United States

Department

of Agriculture

www.ers.usda.gov

Electronic Report from the Economic Research Service

February 2004

Statistical

Bulletin

Number

974-6

Characteristics and

Production Costs of 

U.S. Dairy Operations

Sara D. Short1

In this report. . .Total costs of producing milk in 2000 ranged from an average of

$11.58 per hundredweight (cwt) of milk sold in the Fruitful Rim-West region to $18.23

per cwt in the Eastern Uplands. Milk producers in the West had a significant cost advantage over producers in other regions in 2000 because their operations were much larger.

Operations with 500 or more milk cows had significantly lower total operating and ownership costs, indicative of the economies of size experienced by larger operations. Also,

differences in animal performance, feed efficiency, and labor efficiency were critical in

determining whether producers were in the low- or high-cost group for producing milk.

These findings were based on the 2000 Agricultural Resource Management Survey

(ARMS), the most recent national survey of milk producers.

Keywords: Milk, operation characteristics, production practices, costs of production,

cost variation.

Acknowledgments: The author appreciates the assistance of her colleagues William D.

McBride and Amy Goldian.

1Sara D. Short is an agricultural economist with the Resource Economics Division 

of USDA’s Economic Research Service.
ii  Characteristics and Production Costs of U.S. Dairy Operations/SB-974-6 Economic Research Service/USDA

Milk is produced in all 50 States. The top five milk-producing States in 2000 were California, Wisconsin, New

York, Pennsylvania, and Minnesota (NASS, April 2002),

accounting for 53 percent of all milk produced. The

same five States topped production in 1975, but in different order. Wisconsin, California, New York,

Minnesota, and Pennsylvania together produced 48 percent of the Nation’s milk that year. The percentage

increase for these five States between 1975 and 2000

may seem slight, but their total milk production

increased from 55.8 billion pounds in 1975 to 88.1 billion pounds in 2000.

The top 10 milk-producing States in 2000 and 1975

accounted for 70 and 65 percent, respectively, of total

milk production. Differences in State rankings each year

highlight one key change in milk production—growth in

nontraditional dairy areas. Idaho, New Mexico, and

Washington State replaced Iowa, Ohio, and Missouri—

States in a traditional dairy area, the Midwest—in the

top 10. Coupled with long-term growth of milk production in California, large quantities of milk production in

southern Idaho, eastern New Mexico, eastern

Washington State, and southwestern Kansas have contributed to the changing national landscape of milk production. Growth in the importance of western regions as

major sources of milk supplies is a significant feature of

the U.S. dairy industry.

Beginning in 1993, the National Agricultural Statistics

Service (NASS) began publishing data on the distribution of milk production by herd-size categories. In 2000,

about 65 percent of production came from operations

with 100 or more cows, up from 51 percent in 1993.

Production from the smallest herds (less than 50 cows)

fell by about 60 percent. Recent NASS data, which

include a category of 500 or more cows, indicate how

concentrated milk production has become—more than

35 percent of the herd inventory was on these largest

operations in 2000 (NASS, February 2002).

In 1993, farms with 100 or more cows comprised about

14 percent of all operations, housed just over half of the

cows, and provided over 55 percent of the milk produced. By 2000, farms with 100 or more cows accounted for 20 percent of operations, had almost 66 percent

of the cows, and produced more than 70 percent of the

milk production. Information about operations with 500

or more milk cows further highlights this dimension of

the dairy industry. Such operations are about 3 percent

of all operations, house over 35 percent of the cows, and

provide over 31 percent of U.S. milk production. 

Dairy farming is much more industrialized today than in

the past in terms of resources, technology, and organizational structure. Technological innovations have

increased opportunities for expansion and specialization, processes that tend to change the functions of the

farmer. Even on smaller operations, dairy farm managers are doing more than just making the production

decisions directly related to the animals; they are managing labor and other inputs, and possibly making marketing decisions.

Technology has also changed the way milk is produced.

The switch to more technologically oriented production

has coincided with expansion to take advantage of

economies of size. However, not all technologies are

capital intensive—rotational grazing, for example, is a

production system that does not necessarily require large

capital investments, though it does require a relatively

large investment in human capital because animals are

moved on a daily basis to and from designated grazing

areas. In fact, capital-intensive, confinement dairies also

need high-quality labor for efficient operation.

Prospects for continued expansion of milk production

clearly exist, but they are not limitless. Environmental

concerns about large numbers of animals on small

acreages are increasing, as are concerns about the waste

management associated with those animals. Such environmental issues are not limited to large farms; small

farms face similar concerns. 

Overview
The objective of this report is to examine how milk production costs vary among U.S. producers.

Characteristics and production costs of operations are

compared and grouped according to selected regions,

enterprise size, and production costs. A national

overview of operating and ownership costs is available

at www.ers.usda.gov/Data/CostsandReturns. Operating

plus ownership costs are used in the analysis of production costs (see box "Cost-of-Production Components").

These costs describe the dairy operation's ability to meet

short-term obligations and to replace capital assets as

needed, and thus stay in business. 

Data for the analysis came from a detailed survey of

U.S. dairy producers conducted for 2000 as part of the

USDA's annual Agricultural Resource Management

Survey (ARMS). The survey collected information from

a cross section of U.S. dairy operations, including measures of size, production costs, business arrangements,

production facilities and practices, and farm operator

and financial characteristics. The sampling resulted in

872 responses from 22 States (fig. 1).

Each surveyed (sample) farm represents a number of

similar farms in the target population, as indicated by its

expansion factor. The expansion factor, or survey

weight, is determined from the selection probability of

that farm. The survey weights allow the sample farms to

represent the target population. The ARMS target population was farms with 10 or more milk cows during

2000. The sample represents about 90 percent of U.S.

milk production that year (NASS, April 2002). 

Economic Research Service/USDA Characteristics and Production Costs of U.S. Dairy Operations/SB-974-6  1

Objective and Data

Vermont

Figure 1 

States surveyed in the 2000 ARMS of milk producers

Source: 2000 ARMS, USDA, ERS.

