Dairy Production: The Challenge Ahead

 

Consumers are oftentimes surprised by how much milk prices have gone up in recent years. It is not unusual to hear comments making reference to how well dairy farmers are likely doing judging by how much we have to pay for the gallon of milk at the store. Figure 1 shows retail milk prices per gallon throughout the last 15 years. When the peaks and valleys in prices are cancelled out by using an overall trendline (dotted) milk prices increased roughly from $2.9 in 2001 to $3.6 in 2015 or an almost 24% in 15 years.

 

Farm milk prices in South Dakota, also increased during the same time period showing high variability (Figure 2). Between 2001 and 2015 prices paid for milk went from a base price of $15 to this years’ $16.8. When highs and lows are factored in the net milk farm price increased 55% overall in 15 years.

 

 

Although the difference between the increase in price of milk at the store and that received by the farmer seems striking, it does not tell the whole story. To be able to assess if dairy farmers have lost purchasing power during the last 15 years one has to take a look at their cost of production.

 

The cost of producing milk varies depending on several factors such as size of the farm and the efficiency with which it is operated. Smaller farms usually have larger costs of production per 100 pounds of milk compared to larger operations. These is usually the result of efficiencies of scale in larger operations which gives them more leverage when purchasing inputs. The greatest single item of the cost of production is feed. Depending on the individual farm feed costs per 100 pounds of milk can range between 50 and 70% of the operating costs. Bear in mind these are operating costs (what is needed daily to produce milk) and not total costs. Total costs are much higher since they include other items such as opportunity cost of unpaid labor, capital recovery of equipment, opportunity cost of land (rental rates), taxes and insurance, etc. Figure 3 shows the price of a 16% crude protein dairy ration in South Dakota.