Margin compression affects dairy producers

Quick facts

Like most industries, the dairy industry suffers from margin compression over time. You can prevent your family’s standard of living from declining by using strategies on your farm.

What is margin compression?

Margin compression is when input costs rise faster than the sale price of the product. As a result, margins decline over time. Margin compression commonly occurs in most industries.

Trends in milk price and production cost

Figure 1 shows the milk prices and production costs for Minnesota dairy farms from 1993 to 2017 with trend lines.

Graph that shows margin compression over the years with the cost of production and milk price trend lines getting closer together.
Figure 1. Prices received and production costs for Minnesota dairy farms

Effects of margin compression on producers

Over this time frame, family living costs doubled. Minnesota dairy producers adapted to this margin compression by expanding and improving labor efficiency.

  • The average number of cows on farms in the farm business management program have nearly tripled.

  • The number of pounds of milk sold per full-time worker nearly doubled.

Maintaining your standard of living

Tips for keeping your current standard of living with decreasing margins:

  • Increase the milk per cow and decrease costs fast enough to offset margin compression.

    • This may work if you’re close to retirement but is likely impractical for younger producers.

  • Expand your herd to keep up with declining margins.

  • Branch out your operation.

    • Whole farm profitability has been somewhat shielded from increasing feed costs for most Upper Midwest dairy producers. This is because they raise much of their own feed.

    • Long-term milk and feed prices will tend to change together following a lag time. This advantage helps reduce changes in input costs.

  • Explore value-added opportunities. Your skills may give you a competitive advantage in some area.

    • These businesses could relate to your core business such as custom chopping or manure hauling. Others may include selling high-value animals or on-farm processing.

    • This may be profitable long term, but usually requires a large upfront investment and a different skill set than cropping or livestock production. Some producers may even be able to expand into other areas such as agritourism.

  • Strategically invest in technologies that will increase long-term efficiency and provide your business with a competitive advantage.

Jim Salfer, Extension educator

Reviewed in 2018

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