California

Idaho

Washington

Arizona New Mexico

Texas

Tennessee

Kentucky

Georgia

Florida

Virginia

Pennsylvania

New York

Indiana Ohio

Michigan

Illinois

Iowa

Minnesota

Wisconsin

Missouri
2  Characteristics and Production Costs of U.S. Dairy Operations/SB-974-6 Economic Research Service/USDA

Cost-of-Production Components

Operating costs include major inputs such as feed, veterinary services and medicine, bedding

and litter, marketing, custom services, fuel, lube, electricity, repairs, and interest on operating

inputs. Ownership costs include the annualized cost of maintaining the capital investment

(depreciation and interest) in dairy facilities and equipment and costs for non-real-estate property taxes and insurance.

Most operating costs are developed by summarizing survey responses about the total amount

paid for these inputs. Surveyed quantities of homegrown feed fed to milk cows are valued at

market prices. Surveyed acres of grazed pasture and cropland are valued at market rental cost.

The interest on operating inputs is the opportunity cost of the investment in total operating

inputs during the year.

Capital recovery cost is an estimate of the annual capital expenditure necessary to replace

machinery, buildings, and equipment over their assumed ownership period and includes an

interest charge on unrecovered capital. Detailed information is collected regarding the machinery, buildings, and equipment used in production. The data include age, type, and size of

machinery, buildings, and equipment items. Non-real-estate taxes and insurance for the whole

operation are allocated to the milk enterprise according to the gross margin of milk production

relative to other farm enterprises. All costs are computed using methods recommended by the

American Agricultural Economics Association (AAEA) Task Force on Commodity Costs and

Returns (AAEA Handbook).
This report explores regional diversity in milk production using the ERS Farm Resource Regions as the basis

for regional delineation (Heimlich). The Fruitful Rim

region is modified (Fruitful Rim-West) to include only

States in the Western United States because of this area's

importance as a source of milk (fig. 2). The Northern

Crescent is divided into two separate regions (Northern

Crescent-East and Northern Crescent-West) to enable the

comparison of two traditional milk production areas (fig.

2). The Heartland and Eastern Uplands are also used in

the analysis. The Southern Seaboard and Prairie

Gateway regions were not included because the survey

provided too few observations for a detailed breakdown

of farm and operator characteristics in these regions. The

Northern Great Plains and Basin and Range regions were

excluded for similar reasons.

Only 7 percent of dairy operations were located in the

Fruitful Rim-West. However, these operations accounted

for 28 percent of milk sales (table 1). Sixty-six percent

of the operations were located in the two Northern

Crescent regions combined and accounted for 46 percent of milk sales. The remaining 23 percent of dairy

operations were in the Heartland and Eastern Uplands

regions and accounted for 12 percent of milk sales.

Structural differences in milk production were apparent

among the five regions. For example, producers in the

Fruitful Rim-West had significantly larger dairy operations that are more labor-efficient, tend to be more specialized in milk production, and purchase most, if not

all, of the feed fed. Operations in the Fruitful Rim-West

had an average of 469 milk cows, compared with fewer

than 100 milk cows in each of the other four regions.

Concentration of the cows on the cropland base of dairy

farms in the Fruitful Rim-West (4.61 milk cows per

cropland acre) was significantly higher than in the other

four regions. The concentration of cows on the land

Economic Research Service/USDA Characteristics and Production Costs of U.S. Dairy Operations/SB-974-6  3

Milk producers in the West had a significant cost advantage over producers in other regions because their

operations were appreciably larger. Larger dairy operations benefit from economies of size that spread capital costs over more units of production.

Figure 2 

ERS farm resource regions modified to examine dairy operations

Source: 2000 ARMS, USDA, ERS.

Northern Great 

Plains

Eastern Uplands

Fruitful Rim-West

Heartland

Northern Crescent-West

Northern Crescent-East

Capital Recovery Costs Are Significantly Lower on Operations in

the West
4  Characteristics and Production Costs of U.S. Dairy Operations/SB-974-6 Economic Research Service/USDA

Table 1—Performance and production practices of dairy farms by region, 2000 

Heartland Northern Northern Crescent- Eastern Fruitful RimItem (a) Crescent-East (b) West (c) Uplands (d) West (e)

Percent

Dairy farms 13 b c e 28 a c d e 38 a b d e 10 b c e 7 a b c d 

Milk sales 7 b c d e 22 a d e 24 a d 5 a b c e 28 a b d

Average number per farm

Milk cows 67 e 78 e 80 e 64 e 469 a b c d

Pounds

Output per cow 15,399 b e 17,302 a d 15,391 14,013 b e 18,001 a d

Milk cows per cropland acre

Concentration 0.49 c e 0.42 c e 0.31 a b d e 0.58 c e *4.61 a b c d

Hours per cwt of milk sold

Labor efficiency

Paid 0.06 b c d 0.14 a e 0.15 a e 0.12 a e *0.07 b c d

Unpaid 0.39 e 0.35 e 0.31 e 0.38 e 0.05 a b c d

Total 0.45 e 0.49 e 0.46 e 0.50 e 0.12 a b c d

Pounds per cwt of milk sold

Feed efficiency

Purchased 41 e #142 33 e 67 *185 a c

Homegrown 217 b d e 145 a c e 180 b e 133 a e 56 a b c d

Total 258 *287 213 200 *241 

Percent of milk cows

bST use *12 20 d 13 d *5 b c e *16 c

Hours milking system 

operational 5 e 5 c e 4 b e 5 e 12 a b c d

Percent of farms

Milking units with automatic 

takeoffs 16 e 20 e 18 e *27 e 71 a b c d 

Management practices

Production

Genetic selection/

breeding programs 62 74 c d 60 a 54 b 64 

Breeding/calving season 

control 58 b c 32 a c e 41 a b 44 49 b

Preventive medicine/

practices 88 c 89 94 a 90 93 

Input acquisition

Forward purchases 

of feed 23 e 25 e 21 e *19 e 52 a b c d

Nutritionist to purchase

feed 61 b 77 a d 67 d 51 b c e 66 d

Dealers/suppliers to 

purchase feed 46 39 e 39 e *36 e 58 b c d

Farmer-owned coop to 

purchase feed 47 c 46 c 79 a b d e *39 c 45 c

Monitor forage quality 50 63 51 47 60 

Purchase used farm 

machinery or equipment 53 e 64 d e 59 e 50 b 38 a b c

Coefficient of Variation = (Standard Error/Estimate) x 100. * indicates that CV is greater than 25 and less than or equal to 50. # indicates that

CV is greater than 50 and less than or equal to 75.

a, b, c, d, e indicate that estimates are significantly different from the indicated region above the 90-percent-or-better level using the

t-statistic.

