Executive Summary and Project Overview

 Historically, milk has been Washington’s second leading agricultural commodity in terms of value of production following apples.  In 2007, milk may become Washington’s leading agricultural commodity due to much improved milk prices over 2006.  Further when you consider livestock sales from cull cows and calves in addition to milk’s value of production, dairy production is a vitally important agriculture commodity in Washington’s economy.  Cash receipts generated by milk production and livestock sales are important measures of dairy farms’ direct economic impact on Washington State.  In addition to direct economic impact, dairy farms indirectly impact the local economy through purchases of inputs such as labor, services, equipment and feed.  More generally, Washington’s economy is affected by income and employment growth within the dairy industry and its supporting businesses. Through this cycling of dollars and industry linkages, economic changes in the dairy sector have an impact on the general economy in Washington that is considerably greater than its direct effects alone. 

 The purpose of this report is to describe the economic state, conditions and trends for Washington State dairy farm production and to estimate its state level economic impact.  Measures of economic impact are estimated using an input-output (I/O) analysis, which explicitly recognizes interrelationships between industries. It measures how an economic sector affects other sectors within an economy in terms of output, income, and employment.  The scope of this study is limited to dairy farms.  The entire dairy industry which would include farms, milk transportation, milk processing and milk sales, would be substantially larger.  It is therefore important to note, that this report estimates the economic impact of Washington dairy farm sector, which should not be inferred to as the entire Washington dairy industry.

 Washington’s 2006 dairy farms direct economic effect is $784 million dollars, its indirect effect is $371.9 million dollars and its induced effect is $314.0 million dollars.  Washington’s annual dairy farm’s total economic impact is $1.47 billion dollars to the economy based on 2006 costs of production and milk prices.  In 2007 milk prices increased substantially and the associated economic impact would be greater as milk prices increase.  Washington dairies create substantial employment throughout the State.  Washington’s direct employment effect is 6,168 jobs, its indirect employment effect is 3,626 jobs and its induced effect is 2,859 jobs.  Washington dairy farms total employment 12,653 jobs.  Clearly Washington dairy farms create substantial economic impacts to the State’s economy. 

 This project was undertaken with the financial support of the Washington Dairy Commission and the Washington Dairy Federation.  Research was conducted through the WSU Extension and the School of Economic Sciences.  A survey entitled “Washington Dairy Products Commission Washington Dairy Federation and WSU Extension, 2006 Dairy Economic Impact Survey was conducted from March 2007 to June 2007 to obtain economic data on dairy farm production, revenue, operating costs and employment. 

 Top of page

I.  An Economic Overview of the Washington Dairy Farm Sector

 Washington has long been a national leader in terms of milk yield per cow.  Figure 1 shows a comparative state map of average per cow milk yields for 2006.  Washington’s average annual milk yield per cow is 23,055 lbs per cow.  In 2006 Washington ranked eleventh in terms of dairy cow numbers, but Washington’s dairy cows ranked second in terms of average milk yield per cow.  This identifies Washington’s long standing comparative advantage in milk production yield.  Washington follows Colorado at 23,155 lbs of annual milk per cow as the United States highest yielding State average herd.  Historically Washington has been number one or two in terms of milk yield per cow. 

 Figure 1.  Milk Production Per Cow by State, 2006 USDA Data, Source: http://www.cdfa.ca.gov/dairy/pdf/annual/2006/cost_of_production_annual_2006.pdf

 Washington’s total milk production declined 2.6 percent from 2005 to 2006 as shown in Figure 2, due to a decline in the total number of cows in the state.  Washington was the only state of the nation’s leading dairy production states to show a decline in total milk production.  Although milk production yield per cow continues to grow, the overall dairy herd number has declined from its peak herd size in 1995 and 1996 of 264,000 head, to 237,000 head in 2006.  This represents a dairy herd size decline of ten percent.  Table 1 provides specific herd demographic, production and cash receipt trend data for Washington’s dairy herd.

       Figure 2.  Total Milk Production Percent Change State, 2006 USDA Data,

      Source: http://www.cdfa.ca.gov/dairy/pdf/annual/2006/cost_of_production_annual_2006.pdf

 Milk production per cow with a few exceptions has been continuously increasing in Table 1 from 1980 to 2006 at 23,055 lbs of milk per cow.  Similarly, milk and milk fat production has been increasing in a linear trend.  Milk cash receipts or the value of production has substantial variation due to a variable milk price.  The average milk price for 2006 was weak at $12.60 per cwt.  Figure 3 shows Washington’s historic value of milk production variability on a nominal and deflated basis.  Figure 3 is striking in that on a nominal basis the value of milk production is increasing with variability between years due to variable milk price.  However when the value of production is deflated, Washington’s value of production has declined slightly since 1980.  This can be simply explained when you look at the nominal milk price in Table 1 for 1980, which is $13.01 per cwt and twenty six years later in 2006 it is $12.60.  As is common across all agricultural commodities when you examine agricultural price series, there has been little commodity price growth over this period, and value of production gains were primarily due to yield improving technologies.

