Why bigger isn’t always better for the American dairy sector

CONSOLIDATION of farms and more cows per farm in the United States has been going on for decades. But the trend toward fewer, bigger farms is now fundamentally changing market dynamics.

“The new reality is a milk supply that is less responsive to short-term price shocks since that supply is coming mostly from large operations that can withstand lower prices,” says Ben Laine, senior dairy economist with CoBank’s Knowledge Exchange Division.

“Smaller dairy operations are finding it nearly impossible to compete in the commodity milk market against their larger counterparts, so they are forced to either leave the business or find a higher value niche market.”

Laine says the consolidation effect is self-perpetuating.

Larger dairies are best positioned to keep producing milk during price downturns, which in turn keeps prices low and pressures higher-cost, smaller dairies.

Because the industry doesn’t contract milk supply by milking fewer cows, the industry then becomes more demand-dependent. And that’s exactly what is happening in the current price cycle. Milk prices were poised to increase in the second half of 2018, but retaliatory tariffs from Mexico and China squelched demand for US dairy products.

Consolidation

The extent of dairy consolidation has been known for some time. When the last Ag Census data was released in 2012, large farms, defined as those having 1,000 cows or more, accounted for 47pc of the cows in the country.

But because these operations were getting more milk per cow, they were producing more than 50pc of the milk.

Back then, those large herds were represented by just 1,750 dairies (3pc) out of the 60,000 dairy farms then in operation.

The 2017 Ag Census numbers will be released in February, and the trend toward even more consolidation is expected to continue. Such consolidation carries its own risks, says Laine.

“The largest risk with a densely concentrated milk supply is disease or natural disaster,” he says. “A disease outbreak or natural disaster could quickly impact a larger share of dairy operations when it is concentrated in fewer farms.”

Smaller dairy farms, if they wish to compete, will need to look to more specialty or niche markets, be they local, organic or grazing in order to market premium products, Laine says.

Such a move creates its own challenges and risks. “But for smaller farms, not doing anything is potentially the bigger risk,” he says. © Bloomberg