Agricultural and Food Policy, Farm Management, Livestock Production/Industries, Production Economics, Productivity Analysis,

Blayney, Donald P.

Gillespie, Jeffrey M.

Hallahan, Charles B.

Latruffe, Laure

Morrison Paul, Catherine J.

Nehring, Richard F.

Sauer, Johannes

English

Research Papers in Economics

Determining the Competitive Edge:
Diversified Dairy Production Systems in 
the United States and the European Union 
Johannes Sauer,1 Richard F. Nehring,2 Jeffrey M. Gillespie,3 Catherine
Morrison-Paul,4 Donald  Blayney,2 Charlie Hallahan,2 and Laure Latruffe5
1Associate Professor, University of Manchester, UK
2U.S. Department of Agriculture, Economic Research Service
3Professor, Louisiana State University
4Professor, University of California, Davis
5Senior Researcher, INRA, Rennes, France
The views expressed are the authors and should not be attributed to the Economic Research Service or USDA.  
Copyright 2010  by the authors . All rights reserved. Readers may make verbatim copies of this document 
for non-commercial purposes by any means, provided that this copyright notice appears on all such copies.
Poster prepared for presentation at the Agricultural & Applied  Economics Association  2010
AAEA, CAES, & WAEA Joint Annual Meeting, Denver, Colorado, July 25-27, 20102
Purpose and Methodology
 Investigate structural change in the U.S. and EU dairy 
industries and the level of pasture versus conventional 
production, comparing basic technical and financial trends   
 Investigate structural change in the U.S. dairy industry and the 
impacts of pasture technology and size on:
 Scale economies
 Technical efficiency using an input distance function and 
stochastic production frontier estimation 
 Use a binomial logit model to forecast pasture technologyU.S. and EU Dairy Sector Production Trends
 In the United States, the cost advantages of a larger farm allow 
larger dairies to be relatively more profitable: 
 Most small farms are unable to earn enough to replace capital 
 Further farm consolidation is inevitable if current trends 
continue 
 Pasture-based operations usually involve less milk per cow 
 Based on U.S. and EU policies, promotion of pasture-based 
and organic dairies is important
 The EU plans on eliminating the dairy quota by 2015 to 
emphasize efficiency
 Common Agricultural Policy (CAP) reform includes some 
form of payment  to smaller producers in the higher cost 
areas of the EU
3Source: Agricultural Statistics Selected Issues, and Eurostat
4
Changing structure of dairy farms 
in selected EU-27 countries and the United States
Country Number of  operations Percent 
change
Cows per farm Milk per cow (kilograms) Percent 
change
2000 2007 2000 2007 2000 2007
United States 105,170 75,140 -29.0 88 121 8,257 9,193 11.3
Denmark 9,767 4,940 -45.9 68 107 6,930 8,919 14.5
Germany 136,000 101,000 -25.7 35 41 6,122 6,944 13.4
France 116,647 97,368 -29.0 36 38 5,623 6,381 13.5
Ireland 29,425 23,511 -20.0 40 45 4,289 4,846 13.0
Italy 97,000 48,487 -50.0 35 41 4,894 5,998 22.6
The Netherlands 34,354 23,677 -31.0 48 62 7,417 7,879 6.2
United Kingdom 25,944 15,385 -40.7 90 130 6,155 7,175 16.65 5
Some U.S. and EU Dairy Facts
 The EU is the world’s largest milk producer with 27 percent of 
total production, followed by India at 20 percent and the 
United States at 16 percent    
 In France, low mobility of dairy quotas and high quality soils 
have led to very nonspecialized dairy production; France 
produces close to 13 percent of the EU’s milk supply
 Restructuring of the Danish dairy sector has caused the most 
significant change: herd size has doubled over the last ten 
years and Denmark produces 3 percent of the EU’s milk 
supply
 English dairy farms are developing within the context of 
liberal agricultural policy (allowing a geographic mobility 
of quotas); the UK produces 10 percent of the EU’s 
milk supplyAnalysis: Conventional versus Pasture-based 
Dairy Production Systems
Modeling approach:
 A binomial logit model is used to systematically categorize 
farms into conventional and pasture-based groups
 The dependent variable includes two categories describing 
the extent of pasture use based on percentage of the dairy 
herds’ forage needs derived from pasture: conventional (less 
than 25 percent) and pasture-based (25 percent or more)
 Independent variables include production regions, number 
of dairy cows, age of operator, stocking rate (pasture acres 
per cow), labor and machinery costs per dairy cow, percent 
of expenditures on feed, and percent of harvested acres in 
alfalfa, other hay, and silage
Source: Gillespie, J.M., R.F. Nehring, C. Hallahan, and C.L. Sandretto. “Dairy Resource Management: A Focus on 
Conventional and Pasture-Based Systems,” selected paper at the Northeastern Agricultural and Resource 