 Figure 3.  Nominal and Deflated Washington Value of Milk Production.

 Figure 4 further illustrates Washington’s milk price dynamics.  Nominal milk price exhibits increasing price variation from about 1998 through the end of the series.  Importantly when deflating the milk price using the consumer price index, (1982-84 = 100), the price milk producers receive has shown a negative trend.  Both milk per cow and milk fat per cow continues to increase.  The trend variation in cash receipts is directly attributable to the variation in milk price. 

        Figure 4.  Nominal and Deflated Washington Milk Price.

 The lack of growth in milk prices has depressed dairy farm profitability and as a result the number of dairy farms in the state has declined.  The dairy herd size peaked in 1995 and 1996 at 264,000 head.  The most recent available data for 2006 shows head size at 237,000 head, a decrease of 10 percent, see Table 1.  Although state herd size has shown only 10 percent decrease from its peak, the number of dairy operations has declined at a much greater pace.  From 1996 to 2006 the number of dairy farms has decreased from 1,700 to 790, a decline of about 54 percent.  Figure 5 illustrates the decline in the number of Washington’s dairy operations since 1990.

             Figure 5.  Trend in Washington Dairy Operation Numbers 1990 to 2006.

 The decline from 3,000 dairy operations in 1990 to 790 in 2006 represents almost a 74 percent decline in the number of operations.  Specifically determining the cause of the decline in operations or identifying the converted use of the terminated dairy operation capital assets is beyond the scope of this study.  The decline in dairy operation numbers does have economic effects as the concentration of dairy cows per farm increases.  This can be shown using data on production per size group shown in Table 2. 

 Every herd size category except for the largest size of over 500 head, has had a sizable drop in the number of operations from 1998 to 2006, ranging from a 37 percent decrease in the 200 to 499 herd size to a 55 percent decrease in the number of operations in the 30-49 head herd size.  The largest number of operations is small operations with under 30 head, but this group accounts for only, 0.3 percent of the number of cows and 0.2 percent of the production.  The largest reported herd size group represents slightly over 16 percent of the total number of operations, but has 67 percent of the number of cows and accounts for 70 percent of Washington’s milk production.  Clearly the majority of the milk production and cow inventory and thus economic output is generated from the largest farms, but the decline in the number of small operations has negative economic effects due to decreases in a larger number of repeated capital investments needed to operate small operations.

The changing trend in dairy production toward fewer farms with larger number of cows per farm is shown in Table 3.  The average number of cows per farm has grown from 191 to 300, an increase of 57 percent from 1998 to 2006. 

 Washington Leading Dairy Counties

 Using an east-west boundary line of the Cascade Mountain range, approximately 55 percent of Washington dairy herd is West of the Cascades leaving 45 percent east of the Cascades Mountain range.  The east side’s dairy production is primarily located in Yakima and Grant Counties.  As shown in Table 4 Yakima is the county with the largest number of dairy cows, 70,500 cows and about 30 percent of the State’s dairy cow population and Grant county has seven percent of the State’s dairy cows.  Whatcom is the leading West side dairy county and has twenty-two percent of the State’s dairy cows.  The top 10 counties account for 90 percent of the State’s dairy production.   

 Pacific Northwest Regional Trends

 Washington is seeing increased regional competition in dairy production primarily from Idaho’s growing dairy industry, and a continued strong California dairy industry.  Idaho is one of the fastest growing dairy states in the nation.  Figure 5 illustrates Pacific Northwest dairy cow numbers.  Since 1990, Idaho’s cow numbers have grown from 179,000 cows to 478,000 in 2006.  This represents an average annual growth rate of 6.4 percent in cow numbers for Idaho.  Idaho surpassed Washington’s cow population in 1997.  Washington has exactly the same reported number of cows in 2006 as in 1990 with 237,000 cows.  Idaho’s growth in dairy herd size has introduced increased regional competition in dairy feedstuff markets notably high quality alfalfa hay and has injected tremendous milk production into the regional milk market. 

                    Figure 5.  Growth in Pacific Northwest Dairy Cow Numbers.

