Economies of Scale Driving Consolidation in US Dairy
Dairy farming in the US has historically been a smallholder pursuit dominated by small, family-run farms. Over the last few decades, we have seen a transition in the industry and the rise of large farms. This rise has brought with it a great deal of positive change, including reduced environmental impact through efficiency of production.
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The rise of large farms has picked up speed over the last decade, as market volatility and industry changes have made dairy farming a more challenging but—if done right—more profitable practice, particularly for well-managed, large and efficient producers. The increasing rate of change has boosted consolidation of US milk production, putting increasing influence in the hands of large farms and sending ripples throughout the US dairy industry. With large farms likely accounting for the majority of growth in the coming years, US dairy producers and processors alike should be considering the potential impact of this change.
Large farms increasingly make ‘cents’
Data going back to 1970 indicates that the US dairy industry has seen a steady increase in the average size of dairy farms, as larger operations benefit from economies of scale. According to USDA data, smaller farms have higher costs per cow, and this can hurt profitability. As a result, investments have been concentrated in larger dairies, leading to higher growth rates and further concentration of US milk production. The total number of US dairy operations has declined by 90 percent since 1970, while the milk produced per operation has increased by 1,800 percent. Over the last decade, the pace of this trend has picked up speed, as price volatility, higher average prices, and industry changes have made dairy farming more challenging, but also more profitable in some cases.
…and will continue to do so in the future
According to Rabobank Dairy Senior Analyst Thomas Bailey: “The long-standing trend of consolidating milk production in the US, which is giving rise to large farms, will continue for years to come. This is because the profitability of larger dairy farms is driven by economies of scale, which are intrinsic benefits enjoyed by larger dairies and this will not vanish anytime soon.” The benefits of scale tend to outweigh associated risks, such as public scrutiny. As such, most motivated and successful dairy owners will seek growth as part of their future strategy. “The shorter-term drivers of volatility and higher average milk prices that will encourage investments and growth should also remain consistent, once we get through the current period of lower prices. Together, these dynamics will continue to drive consolidation,” says Bailey.