There are many small dairy farmers in the U.S.　 Many are asking how they can survive in an economic environment experiencing rapid consolidation of retailers, processors, cooperatives, and farmers.　 The purpose of this article is to determine what advice we should be giving our small dairy farmer clients to ensure their economic survival in the future.　 I am sure there are certain similarities between Japan and the U. S. as markets and international trade becomes more global. Let us first look at the opportunities in both our countries.　 Dairymen in the U.S. are often shocked when we tell them that they are participating in a growth industry.　 Demand for milk and dairy products continues to increase year after year in the U.S.

Commercial disappearance of milk rose 42 % in the U.S. in the past 20 years.　 It is true that much of this growth has been in cheese consumption.　 Per capita consumption of American cheese rose from eight pounds in 1975 to 13 pounds in 1999.　 It has increased every year.　 It is increasing this year and cheese consumption is predicted to increase over the next 10 years.　 The U.S. Government recommends that Americans switch to more low-fat dairy products.　 Americans are doing exactly the opposite.　 The U.S. Department of Agriculture reported that total demand for milk fat by U.S. consumers rose 23.4% between 1990 and 2000.　 The point is that the U.S. dairy industry is a growth industry and this provides good opportunities for dairymen.　 It is clearly a growth industry but at the same time the total number of dairy U.S. dairy farms is decreasing rapidly.

Each of you know the current status of the dairy industry in Japan better than I do.　 My understanding is that demand for milk and milk products is increasing so the Japanese dairy industry is also a strong growth industry.　 I think the future for the dairy industry in Japan is even better than in the U.S.　 The per capita consumption of dairy products in Japan and China is extremely low compared to the rest of the world.　 The World is becoming smaller and more alike.　 This may result in a dramatic increase in milk and low fat milk products in both Japan and China.

Let us examine some of the major changes occurring in the U.S. Dairy Industry;

l)　 Government price supports for milk has decreased.　 Price support for milk reached a peak of $13.18 per 100 pounds in 1981.　 Price support for milk has been decreased to $9.80 per 100 pounds in 2001.　 Our legislators are now writing a new farm bill for the next ten years.　 It appears they will leave the price support for milk at $9.80 for the next decade.　 The purpose of decreasing the price support was to reduce the cost.　 The U.S. Government paid dairy farmers $2.6 billion in 1981.　 Now the annual cost is less than $500 million.
The main result of decreasing price supports was that the free market took over the role of determining milk prices.　 This led to greater volatility in milk prices paid to dairymen.　 There are several other complicated government federal market orders that help set the price of milk.　 These market orders have also been modified so that the free and open market sets the price of milk.　 Markets started to offer farmers more money for high quality milk and for higher protein in milk.　 This change also helped the free open market to set the price of milk.

2)　 Rapid decline in number of dairy farms.　 There was a 37% decline in U.S. dairy farm numbers between 1992 and 2000.　 Many small dairymen could not cash flow under the new market conditions.　 Herd size started to increase.　 U.S. agriculture statistics now reveal that 54% of U.S. milk production comes from farms with herd sizes of 200 or more cows.　 This has increased from just 36% in 1993.　 There are still many 35 to 100 cow dairy farms but their numbers are decreasing.　 Larger herd sizes are increasing.

3)　 It is a fact that the U.S. Dairy Industry rewards and encourages competition among diary farmers.　 The free market rewards strong competitors and punishes weak competitors.　 This has been very difficult for many dairymen to accept this fact.　 Study after study shows herds with the highest milk production and best management make the most money.　 This means that farms only grow if they are profitable.　 Yes, there are some limited economic advantages for larger herd sizes but large and small herds must be profitable or competition will force them out of the business.

