They run 37,000 Holstein cows on 19,000 acres. The farming operation produces 64 tanker loads of milk a day and each day about 132 calves are born.
The farm has 425 employees and the onfarm operations staff are mainly Hispanic, so Spanish is the language used for most communications.
Fair Oaks is owned by nine families – many of which also operate their own dairy farms. The business calls itself a family farming operation because of its ownership structure but it’s very different to the typical family farm, with chief executive Gary Corbett reporting to a board.
Fair Oaks Farms also opens both its dairy and pig farming operations to the public – a move that could be considered brave given the public backlash against large-scale farming operations that prevails in the US. But Corbett explains that is exactly why they took the bold step to open their doors.
“The public need to see how large farms work – here they get the chance to see how content our cows are.”
Not only has the farm opened its gates to the public, it has become Indiana’s largest agri-tourism venture attracting more than half a million visitors a year.
The tourism part of the operation is run as a non-profit charity so doesn’t contribute to the farming operation in a financial sense but it certainly helps with keeping the locals on side.
The tourism venture is targeted at families and school groups – many of whom have never had the opportunity to see a live animal. Biosecurity considerations mean no one gets to touch an animal but visitors do see a barn where the milking cows are housed and the milking operations.
One of the most popular parts of operation is the birthing barn, featuring a couple of cows on display so the public can watch a calf being born. A flashing light on the outside of the barn alerts visitors that a calf is about to emerge.
The Fair Oaks farming model consists of a series of farms each with about 3000 cows. Each farm unit has three free-stall barns – two accommodate up to 1300 milking cows and a dry cow barn caters for up to 800 cows. Sand is used for bedding, sourced from the land owned by the farms.
Each farm has a 72-bail rotary dairy which operates 22 hours a day with each cow being milked three times a day. The herd replacement rate is 35% per year indicating cows remain in the herd for three years on average. Lactation length averages 310 days followed by a 65-day dry period. Robotic milking systems are being used on some farms and Corbett says he expects they will expand their use in the future to reduce labour costs.
“On the robotic farms each worker can manage 330 cows whereas the farms with rotary milking platforms require one worker per 170 cows,” he says.
Trials with the robotic milking systems show 2.8 as the optimal number of milkings per cow per day.
“On the robotic farms we are milking the cows fewer times but they are producing more milk – we are yet to understand exactly why this is happening.” Corbett says.
The cows’ diet is identical on both farming systems.
Feed accounts for 40-65% of total costs depending on the price of grain. While more than half of their feed requirements are grown on land owned by Fair Oaks they still need to buy in a large portion of their feed.
Cows are fed a 45kg ration a day, spread into three feeds. Maize silage makes up about 80% of the ration, haylage accounts for about 15%, and straw and hay each account for about 2%, supplemented by various minerals. Each tanker-load of milk requires seven truck-loads of feed. Distillers grain is fed to dry cows, young stock and any steers raised, but not to the milking cows. Young stock are raised off the main farm but returned to the farm they were born on when they reach milking age.
Cows are housed indoors all the time because the logistics of letting them out to graze are deemed too complicated, and less manure would be able to be harvested. Fair Oaks prides itself on innovative solutions for dealing with effluent, which involve producing methane and solid fertilisers, and using the remaining “brown water” to grow duckweed and algae that can be fed to the cows.
Effluent is put through bio-digesters, where bacteria break down the waste and produce biogas. The biogas was initially used to run turbines to generate electricity, with excess electricity sold to a power company. However, the economics of this barely stacked up so now the biogas is purified further to produce a nearly pure methane, similar to compressed natural gas (CNG). The CNG is used to run their fleet of trucks and tractors and also those of other contractors.
After the methane has been removed there is still excess nitrogen and phosphorus to deal with. Further refining produces solid phosphate which can be spread back on the land, and the excess is sold to a fertiliser company.
