Economies of scale – show us the proof

Published 25 June 14

Look more indepth at the economies of scale analysis

The debate about whether you have to get big to be profitable in dairy farming rumbles on. Here, AHDB & DairyCo economist Mark Topliff analyses the latest 2012/13 Milkbench+ data for clues as to the role economies of scale can really play…

We started by taking two views of the data for this study – total milk production and total herd size. For each analysis, the data was divided up in to four equal segments, or quartiles. While number of litres produced per enterprise increased with herd size, so, more surprisingly, did yield per cow, with nearly 2,000 litres difference between the average for the smallest and the largest quartiles.

Table 

Let’s take a look at the impact of this finding on costs of production, net margins and revenue.

Herd Size 

The chart clearly shows a noticeable difference in the level of costs of production due to mainly the smallest herds, on average, having 6.2ppl higher fixed costs than the largest herds, which accounted for almost the entire difference in total costs of production.

The quartile with the smallest herds returned a net margin of -5.6ppl, compared with the quartile with the largest herds, which achieved a positive net margin of 1.5ppl.

Revenue levels (mainly derived from milk price) were virtually the same across all the size quartiles, indicating that fixed costs were the major driver. So does this mean conclusively that getting bigger spreads your fixed costs over more litres and you achieve a better net margin? Not quite.

If we look at the quartiles in more detail we can see an even more interesting picture emerging if we divide each down based on net margin.

The chart below illustrates the overall range in net margin performance across all the four size quartiles.

Net MarginNote: Q1.1 = lowest net margin group within the Smallest herds (Q1) category: Q1.4 = highest net margin within the Smallest herds (Q1) category: Range repeated for the other size categories In each of the four quartiles, there was at least one group which produced, on average, negative net margins on a pence per litre basis. However the number of groups achieving this negative margin reduced as average herd size increased.

So it seems all herd sizes can perform well and, indeed, if we plot the individual results from all the farms providing data for Milkbench+, we can see very good margins from different farms at any herd size on the scale. However, it is notable that the lowest margins are all among the smaller sized herds.

Herd V Margin

So overall, larger herds are more likely to perform better. Comparative results were found within Defra’s Farm Business Survey (2013) data in its report ‘Dairy Farms: Economic performance and links with Environmental Performance’ Analysis show that 78% of dairy herds greater than 170 cows had a positive net margin, while only 28% of herds with less than 100 cows returned a positive net margin.

But while expanding herd or increasing yields can spread costs and improve a business situation, is can also make a business situation worse through exacerbating existing inefficiencies or adding to already-high costs. If a decision is being made to expand then producers clearly need to ask themselves whether they are as efficient as they can be as greater scale will just magnify the existing state of the business. In other words – “get better before getting bigger”.

Download a detailed breakdown of 2012/13 Milkbench data

 

Look more indepth at the economies of scale analysis

 

 

 

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