Economies of scale driving consolidation in U.S. dairy industryEconomies of scale driving consolidation in U.S. dairy industry
Investments have been concentrated in larger dairies, leading to higher growth rates.
February 25, 2016
Dairy farming in the U.S. has historically been a smallholder pursuit dominated by small, family-run farms, but over the last few decades, there has been a transition in the industry with the rise of large farms, according to Rabobank senior dairy analyst Thomas Bailey. This rise, he said, has brought with it a great deal of positive change, including reduced environmental impact through efficiency of production.
“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,” Bailey said.
Total number of U.S. dairy operations has declined by 90% since 1970, while milk produced per operation has increased by 1,800%.
This increasing rate of change has boosted consolidation of U.S. milk production, putting increasing influence in the hands of large farms and sending ripples throughout the U.S. dairy industry, he explained.
“With large farms likely accounting for the majority of growth in the coming years, U.S. dairy producers and processors alike should be considering the potential impact of this change,” Bailey said.
Large farms increasingly make ‘cents’
According to Bailey, data going back to 1970 indicate that the U.S. dairy industry has seen a steady increase in the average size of dairy farms, as larger operations benefit from economies of scale.
U.S. Department of Agriculture data show that smaller farms have higher costs per cow, which Bailey said can hurt profitability. As a result, investments have been concentrated in larger dairies, leading to higher growth rates and further concentration of U.S. milk production. In fact, he noted that the total number of U.S. dairy operations has declined by 90% since 1970, while the milk produced per operation has increased by 1,800%.
“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,” Bailey said, adding that this will continue to hold true in the future.
“The long-standing trend of consolidating milk production in the U.S., 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,” Bailey said.
He pointed out that 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, he said.
“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,” Bailey concluded.
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