Source: 2000 ARMS of milk producers, USDA, ERS.
indicates the amount of land potentially available for

feed production, as well as for manure disposal. 

Concentration was significantly less in the Northern

Crescent-West than in the Northern Crescent-East even

though the average number of milk cows per farm in the

two regions is similar. The Northern Crescent-West has

a much larger cropland base than the Northern

Crescent-East. Northern Crescent-West producers fed

significantly more homegrown feed per hundredweight

(cwt) of milk sold. However, total feed efficiency was

similar in both regions.

Management practices used by dairy farmers in the five

regions suggest that most milk producers take steps to

improve the performance of the dairy enterprise. In

managing dairy herds, a relatively large proportion of

farmers used genetic selection and breeding programs to

improve the herd quality and used preventive medicine

and practices to maintain herd health. To manage input

purchases, a significantly larger percent of farmers in

the Fruitful Rim-West locked in input prices before

delivery to take advantage of favorable prices and thereby control input costs; negotiated input price discounts

with dealers or suppliers; and purchased used farm

machinery or equipment. Such practices may have contributed to operating costs that were significantly lower

in the Fruitful Rim-West than in most other regions

(table 2).

Producers in the Fruitful Rim-West operated their milking systems significantly more hours per day, thus using

more of the available milking capacity than producers in

the other four regions (table 1). Because milking facilities were used much more efficiently in the Fruitful

Rim-West, asset ownership costs were lower as fixed

costs were spread over more units of production.

Consequently, dairy operations in this region had a significant competitive advantage over those in the other

regions, due in part to lower asset ownership costs.

A comparison of the regional cost distributions of milk

producers illustrates the cost competitiveness of producers in each region (fig. 3). The Heartland and Eastern

Uplands were the high-cost regions, as their distributions are above those of the other regions. Cost distributions were similar in both areas of the Northern

Crescent, but were much lower for producers in the

Fruitful Rim-West. At $12.40 per cwt, the average U.S.

all-milk price in 2000, 50 percent of dairy producers in

the Fruitful Rim-West were able to cover total operating

and ownership costs compared with 30 percent of producers in the two Northern Crescent regions, 25 percent

in the Eastern Uplands, and 20 percent in the Heartland.

A significantly larger proportion of producers in the

Fruitful Rim-West attended college compared with producers in the other regions (table 3). The smaller proportion of Fruitful Rim-West producers over 55 years of

age and the higher average debt-to-asset ratio suggest

that the investment in milk production in this region has

been more recent than in the other four regions. Also, a

smaller proportion of dairy farmers in the Fruitful RimWest reported plans to exit milk production within the

next 10 years compared with farmers in the other

regions, indicating that the Fruitful Rim-West will likely

continue to be a major source of milk supplies. Most of

the dairy farms in the Fruitful Rim-West were highly

specialized commercial farms with sales of $250,000 or

more (see glossary).

Economic Research Service/USDA Characteristics and Production Costs of U.S. Dairy Operations/SB-974-6  5

Figure 3

Regional cumulative distribution of milk 

operating plus ownership costs, 2000

Source: 2000 ARMS, USDA, ERS.

0

5

10

15

20

25

30

Heartland

Northern Crescent-East

Northern Crescent-West

Eastern Uplands

Fruitful Rim-West

$/cwt

0 20 40 60 80 100
6  Characteristics and Production Costs of U.S. Dairy Operations/SB-974-6 Economic Research Service/USDA

Table 2—Milk production costs and returns, dollars per cwt milk sold, by region, 2000

Heartland Northern Northern Crescent- Eastern Fruitful RimItem (a) Crescent-East (b) West (c) Uplands (d) West (e)

Dollars

Operating costs

Feed

Feed grains *2.16 0.97 c 1.33 b *1.23 1.16 

Hay and straw 3.11 b d 1.31 a 0.86 d e 1.76 a c 1.83 c

Complete feed mixes 1.09 d 1.48 c d *0.68 b d 2.86 a b c e *1.48 d

Liquid whey and milk replacer *0.07 c 0.05 c 0.15 a b e #0.13 #0.05 c

Silage 1.02 1.22 d e 1.18 d e 0.74 b c 0.81 b c

Grazed pasture and cropland *0.18 e 0.08 d e 0.07 d e 0.26 b c e 0.03 a b c d

Other feed1 1.46 b d 0.87 a 1.31 #2.38 *0.80 a

Total feed cost 9.07 b c e 5.98 a d 5.57 a d 9.36 b c 6.15 a

Veterinary and medicine 0.80 d e 0.79 d e 0.74 d e 0.55 a b c 0.50 a b c

Bedding and litter 0.18 b d e 0.26 a d e 0.22 d e 0.10 a b c *0.08 a b c

Marketing 0.24 b 0.42 a c e 0.20 b d 0.36 c e 0.22 b d

Custom services 0.57 c d 0.62 c d e 0.36 a b d 0.82 a b c e 0.41 b d

Fuel, lube, and electricity 0.59 e 0.54 e 0.56 e 0.56 e 0.36 a b c d

Repairs 0.66 e 0.63 e 0.55 e 0.66 e 0.42 a b c d

Hired labor *0.72 1.03 1.20 0.96 1.12 

Other2 #0.00 *0.00 #0.00 #0.00 #0.02 

Interest on operating capital 0.35 b c e 0.27 a c e 0.24 a b d 0.36 c e 0.24 a b d

Total operating costs 13.18 b c e 10.53 a c e 9.65 a b d 13.73 c e 9.52 a b d

Ownership costs 

Capital recovery 4.73 b e 3.71 a c e 4.52 b e 4.31 e 1.92 a b c d

Housing facilities 1.72 b e 1.28 a e 1.39 e *1.15 0.63 a b c

Milking facilities 0.53 b c e 0.70 a b e 0.79 a d e 0.51 b c e 0.07 a b c d

Feed storage facilities 0.30 e 0.30 e 0.30 e 0.24 e *0.13 a b c d

Manure handling facilities 0.28 b e 0.17 a d e #0.56 0.32 b e 0.55 a b d

Machinery 1.76 b e 1.18 a d e 1.38 d e 1.82 b c e 0.36 a b c d

Breeding herd *0.14 *0.08 d 0.10 *0.27 b *0.18 

Non-real-estate property taxes 

and insurance 0.18 0.20 c e 0.23 b e 0.19 e 0.13 b c d

Total ownership costs 4.91 b e 3.91 a c e 4.75 b e 4.50 e 2.06 a b c d

Total operating and ownership 

costs 18.09 b c e 14.44 a d e 14.40 a d e 18.23 b c e 11.58 a b c d

Returns above

Operating costs @1.22 b c 4.75 a e 4.62 a e @1.92 3.33 b c

Operating and ownership costs *-3.69 b c e *0.84 a c @-0.13 a b e @-2.58 e *1.28 a c d

1Cotton seed meal, protein supplements, protein byproducts, vitamin or mineral supplements, nonprotein byproducts, alfalfa cubes or pellets,

green chop, corn stalks, and antibiotics and other medicated additives. 2Manure disposal fees, permits and licenses, and odor control costs.

