A steady increase in the size of U.S. dairy farms and a steady decrease in the number of dairies since 1970 is a result of larger dairies benefiting from economies of scale. That trend of consolidation in milk production accelerated in the last decade and is expected to continue for years to come.
Over the next 10 years, further consolidation will bring both challenges and opportunities to the remaining larger producers and the processors vying for their milk, according to a new report by Rabobank.
The uptick in consolidation over the past 10 years is partly due to increased price volatility, which can wreak havoc on dairy farms of all sizes. Larger dairies, however, tend to have strategies in place and the finances required to withstand market downturns, they said.
With large farms likely accounting for the majority of growth in the coming years, producers and processors alike should consider the impact of further consolidation, the analysts advised.
The report outlines the implications on both sides of the equation.
With growing influence, large producers will continue to put pressure on processors to give them a voice in how their milk is used. And as large dairies weigh their options, such as processing their own milk, processors are at increased risk of losing key suppliers.
Milk processing is a thin-margin business where efficiency and optimal capacity are instrumental for profitability. Processors should seriously consider ways to retain key milk suppliers, and better deals might not be enough.
Periods of too much milk can also be an issue. Turning additional milk away can create tension if producers feel they are not paid a fair price for that milk. If producers and processors are not aligned in their growth, producers might look at processing their own milk or taking it to a competing processor who is more accommodating.
Another source of tension is producers’ desire to have a voice in what becomes of their milk or in the direction of the company processing their milk. That tension further increases the risk of processors losing key suppliers.
“Unless processors want to buy or build their own dairy farms, they should be creative about how they retain their large suppliers. … It is important for processors and producers to work together: they both have specialized skill sets the other party needs,” the report states.
When tensions arise, producers should be realistic about their expectations, and processors should be ready to give farmers a voice, letting them be leaders and considering joint ventures and equity stakes in plants.
Vertical integration on the producer side offers an opportunity for high milk prices, but it is a high-risk move that requires significant investment and new core competencies.
“It is imperative that a large producer who wants to integrate understands the market they are entering, along with the associated risks before they make the investment,” the report noted.
And while larger producers will gain economies of scale, they will also face headwinds from increased regulation, consumer pushback and the implications of being a highly visible part of the industry, the analysts noted.