05/20/2003

Communities Can Benefit from Economic Study of Large Dairies

Writer:

Martha Filipic
filipic.3@osu.edu
(614)292-9833

Source:

Brian Roe
roe.30@osu.edu
(614)688-5777

COLUMBUS, Ohio -- An economic analysis of seven new large dairy farms in Paulding and Van Wert counties shows they have overall positive economic impacts in the local area, but the effect they will likely have on local government funds is vastly different between the two counties.

Brian Roe, an Ohio State University Extension agricultural economist who led the study, said he hopes the information helps communities throughout Ohio in the decision-making process as new dairy operations express interest in an area and when existing dairies decide to expand.

"When I arrived in Ohio in 1998, this issue was just on the horizon, and there were some very heated public meetings about possible impacts of the new dairies," said Roe, who is also a livestock economics researcher with the university's Ohio Agricultural Research and Development Center. "It was clear to me that some good, solid information could have helped these communities as they decided their future relative to large dairy facilities."

The seven dairies included in this study began operations between August 2000 and September 2002. They average 568 milking cows and 97 dry cows per operation.

The study, conducted with the assistance of local agricultural and community development specialists with Ohio State University Extension, the dairy operators, and local county, township and school officials, examined two areas of impact. "Economic impacts" are how the dairies affect the two counties' overall economies, and "fiscal impacts" are how the dairies affect funding of local governments and school districts.

The study did not examine environmental or social impacts resulting from the dairies, Roe said, which are two other important issues communities need more information on. Other researchers in the College of Food, Agricultural, and Environmental Sciences are examining those aspects.

Economic impacts uncovered in the study include:

• Each year, the seven dairies create a total of nearly $23 million in economic impact in the two counties. That includes a total of 83 jobs generated because of the dairies, with about 58 of those jobs on the dairies themselves.
• Before these seven dairies were constructed, the local dairy industry contributed only one-tenth of one percent to the area's total economic activity. Now, the dairy sector accounts for about 1 percent of all economic activity in these two counties.
• The average wage at the dairies, including both hourly workers and salaried personnel, is $467 a week, which is similar to government workers ($480) and construction workers ($510) in the two counties. Local workers in the wholesale or retail sector and service sector generally get paid less ($316-350), while workers in manufacturing, transportation and the finance, insurance and real estate industries generally get paid more ($560-637).
• The economic impact of these dairies could be greater if the dairies purchased more of their inputs locally. Total input costs for all seven dairies total $9.9 million per year, of which 39.5 percent, or about $3.9 million, is spent locally.

For example, pre-mixed feed is the highest individual cost for the dairies, the researchers found. In total, the dairies spend about $2.5 million a year on pre-mixed feed, accounting for about 25 percent of their total input costs. However, currently the dairies buy only 1 percent, or about $25,000, of that feed locally. "They told us they are interested in doing more local purchasing, but I've found in other research that it can take a while to establish local business relations," Roe said. "New farms in an area are just less likely to buy locally. As they establish themselves, they'll find the local supply chains they need."

Already, the farms buy 71 percent of their corn for grain and 100 percent of their corn for silage locally.

Fiscally, the two counties in the study experienced very different situations. "I expected the outcomes to be much more similar, but we encountered a lot of differences between the two counties," Roe said. "That's good, because I think it makes this study much more informative for other communities who can make use of this data."

The two biggest fiscal costs local governments can incur with new dairies are those involved with road improvements -- necessary for the heavy trucks traveling to and from the dairies -- and the effect new property tax income can have on school funding from the state, Roe said.

"It can be a nightmare to understand how school funding works with the local property taxes," Roe said. "If things aren't set up properly, schools could lose up to a dollar in state funding for every dollar of new property taxes collected locally."

In these cases, all seven dairies entered into Tax Increment Financing (TIF) agreements to distribute the new tax dollars to specific governmental agencies. In four of the seven agreements, part of the tax money was directed as "gifts" to local schools, which protects a school's state funding. Most of the rest of the tax money is directed toward road construction and maintenance.

"We asked other agencies, such as the sheriff's offices, local health departments and emergency management agencies, if they incurred extra costs due to the new dairies, and they reported none," Roe said. "Roads really are the biggest expense."

Roe and his team examined fiscal impacts over a 30-year period, the length of time often used for evaluating projects with long-term implications. In examining the best- and worst-case scenarios for a variety of fiscal costs and income, he estimated that the total fiscal impact over 30 years in Paulding County would amount to a gain of $170,700, while the total gain in Van Wert County would total $1.156 million.

Reasons for the large difference between the two counties include:

• Van Wert County was able to get a Community Development Block Grant from federal sources to fund $72,000 of road improvements for one dairy. Because the grant money was received immediately, it had a large long-term fiscal impact, Roe said.
• Because of the grant, Van Wert County incurred very little debt -- just over $23,000 -- to support road improvements. In contrast, Paulding County will pay $100,000 or more in interest payments over the years to support debt incurred for local road improvements.
• The soil structure in the counties is different, which affects the cost of road improvements. Van Wert officials estimated the cost of $27,000 per mile for major road improvements, compared with Paulding's estimate of $50,000 per mile.
• Only two of the TIF agreements in Paulding County protect state funding for local schools. In contrast, all three of Van Wert's TIFs protect state funding for schools, and two of them were structured to last 30 years, compared with 10 years for the two Paulding TIF agreements.
• The dairies in Van Wert County have a higher assessed property value, which increases the taxes collected in that county $7,000 more than the increased tax revenue for Paulding County.

"One big lesson we learned in this case study is that it's very important for big dairies to work with local governments and school officials and organize their resources jointly, for the good of the locality," Roe said. "A lot of times, grants must be applied for and received before any local hiring or construction begins. It's really a coordination issue, which can be difficult because things often happen quickly in this business," Roe said.

Roe is an assistant professor in the Department of Agricultural, Environmental, and Development Economics. The entire report, "Economic and Fiscal Impacts: A Case Study of Seven Recently Constructed Dairies in Van Wert County and Paulding County, Ohio," is available online at http://aede.osu.edu/resources/publications.htm. Click on "AED Economics Report Series" and scroll down to the report, No. AEDE-RP-0032-03.

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