The economics of dairy production

The structure of the dairy farm industry has been changing rapidly in recent years. Milk production has increased, with dramatic increases in milk produced per cow and with a steep decline in number of milk cows and fewer farms with larger herds. The change in dairy farm size has not been uniform across regions. The growth in farm size has occurred much more rapidly in the Pacific and South regions than in the traditional dairy-producing regions (Upper Midwest, Northeast, and Corn Belt). Using USDA data to examine costs and returns over time reveals that the incentives to produce milk have been much greater in the Pacific and South regions in recent years. Although the cash costs are similar across regions, accounting for all costs including unpaid factors such as labor and capital replacement yields a clear advantage for the Pacific region. Dairy farm size and cost of production are jointly determined. The incentive to increase farm size is derived from the economies of size that may be achieved by spreading the capital, labor, and managerial costs across more units of milk production. Empiric evidence from previous studies indicates a declining cost of production over a large range of herd sizes. Even in the presence of a flat average cost curve, the incentive to maximize farm income provides incentive to increase production. Adjustment costs may fix dairy production facilities in their current use. Those firms facing higher adjustment costs because of individual or regional characteristics or because of different timing of growth will be smaller or grow more slowly than if they faced smaller adjustment costs. This situation may explain the continued lag of farm size and technology adoption in the traditional dairy producing regions relative to the Pacific and South regions where the more recent population growth coincided with the presence of modern, large-scale production technologies. Finally, dairy marketing policies almost certainly have affected the structure and regional pattern of dairy farm size and production. For the most part, however, the policy effects have been of indirect nature. The Pacific region has grown (despite having the lowest average price) by taking advantage of economies of size by specializing in milking cows. The United States dairy industry is a technologically advanced, well-managed, and economically important sector of United States agriculture. Future challenges include the ability to remain viable economically while dealing with environmental and social sustainability issues in the form of new constraints from formal policies and from consumer perceptions.