Dairy farming without legislatively created entry barriers is a very competitive business. There are numerous dairy farmers selling a relatively homogeneous product in any given geographic region. Dairy farmers do not possess market power individually. Farms, however, do differ in their respective cost structures attributable, among other things, to the size of their business, opportunities to exploit economies of scale, price of factor inputs, etc. If the market price is such that average revenue from sales just covers average current expense of the business, the farm breaks even.
Competition brings out the lowest market price for milk produced by the most efficient farmer.
On the graph the farm with the lowest average total cost curve is the large-size farm that could invest in new technology thereby increasing its productivity and reducing unit price. The other two SAC curves represent successively higher cost producers. At that point processors get the lowest price for their marginal valuation of milk. It is because those who at market clearing price would go bankrupt are now able to turn a profit. Between SAC 1 and SAC 3 there can be numerous other producers that turn a profit.