Does Revenue Diversification Improve Small and Medium-Sized Dairy Farm Profitability?

Dairy farmers are well acquainted with managing volatile input and output prices. In the past 5 years, dairy farms experienced record high milk prices in 2014 followed by devastatingly low milk prices. In Minnesota, farms that contribute financial information to the FINBIN farm financial database reported the lowest average accrual net farm income, $407, in 2009, while the same sample reported an all-time average high of $236,544 just 5 years later in 2014 (FINBIN, 2018a). Even though cow-level milk production has increased since 2007 (FINBIN, 2018b); consolidation and a rapid increase in the average number of cows per farm are commonplace in the industry, as evidenced by the total number of U.S. licensed dairy farms, which decreased from 59,135 in 2007 (USDA, 2008) to 40,219 in 2017 (USDA, 2018a). Regardless of changing farm structure, dairy farmers today know that commodity prices are projected to be depressed for several more years (USDA, 2018b). Low prices are not conducive to generational farm transition plans, replacing or updating equipment, or exploring innovative technology adoption. This has caused many dairy farmers to ask, “Is it financially sustainable to remain in the dairy industry at my operation’s current herd size?” More specifically, dairy farmers are trying to determine whether now is an appropriate time to expand, consolidate, or exit the industry. However, these are not the only options. Many small to medium-sized dairy farms in the Upper Midwest have revisited diversification strategies incorporating alternative revenue sources into their farm operation to stabilize whole farm profitability, meet debt obligations, and provide cash flow for family living expenses. Examples of alternative revenue sources to combat volatile milk prices include crop income, custom work, crop insurance, government program payments, and off-farm income. This analysis uses 11 years of consecutive financial data from Minnesota dairy farms to examine how revenue diversification strategies have been implemented and affected the financial success of dairy farms from 2007 to 2017.