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July 23, 2020

Dairy Herd Size Has Tremendous Impact on Costs

Top Story  |   |  By: Jim Dickrell

While not totally surprising, a new study shows almost a two-fold difference in the total economic cost of producing milk between the nation’s smallest and largest dairy farms.

In the United States Department of Agriculture’s report to Congress, Consolidation in U.S. Dairy Farming, dairy farms with fewer than 50 cows had a total economic cost $33.54/cwt while herds of 2,500 cows had a cost of $17.54.

The study, produced by USDA’s Economic Research Service (ERS), used data from 2016. Only herds of a thousand or more cows, on average, saw a net return over total costs that year. Keep in mind, though, that 2016 had the lowest milk price of the decade and the lowest since 2009.

Also note that the study includes all economic costs. Note the authors: “For example, the [total cost]  measure accounts for opportunity costs of farm labor and of home-grown feed (that is, what the farmer could have earned from working off the farm or from selling the feed). It also accounts for the costs of livestock and physical capital to the farm.”

On the return side, ERS accounts for milk revenue, cull cows, milk co-op dividends and even fertilizer value of manure. As such, smaller farms tend to have higher gross returns. For example, herds with 50 to 99 cows had gross returns averaging $18.53 in 2016 compared to $17.44 for herds with 2,500 cows or more.

There is not a huge gap in operating costs between small and large dairy farms. And total feed costs were not widely different: $9.95/cwt for herds with 50 to 99 cows compared to $9.20/cwt for herds with 2,500 cows or more.

The biggest difference came in total labor costs. Small farms had a labor cost of $8.14/cwt, of which $7.53 was unpaid labor. Large farms had a labor cost of $1.85/cwt, but only 10₵ of that was unpaid labor. “The true cost of unpaid labor to the farm operator is therefore the opportunity cost—what farmers and their families could have earned by working elsewhere instead of on the dairy enterprise,” say ERS economists.

The economists also note that some farms in all classes sizes are profitable. “Although herd size is a powerful determinant of costs and returns, there is a wide variation of costs and net returns among farms…. Weather, location, physical infrastructure and management can each affect the financial performance of a dairy farm,” they say.

Still, herds with more than 2,000 cows can be highly competitive and therefore profitable even in times of lower milk prices. The lowest cost producers with 2,000 or more had an average total cost of $15.02/cwt.

All of this suggests herd consolidation will continue. The average rate of decline in dairy farm numbers has been about 4% over the past 40 years. If that trend continues, expect licensed farm numbers to decline to 31,500 by the end of 2021, down from just over 34,000 at the end of 2019.

To read the full report, click here.