The Economic Competitiveness of Dairy Systems Across The U. S. A. Thomas S. Kriegl University of Wisconsin Center for Dairy Profitability University of.

The Economic Competitiveness of Dairy Systems Across The U. S. A. Thomas S. Kriegl University of Wisconsin Center for Dairy Profitability University of Wisconsin-Extension Madison, Wisconsin See http://cdp.wisc.edu for more information National Farm Business Management Conference Overland Park, Kansas, June 9 - 13, 2013 _______________________________________________

Perception that small dairy systems are less economically efficient Lack economies of scale are high cost producers

The Great Lakes Grazing Network (GLGN) Grazing Dairy Farms Financial Summary project initially sponsored by USDA IFAFS grant project #00-52501-9708. revealed relatively consistent differences in financial performance between Great Lakes states and between dairy systems in the northeast quarter of the United States. Showed different cost levels than USDA cost of production estimates _______________________________________________

1.Do the state-to-state differences exist in the rest of the country? 2.Are small dairy systems high cost producers?

Four main dairy systems represented in this comparison are small confinement large confinement management intensive rotational grazing organic. _______________________________________________

Other Data From Frazer LLP Genske, Mulder & co. LLP Cornell University Michigan State University University of Minnesota Finbin University of Maryland---Johnson University of Vermont and University of Maine University of Florida Dairy Business Analysis Program Virginia Tech University---Whittle and Groover

_______________________________________________ Being the low cost producer is the ultimate economic advantage. While achieving economies of scale or being the low cost producer is a tremendous economic advantage, it isn’t the only economic advantage that a business may have. In 2009, large dairy farms experienced a different “economic” disadvantage---the greater willingness of the owner/operator of a small farm to reduce their “wages” more than employees may be willing to accept.

_______________________________________________ Further Discussion--- Economies of Scale Larger business may spread fixed costs over more production units and reduce the total cost of production per unit as the production of units increases. If properly designed, large operation used at full capacity has lower costs than the properly designed smaller facility operated at full capacity, then this would demonstrate economies of scale

_______________________________________________ Several measures should be examined No single measure tells the whole story Net farm income from operations (NFIFO) as a percent of farm revenue based on accrual adjusted income and expenses. A similar measure is used in the non-agricultural business world Driven mainly by large variations in the milk price received and in the pounds of milk sold per cow Multiple year simple averages were calculated for all systems All of the data has been compared in the same period

_______________________________________________ Large confinement systems rely much more on hired labor. NFIFO/$ revenue and NFIFO/$ revenue would be if all labor was unpaid. Most dairy systems retain a very similar ranking from one to other measure.

_______________________________________________ This comparison reveals several major observations: 1.It is unlikely that any dairy system in any state will always be the low cost or most economically competitive producer under all circumstances. 2.The ability to stay in business can also be influenced by factors not readily identified as economic. This was observed in 2009. 3.This data indicates that the economies of scale (lowest cost of production per unit) occur at a much smaller size than expected (somewhat less than 100 cows per farm).

_______________________________________________ 4.There were large consistent differences in NFIFO/$ revenue between many states and systems. 5.Graziers have typically attained more NFIFO/$ revenue than other dairy systems in their states. 6.Wisconsin dairy systems have often attained more NFIFO/$ revenue than similar dairy systems in other states. Major Observations (cont.)

_______________________________________________ 7.Small dairy systems have typically attained more NFIFO/$ revenue than large dairy systems in the same state. 8.The largest farms tend to generate more dollars of total NFIFO per farm and per owner compared to the smallest farms. Major Observations (cont.)

_______________________________________________ 9.The ranking by state is very different from the official USDA cost of production estimate ranking which relies very heavily on opportunity cost. 10. NFIFO per owner has probably driven expansion more than NFIFO per unit. 11. Data suggests contrary to conventional economic theory where NFIFO margins are lower, farms are larger. Major Observations (cont.)

_______________________________________________ 12.The half decade of 2006-2010 appeared to be harsher to confinement, larger herds and herds outside of the midwest than the half decade of 2001-2005. ETHANOL EFFECT??? 13.The half decade of 2006-2010 appeared to be kinder to grazing, organic and smaller herds, (especially organic than the half decade of 2001-2005). 14.Organic price premiums offset higher costs Major Observations (cont.)

