By Andi Anderson
Small and mid-sized dairy farms across the U.S. face a growing challenge: how to stay competitive when reinvestment in aging facilities is needed. Michigan State University (MSU) researchers have developed an economic model and online simulation tool to help farms evaluate their best options for expansion, aiming to balance profitability, efficiency, and risk.
Over the last two decades, the U.S. dairy industry has seen a sharp decline in smaller herds, with nearly 40,000 fewer dairy farms in 2023 than 20 years earlier. Most of this decline has come from farms milking fewer than 200 cows, which often struggle to absorb fixed costs compared to larger operations. As a result, smaller farms face a critical decision: find a niche market or expand to stay competitive.
Replacing a milking parlor, which typically lasts 20–30 years, can cost around $130,000—a significant burden for a 250-cow farm. Many producers choose to expand instead, spreading the investment across more cows to lower per-unit costs. To better understand the economics of this decision, MSU modeled four possible expansion strategies:
- DOUBLE: Doubling land, herd size, and infrastructure.
- BUYFORG: Expanding herd size while purchasing forages and avoiding land investment.
- BUYCOMM: Scaling up cows and feeding a byproduct-heavy diet on existing land.
- ROBOT: Investing in robotic milking systems while expanding as capital allows.
Each scenario assumed a $5 million investment, maintaining 50% equity. Using Monte Carlo simulations—which ran 10,000 economic forecasts based on real-world USDA data—the research team analyzed profitability, solvency, and cash flow over a 10-year period.
Key Findings:
- Most profitable strategy: The BUYFORG model, where farms expand without buying new land, produced the highest net profits and the lowest debt ratio after 10 years.
- Most stable option: The ROBOT model offered the most predictable financial outcomes, appealing to producers seeking lower-risk, steady returns.
- Sensitivity analysis: Showed that milk price, feed cost, and milk production per cow were the top factors influencing profitability.
According to the study, BUYFORG farms achieved positive cash flow about 40% of the time, while ROBOT systems proved resilient under market fluctuations. Milk production increases of 20% or more would make the robotic system the top-performing option.
Recognizing that every dairy farm faces unique challenges, MSU has launched an interactive online decision-making tool. Producers can input their own data—such as land values, feed costs, and herd size—to simulate outcomes for each expansion model. MSU Extension educators are available to help producers interpret results and explore strategies.
This research and tool were developed through the Michigan Alliance for Animal Agriculture (M-AAA) in collaboration with AgBioResearch, MSU Extension, and the Michigan Department of Agriculture and Rural Development.
Photo Credit: michigan-state-university-msu
Categories: Michigan, Education