Melhim, Almuhanad

O'Donoghue, Erik J.

Shumway, C. Richard

Skolrud, Tristan D.

English

Research Papers in Economics

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2nd Quarter 2007 • 22(2) CHOICES 125
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Farm Growth, Consolidation, and 
Diversification: Washington Dairy Industry
By Tristan D. Skolrud, Erik O'Donoghue, C. Richard Shumway, and Almuhanad Melhim
JEL Classification Code: Q12
The shrinking number of farms in the United States is
well-documented. Between 1974 and 2002, the total
number of farms in the United States declined by 21%.
While this represented a large drop in the overall number
of farms, the number of farms with milk cows declined
much more dramatically, falling by 79% during this
period (USDA/NASS, 2002). With four times as many
milk cows per farm in 2002 than in 1974, it is obvious
that the dairy industry has become much more concen-
trated. Further, the entire decline in number of farms with
milk cows occurred in size categories with fewer than 500
cows. The number of farms with 500-999 milk cows grew
by 36% and the number with 1,000 or more milk cows
more than doubled. Changes in the State of Washington
generally followed those of the Nation.
The growth in the number of the largest-sized farms
creates the most intrigue for economists and policymakers
alike. As one of the last bastions of nearly perfectly com-
petitive production, does this growth in farm size hint at a
major change in the historically competitive nature of agri-
cultural commodity supplies? For example, in 2002, more
than 30% of milk sales came from just 1.5% of dairy
farms. This situation warrants careful attention since
adverse environmental effects often accompany increases
in farm sizes, particularly for confined animal operations.
While we know that significant changes are occurring
in farm size, no one has yet identified which farms are
growing or shrinking in size. Nor has anyone documented
the extent of commodity diversification on farms of differ-
ent size. Which farms grow? Do farms in the larger size
categories actually grow the most rapidly? Or do medium-
sized farms combine with other farms of comparable size
to create new large organizations? Do farms in different
size categories increase or decrease their levels of diversifi-
cation over time?
To answer these questions, we examined longitudinal
data from the Census of Agriculture in 1992, 1997, and
2002 for dairy farms in Washington. This is an important
industry in both the state and Nation. In the United
States, dairy products rank second among all agricultural
commodities in value of production (USDA/NASS,
2006a). Washington ranks 10th in the nation in milk pro-
duction and first in milk production per cow, while the
value of milk production in the state also ranks it second
in importance among all agricultural commodities
(USDA/NASS, 2006b). The state’s dairy industry is highly
concentrated, but geographically divided. More than half
the milk cows are located in two counties; Whatcom on
the west of the Cascades and Yakima on the east. The
demographics are changing with rapid movement of cows
to the east side of the Cascades. Cow numbers in Yakima
County grew by more than 30% between 1997 and 2002,
while those in Whatcom County declined.
Sample Selection and Information Collected
For our analysis, we included all farms for which the
owner checked farming as his/her main occupation and
for which at least 50% of all agricultural income (not
including government payments) came from the sale of
milk and dairy products. As a result, 781 farms are
included in our sample, representing 65% of all Washing-
ton dairies in the 1992 census.1 We ranked the farms from
lowest to highest in terms of agricultural sales and then
divided them into 10 equally sized cohorts. In other
words, each cohort had the same number of farms in 1992
with the smallest 10% of dairy farms in the state in126 CHOICES 2nd Quarter 2007 • 22(2)
Cohort 1 and the largest 10% in
Cohort 10. The approximate range
of sales for each cohort is reported in
Table 1. Where possible, we tracked
individual farms in each cohort over
the next two censuses. We also cre-
ated new cohorts for entrants in
1997 and 2002, for a total of 12
cohorts.
We recorded each farm’s tenure
status, total agricultural sales (exclu-
s i v e  o f  g o v e r n m e n t  p a y m e n t s ) ,  a n d
milk and dairy product sales in each
census year that it appeared. Based
on this information, we calculated
the number of farms in production,
the number that entered and exited,
farm size distributional statistics
(mean, median, standard deviation,
skewness, kurtosis, and range of
sales), and the percent of cohort
farms in each of four diversification
categories. The percent of total farm
