 2004, Staff Paper #555, University of Maine, Department of 

Resource Economics and Policy, November 2005.

Dalton, T.J., R. Parsons, R. Kersbergen, G. Rogers, D. Kauppila, L. McCrory, 

L.A. Bragg, and Q. Wang. A Comparative Analysis of Organic Dairy 

Farms in Maine and Vermont: Farm Financial Information from 2004-

2006, Bulletin 851, University of Maine, Maine Agricultural and Forest 

Experiment Station, July 2008.

Dimitri, C., and C. Greene. Recent Growth Patterns in the U.S. Organic 

Foods Market, Agriculture Information Bulletin Number 777, U.S. 

Department of Agriculture, Economic Research Service, September 2002.

El-Osta, H.S., and M.C. Ahearn. Estimating the Opportunity Costs of Unpaid 

Farm Labor for U.S. Farm Operators, Technical Bulletin Number 1848, 

U.S. Department of Agriculture, Economic Research Service, March 1996.

Greene, C., and A. Kremen. U.S. Organic Farming in 2000-2001, 

Agriculture Information Bulletin Number 780, U.S. Department of 

Agriculture, Economic Research Service, February 2003.

Greene, W.H. Econometric Analysis, 5th ed., New Jersey: Prentice Hall, 

2003.

Heckman, J.J. “The Common Structure of Statistical Models of 

Trncation, Sample Selection, and Limited Dependent Variables and a 
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Simple Estimator for Such Models,” Annals of Economic and Social 

Measurement 5(1976):475-91.

Manchester, A.C., and D.P. Blayney. Milk Pricing in the United States, 

Agriculture Information Bulletin Number 761, U.S. Department of 

Agriculture, Economic Research Service, February 2001.

MacDonald, J.M., E.J. O’Donoghue, W.D. McBride, R.F. Nehring, C.L. 

Sandretto, and R. Mosheim. Profi ts, Costs, and the Changing Structure of 

Dairy Farming, Economic Research Report Number 47, U.S. Department 

of Agriculture, Economic Research Service, September 2007.

McBride, W.D., and C. Greene. “Costs of Organic Milk Production on U.S. Dairy

Farms,” Review of Agricultural Economics 31 (winter 2009): 793-813.

Miller, J.J., and D.P. Blayney. Dairy Backgrounder, LDP-M-145-01, U.S. 

Department of Agriculture, Economic Research Service, July 2006.

Rotz, C.A., G.H. Kamphuis, H.D. Karsten, and R.D. Weaver. “Organic Dairy 

Production Systems in Pennsylvania: A Case Study Evaluation,” Journal 

of Dairy Science 90(2007):3961-3979.

U.S. Department of Agriculture, Agricultural Marketing Service. 

Certifi cation, National Organic Program Factsheet, April 2008a.

U.S. Department of Agriculture, Agricultural Marketing Service. Organic 

Production and Handling Standards, National Organic Program 

Factsheet, April 2008b.

U.S. Department of Agriculture, Agricultural Marketing Service. National 

Organic Program, January 2009c, http://www.ams.usda.gov/AMSv1.0/

ams.fetchTemplateData.do?template= TemplateA&navID=NationalOrgani

cProgram&leftNav=NationalOrganicProgram&page=NOPNationalOrgan

icProgramHome&acct=AMSPW. 

U.S. Department of Agriculture, Economic Research Service. Organic 

Production, December 2007a, http://www.ers.usda.gov/Data/Organic/.

U.S. Department of Agriculture, Economic Research Service. Commodity 

Costs and Returns, May 2008b, http://www.ers.usda.gov/Data/

CostsAndReturns/. 

U.S. Department of Agriculture, National Agricultural Statistics Service. 

Agricultural Prices 2005 Summary, Pr1-3 (06)b, July 2006.

U.S. Offi ce of the Federal Register, National Archives and Records 

Administration. National Organic Program (NOP)—Access to Pasture 

(Livestock), Proposed Rule, U.S. Department of Agriculture, Agricultural 

Marketing Service, 7 CFR Part 205, October 24, 2008.