Coefficient of Variation = (Standard Error/Estimate) x 100. * indicates that CV is greater than 25 and less than or equal to 50. # indicates that CV

is greater than 50 and less than or equal to 75. @ indicates that CV is above 75.

a, b, c, d, e indicate that estimates are significantly different from the indicated region above the 90-percent-or-better level using the 

t-statistic.

Source: 2000 ARMS of milk producers, USDA, ERS.
Economic Research Service/USDA Characteristics and Production Costs of U.S. Dairy Operations/SB-974-6  7

Table 3—Dairy operator and operation characteristics, by region, 2000 

Heartland Northern Northern Crescent- Eastern Fruitful RimItem (a) Crescent-East (b) West (c) Uplands (d) West (e)

Age distribution (percent)

Less than 55 years 70 73 69 72 63 

55 years or more *30 27 31 28 37 

Operator education (percent)

High school or less 82 d e 81 d e 69 e 77 a b e 46 a b c d

Attended college 18 d e 19 d e 31 e 23 a b e 54 a b c d

Major occupation (percent)

Farming 97 98 98 95 97

Sales class (percent of farms)

$250,000 or more 26 e 24 e 23 e *16 e 75 a b c d

$100,000-$249,999 31 b 46 a 41 43 na 

$99,999 or less 43 29 36 *41 na 

Production specialty (percent of farms)

Dairy 79 e 92 e 90 e 83 e 98 a b c d

Farm debt/asset ratio (average) 2.58 e 2.77 d 2.74 d e 2.49 b e 2.96 a c d

Typology (percent of farms)

Rural residence farms 9 7 1 13 na 

Intermediate farms 65 68 75 71 na 

Commercial farms 26 e 25 e 24 e *16 e 76 a b c d

Exiting industry (percent of farms)

10 years or less 50 53 66 49 38 

More than 10 years 50 47 34 51 62 

Years in business (percent of farms)

10 years or less na 26 c 16 b e na 29 c

More than 10 years na 74 c 84 b e na 71 c

Coefficient of Variation = (Standard Error/Estimate) x 100.

* indicates that CV is greater than 25 and less than or equal to 50.

na indicates value is not available due to no observations, an undefined statistic, or reliability concerns.

a, b, c, d, e indicate that estimates are significantly different from the indicated region above the 90-percent-or-better level using the 

t-statistic.

Source: 2000 ARMS of milk producers, USDA, ERS.
To analyze the relationship between enterprise size and

production costs, dairy operations were divided into

four groups; small (fewer than 50 cows), medium (50-

199 cows), large (200-499 cows), and industrial scale

(500 or more cows). Small- and medium-sized dairy

operations far outnumbered large and industrial-scale

operations in 2000 (table 4). Thirty-nine percent of

dairy operations were small, but they accounted for only

10 percent of total milk sales. Although only 4 percent

of dairy operations were industrial scale, they accounted

for more than a third of milk sales. Industrial-scale

operations had an average of 955 milk cows, compared

with 313 in large operations, 88 in medium operations,

and 33 in small operations. Concentration of the cows

on the cropland base was significantly higher on industrial-scale operations (3.63 milk cows per cropland acre)

than on any others. Consequently, these producers had

much less acreage for producing feed or spreading

manure. 

Most indicators of performance improved as size of

operation increased. Feed, labor, and capital, the three

major inputs in milk production, were all used more

efficiently on larger operations. Industrial-scale operations were more labor-efficient, using only 0.11 total

labor hours per cwt of milk sold (table 4); small dairy

operations used nearly eight times as much labor per

cwt of milk sold. Feed efficiency was significantly higher on industrial-scale dairy operations than on small and

medium operations. Industrial-scale operations fed 162

pounds of feed per cwt of milk sold, compared with 243

and 253 pounds on small and medium operations,

respectively. Industrial-scale operations more often used

genetic selection and breeding programs to improve

herd quality and a nutritionist to determine feed rations

than did producers in other size groups. A large number

of industrial-scale operations also used preventive medicine and practices to maintain herd health. Differences

in capital efficiency by size, as indicated by the hours

that milking systems were operational, were also significant: industrial scale enterprises operated their milking

systems 8 to 15 more hours per day than the other three

enterprise sizes.

Industrial-scale dairy operations had significantly lower

operating and ownership costs than other operations,

averaging $11.60 per cwt. of milk sold (table 5). Nearly

all of the cost difference is due to the decline in asset

ownership costs with size. This is indicative of the

economies of size experienced as the size of the enterprise increases and fixed facility costs are spread over

more units of production.

Improvements in performance from the small to the

industrial-scale operations were not linear, but rather

incrementally less between the small, medium, and

large groups (fig. 4). The largest efficiency gains were

made between the small and medium groups. Average

costs on medium-sized operations were more than 15

percent less than on small operations, while they fell 12

percent between the medium and large groups.

However, average costs fell almost 13 percent between

large and industrial-scale operations. These data suggest

that production costs are reduced significantly by

enlarging operations beyond relatively small sizes, and

that there are cost-reducing incentives for operations to

grow to the industrial scale.

Seventy percent of small operations had sales of

$99,999 or less (table 6). Milk production was a more

8  Characteristics and Production Costs of U.S. Dairy Operations/SB-974-6 Economic Research Service/USDA

Figure 4

Operating and ownership costs by dairy

enterprise size, 2000

Source: 2000 ARMS, USDA, ERS.

$/cwt

< 50 50 200 >=500

0

5

10

15

20

Milk cows

Ownership costs

Operating costs

Total costs

Operations with 500 or more milk cows had significantly lower total operating and ownership costs, indicative of the economies of size experienced by larger operations.

