With economies of scale driving profitability, the trend toward larger but fewer U.S. dairy herds isn’t going away soon, according to a new report from the Rabobank Food & Agribusiness Research and Advisory group.
The report, “Economies of Scale Driving Consolidation in U.S. Dairy: Farmers and Processors Should Both Pay Attention,” highlights changes to the U.S. dairy industry over the past 45 years.
The total number of U.S. dairy operations has declined by 90 percent since 1970, while the milk produced per operation increased by 1,800 percent.
Over the past decade, that trend has picked up speed. The number of U.S. operations fell by a compound rate of 5.9 percent from 2005 to 2015. On the growth curve, herds with 2,000 cows or more grew at an annual rate of 10 percent between 2002 and 2012.
“Over the last few decades, we have seen a transition in the industry and the rise of larger farms,” report author and Rabobank dairy analyst Tom Bailey said. “These larger operations have created a great deal of positive change for the U.S. dairy industry, including reduced environmental impact through much more efficient production.”
Critical mass: 1,000 cows
According to the Rabobank researchers, dairy herds reach critical mass at about 1,000 cows. At that size, they’re able to capture intrinsic benefits, such as milk price and volume premiums, more access to debt, input cost benefits, and are more attractive to available labor. Able to spread capital costs across more cows, larger herds are more likely to adapt costly technology, which in turn leads to even greater efficiencies.
With the benefits of lower average costs and higher incomes, the resulting margins can be reinvested back into the business. Based on operating costs alone, Rabobank researchers showed herds with more than 1,000 cows had 2014 margins that were 32 percent higher than herds with 50 to 100 cows, and 24 percent higher than herds with 100 to 200 cows.
There is still room for smaller herds
Owners of smaller herds need not throw in the towel, the report indicated. Small-herd opportunities include the ability to move more rapidly into niche markets and take advantage of a trend toward locally sourced, farm-branded products gaining popularity in the U.S.
Risks also higher
Big opportunity brings with it bigger risks, Rabobank researchers warned. With large farms likely accounting for the majority of growth in the coming years, U.S. dairy producers and processors alike should be considering the potential impact of this change.
“We expect both challenges and opportunities for producers and processors alike over the next 10 years,” Bailey said. “As large farms increase their market share, they will continue to put pressure on processors to give them a voice in how their milk is used; they will also face headwinds from increased regulations, consumer pushback and the implications of being a highly visible part of the industry. For large farms to appropriately address these challenges will take time and money.”
“We find many of the most motivated and successful dairy owners seek growth as part of their future strategy,” Bailey said. “The dairy market is definitely more volatile than it was 30 years ago, but if consolidation and growth are done properly, the operation is ultimately more profitable for large and efficient producers.” PD