Economics Association Annual Meetings, Rehoboth Beach, Delaware, June 10-12, 2007.   6Source: 1999-2008 ARMS data. 7
USDA’s ARMS Data
 1999-2008 Agricultural Resource Management 
Surveys (ARMS)
 11,909 observations for 24 States; 
 Multi-frame, probability based sample 
 24 States across seven regions: Appalachia, Corn 
Belt, Lake States, Northeast,  Mountain States, 
Pacific, and  Southern Plains.
 Probabilities for pasture and conventional 
technologies estimated from the ARMS 2005 Cost 
of Production survey and mapped to Phase III 
Household version observations for 1999-2008 Source: Eurostat. 8 8
EU Micro Datasets
 Observations on dairy operations for 1999-2007
 Outputs--dairy, other livestock, and crops off-farm income
 Inputs– labor, fertilizer, pesticides, capital, miscellaneous, and 
land 
 Information on household returns, stocking intensity, milk 
yields, and rental rates 
 12,180 observations for France
 5,973 observations for the United Kingdom 
 3,744 observations for DenmarkSource:  Morrison-Paul, Catherine, Richard Nehring, David Banker and Agapi Somwaru. “Are Traditional 
Farms History?” Journal of Productivity Analysis 22 (2004):  pp. 185-205.
Technical Efficiency Estimation
 Input distance function
 DI(X,Y,R) = Max {ρ: (x/ρ) Є L(Y,R)}
 X = input vector: labor (adjusted to reflect labor cost of 
working off-farm), miscellaneous (feed, fertilizer, etc.), 
capital, and land
 Y = output vector: crops/livestock (value of production) and 
off-farm income (earned income from wages and salaries, 
rental, etc.)
 R = external production determinants
 Identifies the least input use possible for producing given 
output vector L(Y,R)
 Parametric procedures.10
Input Distance and Technology Results
 Input distance function: marginal outputs and inputs with correct signs 
and generally significant
 Binomial Logit Model
 Correctly predicted 76.6 percent of the time the allocation of dairy 
farms into the conventional and pasture-based categories
 Percent of forage needs from pasture during grazing season:  
 Conventional (less than 25 percent)
 Pasture-based (25 percent or more)
 Independent variables significant (at the 10 percent level or better):  
 Region
 Stocking rate (pasture acres per cow) 
 Labor per cow
 Machinery per cow 
 Share alfalfa acres/harvested acres 
 Share silage acres/harvested acresU.S. Cost and Production Statistics for Conventional and 
Pasture-based Dairy Farms, 24 States, 2000 
Item             Pasture-based Conventional
Stock (>=1.5) 
Pasture 
acres/cow
Stock (<1.5) 
Pasture 
acres/cow 
<=500 cows >500 cows
Non-West States
>500 cows 
West
Number of farms                          242 669            322 44 92
Percent of farms  21.0 50.4 24.7 1.1 2.8
Value of production (%) 11.0 38.5 24.7 6.1 19.7
Dairy cows per farm 101BCDE 160ADE 157ADE 864ABCE 1,436ABCD
Net return on household 
assets (%)
7.4C 7.9C 12.1AB 10.0 8.6
Total variable costs/cow ($)  1,559BCE 1,268AC 1,505BDE 1,346ACE 1,122ACD
Price of land per acre ($)  1,087BCDE 1,886ADE 1,894ADE 1,393ABCE 7,109ABCD
Efficiency score 0.897 0.897 0.893 0.898 0.897
Returns to scale 0.409CDE 0.424CDE 0.477ABDE 0.552ABC 0.553ABC
Off-farm/total income (%) 8.3BDE 4.4ACDE 7.5BDE 1.5ABC 1.3ABC
Dairy output/total output  (%) 74 87 74 93 98
Source:  2000  ARMS Cost of Production and Cost  and Returns Report  data for observations 
with more than 40 cows.
11
Notes: Significance at the 10 percent level (t=1.645) or higher where A represents at least 25 percent of forage needs met from pasture during the grazing season and 
stock >=1.5; B represents at least 25 percent of forage needs met from pasture during the grazing season and stock <1.5; C represents conventional dairies with 500 cows 
or less; D represents conventional dairies with more than 500 cows not in the West; and E represents conventional dairies with more than  500 cows in the West. The t-
statistics are based on 1,369 observations using weighting techniques constructed in Dubman’s CV15 model. Source: 2005 ARMS cost of Production  and Costs and  Returns Report data of 
observations with more than  40 cows.
12 12
U.S. Cost and Production Statistics for Conventional and 
Pasture-based Dairy Farms, 24 States, 2005 (1999 dollars)
Item             Pasture-based Conventional
Stock (>=1.5) 
Pasture 
acres/cow
Stock (<1.5) 
Pasture 
acres/cow 
<=500 cows >500 cows 
Non-West States
>500 cows 
West
Number of farms                          460 1,414            648 212 165
Percent of farms  17.0 59.4 19.6 1.8 2.1
Value of production (%) 5.9 33.5 15.7 12.9 32.0
Dairy cows per farm 97BCDE 138ACDE 174ABCDE 1,302ABC 2,741ABC
Net return on household 
assets (%)
3.8BCDE 6.5ADE 6.0ADE 11.4ABC 10.2ABC
Total variable costs/cow ($)  799D 793D 745 691AB 743