Operation Performance, Input Use, and Costs Varied by 

Enterprise Size
important component of the overall business of industrial-scale operations than of small and medium ones. All

the industrial-scale operations were highly specialized

commercial farms with sales of $250,000 or more (see

glossary). A significant proportion of operators of large

and industrial-scale operations attended college, in contrast with operators of small and medium-size operations. Only 16 percent of industrial-scale operators

reported intentions to exit milk production within the

next 10 years, compared with 65 percent of small operators, indicating that industrial-scale operations will likely continue to be the major source of milk supplies.

Economic Research Service/USDA Characteristics and Production Costs of U.S. Dairy Operations/SB-974-6  9

Table 4—Performance and production practices of dairy farms, by enterprise size, 2000

Enterprise size (number of milk cows)

Small (a) Medium (b) Large (c) Industrial scale (d)

Item Fewer than 50 50-199 200-499 500 or more

Share of ARMS (percent)

Dairy farms 39 b c d 52 a c d 5 a b 4 a b 

Milk sales 10 b d 41 a c 14 b d 35 a c

Milk cows (average number per farm) 33 b c d 88 a c d 313 a b d 955 a b c

Output per cow (pounds) 14,932 b c 16,157 a 17,420 a 17,326 

Concentration (milk cows per

cropland acre) 0.39 c d 0.60 c d *2.07 a b 3.63 a b 

Labor efficiency (hours per cwt 

of milk sold)

Paid 0.07 b c 0.13 a 0.12 a *0.09 

Unpaid 0.77 b c d 0.31 a c d 0.07 a b d 0.02 a b c

Total 0.84 b c d 0.44 a c d 0.19 a b d 0.11 a b c

Feed efficiency (pounds per cwt 

of milk sold)

Purchased 38 d *93 #230 102 a

Homegrown 205 c d 159 c d 87 a b *60 a b

Total 243 d 252 d #317 162 a b

bST use (percent of milk cows) *8 10 *17 22 

Hours milking system operational 3 b c d 5 a c d 10 a b d 18 a b c

Milking units with automatic takeoffs

(percent of farms) 3 b c d 30 a c d 85 a b 87 a b 

Management practices (percent of farms)

Production

Genetic selection/breeding programs 56 b c d 68 a d 70 b d 89 a b c

Breeding/calving season control 38 b 46 a 39 51 

Preventive medicine/practices 86 b d 94 a 93 97 a

Input acquisition

Forward purchases of feed *12 b c d 27 a c d 58 a b d 89 a b c

Nutritionist to purchase feed 51 b c d 76 a d 76 a 90 a b

Dealers/suppliers to purchase feed 32 b c d 44 a d 56 a d 90 a b c

Farmer-owned co-op to purchase 

feed 55 62 d 68 d 48 b c

Monitor forage quality 42 b c d 63 a 72 a 65 a

Purchase used farm machinery 

or equipment 51 b 63 a d 52 45 b

Regional distribution (percent of farms)

Heartland 18 b 12 a na na

Northern Crescent-East 28 32 na na

Northern Crescent-West 41 42 na na

Eastern Uplands *12 11 na na

Fruitful Rim-West na 4 d na 77 a

Coefficient of Variation = (Standard Error/Estimate) x 100. * indicates that CV is greater than 25 and less than or equal to 50. # indicates that

CV is greater than 50 and less than or equal to 75.

na indicates value is not available due to no observations, an undefined statistic, or reliability concerns.

a, b, c, d indicate that estimates are significantly different from the indicated enterprise size above the 90-percent-or-better level using the 

t-statistic.

Source: 2000 ARMS of milk producers, USDA, ERS.
10  Characteristics and Production Costs of U.S. Dairy Operations/SB-974-6 Economic Research Service/USDA

Table 5—Milk production costs and returns, dollar per cwt milk sold, by enterprise size, 2000 

Enterprise size (number of milk cows)

Small (a) Medium (b) Large (c) Industrial scale (d)

Item Fewer than 50 50-199 200-499 500 or more

Dollars

Operating costs

Feed

Feed grains *1.88 1.13 1.13 1.17 

Hay and straw 2.93 b c d 1.43 a 1.17 a 1.31 a

Complete feed mixes 1.04 c 1.34 1.69 a 1.54 

Liquid whey and milk replacer 0.08 c 0.10 c *0.04 a b *0.07 

Silage 0.90 b 1.11 a 0.90 *1.20 

Grazed pasture and cropland 0.25 b c d 0.10 a c d *0.04 a b d *0.01 a b c

Other feed1 1.08 1.33 c 0.86 b 0.88 

Total purchased feed cost 8.16 c d 6.54 5.83 a 6.17 a

Veterinary and medicine 0.66 0.71 0.58 0.60 

Bedding and litter 0.25 b d 0.20 a d 0.17 d 0.07 a b c

Marketing 0.32 0.29 0.25 0.24 

Custom services 0.61 b 0.52 a 0.52 0.51 

Fuel, lube, and electricity 0.65 c d 0.58 c d 0.41 a b 0.35 a b

Repairs 0.62 c d 0.64 c d 0.47 a b 0.41 a b

Hired labor 0.32 b c d 1.01 a c d 1.45 a b 1.41 a b

Other2 *0.00 0.00 *0.00 #0.02 

Interest on operating capital 0.33 c d 0.27 c d 0.24 a b 0.24 a b

Total operating costs 11.92 10.76 9.94 10.03 

Ownership cost

Capital recovery 5.85 b c d 4.17 a d 3.24 a d 1.44 a b c

Housing facilities 1.57 b d 1.31 a d *1.14 d *0.48 a b c

Milking facilities 1.33 b c d 0.66 a c d 0.10 a b d *0.06 a b c

Feed storage facilities 0.30 c d 0.32 c d 0.13 a b *0.12 a b

Manure handling facilities 0.15 b d 0.34 a #1.06 0.37 a

Machinery 2.26 b c d 1.43 a c d 0.54 a b d 0.26 a b c

Breeding herd 0.24 b 0.11 a *0.26 *0.14 

Non-real-estate property taxes 

and insurance 0.21 c d 0.23 c d 0.15 a b d 0.12 a b c

Total ownership costs 6.06 b c d 4.40 a d 3.38 a d 1.57 a b c

Total operating and ownership costs 17.98 b c d 15.16 a c d 13.32 a b d 11.60 a b c

Returns above

Operating costs *3.82 3.92 4.12 3.38 

Operating and ownership costs *-2.24 c d @-0.48 d @0.73 a *1.81 a b

1Cotton seed meal, protein supplements, protein byproducts, vitamin or mineral supplements, nonprotein byproducts, alfalfa cubes or

pellets, green chop, corn stalks, and antibiotics and other medicated additives. 2Manure disposal fees, permits, and licenses, and odor control costs.

