ArticleVolume Number August 5, 2019
René RoyAgr.

The future belongs to larger farms... Don't be so sure!

L'avenir est aux grosses fermes ... pas certain!

In my last post « Everything Costs More in Dairy Production », I emphasised that despite increases in the price of inputs from 2013 to 2017, the variable costs per hectolitre actually showed a slight decrease during this same period.  I explained that this result was due to the productivity gains made by farms and it seemed to me that this positive achievement by producers needed to be highlighted. 

Are big farms systematically more productive?

My colleague, Jeff Gunn, found the above article interesting so he invited the members of the Lactanet Atlantic Canada Facebook group to read it.  Many producers made pertinent comments - but one in particular stood out to me.  The point that they shared, as I understood it, was that the quest for gains in productivity is inevitably driving us toward bigger farms.  This compelled me go back to the data sampling that I used to see if their point was truly valid. 

In the graph below, every blue diamond represents one of the 397 farms included in my 2017 data sample.  At first glance, the dotted line shows that there is a slight tendency for production costs to drop (target price) according to the size of the farm (volume of milk delivered).   However, the light blue zone at the bottom depicts the farms with excellent production costs (< $70/hl) and there are farms of all sizes in this zone.  In fact, 16% of the farms with production costs below $70 /hl produce less than 500,000 litres of milk (green circle).   The upper part of the graph shows that there are also a significant number of small farms are above $90/hl (red circle).  It would therefore be a mistake to lump all small farms into the same basket and think that only big farms can fare well in the current economic environment.

Graph 1

What about the smaller farms?

Small farms that produce less than 500,000 litres of milk represent 26% of the 397 farms analyzed, whereas large farms with more than 1,500,000 litres represent about 9%. Further in- depth analysis of farms with a target price below $70/hl shows us that their variable costs are similar at $43.64/hl (small) vs. $42,56 /hl (large) whereas the average of the 397 farms falls at $46.01/hl.   In the case of fixed costs before salaries: $15.86 /hl (small) vs. $16.40/hl (large) as compared to $19.84 for the whole group. 

As would be expected, the larger herds surpass the small herds when it comes to milk produced per farm worker:  323,000 litres as compared to 618,000 litres for large farms.  This confirms what we already know:  labour a primary area where economies of scale are present in dairy production.  Despite all of this, because large farms must rely more on outside employees and these have been harder to find in recent years (no illegal workers available here…), the salaries and social security charges paid out means that large farms are missing out on some of this advantage:  $9.50/hl for large vs. $10.09/hl for small.  Some may say that the small farm operators pay lower than average wages and that is helpful to them financially. It is true that the wages per employee are lower on small farms but even if they were increased to the average of the 397 farms, the more successful small farms would continue to show production costs below $70/hl.  Therefore, it is a question of choice, not necessity.

Another thing particular to the more efficient small farms is that their debt is $123/hl vs $262/hl for the large farms in the same group ($212/hl is the average of the 397 farms).   This means less risk in the face of possible interest rate increases.  This does not signify that these farms have not invested in recent years but they simply limited « big » projects.  Instead, they concentrated regularly updating of equipment and buildings, as well as quota purchases.  Moreover, because of their low production costs and their low level of debt, they were able to self-finance a significant portion of their new investments and avoid seeing their debt grow. 

It is all a question of strategy!

The future belongs to neither small nor large herds. The future belongs to those who know how to take advantage of their particular situation in order to perform well:  a hockey player who is 5”8’ and dreams of playing in the NHL will have to use a different style than a player who is 6”3’ in order to succeed.  In a business, production costs are one of the important elements of production measurement.