Will There Be Any Private Dairies Left?

Published on Tue, 12/29/2009 - 3:01pm

The U.S. dairy industry has been steadily consolidating over the past thirty years, and analysts with USDA’s Economic Research Service say a big part of the reason has been what has been until recently the low cost of feed.

In the December, 2009 edition of ERS’ Amber Waves, USDA economist Roberto Mosheim noted the average herd size of U.S. dairy farms has increased from 29 to 139 head over the past three decades, and claimed decreases in average production costs in the U.S. dairy industry had driven the trend, which he projected to continue. Mosheim said for farms of all sizes, the marginal cost—how much it costs to increase output with the same facilities—is less than the average cost per unit of production, although the largest U.S. dairy farms are almost to the point where they can no longer achieve efficiencies of scale through expansion. At the same time, he said, “Many farms are not taking advantage of the incentives to expand. Some owners of small dairy operations may be unable to afford to hire a professional manager or outsource managerial responsibilities to family members and perform their own labor…Owners of small operations may also be hindered by the costs necessary to adopt new technologies that could increase their efficiency and help lower average production costs.”
A similar report written in 2007 by ERS economists James MacDonald, William McBride and Erik O’Donoghue found, while 100 cows was considered a “large” dairy farm in the 1970s, still small enough so a family could provide all the labor and grow all the feed, the number of operations of that size is in sharp decline. In 1992, the Census of Agriculture identified 564 dairy herds of 1,000 head or more; they accounted for 11% of U.S. dairy production. The 2007 Census found 1,582 such farms; their share of U.S. dairy output is over 41%.
“Overhead costs comprise the major cost advantage held by larger dairy enterprises,” the three economists wrote, “as these operations are able to use capital and labor far more intensively than smaller operations. Although most operators and their families do not pay themselves a cash wage for their labor, their labor still has an opportunity cost—they forego other money-earning activities when they work on the farm.” Although smaller dairy farms actually get a higher price on average for their milk—largely because the parts of the country where milk prices are higher, like the Northeast, are areas where smaller farms still predominate—that wasn’t enough to overcome those cost of production disadvantages; using 2005 data, MacDonald, McBride and O’Donoghue said on average, dairy enterprises with 100-499 cows were actually losing money.
But smaller farms have their advantages, and the economists said many of them would remain in business. Some of them, though not a majority, were operating in the black in 2005. And for others, profitability is not the driving factor. “Operators of existing farms have already committed their equipment and structures,” the economists said, “and that capital may have a very low salvage value. Capital recovery costs may be irrelevant to their decision to continue operating; what matters is not whether the value of production exceeds total costs, but whether it exceeds all costs except for capital recovery.” A majority of the 100-499 head dairies—and even a quarter of the smaller ones—met that standard.
Another factor, noted by the economists and others, has been the helping hand of government. On the federal side, Congress has preserved long beyond its original expiration date the Milk Income Loss Contract program, which pays dairy producers when prices fall below a national benchmark—but only up to 2.4 million lbs. of annual production, a fact that’s riled the big operations of the West and their elected representatives. This fall, Congress passed an emergency $350 million assistance package for dairymen, but not before Sen. Dianne Feinstein (D-Cal.) placed a hold on the bill for fear the aid would be distributed as an additional MILC payment. As of this writing, USDA was still working out how the money would be used. MILC “gives a little advantage to the smaller producer,” says dairyman Woody Bryant. “There may be some changes to that later on.”
Bryant is a small dairy farmer who’s had big responsibilities. The Austin, Ark. producer, who now milks about 84 head, is a past chairman of the National Dairy Board, the 36-member body that control one-third of the $240 million producer-funded promotion and research fund. He’s also a regional board member of leading dairy cooperative DFA and, for the last three years, he’s been chairman of a task force named by his home state’s governor Mike Beebe and charged with finding ways to keep Arkansas’ dairy industry from fading completely away.
For the time being, Bryant thinks they’ve accomplished that goal. Last year, the Arkansas legislature approved a $4.1 million, two-year program to compensate producers when the price of milk is less than two-thirds to cost of production; payments started in August, and Bryant says so far it’s going well. “We haven’t had any more loss of dairy farms,” he says, “other than just a few right at the beginning of the program that were probably going, anyway. Production’s down just slightly in the third quarter, but there’s a lot less decrease than we’ve had in many years now, almost double digits every other quarter.”
The Arkansas Department of Agriculture felt the need to perform triage at the outset. The program limits payments to no more than $5/cwt of a producer’s output in one month, and no more than $2/cwt for a full year’s average; with milk prices at two-decade lows and feed prices still relatively high, the $5 payments started right away. Bryant says, “We felt we had to front load it so we could get them out of the financial stress that they were in and, as they say, let them live to fight another day. Because if we didn’t do something, they weren’t going to live.”
It would seem the factor the USDA economists said was driving dairy expansion—low production costs—is not, for the time being, present; grain prices reached record levels in 2008 and have remained relatively high most of 2009. Bryant says producers of all sizes have felt the pain, but acknowledges, “I would think if you’re relatively small and have very little debt, you were positioned to get through this particular cycle that we’ve been through. And you know, if they have the manpower, they have the help and the facilities, I think they’ll continue to survive. They always have.”
But Bryant says he’s survived the last couple of years by not spending anything. “I have not bought any new equipment; I have not made what I would think are normal repairs like buildings and fences. I just cut my expenses to the bare bone; I keep ‘em fed and keep ‘em milked.” He’s also reduced needed fertilizer and lime applications to his forages…as he did two years ago, when fertilizer prices soared to all-time highs. “Those things that will catch up with me,” he admits. “Soil fertility really goes back to total production, because of what’s in your grains and your hay. So I pay a price for that, but that’s what kept me going.”
Are small farmers going to have to get bigger to stay in business? “That’s been the talk all along,” he says, “but…I think there will always be a provision there for small family farms if they’re willing to work it themselves. If they’re not looking to make a salary like they could now, and they’re looking for a way of life, yes, there’s going to be a place there for them.” Some may also move into niche markets like further processed dairy products or organic milk, but Bryant cautions that’s where the lack of available labor on a small, family farm becomes an impediment. “Their time will be occupied with the manufacturing part of it and then the retail part of it, versus the production side of it.”
Bryant, 63, says many of the improvements on his farm he’s bypassed due to the economy won’t ever get done. “I don’t have anyone else in my family that has an interest in going forward with it, so obviously I’ve got to look at that,” he says. “I’m not looking for any building that’s going to last another 20 years.” And he realizes he’s not alone, and the advancing age of many small dairy operators is the true threat to their continued existence. “As we go by the wayside,” he says, there won’t be many other younger ones that stay small, like we are. They will opt for the bigger operations, if they can get funding for it.”