Coefficient of Variation = (Standard Error/Estimate) x 100. * indicates that CV is greater than 25 and less than or equal to 50. # indicates that

CV is greater than 50 and less than or equal to 75. @ indicates that CV is above 75.

a, b, c, d indicate that estimates are significantly different from the indicated enterprise size above the 90-percent-or-better level using the tstatistic.

Source: 2000 ARMS of milk producers, USDA, ERS.
Economic Research Service/USDA Characteristics and Production Costs of U.S. Dairy Operations/SB-974-6  11

Table 6—Dairy operator and operation characteristics, by enterprise size, 2000 

Enterprise size (number of milk cows)

Small (a) Medium (b) Large (c) Industrial scale (d)

Item Fewer than 50 50-199 200-499 500 or more

Age distribution (percent)

Less than 55 years 74 68 61 71 

55 years or more 26 32 *39 29 

Operator education (percent)

High school or less 84 b c d 70 a c d 48 a b *36 a b 

Attended college 16 b c d 30 a c d 52 a b 64 a b

Major occupation (percent)

Farming 97 97 90 94 

Sales class (percent of farms)

$250,000 or more 2 b c d 36 a c d 98 a b 100 a b 

$100,000-$249,999 28 b d 55 a d na 0 a b

$99,999 or less 70 b d 10 a d na 0 a b

Production specialty (percent of farms)

Dairy 81 b d 94 a d 93 100 a b

Debt/asset ratio (average) 2.65 c d 2.72 d 2.92 a d 3.32 a b c

Typology (percent of farms)

Rural residence farms na 1 d na 0 b

Intermediate farms 86 b d 62 a d na 0 a b

Commercial farms na 37 c d 98 d 100 b

Exiting industry (percent of farms)

10 years or less 65 b c d 54 a d 39 a d 16 a b c

More than 10 years 35 b c d 46 a d 61 a d 84 a b c

Years in business (percent of farms)

10 years or less 24 d 20 d 20 d 44 a b c

More than 10 years 76 d 80 d 80 d 56 a b c

Coefficient of Variation = (Standard Error/Estimate) x 100. * indicates that CV is greater than 25 and less than or equal to 50.

na indicates value is not available due to no observations, an undefined statistic, or reliability concerns.

a, b, c, d indicate that estimates are significantly different from the indicated enterprise size above the 90-percent-or-better level using the 

t-statistic.

Source: 2000 ARMS of milk producers, USDA, ERS.
Estimated operating and ownership costs per cwt of milk

sold were ranked from lowest to highest to form a

weighted cumulative distribution of operations. A comparison of costs with prices received by milk producers

gives a rough indication of the number of producers who

covered costs. At the 2000 average milk price of $12.19

per cwt, roughly 72 percent of milk producers were able

to cover operating costs of production. Only about 26

percent of producers were able to cover both operating

and asset ownership costs (fig. 5). Prices received by

farmers for milk vary substantially, while production

costs are relatively stable. Between 2000 and 2003, average monthly prices were as high as $17 per cwt and as

low as $11. This means that the number of producers

able to cover costs can vary widely at any point in time.

To analyze factors contributing to variation in production costs, dairy operations were divided into low-,

mid-, and high-cost groups. Twenty-five percent of dairy

operations had costs of $12.17 or less per cwt of milk

sold (fig. 5). These low-cost operations accounted for 43

percent of total milk sales (table 7). Low-cost operations

had significantly larger herds than high-cost operations,

181 milk cows vs. 57. High-cost operations, with costs

of $18.79 or more per cwt of milk sold, accounted for 9

percent of milk sales.

Differences in animal performance were critical in

determining whether producers were low or high cost.

Output per cow on low-cost farms averaged 17,777

pounds, compared with 11,739 pounds on high-cost

farms. As a result, low-cost producers averaged some

$750 more in cash receipts from the sale of milk for

each cow in the milking herd. Feed represents a major

expense in milk production. Low-cost producers fed 142

pounds of feed per cwt of milk sold, compared with 569

pounds fed by high-cost producers. Greater feed efficiency on the part of low-cost producers resulted from

both more output per cow and less feed fed per cow. 

Low-cost producers more often used innovative management practices and technologies than high-cost producers.

For instance, low-cost producers made significantly

greater use of genetic and breeding programs to improve

herd quality, and they more often used a nutritionist to

purchase feed and formulate dairy rations. Low-cost producers were also more labor-efficient than high-cost producers, using 0.23 total labor hours per cwt of milk sold,

compared with 0.75 total hours in high-cost operations.

Low-cost dairy farms also used their milking facilities

more efficiently than high-cost farms, keeping their milking systems operating 6 hours per day on average compared with 4 hours per day on high-cost farms.

Average total operating costs were $8.74 per cwt of

milk sold for low-cost producers, compared with more

than $23 for high-cost producers (table 8). High-cost

operations had significantly higher feed costs than all

other operations: an average of $17.25 per cwt of milk

sold vs. $5.12 in low-cost operations. Low-cost farms

made significantly more use of forward purchases to

lock in feed prices (table 7). They also made significantly more use of nutritionists, dealers or suppliers, and

farmer-owned cooperatives to purchase feed. 

In general, dairy farms are highly specialized operations

that derive most of their household income from milk

production, as illustrated by the distribution by farm

typology (see glossary). Ninety-eight percent of lowcost farms were intermediate and commercial farms,

compared with 87 percent of high-cost farms (table 9).

Low-cost producers were generally younger than highcost producers and expected to stay in the dairy business beyond the year 2010.

12  Characteristics and Production Costs of U.S. Dairy Operations/SB-974-6 Economic Research Service/USDA

Low-cost operations showed the advantages of economies of size, as the average operation size was more

than three times that of high-cost operations.

Figure 5

Cumulative distribution of operating and total

costs for producing milk, 2000

Source: 2000 ARMS, USDA, ERS.

