Although dairy farm size can be characterized for the U.S. overall, there are important distinctions by state, as the dairy farm size distributions differ greatly by state. It is important to distinguish growth patterns of dairy farms by state. Macdonald et al. detail that larger dairy farms are able to capture economies of scale, more so than smaller dairies, resulting in a lower average milk production cost. However, the article does go on to specify that the distribution of dairy farm size differs greatly by state based on the specific financial and economic environment of the dairy industry in that state. Alternatively, some dairy farms lower the average milk production costs by capturing the economies of scope, i.e., diversification of sales. This could be characterized as raising and selling replacement dairy heifers, or other agricultural products such as grain to maintain economic viability. Finally, I consider the relationship that farm operator characteristics may have with farm size and the decision of a farm to exit. In Chapter Five, I detail a specific line of analysis related to the influence of female farm operators on farm size, flood drain tray but in this chapter, I will discuss the influence that the age of the farm operator may have on the farm size.
Dairy farm size changes in response to these and other factors is important in considering future trends in farm size and their impact on milk production in the U.S. and the future structure of the dairy industry. This chapter aims to characterize the herd size distributions of the U.S. dairy industry, present evidence on the characteristics of the farm size distributions, and then finally discuss the correlation between farm level characteristics and farm size. This chapter will be structured as follows: a brief overview of previous literature on firm and farm size, a discussion about farm size distribution estimation, and then the results and discussion.Economic research and discussion have produced several theories on firm size and firm growth to characterize industries and the economy. This section will briefly review important studies related to firm size more generally and then will move on to research specific to the study of farm size and the economics of dairy farm size and size distributions. The study of firm size by economists can be best discussed chronologically, as much of the research builds off one another or finds results inconsistent with previously held theories. In 1931, Gibrat postulated what has come to be known as Gibrat’s Law that a firm’s growth rate is independent of its size.
This would mean that the growth rate of an individual firm over a particular time period should not be influenced by its original size. Ijiri et al. , using the foundation built by Gibrat’s Law, finds that firms that grew over 10% in the subsequent period are more likely to see above industry average growth, due to continued benefits of innovation that occurred in the subsequent periods. Viner theorizes that firm size distribution is based on the industry environment and that individual firms have a U-shaped average cost curve and will function at the minimum of this curve. He goes on to specify that firm entries and exits are determined by the quantity demanded by the market. Lucas used these previous works to build a new theory about the size distribution of firms in an industry that looks at size distribution as a solution for output maximization with a given set of production factors and managers with varied human capital levels. This model predicts the size distribution of firms based on the managerial ability of laborers and then subsequent resource allocation. Jovanovic finds that smaller firms will tend to have higher growth rates than larger firms, but that these smaller firms are more likely to exit the industry than the larger firms.
Evans discusses growth relative to a firms age, finding that a firm’s growth can be tied to the age of the firm itself and that older firms have a slower growth rate. This theory is hypothesized to remain true for dairy farms. Stemming from foundation of Gibrat’s law, which claims that the firm size distribution follows a log normal distribution, there has been significant literature on the size distribution of firms that looks at fitting parametric distributions to actual firm size data. Kondo, Lewis, and Stella evaluate recent non-farm panel data from the U.S. Census Bureau and find that the current U.S. firm size data best fits with a log normal distribution, but there are differences in goodness of fit by industry. Akhundjanov and Toda use the original data, in Gibrat’s original paper, find that a Pareto distribution better characterizes the empirical size distributions. The distribution of firm size remains a fundamental part of research firm growth patterns and the literature on firm size has been directly applied to research on the growth rate of farms and farm size changes in different agricultural industries. Two common parametric distribution used in farm size distribution analysis are log normal and exponential. Allanson evaluates farm size trends in England and Wales finding that the log normal distribution fits farm size measures relatively well across time. WhereasBoxely uses an exponential distribution to evaluate farm size data from the Agricultural Census and finds that from 1935-1964 farm size shifted to the right, but that at the state level farm size does tend to follow the exponential distribution with some regularity. Before going any further in the analysis, it is important to outline the concept of farm size for this analysis. Farm size measures across the whole agricultural industry tend to leave out key details that give better and more accurate accounts of the size of the farm for the commodity/industry. For example, when looking at the size of U.S. farms overall measuring the size of the farm based on acreage will lead to inaccurate or confusing results. The acreage needed to generate the same revenue for corn versus dairy milk or strawberries is substantially different. However, looking at the dairy industry specifically, many different characteristics shape a dairy’s economic footprint on the market, and therefore, defining how to characterize dairy farm size is fundamental to discussing changes in the dairy market. One can characterize the size of a dairy by the number of milk cows, or herd size, as one measure of dairy firm size. However, other characteristics such as the quantity of milk produced, the value of production, and value-added on the farm could also be considered as farm size measures . Different farm size measures allow us to answer different agricultural economic questions. While analyzing the dairy industry it is relevant to consider herd size, the milk and/or dairy sale revenue of the firm, and the total value of production, as we have already discussed in Chapter 2. Previous research on dairy farm size documents strong trends toward consolidation in the U.S. with a decrease of about 50% of all registered U.S. dairies from 2002 to 2019 . These trends in consolidation have differed by location with historically dairy producing regions seeing a large share of exits, these states were historically made up of smaller and mid-size dairies. MacDonald et al. detail the cost differences between larger and smaller dairies with cost advantages for larger dairies that drive the investment decision to increase herd size. This research suggested that there would continue to be a steady decline in the number of smaller and mid-size dairies and that the trend of consolidation would likely continue. This trend has raised research questions about what factors influence the distribution of farm size and the decisions of some farms to exit the industry. A common, albeit incorrect, assumption about the size distribution of the U.S. dairy industry is that it is bimodal.