Now let us look at some of the challenges facing the U.S. Dairy Industry:

1)　 The price of milk has not kept up with the rate of inflation.　 Dairy farmers have correctly pointed out that the milk price has been relatively stagnant over time and that inflation has increased year after year.　 They believe that milk prices should rise each year just enough to offset the increase in inflation.　 That would allow a business to remain small and still make a good profit.
The truth is there are very few businesses in the U.S. economy that achieve an inflation adjusted market price each year.　 Most businesses realize that in order to remain competitive and prosperous, they must expand their sales and market share each year.　 For the dairy business, that means gradually increasing cow numbers and productivity each year.　 This means that dairymen must accept a lower margin.　 This means that dairymen must increase their milk production in order to continue to make a profit.　 This often means that dairymen must increase the size of their herd.
I assume this exact same business principal is operating in Japan.　 We should try to explain this to our clients that are exiting the business and to those that want to stay in the dairy business.　 The truth is that small farmers are in the best position to gradually expand their herds.　 We have all seen very high death losses when dairy farms expand too fast.　 Starting new large herds works well if management is excellent but is disastrous if it is not.　 Perhaps the main challenge to dairy veterinary consultants is to develop a program to help small dairy farms gradually expand cow numbers and increase milk sales.　 This is the primary way that small dairy farms can continue to cash flow with stagnant milk prices.

2)　 The biggest challenge facing the dairy industry today is in changing the current philosophy that treats the family farm as a lifestyle and not as a business.　 Businesses are dynamic.　 Businesses must adjust to changing market conditions.　 They must be competitive.　 Some dairy farmers find it difficult to restructure their dairy to become more competitive.　 Dairymen that do not change their business decade after decade often fail to remain competitive.　 Veterinary consultants can help farm families understand dairy business principals.　 There must be a change over to routine business practices if farm families are to be financially successful.
A good place to start is to sit the family down and compute the cost of producing milk and the profit margin.　 The profit margin is the profits generated from each dollar of sales.　 Given this information, and the dollars needed for family living, one can pencil out how much annual milk sales are needed to make the family business viable.　 This may or may not involve expanding the herd size.　 Boosting milk production per cow, contract purchasing of feed and forage, and limiting investments to those that provide a positive return can result in greater profits without necessarily expanding herd size.　 This bottom up method of looking at the farm business is exactly what small business owners do all across our economy.　 It is called business planning.

3)　 A third major challenge to dairy farms is gaining access to capital and dealing with hired labor.　 Gaining access to capital requires writing a business plan and knowing the farms financial benchmarks.　 You must explain to a banker how your plan makes financial success.

I listened to a very good lecture presented by a banker at World Dairy Expo.　 The title of the talk was-- Questions your banker is asking today that they did not ask five years ago.　 Most of the questions centered around learning and understanding basic beginning business principles and general management principles.　 Questions the banker asked were:

a)　 Can you demonstrate to me that you have basic business sense?
b)　 Do you think you will improve your management skills and abilities?
c)　 What is your environmental mentality?
d)　 Do you have a money mentality?
e)　 Do you know how your operation compares to other dairies?
f)　 What is your cost of production?
g)　 What is your investment per cow?　
h)　 What is your return on assets?
i)　　 What is your return on investments?
j)　　 Are you willing to learn how to manage labor?

The banker stated that those who come with a well prepared business plan and know their financial benchmarks often obtain a bank loan.　 He told the large audience that many small to medium size dairy farms have been very, very successful and continue to be very profitable.

The message was simple.　 You must learn business and management skills.　 You must learn to work with hired labor.

SUMMARY AND CONCLUSIONS

The U.S. Dairy Industry is a growth industry.　 The numbers of U.S. dairy farms are decreasing rapidly.　 Government price support for milk has decreased significantly.　 The main result of decreasing price supports was that the free market now determines the price that dairymen are paid for milk.　 This means more direct competition among farmers.　 Challenges facing the dairy industry are: 1) the price of milk does not keep up with inflation so farmers must increase production and accept a lower margin, 2) dairymen must operate their farm as a business and not as a life style. 3) access to capital and managing hired labor.　 It requires business skills to obtain capital and dairymen must learn to manage labor.

Next month we will examine factors that contribute to success on dairy farms.

(Part of this article was written by an Economics professor, Dr. Ken Bailer, and published in Feedstuffs, October 8, 2001 Pages 14-23.　 Dr. Bailey has also authored a book titled --　 Marketing and Pricing of Milk and Milk Products in the U.S.)