sales (exclusive of government pay-
ments) derived from milk and dairy
product sales determined the diversi-
fication categories: (1) 90% or more,
(2) 75 - 89.9%, (3) 50 - 74.9%, and
(4) less than 50%.
Farm Growth
Mean growth rates of 1992 dairy
farms that remained in production
varied considerably both among
cohorts and between censuses. After
adjusting for inflation between the
censuses, the dairy farms grew at an
average compound rate of 1.6% per
year between the 1992 and 1997 cen-
suses and 1.1% per year between the
1997 and 2002 censuses, averaging
1.4% between 1992 and 2002.
Figure 1 shows the annual growth
rates we computed for each cohort
for the 5- and 10-year periods. The
average size of the smallest cohort of
dairy farms decreased over the 10-
year period, while the average size of
farms in the three largest cohorts
increased substantially and steadily
over time. Farms in the intermediate
size ranges generally grew slowly and
more erratically. Overall trends sug-
gest that, as farm size increased, so
did the corresponding growth rate.
Distribution of Farms within 
Cohorts
Farms were close to being uniformly
distributed within most cohorts in
1992. Only in the largest cohort was
the distribution of farms appreciably
skewed. In this cohort, the majority
of farms lay in the lower part of the
range and only a small number of
much larger farms resided in the
upper end of the range.  In successive
censuses, as farms tended to grow in
size, the surviving farms in all cohorts
became positively skewed, similar to
the largest cohort in 1992. This find-
ing implies that a small number of
farms in every cohort grew much
more rapidly than others.
These results suggest that average
cohort sales were particularly influ-
enced by a small number of farms
that grew rapidly within each cohort.
In fact, in each of the five smallest
cohorts, a majority of the surviving
farms were smaller in each successive
census than in 1992. Therefore, if
used improperly, average farm size
can result in very misleading conclu-
sions.
Farm Size and Diversification
Because of the criteria used to select
farms to include in the sample, no
dairies in 1992 were in the most
diversified sales class (with less than
50% of agricultural sales from milk
and dairy products). As apparent
from Figure 2, the smallest three
1. The remaining 35% of dairy farms 
consisted of retired and residential/
lifestyle farmers.
Table 1. 1992 agricultural sales.a
Cohort Range
1 < 95,000
2 95,000  – 155,000
3 155,000  – 215,000
4 215,000  – 270,000
5 270,000  – 325,000
6 325,000  – 405,000
7 405,000  – 505,000
8 505,000  – 685,000
9 685,000  – 1,085,000
10 > 1,085,000
a Because of data confidentiality conditions, 
these ranges are only approximate.
Figure 1. Annual growth rates.
-10.00
-8.00
-6.00
-4.00
-2.00
0.00
2.00
4.00
6.00
8.00
P
e
r
c
e
n
t
123456789 1 0
Cohort
1992-1997
1997-2002
1992-20022nd Quarter 2007 • 22(2) CHOICES 127
cohorts were the most diversified and
all larger cohorts were more special-
ized.
In successive censuses, every
cohort became more diversified. For
example, the percent of farms that
received 90% or more of their agri-
cultural sales from milk and dairy
products declined from 35% in 1992
to 27% in 2002 in Cohort 1 and
from 78% in 1992 to 67% in 2002
in Cohort 10. Much more dramatic
was the shift of farms to the most
diversified sales class. By 2002, nearly
75% of farms in Cohort 1 received
less than half of their agricultural
sales from milk and dairy products,
while none did in 1992.
Across cohorts, diversification
followed roughly the same pattern in
1997 and 2002 as in 1992. The
smallest cohorts were the most diver-
sified and specialization increased
with farm size (see Figures 2-4). We
tested this graphical evidence by
examining the correlation between
farm size and level of diversification.
Confirming our results, we found
statistical evidence that as farm size
increased, farms tended toward
greater specialization. This tendency
became stronger over time.
While the diversification trends
between 1997 and 2002 followed
those between 1992 and 1997, some
caution should be exercised when
interpreting the most recent statistics.
Milk and dairy product sales do not
include cull dairy cow or other cattle
sales, and milk prices were lower in
2002 than in 1992 or 1997. Conse-
quently, it is possible that part of the
apparent increase in diversification in
2002 was due to a higher than nor-
mal culling rate induced by the lower
milk price.
A further caution should be made
about the diversification levels. We
measure farm size by value of agricul-
tural sales (exclusive of government
Figure 2. Farm diversification, 1992.
Figure 3. Farm diversification, 1997.
Figure 4. Farm diversification, 2002.
0%
20%
40%
60%
80%
100%
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n
t
 
