No upper limit?...

For dairy-illiterates like myself, an article in the current issue of Amber Waves, published by the ERS is a quick-and-dirty short course on current business trends in the dairy industry. I was struck by several points.

First, the cost structure seems to have no limit for economies of scale. The popular belief in grain farming is "small operations can be just as efficient as large". But that is clearly not true in dairy.

Small conventional dairies have higher average costs, 2005
	Herd size (milk cows)
Item	1-49	50-99	100-199	200-499	500-999	1,000+
	Dollars per hundredweight of milk produced
Gross value of production	17.87	17.56	17.20	17.25	16.56	16.54
Operating costs	12.30	12.94	11.51	11.31	11.07	9.74
Overhead costs	17.79	12.56	9.31	6.61	5.00	3.85
Unpaid labor	10.60	6.10	3.13	1.34	0.54	0.17
Capital recovery	5.26	4.56	3.89	2.55	2.03	1.66
Total costs	30.09	25.50	20.82	17.92	16.07	13.59
Net returns	-12.22	-7.94	-3.62	-0.67	0.49	2.95
Source: ERS estimates

Moreover, ERS suspects the trend continues beyond the current definition of "big".

On average, large dairy farms exhibit better financial performance than small. But ongoing structural change has led to even larger farms, with 5,000 and 10,000 cows. ERS’s financial database is not comprehensive enough to tell whether farms of that size have financial advantages over farms with 1,000 cows, but other evidence suggests that they might.

Finally, as in the post below, it strikes me that support programs are powerless to overcome the economics of consolidation, since this is all occurring as the government pays billions in dairy subsidies. The House version of the 2007 Farm Bill essentially continues current policy, so dairy producers are implicitly embracing the future suggested by the ERS, it seems.

I will be speaking to the 2007 Elite Producer Conference in November. I am looking forward to understanding how these farmers feel about their future.