By: Krissa Welshans, August 22,2019
Economies of scale are driving consolidation and expansion across the U.S. dairy sector, changing the way farms are managed as well as where milk is produced, according to a newly released Rabobank report.
The growing reliance on large-scale dairy production presents its own risks, Rabobank dairy analyst Ben Laine suggests.
The evolution, he said, has divided the industry along geographical lines and across various farm sizes and will challenge smaller farms to alter their businesses to differentiate and find innovative ways to manage costs.
According to the report, the U.S. Department of Agriculture’s 2017 “Census of Agriculture” showed that 55% of U.S. milk cows resided on farms that milk more than 1,000 cows — a large increase from 20 years earlier, when these operations accounted for less than 20% of the U.S. dairy herd.
“With limited opportunity to improve milk revenues during extended periods of subdued milk prices, farms have looked for opportunities to better their cost management to improve margins,” Laine said. “Expanding to a larger scale has been one of the ways that farms have attempted to do that.”
According to the report, several cost factors are affected as scale increases. Larger farms with 2,000 cows or more have reduced costs per hundredweight across the board due to lower feed costs, lower operating costs and lower allocated overhead than smaller operations. Also, while larger operations have greater levels of purchased feed and hired labor, Laine said hired labor on large-scale farms generally yields higher returns.
Today, 58% of U.S. milk is produced on farms with more than 1,000 cows. As output shifts to larger farms, the report pointed out that the average cost of production declines. A greater share of total milk production at a lower breakeven cost and with less sensitivity to low milk prices means lower prices can be sustained for longer periods of time without triggering a reduction in supply, the report explained.
These longer periods, however, have led to increased pressure on smaller operations. Rabobank pointed out that, in some cases, this pressure has fueled animosity toward large-scale farms.
Further, as the scale of milk production has shifted, so have the locations of the nation’s milk production centers, according to the report. USDA data show that, in 2017, there were 189 dairy farms with more than 5,000 cows in the U.S., with an average herd size of 7,400 cows. The largest concentration was in California and Idaho, each with 35 dairies in this size category, followed by Texas with 25.
The evolving industry has led to a greater reliance on large-scale dairy production. However, Rabobank noted that it has not come without risks.
“Recent activities by animal rights activists have heightened the awareness of the risks of relying too heavily on large-scale agriculture or too few suppliers. If there is consumer backlash against large-scale production in general, entire supply chains would face pressure to adjust,” Laine noted.
This could provide an opportunity for smaller-scale niche products, but Laine warned that these ventures could be at risk during a downturn in the domestic economy.
“Regardless of the risk producers face, the way farms are managed will change as the average farm size grows,” Laine said.
New emerging technologies can also allow farms of various sizes to compete and optimize their margins, he added. Some of these technologies involve robotics, which will help manage labor costs, and genomics, which will help optimize multiple revenue streams and manage heifer inventory, he said.