Scale vital to US dairy industry

Larger dairy operations are likely to survive price downturns and save on operating costs according to a new Rabobank report.

The US dairy farming industry is consolidating ever faster as producers struggle to remain profitable in an increasingly volatile price market, according to a new Rabobank report.

The number of US dairy operations fell by a compound annual growth rate (CAGR) of 4.7 percent between 1970 and 2005, but 5.9 percent from 2005 to 2015, spurred by a 2009 drop in prices, said the paper Economies of Scale Driving Consolidation in US Dairy.

The report adds that it is larger operations “who tend to have the strategy in place and finances required to withstand market downturns”, as well as the ability to command higher prices from milk processors and make further use of economies of scale.

Operating costs at large-scale dairies are at least 20 percent lower than for most small farms. Being able to access credit more easily, buy equipment in bulk and employ fewer staff per cow milked can all save costs for large operators. According to the United States Department for Agriculture, the cost of dairy farming equipment can be 150 percent higher than other agri sectors, but costs decrease by at least 21 percent when a dairy operation has over 1,000 cattle. Costs of labour per cow also decrease by 30 percent, according to their data.

“Larger farms tend to be the better option for investors, as they historically have a higher return on investment,” says the report.

“This trend has occurred across all ownership structures: family owned, outside investors, or from processors moving upstream.”

Premium prices can be made from small-scale local production where producers can tap into a local retail market, as well as in other areas such as organic production, says the report, but for the most part it is large-scale farming that can operate profitably long term.

The report concludes that the trend towards large-scale dairy farms will “continue for years to come”, adding that the same situation is happening in other countries around.