An Economic Simulation Study of Large-Scale Dairy Units in the Midwest

Abstract

The objective of this study was to assess the economies of scale and to analyze the economic feasibility of large-scale dairy units in the Midwest. More specifically, this study focused on the evaluation of the impact of economies of scale on the profitability of alternative unit sizes. An economic simulation model and production plans for 150-, 300-, 500-, and 1000-cow units were developed by a multidisciplinary team of dairy scientists. These plans were for start-up operations, used common production assumptions across unit sizes, and assumed a milk price of $12.80/cwt (per 45kg) and a 50% start-up equity. The plans focused on investments, labor, production and price assumptions, feeding system, and other financial and economic assumptions. The economic simulation model was used to calculate the financial results of these plans over a 5-yr planning horizon. These results were then compared with lending standards for large-scale dairy units. The results indicated that only the 500- and 1000-cow units would be economically viable as start-up operations given the assumptions used. The results, however, would be considerably different for alternative assumptions or for an existing operation that wanted to expand in size. The results also implied that large dairy units could be profitable in the Midwest once economies of scale were achieved and sound business and production management practices were used.