How relentless market pressures put small farms out of business has been illustrated in a report by Rabobank dairy analyst Ben Laine on the changing landscape of US dairy farming.
Now, the growing reliance on large-scale dairy production presents its own risks, says Laine, even if it has improved the competitiveness of the US dairy industry in global commodity markets.
The move to bigger farms has changed the landscape by driving production increases to new states, away from the traditional dairy regions.
According to the USDA’s 2017 Census of Agriculture report, which is published every five years, most US milk cows (55%) reside on farms that milk more than 1,000 cows.
Farms of that size accounted for less than 20% of the US dairy herd 20 years earlier. In 1997, 40% of US milk came from farms with fewer than 100 cows. In 2017, they contributed only about 12%.
The majority of milk (58%) is produced on farms with more than 1,000 cows.
The change came when farms had limited opportunity to improve milk revenues during extended periods of subdued milk prices, and looked to better their cost management in order to improve profit margins.
Expanding has been one of the ways farms have attempted to do that.
Large farms with 2,000 or more cows have reduced costs per hundredweight of milk across the board, compared to farms with 100 to 200 cows, according to USDA cost of production estimates. On a per hundredweight basis, large farms have 12% lower feed costs, 20% lower operating costs, and 45% lower allocated overhead.
The costs of purchased feed and hired labour are higher on large farms, by 48% and 36% respectively.
However, the hired labour on large-scale farms would generally yield higher returns, with those salaries going toward more specialised roles and management.
The big farms’ heavier reliance on purchased feed can reduce profit margin volatility, where feed costs are contracted over long periods.
Meanwhile, the savings on lower hired labour costs for small farms are more than offset by the opportunity cost of their unpaid labour (how much more their “unpaid” family workers could earn from jobs off the farm).
In addition to cost reductions, large farms experience a 17% higher yield of milk per cow.
As output shifts to larger farms, the average cost of production in the US is reduced. Lower prices can be sustained for longer periods, without triggering a reduction in supply. But longer periods of low prices increase pressure on smaller-scale dairy farms.
In traditional dairy regions, like the Upper Midwest and the Northeast, the change has fuelled animosity toward large-scale farms, by those who view them as forcing change on smaller, multi-generation farms.
According to the USDA, there were 189 US dairy farms with over 5,000 cows in 2017. The average herd size among these operations is 7,400 cows, with the largest concentration in California and Idaho, each with 35 dairy farms in this size category. Idaho and Texas both experienced substantial growth in milk production between 2008 and 2018. California experienced significant growth in the decade prior (1998 to 2008) but saw a decline over the most recent ten years, due to water availability concerns and changing labour regulations.
Regions that are more favourable to larger farms, whether due to land values, local regulations, or water availability, will continue to attract dairy operations and will be a determining factor in where processors build manufacturing plants in the years ahead.
But recent activities in the US by animal rights activists have heightened 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,” said Rabobank dairy analyst Ben Laine.
“This could raise opportunities for smaller-scale speciality products to differentiate and obtain premium pricing, but such premiums would be at risk during a downturn in the domestic economy.”