This assumption comes from news reporting and political commentary that there is a “declining” middle of farms in the U.S. and that there is this dichotomy between small, sometimes organic, flood and drain tray farms and larger farms. Again, Wolf and Sumner find no evidence of a bimodal dairy industry using Farm Cost and Return Surveys of dairy farms for the years 1989 and 1993. In MacDonald et al. , they suggest that larger dairies tend to have lower costs per cow, which allows them to capture greater economies of scale. The cost-minimizing efforts of individual dairy farms will influence the specific farm management choices that the farm makes, as only the individual farm has a true sense of where it sits on its long-run average cost curve. Some of these management decisions include the dairy’s strategy to capture economies of scope, through sales diversification, or vertically integrate to minimize input and production costs. Sumner and Wolf find that vertical integration has little influence on the farm size and that the tendency for farms in the Pacific and South to have larger herd sizes remains true, even when accounting for the levels of vertical integration. The farm’s choice to incorporate different management strategies reflects the incentives and constraints that the farm faces, i.e., influences of geographic location and capital. Other influences on management choices by dairies are in part due to different environmental regulations in each state that impact the average cost of production for dairy farms.There has been a significant amount of agricultural economic research on dairy farm size with respect to their risk management and technical efficiency. Tauer finds that smaller dairies in New York do have a high average cost of production than dairies with larger herd sizes, but that these higher costs are due to inefficiencies and efficient small dairies are competitive with the larger dairies. Tauer and Mishra examine whether differences in technology or efficiency characterize the higher cost that smaller dairy farms face and find that using a frontier cost of production analysis show that inefficiencies in smaller dairies characterize the higher costs, not technological differences. Zimmermann and Heckelei utilize a Markov Chain Model on dairies in the European Union to characterize farm size change and find that regional characteristics such as off-farm opportunities and unemployment rates are significant in relation to dairy farm size change. They also find that high milk prices slow down farm size change due to high milk prices correlation to uncertainty and price volatility leading to a decrease in investment. Wolf details how dairy farms in Michigan have increased their use of risk management tools from 1999 to 2011 and find that the use of such risk management tools was positively correlated with measures of dairy farm size. This research also discusses how age related to risk management adoption with younger dairy farmers being less likely to utilize the risk management tools. Wolf outlines characteristics of dairy farm size change across time Beyond management decisions influencing or being correlated with the farm size and farms’ decision to exit, previous economic literature has hypothesized about the possible influences of operator characteristics, like human capital , the number of female operators, the age of operators, or other farm operator characteristics on farm size. Sumner and Leiby find that human capital positively influences the size of the farm, and this is hypothesized to be due to increasing opportunity costs for dairy farmers with high levels of human capital. Dairy farmers that have the possibility of making more money elsewhere will do so, therefore it seems likely that dairy farms with sufficient returns, which tend to be found on larger dairy farms, will attract high human capital management. Another aspect of the previous research related to farm size and the dairy industry is farm exits. There have been several studies of individual farm movement across farm size groups and characterization of exits. Most of this literature, however, has been limited to regions or states. Macdonald et al. finds that in 2016 about 40 percent of dairy farms with at least 2,000 milk cows did not have positive net returns and that the share of dairies that did not have positive net returns increased as herd size decreased. However, they do note that negative returns in the dairy industry are seen as temporary lows by dairy operators, so they do not serve as a direct indication of an expected exit from the industry. Other reasons for exits from agriculture, or dairy specifically, include increased suburbanization of previously agricultural land, driving land prices up, and strong local economies, opening off-farm employment opportunities for farm operators.