Dairy Sector Consolidation, Scale, Automation and Factor Biased Technical Change: Working through “Get Big or Get Out”

Milk production in the United States has become increasingly concentrated among fewer herds. This consolidation has, as in other on-farm agricultural sectors, long been recognized (e.g., Drabenstott, 1994; MacDonald, Cessna, and Mosheim, 2016). According to USDA milk production reports (LMIC, 2018), the number of licensed dairy herds in the United States declined from 45,344 in 2014 to 40,219 in 2017, a 4% annual rate of decline over the period.Large and small farms are, in aggregate, different in their output, production costs, and quality metrics. Significant scale economies exist in dairy production (Mosheim and Knox Lovell, 2009): larger herds are generally better positioned to attain quality standards as reflected by somatic cell count indicators (Norman, Walton, and Dürr, 2018) and technical inefficiency is a factor in exit decisions (Dong et al., 2016). Given the obstacles faced, smaller dairy farms generally have difficulty competing with larger farms unless they receive higher prices in specialty milk markets or have low opportunity costs of operator time.Less well understood are the investment dynamics that precede both exit and expansion. In this article, we provide a snapshot of the dairy industry based on a survey of dairy farmers in a market environment of multiple continuous years of low milk prices and low milk profit margin. The survey allows us to analyze how farm size relates to dairy farmers’ views of industry outlook and their decisions regarding expansion or contraction of herd size, labor, and capital as the industry adjusts to market pressures and emerging technological opportunities.