US Dairy Industry Stats

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Figure 1: Number of US Dairy Farms Over Time. (Source: USDA)

Early in my life, I spent quite a bit of time around cows on small farms with about 160 to 200 acres of land, and 40 to 50 cows. I never saw a corporate farm. Three years ago, I spent quite a bit of time in Iowa working on a number of fiber optic deployments in rural areas populated with a large number of dairy operations. While performing fiber installation inspections, I noticed that many of the old farmhouses were occupied by renters and the land was being farmed by corporations. As I looked around both Iowa and Minnesota, I realized that the number of dairy farms is dropping fast (Figure 1).

This change in farming is affecting my extended family, which is descended from two German brothers who came to America to escape the Franco-Prussian War. They setup their dairy farm on a 160-acre homestead. That farm will not go forward in our family because it is just too small to be competitive. I talked to my uncle about the situation and he said that the problem occurred when the time came to pass the farm from one generation to the next. The farm simply was not big enough to support two families while the transition should have occurred. After much angst, he decided that it was time for the family farm to be consolidated with a larger operation. His son will not be farming that land.

A key part of my uncle's decision is the unprofitability of the US Dairy industry. The lack of profit in the dairy industry is a complex tale of:

• Declining Demand
  Many people are avoiding milk because of lactose intolerance. Milk substitutes are now readily available.
• Counterproductive Government Subsidy System
  The US government wants to keep milk prices low to keep consumers happy.
• Oversupply
  With demand dropping, the capacity needs to drop.

Figure 2 shows the red ink of today's dairy industry. The revenue per hundredweight of milk (a standard unit for US milk production) has not covered the Cost of Goods Sold (COGS) for years.

Figure 2: Economics of Today's Dairy Market. (Source)

To support two families when the farm transitioned from father to son, my uncle said that he would have to increase the number of cows from the 43 he has managed for years. But every cow requires a certain amount of land on which to graze and to grow feed crops. He said that buying feed was a money loser because it was too expensive – you must support your herd with the land you have. Let's walk through the numbers of running a dairy operation on a small Midwest farm (160 acres) using the analysis method from the Wisconsin Department of Agriculture. Wisconsin has similar conditions to those in Minnesota and the numbers for both states are similar.

This analysis assumes that the cows just eat what is grown on the land. While my uncle did not use any formulas, his rules of thumb were very similar to key constants that drive this analysis, namely the amount of food that a cow needs per day and what the land can produce. The bottom line is that a 160 acre Minnesota farm can support about 40 dairy cows with a 50/50 split between pasture and field crops.

Figure 3: Cow Carrying Capacity for a 160 Acre Minnesota Farm.

Today, this land is being farmed by a larger dairy operation – they have the size needed to reduce the cost of production through automation and improved efficiency. The same economics is affecting the other dairy farmers in the region. This means that we will see US dairy operations become fewer in number but larger in the number of cows per operation. Figure 4 shows the number of cows per dairy operation by region. The US West already has huge operations, but the Midwest is going to experience much painful restructuring.

Figure 4: Dairy Herd Size By Region.

For those who are interested, my Excel workbooks and R markdown code are here.