Weil, Ray R., and Rachel E. Gilker. Management intensive grazing: 

Environmental impacts and economic benefi ts, fact sheet, University of 

Maryland, College Park, MD, 2003.
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Appendix A: Measuring Milk 

Production Costs

Milk production costs were computed according to standards recommended 

by the American Agricultural Economics Association (AAEA) and used by 

USDA in its annual commodity costs and returns report (USDA, Economic 

Research Service, 2008b). Costs were computed per cwt of milk sold and 

divided into three categories: operating costs, operating and capital costs, 

and total economic costs. Operating costs included costs for feed; veterinary 

and medical services; bedding and litter; marketing; custom services; fuel, 

lubrication, and electricity; repairs; hired labor; organic certifi cation/compliance; and operating interest. Capital costs included the annualized cost of 

maintaining the capital investment (economic depreciation and interest) in 

the dairy operation, and costs for non-real-estate property taxes and insurance. Total economic costs were the sum of operating and capital costs, plus 

opportunity costs for unpaid labor and land and allocated costs for general 

farm overhead items.

Operating cost items, except those for farm-raised inputs, were taken directly 

from survey responses to questions about dairy expenditures for each item. 

Homegrown harvested and grazed feed costs were computed using market 

prices for each feed item to estimate the opportunity cost of feed for dairy 

cattle. State average market prices were used to value the harvested feed 

items fed to dairy cows on conventional dairies (USDA, National Agricultural 

Statistics Service, 2006). Because organic feed prices can be signifi cantly 

higher than conventional feeds, premiums paid by organic producers for feed 

items were estimated from the ARMS data and added to the State average 

market prices to estimate the opportunity cost of homegrown organic feeds.1

Pasture rental rates estimated from the ARMS data were used to approximate 

the opportunity costs of grazed feed items on conventional and organic operations. The average prices paid by conventional and organic dairy operations 

for purchased feed grain, forage, grazing, and other purchased feed items that 

set the homegrown feed costs are shown in Appendix A table.2 Feed costs 

accounted for the largest share of milk production costs at 65 to 75 percent of 

operating costs and 33 to 50 percent of total economic costs.

Capital costs for milk production (economic depreciation and interest) were 

computed using the capital recovery approach (AAEA, pg. 6-19). Capital 

recovery is an estimate of the cost to replace the capital investment for cattle 

housing, milking facilities, feed storage structures, manure handling and 

storage structures, feed handling equipment, tractors, trucks, and purchased 

dairy herd replacements used in the annual production process, plus interest 

that the remaining capital could have earned in an alternative use. These costs 

were computed based on 2005 replacement cost estimates for the dairy assets 

reported by farmers in the ARMS. Farm expenditures on non-real-estate 

property taxes and insurance were allocated to the dairy enterprise based on 

an estimate of the dairy enterprise’s gross margin relative to the whole farm. 

Capital costs on organic operations were not computed differently than those 

for conventional operations. 

1These premiums refl ect the difference in the production costs of organic 

and conventional feed items, but may 

also refl ect additional transportation 

costs that could result from a scarcity 

of organic inputs in some areas. To the 

extent that these premiums refl ect the 

scarcity of organic inputs in some areas, 

the opportunity costs for using these 

homegrown inputs may be overstated.

2Using the opportunity cost approach to estimate homegrown dairy 

feed costs might bias the results against 

farms that produce feed because their 

feed production costs could be lower 

than assumed feed prices. This bias 

could be problematic because organic 

and pasture-based operations produce 

a relatively larger share of their feed 

than other operations. However, means 

estimated for whole-farm variable and 

fi xed costs per unit from the ARMS 

data are not signifi cantly different from 

per unit enterprise costs estimated 

with the opportunity cost approach. 

Enterprise costs for producing milk are 

useful in this report because they can be 

directly compared with milk prices.
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Characteristics, Costs, and Issues for Organic Dairy Farming / ERR-82

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The largest component of other costs for milk production is unpaid labor. 

Unpaid labor was charged using the quantity of labor used for dairy production, as reported in the survey, times an imputed wage rate. The wage rate 

refl ects the opportunity cost of farm operator labor employed off-farm, estimated from an econometric model of off-farm labor supply and wages 

(El-Osta and Ahearn, 1996). Unpaid labor hours worked by individuals less 

than 16 years of age were charged the State minimum wage rate. The differences between organic and conventional dairies were due to the amounts of 

labor reported for the dairy enterprise and, to a lesser extent, the characteristics of farm operators that infl uenced their opportunity wage (i.e., age, education, farm location).3 General farm overhead costs were nonenterprise 

specifi c costs allocated to the enterprise based on dairy gross margins, while 

the land cost was an opportunity cost of the land used for building sites and 

animal holding areas.

3Opportunity costs of labor may vary 

signifi cantly among producers, and 

some producers may be willing to accept returns less than they could earn in 

nonfarm employment because of lifestyle preferences and costs of switching 

Appendix A table occupations, among other reasons.