Multiple Year Snapshot of Financial Performance of Several U.S. Dairy Systems from 2001-2005 Sorted by NFIFO as a % of Revenue if all labor were unpaid Dairy System Approximate Herd Size # of Years in AverageTime Period NFIFO as a % of Revenue NFIFO as a % of Revenue if all Labor were Unpaid Wisconsin Graziers61-6952001-200524.98%28.75% Ontario Graziers45-5552000-200422.56%28.20% Wisconsin Confinement 51-75 cows/herd62-6352001-200517.72%26.72% Wisconsin Confinement 151-250 cows/herd188-20052001-200514.95%26.54% Wisconsin Confinement 101-150 cows/herd126-12752001-200515.73%26.35% Wisconsin Confinement 76-100 cows/herd87-8852001-200516.43%25.87% Wisconsin Confinement < 50 cows/herd41-4252001-200518.79%25.83% Wisconsin Confinement All Sizes97-13452001-200514.25%25.67% New York Graziers79-9552001-200516.82%25.45% Minnesota Graziers with Replacements, no Organic46-6652001-200520.43%24.82% New York Confinement224-34052001-200510.05%24.77% Wisconsin Confinement >250 cows/herd441-55552001-200510.97%24.70% Minnesota Confinement with Replacements, no graze, no organic96-11852001-200516.16%24.33% Wisconsin Organic47-7452001-2005 19.93%24.24% Michigan Graziers99-11852000-200415.73%24.09% Maryland Graziers10052001-200521.72%22.48% California, Bakersfield to Fresno (GM) Large Confinement1688-253852001-200513.07%21.15% California, Southern (M) Large Confinement1316-162852001-20058.58%20.47% New Mexico (GM) Large Confinement1878-207552001-20059.68%20.06% Washington (GM) Large Confinement1523-183152001-200510.45%19.96% Florida/Georgia SE USA (DBAP)977-131652000-20044.24%19.74% California San Joaquin Valley (M) Large Confinement2328-272452001-20059.56%18.90% California, North of Fresno (GM) Large Confinement1194-131852001-20059.52%18.75% Idaho (GM) Large Confinement1612-227952001-20057.76%18.60% California, South of Bakersfield (GM) Large Confinement938-110252001-20056.85%16.95% Maryland Confinement10852001-200512.90%16.89% Arizona (GM) Large Confinement1586-201852001-20055.19%14.82% Central Texas (GM) Large Confinement814-113052001-20058.47%13.65% Virginia Confinement cash basis122-15552001-20055.61%12.92%

Multiple Year Snapshot of Financial Performance of Several U.S. Dairy Systems from 2006-2010 Sorted by NFIFO as a % of Revenue if all labor were unpaid Dairy System Approximate Herd Size # of Years in AverageTime Period NFIFO as a % of Revenue NFIFO as a % of Revenue if all Labor were Unpaid Wisconsin Graziers58-6752006-201025.90%29.35% Wisconsin Organic70-7552006-201022.22%27.57% Vermont Organic60-6752006-201019.84%27.51% Minnesota Organic with Replacements69-9552006-201019.40%27.36% New York Graziers101-13452006-201019.15%26.84% Minnesota Graziers with Replacements plus Organic65-10152006-201018.36%25.00% Wisconsin Confinement 101-150 cows/herd126-12752006-201014.50%24.88% Wisconsin Confinement 76-100 cows/herd87-8852006-201015.09%24.51% Wisconsin Confinement 51-75 cows/herd61-6252006-201015.95%24.48% Wisconsin Confinement < 50 cows/herd41-4252006-201016.68%23.96% New York Confinement350-48952006-20109.89%23.58% Wisconsin Confinement 151-250 cows/herd192-19852006-201012.31%23.33% Wisconsin Confinement All Sizes139-17652006-201010.61%21.80% Minnesota Graziers with Replacements, no Organic69-8732006-2010*18.75%20.72% Wisconsin Confinement >250 cows/herd555-64452006-20106.94%19.68% Minnesota Confinement with Replacements, no graze, no organic132-15652006-20107.84%17.45% Washington (GM) Large Confinement1682-236352006-20108.41%17.05% New Mexico (GM) Large Confinement2226-316452006-20102.17%12.37% California, Bakersfield to Fresno (GM) Large Confinement2578-270852006-20103.20%11.49% California, North of Fresno (GM) Large Confinement1427-177552006-20101.63%10.71% Central Texas (GM) Large Confinement1305-146952006-20101.44%9.97% High Plains (GM) Large Confinement1837-208342007-20100.03%9.62% Panhandle (Clovis, NM to Amarillo, TX to Lubbock, TX), (M)2268-391852006-2010-0.40%9.41% Kern County, California (M)2845-336552006-20100.19%8.99% Arizona (GM) Large Confinement2370-318552006-2010-0.21%8.59% California, South of Bakersfield (GM) Large Confinement1168-148852006-2010-2.01%7.85% Idaho (GM) Large Confinement1709-200252006-2010-1.23%7.46% California, Southern (M) Large Confinement1203-135952006-2010-4.57%7.31% California San Joaquin Valley (M) Large Confinement2720-332752006-2010-3.29%6.50%

_______________________________________________ There are some public policy implications from the above observations. Some government policies encourage increased dairy farm size on presumption of economies of scale (lower cost of production). Larger farms may not be more economically efficient than smaller farms. Future public policy decisions should consider this information along with environmental and social factors associated with each system.

The Economic Competitiveness of Dairy Systems Across The U. S. A. Thomas S. Kriegl University of Wisconsin Center for Dairy Profitability University of.

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The Economic Competitiveness of Dairy Systems Across The U. S. A. Thomas S. Kriegl University of Wisconsin Center for Dairy Profitability University of.

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