The Industrialisation of American Dairying and the Implications for New Zealand

The ‘handout notes’ that follow were written  for a Lincoln University Dairy Farm Focus Day on 10 October 2013. These focus days are held every two months. This one was attended by about 200 farmers and rural professionals. I gave the presentation as Lincoln’s Professor of Farm Management and Agribusiness, standing on a trailer out in the paddock – so basically it was all ad libbed without visual aids. Actually,  sometimes it is fun to talk without the distraction of powerpoints!

Background

  • The American dairy industry is rapidly transforming to an industrial model based on large scale (>2000 cow) mega farms.
  • As of 2013, approximately 40% of American production comes from 800 mega farms.
  • Another 30% comes from a further 2500 farms, each with between 500 and 2,000 cows.
  • The final 30% comes from more than 50,000 farms with less than 500 cows
  • The mega farms have costs of production that are much lower than the smaller farms.
  • The last 5 years have been difficult for all American dairy farmers due to high feed prices.
  • The tide has now turned and with lower feed prices the mega farms are expanding again.
  • America is now the second largest global exporter of dairy products with about 18% of their milk exported.
  • My expectation is that within 5 years the USA will overtake New Zealand as the largest global exporter of dairy products.

Much of the  information that follows was obtained  during two weeks of visits to American  ‘mega farms’ undertaken with my Lincoln colleagaue (and also dairy farmer) Marvin Pangborn in June 2013.

 The Basics of the System

  • The farms are either ‘open-lot’ containment or ‘free-stall’ housing. Either way, the cows are ad-lib fed a computer generated total mixed ration (TMR).
  • With the open-lot system, cows are kept in feedlot type facilities with some shading. There are inevitable nutrient leaching issues with this system.
  • In the free-stall system cows are free to choose their own individual step-up raised stall. When the cow stands to urinate or defecate the waste products land in a lower area which is typically cleaned several times a day either mechanically or by a pulse of water. The bedding stays dry and it is possible to collect all nutrients with this system.
  • The Holstein (predominant breed) cows typically produce about 35 litres of milk per day. With three-times-a-day milking and use of BST (bovine somatotropin) this can be further increased.
  • Milking parlours are either parallel pits (similar to herringbone systems) or rotaries (known as carousels).
  • Milking typically occurs for about 22 hours per day plus 2 hours of cleaning.
  • Tankers collect the milk every few hours (milk vats typically are non-refrigerated).
  • Cows are washed and dried prior to milking.
  • The labour is predominantly Hispanic ethnicity and they work 8 to 12 hour shifts.
  • Some farms grow their own forage (about half the diet) but others buy it in.
  • Most farms buy the concentrates they need.
  • Everything is done according to standard operating procedures (SOPs).

Competitive Advantage of the System

  • Very efficient use of capital (e.g. a 72 bale rotary, milking 4500 cows, each of which produces about twice the milk of a typical cow in the NZ system).
  • High feed efficiency with most of the feed being used to produce milk rather than just maintain the cow.
  • Moderately high labour productivity (litres per labour unit) arising from high production per cow but limited by the need for cow preparation.

Potential Achilles Heels

  • Depends on Hispanic workers, many of whom do not have legal status.
  • Dependent on bought-in feeds.
  • Shortage of water in some regions.

Overall Economics

  • Depends very much on feed prices.
  • Depends very much on management efficiency. (We saw a great range, from superb to woeful.)
  • There are economies of size up to at least 5000 cows, and arguably beyond this scale of operation.
  • Given the above caveats, the breakeven point is probably about $US18 per 100lb of milk (about $NZ7 per kg MS) based on 2012/13 grain prices.
  • However, with corn and other grain prices now dropping rapidly the breakeven point will be lower than this; hence the current and expected expansion.
  • The bottom line is that the mega farms can be internationally competitive and they are going to expand.
  • The main area of expansion will be the Mid-West States (e.g. Kansas, Iowa, Wisconsin, Minnesota).
  • Productivity improvements are on-going.

Challenges for the USA

  • The current demand is for whole milk powder but they don’t have the right processing plants.
  • Environmental regulations.
  • A shortage of water in some regions.

Some Lessons for New Zealand

  • New Zealand on-farm infrastructure is under-engineered relative to American infrastructure.
  • Many dairy farms are moving to Jersey cows based on comprehensive performance data (e.g. whole-of-herd comparisons of a shed of Holsteins versus a shed of Jerseys).
  • Individual technologies are not easily transferable to NZ.
  • Don’t be fooled by the ‘tales of woe’ in the news media about the small scale American farms. These farms will continue to decline but the overall industry is likely to expand.

Should New Zealand be worried?

  • Only if we rest on our laurels.
  • We must keep seeking productivity improvements (within environmentally acceptable  footprints).
  • We must also work harder on consumer brands, particularly for Asia.
  • We are lucky that the demand for dairy products in Asia, and particularly China, continues to climb.
  • Production in China is at best static and probably in decline as they struggle to transform their own industry.
  • There is room for both New Zealand and the USA in the global marketplace.
  • There will be on-going volatility, and those who make bad decisions will fail, but this is a golden period for dairy.

 *************

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About Keith Woodford

Keith Woodford is an independent consultant, based in New Zealand, who works internationally on agri-food systems and rural development projects. He holds honorary positions as Professor of Agri-Food Systems at Lincoln University, New Zealand, and as Senior Research Fellow at the Contemporary China Research Centre at Victoria University, Wellington.
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2 Responses to The Industrialisation of American Dairying and the Implications for New Zealand

  1. Pingback: Rural round-up | Homepaddock

  2. mist42nz says:

    One of the major dangers is the US system is modular. Want to lift production? Put in another lot&palour, drive a few more trucks in, don’t cull a bunch of average animals. Want to drop production, mothball a lot&palour, drop non-exert labour units, stop a batch of truck deliveries, cash in the chopped heads.

    In NZ, lift production? Scramble for land and what cost, animal walk times, races, rebuild races and fences using NZ construction infrastructure (poor & expensive). Much NZ dairy land has taken decades to bring up to speed, even the conversions struggle to get to stable operation. As for finding staff that can handle it – good luck. And you’re limited to resource consents etc for feed. And good luck finding good animals in a hurry.

    Drop production? Pasture goes feral, much of the infrastructure races and fences continue to degrade. fire expert staff skilled in many areas, cut heads off mature elite animals.

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