 The Pacific Northwest’s comparative national ranking by total milk production is given in Table 5.   Washington has fallen in the rankings as New Mexico and Idaho dairy production has been expanding.  Washington’s national ranking is currently the tenth for total milk production.  Table 5 further identifies Idaho’s dramatic growth in dairy production as it has increased in state rankings from tenth to fourth over the 1994 to 2006 time periods provided in the table.  Oregon has remained the 16^th ranked dairy production state, since 2000. 

 Summary of the Economic State of Washington Dairy Farms

 Washington’s dairy strength is concentrated in its herd of highly productive milking cows and remains a national leader in terms of milk cow yields.  This section presented declining trends in terms of dairy cow numbers, the number of dairy operations, Washington’s comparative national dairy production ranking, and declining deflated milk prices.  Dairy farmers are facing economic challenges concerning stagnant to declining milk sales prices and increasing production costs from feed, labor and employee benefit expenses. 

Top of page

II.  2006 Dairy Economic Impact Survey Results

 A survey entitled “2006 Dairy Economic Impact Survey” was conducted from March 2007 to May 2007 to obtain data needed to estimate the economic impact of Washington’s Dairy industry using 2006 costs and returns (see appendix 1). The study’s basic framework is built around an economic model to identify dairy farming annual revenues and costs of production.  Estimating an industry’s economic impact requires data on income, expenses, sources of inputs purchased, capital improvements, and taxes paid.  This research utilizes primary data acquired through a survey instrument in an attempt to improve and calibrate IMPLAN’s internal production functions to improve the economic modeling data inputs representing Washington’s economic conditions.  The survey included questions on revenues received by producers for commodities other than milk, such as the sales of heifers, calves, cull cows, and other revenues received. The expense categories included questions on the actual expenses incurred (operating and capital) and on the percentage purchased locally, regionally and out of state.  For capital expenses, producers were asked to provide typical annual expenditures. 

 Surveys were sent to all 480 Washington Dairy Federation member dairy farm owners.  Eighty-eight surveys were returned and yielded 82 usable surveys representing a usable response rate of 17 percent.  Using the 2006 USDA reported herd size and production as reported in Section I, the survey response represents approximately 20.7 percent of the total state’s inventory of dairy cows, and 23.4 percent of the state’s total milk production. 

 Table 6 presents a demographic summary of the survey respondents’ dairy operations.  The average number of years the dairy operated at its location was 45 years.  On average the farm milked 598 cows and had an average annual milk yield per cow of 25,072 pounds of milk per cow.  The average dairy owned 333 acres and 62 or 80 percent of the respondents leased additional acreage, 213 acres.  Eight-nine percent of the respondents raised crops for their dairy with the majority of raised crop acreage used for corn silage.  Only 16 percent of the dairies raised crops for cash sale. 

 Table 7 provides summary statistics on the revenue generating activities of the dairy.  Clearly milk sales dominate the dairies revenue stream.  The average dairy generates over $1.9 million dollars in milk sales.  Additional revenues from cull cows, calves and replacement heifers contribute to total dairy revenue. 

 The survey results average dairy farm expenses are provided in Table 8.  The labor and benefit expenses are separated out from operating and capital expenses.  The average farm expense for labor was $260,525 and on average paid $44,293 in benefit expense.   The survey asked for average over the past five year average annual capital expense cost.  The average annual capital expense cost was $167,437.  The average annual property tax paid per farm was $15,725.  

 The number of farm employees is reported in Table 9.  The survey asked for the number of people hired in both full time and part time positions.  The part time positions were converted in full time equivalences.  On average the farm hired 10.2 employees per farm.  The full time equivalency on a per cow basis was 0.01975 employees per cow.  Or in other words, each 100 cows required 1.975 employees. 

 The survey asked questions to determine regional purchase coefficients for their dairy farm expenses.  The dairies predominantly purchase inputs within Washington and locally.  The survey estimates that 64 percent of dairy operating purchases are local within 30 miles of their operation.  Thirty percent of the inputs are purchased regionally in Washington.  For example, it is common for dairies to purchase hay from the Columbia Basin, which in many cases would be a regional purchase as opposed to a local purchase.  Out-of-State purchases were estimated to be six percent. 

 Survey Respondents Issues of Importance

 The survey asked respondents to rank a set of provided dairy issues on a 1 to 5 scale.  The number 1 was defined as “not important” and 5 was defined “highly important”.  Table 11 provides the issues and their rankings in the order from highest to lowest importance.  Profitability in terms of revenues and costs are the leading issues of concern.  Revenue as dictated by milk price has the highest issue ranking at 4.45 ranking, and has the second lowest standard deviation, indicating that its importance is consistent across the survey respondents.  Throughout this report milk price consistently emerges as the critical factor effecting dairy farms.  As reported in the economic overview section, milk price is in a declining trend, and the 2006 nominal price is the third lowest on record over the twenty-six year history of available data. 