$/cwt

Percent of dairy operations

high-cost

operations

Operating costs

Total costs

Average milk price =$12.19/cwt.

0

5

10

15

20

25

30

0 25 50 75 100

$12.17

72%

$18.79

low-cost

operations 26%

Enterprise Size and Physical and Economic Performance

Distinguished Low-Cost from High-Cost Operations
Economic Research Service/USDA Characteristics and Production Costs of U.S. Dairy Operations/SB-974-6  13

Table 7—Performance and production practices of dairy farms, by production cost group, 2000 

Item Low-cost farms (a) Mid-cost farms (b) High-cost farms (c)

Dairy farms (percent) 25 b 50 a c 25 b

Milk sales 43 c 48 c 9 a b

Milk cows (average number per farm) 181 b c 104 a c 57 a b

Output per cow (pounds) 17,777 c 16,830 c 11,739 a b

Concentration (milk cows per cropland acre) *1.27 b c 0.57 a c 0.32 a b

Labor efficiency (hours per cwt of milk sold)

Paid 0.09 c 0.11 c 0.18 a b

Unpaid 0.14 b c 0.23 a c 0.57 a b

Total 0.23 b c 0.35 a c 0.75 a b

Feed efficiency (pounds per cwt of milk sold)

Purchased 69 *116 #275 

Homegrown 72 b c 129 a c 294 a b

Total 142 b c 245 *569 a b

bST use (percent of milk cows) 18 c 14 9 a

Hours milking system operational 6 b c 5 a c 4 a b

Milking units with automatic takeoffs

(percent of farms) 30 c 26 c 17 a b

Management practices (percent of farms)

Production

Genetic selection/breeding programs 69 c 65 58 a

Breeding/calving season control 37 45 44 

Preventive medicine/practices 90 94 88 

Input acquisition

Forward purchases of feed 29 c 28 c 14 a b

Nutritionist to purchase feed 70 c 74 c 48 a b

Dealers/suppliers to purchase feed 43 c 47 c 29 a b

Farmer-owned co-op to purchase feed 49 b 66 a 57 

Monitor forage quality 54 58 51 

Purchase used farm machinery or equipment 56 61 51 

Regional distribution (percent of farms)

Heartland 17 46 37

Northern Crescent-East 28 43 29

Northern Crescent-West 23 61 16

Eastern Uplands 26 38 36

Fruitful Rim-West 48 39 13

Coefficient of Variation = (Standard Error/Estimate) x 100. * indicates that CV is greater than 25 and less than or equal to 50. # indicates that

CV is greater than 50 and less than or equal to 75.

a, b, c indicate that estimates are significantly different from the indicated production cost group above the 90-percent-or-better level using

the t-statistic.

Source: 2000 USDA ARMS of milk producers, USDA, ERS.
14  Characteristics and Production Costs of U.S. Dairy Operations/SB-974-6 Economic Research Service/USDA

Table 8—Milk production costs and returns, dollar per cwt milk sold, by production cost group, 2000 

Item Low-cost farms (a) Mid-cost farms (b) High-cost farms (c)

Dollars

Operating costs

Feed

Feed grains 1.06 c 1.10 c *3.33 a b 

Hay and straw 1.07 b c 1.49 a c 5.70 a b

Complete feed mixes 1.23 c 1.68 1.96 a

Liquid whey and milk replacer *0.06 *0.09 *0.18 

Silage 0.83 c 1.12 *3.34 a

Grazed pasture and cropland 0.04 b c 0.09 a c *0.36 a b

Other feed1 0.82 c 1.29 #2.38 a

Total feed cost 5.12 b c 6.86 a c 17.25 a b

Veterinary and medicine 0.56 b c 0.78 a 0.79 a

Bedding and litter 0.12 b c 0.19 a c 0.31 a b

Marketing 0.25 c 0.29 c 0.41 a b

Custom services 0.44 b c 0.62 a c 0.85 a b

Fuel, lube, and electricity 0.38 b c 0.57 a c 1.00 a b

Repairs 0.39 b c 0.69 a c 1.05 a b

Hired Labor 1.25 b c 0.98 a 0.94 a

Other2 #0.01 *0.00 *0.00 

Interest on operating capital 0.21 b c 0.29 a c 0.62 a b

Total operating costs 8.74 b c 11.26 a c 23.23 a b

Ownership cost

Capital recovery 2.01 b c 4.23 a c 9.62 a b

Housing facilities 0.62 b c 1.50 a c 2.26 a b

Milking facilities 0.25 b c 0.61 a c 1.28 a b

Feed storage facilities 0.16 b c 0.26 a c 0.58 a b

Manure handling facilities 0.30 0.29 #2.43 

Machinery 0.55 b c 1.41 a c 2.77 a b

Breeding herd *0.14 c 0.16 c 0.29 a b

Non-real-estate property taxes and insurance 0.14 b c 0.21 a c 0.33 a b

Total ownership costs 2.15 b c 4.44 c 9.95 a b

Total operating and ownership costs 10.89 b c 15.70 a c 33.18 a b

Returns above

Operating costs 4.98 b c 3.56 a c *-7.04 a b

Operating and ownership costs 2.84 b c -0.89 a c -16.99 a b

1Cotton seed meal, protein supplements, protein byproducts, vitamin or mineral supplements, nonprotein byproducts, alfalfa cubes or pellets,

green chop, corn stalks, and antibiotics and other medicated additives. 2Manure disposal fees, permits and licenses, and odor control costs.

Coefficient of Variation = (Standard Error/Estimate) x 100. * indicates that CV is greater than 25 and less than or equal to 50. # indicates that

CV is greater than 50 and less than or equal to 75.

a, b, c indicate that estimates are significantly different from the indicated production cost group above the 90-percent-or-better level using

the t-statistic.

