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Moo-titude of changes: Dairy industry evolves

If you know anything about the U.S. dairy industry, you know that dairy farms have been getting bigger for decades. A new report from the U.S. Department of Agriculture examine that growth, as well as changes in dairy product markets, growing pri...

Dairy cow
Agweek file photo.

If you know anything about the U.S. dairy industry, you know that dairy farms have been getting bigger for decades. A new report from the U.S. Department of Agriculture examine that growth, as well as changes in dairy product markets, growing price volatility, and dairy policy.

USDA’s Economic Research Service newly released Changing Structure, Financial Risks, and Government Policy for the U.S. Dairy Industry finds, among other things, that milk use is switching from beverages toward cheese and other dairy products used in foodservice and food manufacturing. It also finds that dairy exports have greater prominence, as well.

Here are a few of the report’s key conclusions:

Milk production continues to shift to larger farms. In 1987, after decades of consolidation, half of all dairy cows were on farms with 80 or fewer cows. By 2012, that midpoint herd size was 900 cows.

Costs are a driving force behind structural change. The largest farms earn substantially higher net returns per hundredweight of milk produced, and they have strong incentives to expand. Average milk costs of production fall sharply as herd sizes increase, and the largest farms- those with 2,000 or more head-realize costs, per hundredweight of production, that are 16 percent below farms with 1,000 to 1,999 head and 24 percent below farms with 500 to 999 head.

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Changes in the size structure of dairy farms reduced national-average milk production costs by nearly 19 percent between 1998 and 2012. In turn, lower milk production costs reduced milk prices compared with what they would have been without structural change.

The U.S. has become a major exporter of dairy products, including nonfat dry milk, skim milk powder, cheese, butter, and whey. Total U.S. dairy exports were $7.2 billion in 2014, up from $1.0 billion in 2003. Expanded exports follow from growing international demand for dairy products (particularly from Asia and Latin America), improvements in U.S. dairy productivity, and changes in dairy and trade policies.

Dairy farmers face substantial financial risks arising from wide fluctuations in milk and feed prices. Farm milk prices have been more volatile since 1995, and the volatility of feed prices increased sharply after 2005. Specific features of dairy markets make them prone to price volatility. Milk supply varies little in response to price changes. Moreover, dairy product demand also responds only weakly to price changes. Consequently, shifts in the demand for dairy products require substantial changes in price to reset the supply-demand balance for farm milk.

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