 Milk price is the primary factor effecting dairy revenue, and feed costs are the primary variable cost and is the second ranked issue of importance.  Price and cost were the only two issues that received issue importance scores above 4.   

 Top of page

III. Input – Output Model: How Dairy Farms’ Economic Impact Multiplies

 The agricultural sector in general and the dairy industry specifically, represents basic industries to Washington.  Basic industries provide income to a locality by producing an output, purchasing production inputs, services and labor.  Dairy product sales and the local jobs and incomes directly responsible for the production of dairy products represent the direct impact of the industry on the locality.

 The dairy industry also generates indirect impacts as the revenues from the sales of dairy products are re-spent in the local economy. The indirect impact of the dairy industry on local economies includes purchases of a variety of agricultural inputs and professional services in the process of producing milk. Indirect effects represent additional economic activity in the local economy driven by dairy product sales.  These effects appear as jobs and income in local industries serving the dairy industry (e.g., veterinarians, feed suppliers, implement suppliers, trucking and transport).

 In addition to the direct and indirect impacts of the production and sales of dairy products outside of the region, the dairy industry is responsible for induced economic impacts in the form of the local goods and service purchased by people using the salaries and wages earned contributing to the productivity of the dairy industry. These induced expenditures translate into jobs and income for retailers, bank tellers, grocery store clerks, restaurant employees, and gas station attendants and so on.

 The income generated directly by dairy farms adds to this interdependency; dairy farm employees spend their wages and salaries on groceries, housing, entertainment, and a range of other consumer goods and services.  Typically in the dairy farm’s local rural area generating rural economic development.  In turn employees in these industries spend their income on consumer goods and services. These additional linkages, beyond dairy and indirectly related sectors of the economy, create induced effects, which help to form a complex intertwining of industries within Washington.  So the relevant question to ask is not only what dairy adds to the Washington economy directly, but also how much do dairy farms contribute to Washington’s economy through this complex networking of industries. 

 To measure the economic impact, we used a social accounting matrix — basically a “snapshot” of the economy that looks at the sales and purchases of goods and services between all sectors of the economy for a given period of time.  A social accounting matrix tracks monetary flows between industries and institutions, both market and non-market.  The market flows are those between producers of goods and services and consumers, both industrial, and non-industrial (i.e households, government, investment, and trade).  The non-market flows are those between households and government, government and households, and so on. These flows are often called inter-institutional transfers.  By looking at dairy farms’ spending and revenues, we can assess the contribution of the dairy industry to Washington’s economy.  By tracing the flow of dairy-related dollars throughout the economy we can capture and measure the “multiplier effect.” We used a software package, IMPLAN (IMpact PLANning), to create the social accounting matrix for Washington.

This study uses primary data collected through the survey, Washington 2006 Dairy Economic Impact Survey to improve and calibrate IMPLAN’s production functions so they might better conform to local conditions. For example, the survey included questions on revenues received by producers for commodities other than milk, such as the sales of heifers and cattle, and other dairy income received.  The expense categories included questions on the actual expenses incurred (operating and capital) and on the percentage purchased locally, regionally within Washington, and out-of-state.  These survey results are summarized in the previous section of the report.  IMPLAN uses a set of Bureau economic data for labor and economic conditions, and USDA NASS Washington dairy data was used to measure aggregate production.

I-O Model Development

 The Input-Output model in this paper is based on the IMPLAN (Impact analysis for PLANning) ProfessionalTM (MPLANproTM) data and Version 2.0 software. The model represents Washington’s economic structure for 1997, the latest available from IMPLAN for Washington.  The input-output analysis is presented for a type SAM model treating household income and consumption as endogenous.

 In order to be consistent with standard I/O accounting, all expenditures in the dairy production enterprise budget must be converted to producer prices rather than purchaser prices. Margin tables were used to convert the enterprise budgets purchaser prices to producer prices. The final products that producers bought in purchaser price were separated into transportation, wholesale, retail margin, and producer price as is standard practice for Input-Output analysis.  This was done by using information from the IMPLAN margin tables.