Prices paid for purchased feed items, by producer type, 2005

 Type of dairy

Item Unit Conventional Organic

 Dollars per unit

Feed grains:

 Corn bushel 2.42 5.42

 High-moisture corn bushel 2.37 5.15

 Barley bushel 2.87 5.24

 Oats bushel 2.23 3.11

Forage:

 Alfalfa hay ton 104.54 146.68

 Other hay ton 86.17 89.33

 Silage ton 35.88 40.74

Grazed feed:

 Improved pasture—irrigated acre 115.81 152.14

 Improved pasture—dry acre 47.17 60.81

Other purchased feed:

 Complete feed mixes ton 285.92 345.90

 Protein supplements cwt 15.62 23.52

 Vitamin/mineral premix cwt 35.69 59.35

 Milk replacer/calf starter pound 0.82 1.06

Source: USDA’s 2005 Agricultural Resource Management Survey, conducted by the National 

Agricultural Statistics Service and the Economic Research Service.
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Appendix B: Modeling the Impact of Organic 

Participation on Milk Production Costs

A treatment-effect sample selection model was employed to measure the impact 

of organic participation on milk production costs (Greene, 2003). The model 

assumes a joint normal distribution between the errors of a participation equation 

(use of the organic approach) and a treatment equation (measure of production 

costs). This technique accounts for the possible correlation of unmeasured variables with both organic participation and production costs, allowing for an unbiased estimate of the impact of organic production on milk production costs.

Applying the treatment-effect model, the organic approach can be expressed 

with the latent variable Oi

*

 indicating the net benefi t from using this approach, 

so that:

OZ u O O ii i i i

* * =+ = > γ ; , 0 otherwise, where if 1 0 (1)

where Zi

 is a vector of operator, farm, and regional characteristics. If the 

latent variable is positive, the variable indicating organic production Oi equals 

one, and equals zero otherwise. A measure of the impact of organic participation on production costs yi

 can be expressed by: 

yii i i = ++ X O β δ ε (2)

where Xi is a vector of operator, farm, and regional characteristics.

Equation 2 cannot be estimated directly because use of the organic approach 

may be determined by unmeasured variables, such as management factors, 

that may also affect production costs. If this were the case, the error terms in 

equations 1 and 2 would be correlated, leading to a biased estimate of δ. This 

selection bias was addressed by assuming a joint normal error distribution 

with the following form:

and by recognizing that the expected costs of using the organic approach is 

given by:

E ⎡yO X ii i i = ⎣ ⎤

⎦1 = ++ β ρσλ δ ε (3)

where i

 is the inverse Mills ratio. To derive an unbiased estimate of δ, a twostage approach can be used, starting with a probit estimation of equation 1. In 

the second stage, estimates of  are used to compute the inverse Mills ratio, 

which is included as an additional term in a least-squares estimation of equation 

2. This two-stage Heckman procedure is consistent, albeit not effi cient. Effi cient 

maximum likelihood parameter estimates were obtained by maximizing:

L f O y dydO f

O

i i

i i O

(,, ,) ( , ;,, ,) ⋅ ( * * γ β σ ρ γ β σ ρ = −∞

∞

= −∞ −∞

∞ ∞

∏ ∫ ∫ ∫ ∫

0

0 = 0

∏

1

O y dydO i i

* * , ;,,,) γ β σ ρ

2

0 1 , 0u

N

ε ε σ

⎡ ⎤ ⎡ ⎤⎡ ⎛ ⎞⎤

⎢ ⎥ ⎢ ⎥⎢ ⎜ ⎟⎥ ⎣ ⎦ ⎣ ⎦⎣ ⎝ ⎠⎦

∼ ρ

ρ
42

Characteristics, Costs, and Issues for Organic Dairy Farming / ERR-82

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where f O y i i ( , ;,,,) * γ β σ ρ is the joint normal density function, which is a function of the parameters. The negative of the log of the likelihood function was 

minimized using the estimates from the Heckman procedure as starting values.

Once the treatment-effect model was estimated, the difference in costs between 

organic and conventional dairies was determined by (Greene, pg. 788):

E yO E yO ii ii

i

i i

⎡

⎣ = ⎤

⎦ − ⎡

⎣ = ⎤

⎦ = + −

⎡

⎣

⎢ ⎤

⎦

1 0 ⎥ 1 δ ρσ φ ε Φ Φ ( )

 (4)

where  is the standard normal density function and  is the standard normal 

cumulative distribution function evaluated at variable means.