Fair Oaks is constantly looking for opportunities to diversify further or replicate their existing farming operation elsewhere. The families that own Fair Oaks haven’t always farmed in Indiana. They saw an opportunity to purchase a vast tract of land that had previously been earmarked as a potential location for a third airport for Chicago, which is 1.5 hours north.
Corbett says he has looked at dairy farming systems in many parts of the world including Russia, China, Argentina and other parts of South America, but sees greatest potential for replicating their farming model within the US.
“There is plenty of land between here [Indiana] and the Rockies that’s suitable for developing additional farms – we could go elsewhere but our systems are tuned for the US so it makes sense to invest here.”
Managing price risk
Fair Oaks Farms is less exposed to the volatile global commodity markets than most NZ farms but it still actively manages its price risk.
Most of the milk produced is used for consumer products destined for the shelves of US supermarkets. Fair Oaks has a stake in a milk processing company called Select Milk Processors that has developed its own brand of milk targeting the high end of the market.
Their brand, developed in conjunction with CocaCola and called Fairlife, retails at double the price of standard milk. Fairlife milk uses ultra-filtration technology to filter out excess sugar leaving a product that contains higher calcium and protein levels.
The technology initially developed onfarm as part of its effluent management system was refined further for separating the milk components.
Milk produced by Fair Oaks is also manufactured into butter and milk powder.
To manage their exposure to the commodity markets Fair Oaks uses the futures and options products offered by the Chicago Mercantile Exchange (CME).
The CME offers milk price futures for both Class III and Class IV milk.
Class III is milk used for cheese production while Class IV milk is manufactured into butter and non-fat dry milk – a product similar to skim milk powder. The exchange also offers futures for non-fat dry milk, butter, cheese and whey, and options are available for each of the futures products.
Fair Oaks uses a mixture of dairy commodity and milk price futures and options to manage their price risk. They review their positions every few days – a process that involves various members of the management team, financial advisors and their broker.
Fair Oaks has been hedging its milk price for at least 15 years and has been hedging its exposure to grain prices even longer.
Many US dairy farmers were already hedging their feed costs when the CME started offering futures for dairy products, so it was a relatively easy transition to move to hedging their milk price. By hedging milk and feed they have a pretty good idea of the profits their business will generate.
Fair Oaks chief executive Dr Gary Corbett says hedging is now ingrained in their business.
“I couldn’t imagine not hedging – not if I want to sleep at night.”
Fair Oaks hedges between 50% and 80% of their total milk production. The volume varies depending on what is happening in the market, and whether they see opportunities or risk in not being hedged. Corbett does warn you do need some equity behind you in order to manage margin calls.
Other dairy farmers Dairy Exporter spoke to in the US echoed similar messages. They said it could be hard to get your head around margin calls because you know if you hadn’t hedged you would have to be paying those margin calls. But when the market moves in the other way [goes down] it’s pretty good to know you are going to be able to cover the cost of production.
US farmers typically have a margin account, which is essentially an additional overdraft account. Interest rates are typically the same as their short-term finance (overdraft) rates.
There are US farmers who have had bad experiences using futures and options because they didn’t understand how the products worked. Many farmers who hedged didn’t receive the full upside the market delivered in the later part of 2007 so decided not to hedge the following year.
That decision caused some of them to lose their farms when milk prices crashed in the US as a result of the global financial crisis. Their message was farmers needed to invest some time and effort to understand how futures markets could benefit their business.
“Some of us jumped in at the start and lost money – but when you lose money you start to figure out how these products work pretty quickly”.
They all shared the same sentiment that having a broker who understands your business and your appetite for risk is really important.
The US farmers who trade directly on the CME tend to be large-scale farmers with at least 400 cows, who derive their income solely from dairying. Many US dairy companies also offer ways for farmers to manage their price risk, such as fixed milk prices. The dairy companies that offer these products often use the futures market to offset any risk they are taking by offering fixed prices to their suppliers.