o
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F
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Cohort
Less than 50% 50-74.9%
75-89.9% 90-100%
0%
20%
40%
60%
80%
100%
P
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o
f
 
F
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Cohort
50-74.9% 75-89.9%
90-100%
Percent of Farm Sales from 
Milk & Agricultural Products
Percent of Farm Sales 
from Milk & 
Agricultural Products 
0%
20%
40%
60%
80%
100%
P
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n
t
 
o
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Cohort
Less than 50% 50-75%
75-90% 90-100%
Percent of Farm Sales 
from Milk & 
Agricultural Products 128 CHOICES 2nd Quarter 2007 • 22(2)
payments), and our sample was
selected to include only those farms
for which milk and dairy product
sales accounted for at least 50% of
agricultural sales. Consequently, the
most diversified farms with milk
cows did not enter our initial sample.
If they had been included, the evi-
dence of diversification within the
dairy industry would be even greater.
Farm Entry and Exit
Between each pair of censuses, more
than twice as many dairy farms exited
the industry in Washington as new
farms entered. Smaller dairy farms
tended to exit at higher rates than did
larger farms. In Cohorts 1-7, an aver-
age of 3.5 farms exited for each farm
that entered between 1992 and 2002.
In contrast, an average of just over
one farm exited for every farm that
entered in Cohorts 8-10, implying a
very low net exit rate. Further, the
largest farms (Cohort 10) had fewer
exits than entrants, which resulted in
positive growth in the number of
largest dairy farms.
Farms of all sizes entered the mar-
ketplace. However, their distribution
and behavior differed widely from
incumbent farms. While their mean
size was much larger than the incum-
bents, falling between the means of
the two largest incumbent cohorts,
their growth rates tended to be much
slower than the growth rates of the
largest incumbents. They averaged
less than 1% growth per year. They
also entered the marketplace with a
higher average level of diversification
than any of the large incumbent farm
cohorts in the initial sample and con-
tinued to diversify at a much more
rapid rate.
What Does All This Information 
Mean?
This analysis of longitudinal agricul-
tural census data for the Washington
dairy industry has produced impor-
tant insights about the relationship
between initial farm size and both
subsequent growth rates and the ten-
dency to diversify. The largest group
of cohorts is growing the fastest, sug-
gesting that, despite earlier evidence
that economies of scale were largely
exhausted by 750-cow farms (e.g.,
Matulich, 1978), dairy farms in the
state are not yet converging toward a
size that minimizes average cost
within the current size range. How-
ever, the fact that it was Cohort 8
rather than Cohort 10 that grew at
the fastest rate does suggest that
economies of scale may be diminish-
ing for the very largest farms.
Additionally, we found that the
larger the farm, the greater the ten-
dency to specialize. In other words,
larger dairy farms derived more of
their revenues from milk and dairy
product sales, while smaller farms
turned to a more diverse range of
outputs to generate their agricultural
revenue streams. The only exceptions
applied to new entrants. While their
average size was very large at entry,
they were much more diversified
than large incumbent farms and grew
much more slowly. However, the
average level of diversification in all
cohorts has increased over the 10-
year period examined. This finding is
particularly surprising for an agricul-
tural commodity that has been one of
the last bastions of the single-product
farm.
Tristan D. Skolrud (tskolrud@wsu.
edu) is Undergraduate Honors Stu-
dent, School of Economic Sciences,
Washington State University, Pull-
man, WA. Erik O'Donoghue
(eo’donoghue@ers.usda.gov) is Agri-
cultural Economist, Economic
Research Service, U.S. Department of
Agriculture, Washington, DC. C.
Richard Shumway (shumway@wsu.
edu) is Professor, School of Economic
Sciences, Washington State Univer-
sity, Pullman, WA. Almuhanad Mel-
him (amelhim@wsu.edu) is Gradu-
ate Research Assistant, School of
Economic Sciences, Washington State
University, Pullman, WA.
Acknowledgements
The views expressed are those of the
authors and do not necessarily corre-
spond to the views or policies of ERS
or the U.S. Department of Agricul-
ture.
For More Information
Matulich, S.C. (1978). Efficiencies 
in large-scale dairying: Incentives 
for Future Structural Change. 
American Journal of Agricultural 
Economics, 60(4), 642-67.
United States Department of 
Agriculture National Agricultural 
Statistical Service (USDA/
NASS). (2002). Census of 
Agriculture. Available online: 
http://www.nass.usda.gov/
Census_of_Agriculture.
United States Department of 
Agriculture National Agricultural 
Statistical Service (USDA/
NASS). (2006a). Agricultural 
Statistics. Available online: http://
www.nass.usda.gov/Publications/
Ag_Statistics/agr06/.
United States Department of 
Agriculture National Agricultural 
Statistical Service (USDA/
NASS). (2006b). Washington 
2006 Annual Bulletin. Available 
online: http://
www.nass.usda.gov/
Statistics_by_State/Washington.

Farm Growth, Consolidation, and Diversification: Washington Dairy Industry

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