Organic Milk Is Booming, but Its Farmers Are Not

It would seem to be a good time to be an organic dairy farmer. Thanks to consumer demand for healthy, environmentally friendly, and ethically produced products, US sales of organic food climbed to $60 billion in 2022, about double what they were in 2013. Production of organic milk grew about 10 percent annually from 2008 to 2019, according to the US Department of Agriculture.

But American organic-milk producers, particularly small ones, aren’t sharing in this bounty—and milk production has been moving to larger farms, according to research from University of Wisconsin PhD student Guang Tian.

While consumer demand for organic milk has climbed, small organic dairy farms have dwindled. The number of organic dairy farms with less than 200 cows fell by 37 percent between 2007 and 2017, according to the 2016 Agricultural Resource Management Survey, which is operated by the USDA and the National Agricultural Statistics Service. What’s more, only those with more than 100 cows made a profit, and then just barely. The smaller farms lost money.

To explore the gulf between consumer demand and price markups, Tian used the NielsenIQ data sets at Chicago Booth’s Kilts Center for Marketing to analyze the organic milk industry. Key numbers came from NielsenIQ Retail Scanner Data (collected from retailers about consumer purchases) and NielsenIQ Consumer Panel Data (generated by thousands of households self-reporting their grocery purchases) between 2017 and 2019.

Tian focused on retail data from Wisconsin, the second-largest dairy-producing US state, and Illinois, where Chicagoans represent a key consumer target for organic milk products. He chose five popular conventional and four organic milk brands and types to analyze.

Although organic milk costs more at the store and has higher profit margins than conventional milk (about 27 cents per 8-ounce serving as compared with 14 cents), organic dairy farmers extract only about 5 percent of this margin, Tian finds. Their farms may lack the market power to bargain effectively when setting prices with retailers, he hypothesizes.

What’s more, the costs of operating an organic dairy farm are steep, putting producers in an even more vulnerable position. Farms must follow strict USDA requirements in order for their products to be certified as organic, such as providing consistent pasture access for milk cows and forgoing all antibiotics, hormones, and other chemicals typically used to produce conventional milk. Tian estimates that the average marginal costs for conventional milk production are about $16, while they’re close to $59 for organic milk. Dairy farms with 10–49 cows pay the highest costs, while those with 100–199 cows pay the lowest, he writes.

On the consumer side, Tian points out, even though the US organic milk market has experienced fast growth, it’s still small. Only 7 percent of milk production in 2021 was organic. Moreover, price spikes can scare off customers. “Consumers may have a lower loyalty to organic milk products than conventional milk products,” he writes. Households with higher education levels or kids are more likely to stick with organic milk products, and yet household income is actually not a major factor in consumption, he finds. Rather, many consumers have limited knowledge of organic products generally so are prone to bolting.

Ultimately, writes Tian, small organic dairy farms struggle to reap the rewards of a growing market because their business requires a high initial investment, has a high marginal cost, and is limited in scale, which hurts their ability to bargain effectively with retailers. There is no sign of this trend abating, he adds, meaning that many more small organic dairy farms could struggle—or even cease production—in the coming years.