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It’s long been assumed that large dairies enjoy economies of scale that allow them to have lower costs, be both more competitive and more profitable than their smaller neighbors who milk fewer cows and farm fewer acres.

But analysis of farm financial records of dairies which participate in the University of Minnesota’s (U of M) Center for Farm Financial Management show that’s not always true, says Jim Salfer, a U of M Extension dairy specialist.

“Herds over 500 cows on average tend to be more profitable, but profit is much more variable on large farms,” he says. Averages of farm financial records from 2015 through 2018 show that large farms can be in the lowest 20% of profitability and in the top 20%.

“I think some of these farms just can’t handle expansion very well or are just too far in debt,” Salfer says.

Still, on average, large farms show the most profit per cow at about $275 per cow. Farms with less than 200 cows have profits of about $160 per cow. Herds with 200 to 500 cows are seeing profits of just $84 per cow.

“The challenging size are the 200- to 500-cow farms,” he says. “They tend to be too big to be primarily family managed and too small to take real advantage of the scale of size.”

Production per cow is also not necessarily a determining factor, either. Most herds that participate in the program have production per cow that exceeds state and national averages, and 80% of them have herd averages that exceed 24,000 lb/cow.

“I’m not saying high production is not important [to profitability]. Rather, the data show all farms are becoming high producing,” Salfer says. In other words, high production in and of itself does not lead to profit, he says.

High-profit farms, however, have five characteristics:

  • High-profit herds sell more milk per worker. High profit farms sold about 1.85 million pounds of milk per worker. Low profit farms sold less than 1.5 million pounds per worker.
  • High-profit farms have higher gross margin. The highest profit farms average $4,416 of gross margin per cow, driven largely by high milk income and lower net replacement costs.
  • High-profit farms produce higher value milk. From 2015 through 2018, the highest profit farms averaged $17.66/cwt while the lowest profit farms averaged $1/cwt less. Since large farms were in both categories, volume premiums weren’t the likely driver of these price difference. Milk components and milk quality likely were.
  • High-profit farms have lower feed costs per cow. The high profit farms averaged $1,916 per cow in feed costs while the low profit farms’ average feed costs were nearly $200/cow higher. High profit farms tend to have higher forage quality and lower supplemental feed costs.
  • High-profit farms do a better job of controlling all costs. High profit farms had $14.36/cwt in direct and overhead costs. Low profit farms had costs that were a third higher at $19.23/cwt.

These trends and differences demonstrate the dairy industry is ever-evolving, says Salfer. “In the 1960s, if you simply worked hard you succeeded. In the 1980s, the focus was on forage quality. In the 1990s, it was milk quality. Then, in the 2000s it was cow comfort, and in the last decade it has been reproduction.

“What will it be in the future? Will it be driven by efficiencies? Both labor and moving toward a knowledge and technology-based economy?” he asks. “Business acumen and efficient asset use will also be important.”

The critical thing is to develop a strategy for your farm moving forward. “Staying the same is likely not an option,” Salfer says.

One option is scale-adapted dairies, with herd sizes in excess of 1,200 cows. “The intention here is to compete by economies of scale and volume in the face of tightening margins,” he says.

A second option is the more traditional dairy of less than 600 cows, with most smaller than 200. “The intention here is to compete from an established base of facilities and equity,” Salfer says. To do so, you must be good at asset use and need to have high margins per cow.

The third option is a niche-based dairy. “The intention is to compete by significantly expanding the margin between income and expenses,” he says. Options include grazing, on-farm processing, organic or specialty markets such as selling genetics.

“Reprinted by permission of Farm Journal media, July 2019”

This story originally appeared online on the Farm Journal's Milk webpage.

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