Analysis Tells the Story

2/16/2013 7:00 AM

A year ago, the Center for Dairy Excellence set out, with the help of the University of Pennsylvania, St. Joseph’s University and Penn State, to analyze the Pennsylvania dairy industry to better understand what it will look like in 2020. Our goal was to determine what we could do today to help producers achieve their profitability goals.

The results from our analysis were telling. Dairy is clearly not immune from cultural and market-based shifts affecting nearly every industry and every business around the country. The analysis shed light on noticeable changes happening in the dairy industry, which I like to call the “fourth generation dairy producer.”

When my grandfather started dairying in 1925, his large dairy herd of 20 cows provided an adequate equity (land, etc.) base and sufficient liquidity to grow his business and eventually double his herd size to accommodate the next generation. Fast forward to 2013, the fourth generation of U.S. commercial dairy producers, now in their 20s and 30s, are “in the throes” of a different industry, with a global reach, requiring unique financial and business management skills to grow equity and preserve liquidity. And, with higher farm land prices, they also are more dependent on well thought-out business transition plans than perhaps was the case in 1940.

Our analysis included a survey of 1,100 dairy producers across Pennsylvania. The survey was modeled after a similar survey conducted in 2008 by the center. This time, the average responder is nearing 50 years of age. More farms reported having a written business plan, a formal plan for succession, and having used some dairy risk management tools to mitigate volatility than did in 2008. About 318 of the dairy farm owners surveyed this time are in their 20s or 30s. Although they were not milking significantly more cows, they did reflect a higher trend towards partnerships and the use of consultants and professional nutritionists. They also reported greater optimism about the future compared to those in the older generation.

Our analysis also reflected the value in having a “modern dairy facility design.” According to the survey, the farms that are doing the best have systems for dairy cow housing and comfort that maximize production capabilities and longevity opportunity. Larger dairy operations are pulling away, on average, in their ability to achieve highest production, reproduction, and milk quality levels. However, some smaller dairy farms that have incorporated similar cow management systems as their larger herd counterparts are competing very favorably.

Milk price is virtually the same on farms of all sizes, with per cow expenses about $800 higher on larger herds. About half of this is attributed to higher feed costs. However, on the larger farms, the net income nearly doubled because of higher production per cow. With more acres per cow in smaller herds, and higher assets per cow, we questioned whether there is opportunity to direct the land assets towards more feed and more total production. Land prices across Pennsylvania contributed to each farm’s answer to this question.

Our industry in Pennsylvania, as in other regions of the U.S., is changing. As these changes evolve, it will become clearer what approach and business model can most favorably compete. Here at the center, we believe our region is unique and affords opportunity to all producers, irrespective of herd size. Our work in 2013 will increasingly be targeted at providing resources which enable dairy farmers, and the consultants who serve them, to clearly identify these opportunities and to help us become a fourth-generation enterprising industry with many such enterprising dairy family businesses.

For more information about the analysis, call the center at 717-346-0849 or email info<\@>

Editor’s Note: John Frey is the executive director for the Pa. Center for Dairy Excellence.

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