Price of land per acre ($)  2,246BCE 2,918ADE 2,842ADE 2,216BCE 8,292ABCD
Efficiency score 0.817D 0.826D 0.826D 0.855ABC 0.822
Returns to scale 0.390BCDE 0.422ACDE 0.471ABDE 0.596ABCDE 0.572ABCD
Off-farm/total income (%) 9.5BCDE 4.0ACDE 6.7ABDE 1.1ABC 0.6ABC
Dairy output/total output  (%) 80 84 79 85 93
Notes: Significance at the 10 percent level (t=1.645) or higher where A represents at least 25 percent of forage needs met from pasture during the grazing season and 
stock >=1.5; B represents at least 25 percent of forage needs met from pasture during the grazing season and stock <1.5; C represents conventional dairies with 500 cows 
or less; D represents conventional dairies with more than 500 cows not in the West; and E represents conventional dairies with more than  500 cows in the West. The t-
statistics are based on 2,899 observations using weighting techniques constructed in Dubman’s CV15 model. Technology and Size Comparisons 
for the United States, 2000 and 2005 
 Performance measures:
 Net return on assets: 
 Generally much higher for conventional dairy farms 
 Returns to scale:
 Consistent pattern in both time periods (lowest for extensive 
pasture use to highest for large conventional dairy farms) 
 Efficiency score: 
 Similar value in both time periods, about .85
 High-cost land appears to reduce efficiency on large 
Western dairies 
Sources: 2000 and 2005 ARMS data. 13U.S. Farm and Production Shares, 2000 and 2005
Major shift out of pasture and small conventional dairies 
 Share of dairy farms (2000-2005):
 Conventional operations: 
 Small (<= 500 cows) down (25 to 20 percent); large (>500 cows) 
Non-West States up (1.1 to 1.8  percent); and large (>500 cows) 
West down (2.8 to 2.1  percent)
 Pasture-based: 
 Extensive (> 1.5 acres per cow) down (21 to 17percent); intensive 
(<= 1.5 acres per cow) up (50 to 59 percent) 
 Share of value of production (2000-2005):
 Conventional: 
 Small (<= 500 cows) down (25 to 16 percent); large (>500 cows) 
Non-West States up (6 to 13  percent); and large (>500 cows) 
West up (20 to 32  percent)
 Pasture-based:
 Extensive (> 1.5 acres per cow) down substantially (11 to 6 
percent); intensive (< =1.5 acres per cow) down (39 to 34 percent)
Sources: 2000 and 2005 ARMS data. 14Source: 1999-2001 ARMS data;  NASS; and  Eurostat.
15 15
Cost and Production Statistics for U.S., 
UK, French, and Danish Dairies
1999 EU and U.S. data centered on National estimates for 2000  
United States Denmark France United Kingdom
Number of farms                          3,665   391            1,479 895
Dairy cows per farm  88 82 40 93
Hectares per farm  153 86 71 87
Milk per cow (kilograms) 8,257 6,998 5,720 6,007
Stocking rate (cows/hectare) 3.69 2.66 1.51 2.20
Net return on household assets (%) 10.6 9.0 14.8 7.3
Total variable costs/cow  ($ or Euros)  1,329 2,601 2,502 1,838
Nominal land price ($/acre 1999-2001, 
Euro/hectare 1999)
1,973 10,490 3,440 10,033
Off-farm/dairy output (%) 5.2 2.7 5.5 4.9
Dairy output/total output  (%) 85.1 78.9 64.3 78.7Source: 2005-2008 ARMS data; NASS; and Eurostat 
16 16 16
Cost and Production Statistics for U.S., 
UK, French, and Danish Dairies
2007 EU and U.S. data centered on National estimates for 2005  
United States Denmark France United Kingdom
Number of farms                          5,629   457            1,242 560
Dairy cows per farm 121 150 47 121
Hectares per farm 179 151 91 111
Milk per cow (kilograms) 9,193 8,092 6,088 6,751
Stocking rate (cows/hectare) 4.42 3.24 1.44 2.13
Net return on household assets (%) 10.1 9.4 13.4 12.3
Total variable costs/cow  (1999 $ or Euros)  1,036 3,030 1,733 1,590
Nominal Land price ($/acre-2005/2008, 
Euro/hectares 2005)
5,225 19,950 4,100 11,424
Off-farm/dairy output (%) 2.7 6.1 3.7 2.5
Dairy output/total output  (%) 87.4 62.1 63.7 79.0Key U.S./EU Comparisons, 
1999 and 2007
 Net household returns are generally comparable, but French 
producers achieve significantly higher returns
 The milk yield gap in France remains large
 Stocking intensity does not appear to be increasing in France and 
the UK in stark contrast to trends in the United States and Denmark
 Variable costs per cow are generally declining reflecting scale 
economies—France is an exception
 Off-farm income is generally declining in importance, while crops 
are growing in importance in the EU
 Increases in land prices in the Western United States and Denmark 
and the UK are likely to reduce competitiveness
17

Determining the Competitive Edge: Diversified Dairy Production Systems in the United States and the European Union

Determining the Competitive Edge: Diversified Dairy Production Systems in the United States and the European Union

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