National Farm Business Management Conference Overland Park, Kansas, June 9 - 13, 2013

1. _______________________________________________ The Economic Competitiveness of Dairy Systems Across The U. S. A.Thomas S. KrieglUniversity of Wisconsin Center for Dairy ProfitabilityUniversity of Wisconsin-ExtensionMadison, WisconsinSee http://cdp.wisc.edu for more information National Farm Business Management Conference Overland Park, Kansas, June 9 - 13, 2013

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

3. _______________________________________________ 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

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

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

6. 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

7. 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. _______________________________________________

8. 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

9. 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 _______________________________________________

10. 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. _______________________________________________

11. This comparison reveals several major observations: • It is unlikely that any dairy system in any state will always be the low cost or most economically competitive producer under all circumstances. • The ability to stay in business can also be influenced by factors not readily identified as economic. This was observed in 2009. • 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). _______________________________________________

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

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

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

15. Major Observations (cont.) _______________________________________________ • The half decade of 2006-2010 appeared to be harsher to confinement, larger herds and herds outside of the midwestthan the half decade of 2001-2005. ETHANOL EFFECT??? • 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). • Organic price premiums offset higher costs

20. 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.