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Economies of Scale in Dairying


ARE THERE ECONOMIES OF SCALE IN DAIRYING?

IF SO, WHAT IS THE MOST ECONOMIC SIZE?

By David Beca, Managing Director, Red Sky Agricultural Pty Ltd

SUMMARY

  1. Over 95% of the expenses in pasture-based dairying businesses are directly correlated to either land area or cow numbers.
  2. The investment per hectare in land, buildings, livestock, vehicles, plant & machinery, and other dairy related assets is relatively similar across a majority of farm sizes.
  3. Given the high proportion of variable expenses and a similar investment per hectare of land, there are no significant economies of scale in pasture-based dairying.
  4. Farms with fewer than 150 cows are disadvantaged as a result of the small proportion of ‘fixed’ expenses that are unrelated to land area or cow numbers, plus the cost to have at least one capable manager in a dairy business.  In addition the value of capital infrastructure (housing and dairy in particular) per hectare that is often associated with small farms disadvantages these businesses.
  5. There are normally losses in efficiency once the owner/operator is substantially removed from the interface between cows, pastures and supplements, which is likely to occur when more than 800-900 cows are being farmed.  This loss of efficiency is due to the complexities of managing pasture-based dairy businesses and hence the influence of the person physically managing this interface.  This can at times be offset by the lower value of capital infrastructure (dairy in particular) per hectare that is sometimes associated with larger farms.
  6. As a result of the comparative disadvantages of either small or large farms, the most economic size is between 200 and 750 cows.
  7. Given the complexities of managing pasture-based dairy systems and the resultant influence of the person operating the business, it is therefore not reasonable to conclude that farms with less than 200 cows or over 750 cows cannot be highly profitable.
  8. It would also be reasonable to conclude that dairy business owners should strive to produce more milk and therefore grow their business over time.  The need to grow a business over time is unrelated to any potential economies of scale.  This alternative business principle is that productivity improvements are necessary for industries to remain competitive, and part of improving productivity is to increase milk production over time.

To read the full paper please click here.

To view the Appendix please click here.

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