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Profits, Costs, and the Changing Structure of Dairy Farming
By James M. MacDonald, Erik J. O’Donoghue, William D. McBride, Richard F. Nehring, Carmen L. Sandretto, and Roberto Mosheim
Economic Research Report No. (ERR-47) 41 pp, September 2007
Dairy farming in the United States is undergoing dramatic changes, driven by both supply and
demand factors. Consumption is shifting from fluid milk, generally produced for local markets,
toward manufactured products, such as cheese, and dairy-based ingredients produced for national
and global markets. Innovations in breeding and feeding systems have led to large increases in
the amount of milk that a cow produces. Milk production is shifting toward Western States like
California, Idaho, and New Mexico, and to much larger farms. The number of dairy farms with
fewer than 200 cows is shrinking, while the number of very large operations, with 2,000 or more
cows doubled between 2000 and 2006.
What Is the Issue?
Large dairy farms first emerged in the Western States, but are now appearing in traditional dairy
States as well. This report documents shifts in the location and size of dairy farms, and also takes
a look at what those changes may mean. If the shift in farm size reflects economies of scale in
dairy production—that is, lower costs on larger farms—then increasing farm size also enables
milk to be produced with fewer resources, thereby reducing prices to consumers. However, the
shifts also concentrate animal wastes from manure onto a much smaller land base and may
exacerbate pollution associated with concentrated livestock production.
What Did the Study Find?
Large dairy enterprises generate returns that, on average, well exceed their full costs. At the same
time, smaller dairy farms mostly incur economic losses—the value of their production does not
exceed full costs, including the costs of capital and time committed by their owners. Large farms
incur much lower costs, on average, than smaller farms, and these advantages accrue across a
wide range of sizes. Costs per hundredweight of milk produced fall by nearly half as herd size
increases from fewer than 50 head to 500 head, and continue to fall, but less sharply, at even
larger herd sizes.
Dairy investment decisions are consistent with the financial evidence. Farms with fewer than 200
cows accounted for over two-thirds of the nationwide inventory of cows in 1992. By 2006, their
share of the nationwide inventory had dropped to 38 percent. Meanwhile, farms with at least
1,000 head of dairy cows are growing more prevalent. They accounted for less than 10 percent of
inventory in 1992 but more than a third by 2006. Structural shifts are evident among the largest
farms, too. During the 1990s, farms with 1,000-3,000 head were adding the most capacity, but
capacity additions have since shifted to even larger farms, with 3,000-10,000 head.
Some small dairy farms are profitable, and others continue to earn enough to remain in operation. As a result, structural
change is likely for the foreseeable future, with a continuing decline, rather than a sudden disappearance, of
small and midsize dairy operations. The ongoing structural changes will continue to place downward pressure on
milk prices.
Excess nutrient applications, which arise from animal manure and can cause water and air pollution, appear to be
intensified on larger operations. But their production cost advantages still outweigh the likely additional costs of
manure treatment and removal, and it is unlikely that manure management regulations will reverse the ongoing patterns
of structural change.
How Was the Study Conducted?
Confidential farm-level records from successive censuses of agriculture (1992, 1997, and 2002) were used to depict
changes in the location and size distribution of dairy farms. More aggregated public information on the size distribution
of dairy farms is drawn from annual dairy surveys carried out by USDA’s National Agricultural Statistics Service
(NASS).
Additional farm-level data come from the annual Agricultural Resource Management Survey (ARMS), administered
jointly by the Economic Research Service (ERS) and NASS. Dairy farms in major milk-production States were targeted
with commodity-specific ARMS versions covering operations during 2000 and 2005. These surveys provide detailed
information for analyses of costs, manure management practices, and operator expectations for survival. Data from
successive years of version 1 of the ARMS are used to develop measures of potential excess nutrient production on
dairy operations.
This study focuses on conventional dairy production, and does not assess costs and farm sizes among organic dairy
operations, a rapidly growing but still small segment of the industry. The 2005 ARMS dairy version contains comprehensive
information on a sample of organic producers, and other research projects are analyzing that data.
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