Economies Of Size In Producing Milk And U.S. Dairy Policy: A Key Relationship

 

 

 

Cotton and dairy have dominated early discussions of the next U.S. farm bill, often involving pointed debate. Seven farmdoc daily articles have examined cotton (see May 18, 2017 article and articles cited therein). This article examines dairy. The underlying thesis is that the pronounced economies of size in producing milk are important to understanding the dairy policy debate.

 

Economies of size: Using data as of May 24, 2017 from USDA (U.S. Department of Agriculture), Economic Research Service; total cost of producing milk is $26 per hundredweight ($27/cwt.) or 55% lower for herds of 1,000 or more cows than for herds of less than 50 cows and decline steadily across the various herd sizes (see Figure 1 and data note 1). Non-feed costs explain 86% of the cost advantage of the largest vs. smallest dairy farms. Pronounced economies of size remain even if opportunity cost of unpaid labor and land is removed from non-feed cost. To put these economies of size in perspective, the 2012 Census of Agriculture reports that 44% of dairy cows are on farms with herds of 1,000+ while 54% of the 64,098 U.S. dairy farms have less than 50 cows (see Figure 2 and data note 2). Last, economies of size in producing milk are believed to be on the high side among ag commodities.

 

 

 

Net return: Average net return above all cost was negative for all dairy farm size categories over 2012-16 (see Figure 3 and data note 3). However, due to the economies of size, loss declines notably as size increases. Moreover, a category of larger dairy farms may have covered all costs since cost economies continue to be observed even for the largest currently reported category.