Source: 2000 USDA ARMS of milk producers, USDA, ERS.
Economic Research Service/USDA Characteristics and Production Costs of U.S. Dairy Operations/SB-974-6  15

Table 9—Dairy operator and operation characteristics, by production cost group, 2000 

Item Low-cost farms (a) Mid-cost farms (b) High-cost farms (c)

Age distribution (percent)

Less than 55 years 73 70 66 

55 years or more 27 30 34 

Operator education (percent)

High school or less 68 c 75 79 a 

Attended college 32 25 21 

Major occupation (percent)

Farming 97 97 96 

Sales class (percent of farms)

$250,000 or more 46 b c 24 a c *10 a b

$100,000-$249,999 35 44 36 

$99,999 or less 19 b c 32 a c 54 a b

Production specialty (percent of farms)

Dairy 95 c 94 c 70 a b

Debt/asset ratio (average) 2.70 2.80 c 2.60 b

Typology (percent of farms)

Rural residence farms 2 4 13 

Intermediate farms 51 b c 72 a 77 a

Commercial farms 47 b c 24 a c *10 a b

Exiting industry (percent of farms)

10 years or less 48 c 55 c 70 a b

More than 10 years 52 c 45 c 30 a b

Years in business (percent of farms)

10 years or less 25 20 *25 

More than 10 years 75 80 75 

Coefficient of Variation = (Standard Error/Estimate) x 100. * indicates that CV is greater than 25 and less than or equal to 50.

a, b, c indicate that estimates are significantly different from the indicated production cost group above the 90-percent-or-better level using

the t-statistic.

Source: 2000 USDA ARMS of milk producers, USDA, ERS.
Dairy farms represent those selected in USDA's 2000

ARMS, Dairy version, and include only operations that

had 10 or more milk cows in 2000.

Enterprise size is a structural indicator of farm size

based on the number of milk cows.

Farm operator is the person who makes most of the

day-to-day decisions about the farm, regardless of

whether or not others share management responsibility.

Thus, for the ARMS as for the Census of Agriculture,

the number of farm operators equals the number of

farms.

Farm typology is a classification developed by the

Economic Research Service (ERS) to divide U.S. farms

into mutually exclusive and homogeneous groups. The

farm typology focuses on "family farms," or farms

organized as proprietorships, partnerships, or family

corporations that are not operated by a hired manager.

To be complete, however, the classification also considers nonfamily farms.

• Rural residence farms

Limited-resource—Any small farm with gross sales

less than $100,000, total farm assets less than

$150,000, and total operator household income less

than $20,000. Limited-resource farmers may report

farming, a nonfarming occupation, or retirement as

their major occupation.

Retirement farms—Small farms (sales less than

$250,000) whose operators report they are retired.

(Excludes limited-resource farms operated by retired

farmers.)

Residential/lifestyle farms—Small farms (sales less

than $250,000) whose operators report they had a

major occupation other than farming. (Excludes limited-resource farms with operators reporting a nonfarm

major occupation.)

• Intermediate farms

Farming occupation/lower sales—Small farms with

sales less than $100,000 whose operators report farming as their major occupation. (Excludes limitedresource farms whose operators report farming as

their major occupation.)

Farming occupation/higher sales—Small farms with

sales between $100,000 and $249,999 whose operators report farming as their major occupation.

• Commercial farms

Large family farms—Sales between $250,000 and

$499,999.

Very large family farms—Sales of $500,000 or more.

Nonfamily farms—Farms organized as nonfamily

corporations or cooperatives, as well as farms operated by hired managers.

High-cost producers are the 25 percent of milk producers with the highest total operating and ownership costs

per cwt of milk sold. Included are milk producers with

costs of $18.79 or more per cwt of milk sold.

Low-cost producers are the 25 percent of milk producers with the lowest total operating and ownership costs

per cwt of milk sold. Included are milk producers with

costs of less than $12.17 per cwt of milk sold.

Major occupation is that occupation in which the operator reported spending the majority of his/her time during 2000.

Production specialty is the farm production classification that represents the largest portion of gross commodity receipts from the farm operation.

Sales class is a structural indicator of farm size based

on gross value of sales.

16  Characteristics and Production Costs of U.S. Dairy Operations/SB-974-6 Economic Research Service/USDA

Glossary
Survey results are only indications of the total population. They may differ from data collected in a complete

census using the same questionnaires, instructions, and

enumerators. USDA's annual ARMS survey applies

complex, stratified, multiple-frame, probability-weighted, and multiple-phase sampling methods to provide

financial measures of the agricultural sector. These sampling methods lead to complications in estimating the

efficiency of summary statistics. Software has been

developed within USDA's ERS that addresses the intricacies of the ARMS. This software employs the deletea-group jackknife variance estimator (Dubman), a universal all-purpose variance estimator that avoids problems in complex sample design. The delete-a-group

jackknife is easy to apply to all weighted estimates,

regardless of their complexity or statistical properties. 

In this report, ranges for coefficient of variation (CV)

are given if the CV is greater than 25.

Differences among means of characteristics and cost

and return items for the various groupings presented in

this report are statistically tested. Although t-statistics

are not reported here, the discussion in each section

emphasizes comparisons among the groups only when

means were significantly different at the 90-percent-orbetter level.

Survey data are also influenced by nonsampling errors,

which are not measurable or known. Nonsampling

errors may be introduced by enumerators, respondents,

and questionnaire design, among other factors. Efforts

were made to minimize these errors and maintain survey accuracy, including training of data collectors,

detailed review and editing of data, and analysis for

comparability and consistency.

Economic Research Service/USDA Characteristics and Production Costs of U.S. Dairy Operations/SB-974-6  17

Data Reliability
American Agricultural Economics Association Task

Force on Commodity Costs and Returns. Commodity

Costs and Returns Estimation Handbook. Ames,

Iowa, July 20, 1998.

Blayney, Don P. The Changing Landscape of U.S. Milk

Production (SB-978). U.S. Dept. Agr., Econ. Res.

Serv., June 2002. Available at www.ers.usda.gov.

Dubman, Robert W. "Variance Estimation with USDA's

Farm Costs and Returns Surveys and Agricultural

Resource Management Study Surveys" (AGES 00-

01). U.S. Dept. Agr., Econ. Res. Serv., April 2000.

Heimlich, R. ERS Farm Resource Regions. U.S. Dept.

Agr., Econ. Res. Serv., 2001.

www.ers.usda.gov/Emphases/Harmony/issues/resourc

eregions/resourceregions.htm

U.S. Department of Agriculture, National Agricultural

Statistics Service. Milk Production. February 2002.

________. Milk Production, Disposition, and Income,

2001 Summary. April 2002.

________. National Commission on Small Farms. A

Time to Act: A Report of the USDA National

Commission on Small Farms. MP-1545. January

1998.

18  Characteristics and Production Costs of U.S. Dairy Operations/SB-974-6 Economic Research Service/USDA

References