 The procedure of Willis and Holland was used to convert dairy enterprise budget into a framework consistent with the standard Input-Output accounting structure. Willis and Holland used six sequential procedures to translate producer enterprise budgets into Input-Output accounts.  Similar procedures using two steps were used in this study.  The first step was mapping the enterprise budgets into an I/O account framework. This was done by mapping the annual dairy enterprise budget given in Appendix Table1into the Input-Output accounting structure. The second step was converting the enterprise budget fixed costs into the IO format presented in Appendix Table 2. To do so, three accounts were created 1) proprietary income; 2) total value added; and 3) total industry outlay (TIO).  Finally, it was necessary to calculate the production function technical coefficients. This coefficient was calculated by dividing the individual inter-industries purchase in producer price value by the TIO.  Appendix Table 3 illustrates the state’s dairy direct economic aggregation mapping to IMPLAN sectors.

 Family owned farms have a different economic expenditure flow than corporate owned farms primarily due to farm financial differences in labor expenditures and returns to capital.  Proprietary income is the proportion of dairy farm income to family or individually owned dairy farms.  Corporate farm income is the proportion of dairy farm income produced by corporately owned dairy farm structures.  A study of dairy farm ownership structure using the 1992 Agricultural Census revealed that 80 percent of the dairies were family owned, 15 percent where partnership owned, and about 5 percent where family owned corporations (Outlaw et al. 1996).  The 2002 Agricultural Censes for Washington does not separate Dairy farms from all farms.  All farm ownership structure for Washington has a distribution of about 85 percent family owned, 5 percent partnership and 8 percent corporate ownership (USDA 2002 Ag. Census).  For this study it is estimated that 60 percent of the dairy farms have family ownership, and 40 percent impact the economy in a corporate ownership structure.  The National Agricultural Statistical Service (NASS) publishes state-level average monthly and annual estimates of milk prices paid to producers (USDA NASS, 2006).  This study uses the NASS average annual prices for Washington.

Results and Economic impacts

 When final demand for a particular commodity changes, three types of economy wide impacts are measured in a SAM input output model: direct, indirect, and induced effects.  Direct effects are the immediate effects within the economy as result of the change in final demand of a particular industry.  Table 12 provides the IMPLAN modeling results estimating the economic impact of the dairy farm sector on Washington’s economy  The direct effect Washington dairy production is $784 million dollars.  The indirect and induced effects are $371.9 and $314.9 million dollars respectively.  The total economic effect is $1.47 billion dollars.  The associated economic output multiplier is 1.876.   

 Table 13 presents economic impact multipliers for comparable dairy farm studies.  This study’s findings for Washington output multiplier of 1.876 and employment multiplier of 2.051 are toward the higher end of these comparable studies.  This is not surprising given Washington’s high yielding dairy cows and mix of large and small dairy farm sizes.

 Top of page

References

 Deller, Steven C., Rethinking Dairyland: Background for Decisions about Wisconsin’s Dairy Industry, Got Jobs?, Department of Agricultural and Applied Economics, University of Wisconsin-Madison, http://www.aae.wisc.edu/www/pub/, June 2002.

 Flanders, Archie, Tommie Shepherd, and John McKissick, Economic Importance of the Georgia Dairy Industry, Center for Agribusiness and Economic Development, College of Agricultural and Environmental Sciences, The University of Georgia, July 2006.

 Hussain Ali Jafri S., and David Buland, Economic Impact of Erath County’s Dairy Industry, The Texas Journal of Agriculture and Natural Resource 19:8-22 (2006) 8

 Nielsen, Tommie G., Keith O. Keplinger, and Robert H. Neal, Economic Impacts of the Erath County Dairy Industry: An Input-Output Analysis, Livestock and the Environment A National Pilot Project, Texas Institute for Applied Environmental Research Tarleton State University, September 1998.

 Outlaw, Joe L., Robert E. Jacobson, Ronald D. Knutson and Robert B. Schwart, Jr., “Structure of the U.S. Dairy Farm Sector.” Dairy Markets and Policy Issues and Options, March 1996.  http://dairy.cornell.edu/CPDMP/Pages/Publications/Pubs/M4.pdf,

 Seidl, Andy and Stephan Weiler, Estimated Economic Impact of Colorado Dairies, Agricultural and Resource Policy Report, Colorado State University, Fort Collins, CO, January, 2000.

 USDA, Washington State and County Data, Volume 1 Geographical Area Series, 2002 Census of Agriculture, http://www.nass.usda.gov/census/census02/volume1/wa/WAVolume104.pdf

 Willis, David and David Holland. Translating Farm Enterprise Budgets into Input Output

Accounts: Another Example from Washington State. Department of Agricultural Economics,

Washington State University, 1997.

 Top of page