Challenges and Trends in the Dairy Industry

Milk is big business in Ontario as it is the largest sector of agriculture with $1.7 billion in milk receipts making up 20% of the province’s agricultural production. Ontario currently has 4,200 producers with the average herd size close to 76 cows. These producers spent just over $1.5 billion last year in their local communities which magnifies the importance of the industry.

The dairy sector like many commodities is going through some major changes. The question many producers are asking is - what must I do to stay competitive in the industry? At present the majority of new barns being constructed in Huron and Perth Counties are free stalls with capacity to house and milk over 100 cows. The trend is very obvious - larger herds and fewer farms! However, this does not necessarily mean the "downfall" of smaller family farms. Producers who are making a long term commitment to the industry should be aware of the four major factors that can influence survival and profitability:

1. Production Efficiencies
2. Cost Control
3. Scale of Operation
4. Debt

The secret for success is to focus on all of the factors that affect profit and strive towards the balanced approach, including quality of life style.

Profit in its simplest form can be defined as (price - cost of production) x volume. This formula can be used as a tool to help evaluate the FINANCIAL HEALTH and FUTURE DIRECTION of a dairy operation.

What makes some farms more profitable?

1. Price - Milk and subsidy revenue/kg of quota can vary greatly from one farm to the next. Altering the protein/fat ratio can influence returns/kg of quota. Tighter profit margins plus high quota values will force producers to maximize returns from their quota holdings. Milk revenue accounts for approximately 85% of the total revenue on most dairy farms.
2. Cost of Production (C.O.P.) - Again, there is a tremendous range in cost of production to produce a litre of milk. Producers should track the performance of each enterprise such as dairy, herd replacements and crops to determine what segment of the operation performs best. Well managed, low cost operations will be better positioned to compete in the future. Apply the 60% Rule - total expenses less depreciation and interest payments, ideally should be less than 60% of revenue. The Ontario Farm Management Analysis Project is a good program to show where expenses may be out of line.
3. Volume - Aim to produce large volumes of milk both per cow and per person. Strive for a herd average milk production level that is at least 10% or more above provincial average. Efficient production of milk can be summed up in one statement - Maximize dry matter intake. Identify bottlenecks restricting intake and correct them. 

As we near the turn of the century, many challenges and uncertainties face producers:

• tighter profit margins
• new technology
• future of supply management and quota values
• increasing demands on net farm income (particularly family living costs)

When reviewing personal, financial and production goals, producers should always be reminded of future challenges facing the industry.

Because of the large capital investment required in the dairy industry today, it is important to be a good money manager. Use capital wisely by analyzing all major changes to a business and only make changes based on realistic cashflow projections. Apply the sensitivity rule - can your farm handle a 5% drop in revenue and a 5% rise in expenses? Debt is not necessarily bad, but make sure it’s manageable.

In summary, the dairy industry is highly productive, very efficient and a large part of the economy. I believe producers who are willing to adapt to change have good reason to be optimistic about their future.

Last Reviewed: June 2010