Backward integration is a form of vertical integration in which a company expands its role to fulfill tasks formerly completed by businesses up the supply chain, and it is now being used in the dairy industry.

In other words, backward integration is when a company buys another company that supplies the products or services needed for production. For example, a company might buy their supplier of inventory or raw materials.

Companies often complete backward integration by acquiring or merging with these other businesses, but they can also establish their own subsidiary to accomplish the task.

Complete vertical integration occurs when a company owns every stage of the production process, from raw materials to finished goods/services. Let us now see how backward integration and be utilized to grow the dairy industry.

• How does Backward Integration work?
• What are the Pros and Cons of Backward Integration?
• What is a Real-World Example of Backward Integration?
• How do Dairy Companies Grow?
• Is Dairy Farm Profitable?
• Will the Dairy Industry Recover?
• How can I Success in Dairy Business?
• How is the Dairy Industry bad?
• The Impact the Dairy Industry Has on the Environment and Climate Change

How does Backward Integration work?

Companies often use integration as a means to take over a portion of the company’s supply chain. A supply chain is the group of individuals, organizations, resources, activities, and technologies involved in the manufacturing and sale of a product.

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The supply chain starts with the delivery of raw materials from a supplier to a manufacturer and ends with the sale of a final product to an end-consumer.

Backward integration is a strategy that uses vertical integration to boost efficiency. Vertical integration is when a company encompasses multiple segments of the supply chain with the goal of controlling a portion, or all, of their production process.

Vertical integration might lead a company to control its distributors that ship their product, the retail locations that sell their product, or in the case of backward integration, their suppliers of inventory and raw materials.

In short, backward integration occurs when a company initiates a vertical integration by moving backward in its industry’s supply chain.

An example of backward integration might be a bakery that purchases a wheat processor or a wheat farm. In this scenario, a retail supplier is purchasing one of its manufacturers, therefore cutting out the middleman, and hindering competition. 

What the Pros and Cons of Backward Integration?

Pros

Companies pursue backward integration when it is expected to result in improved efficiency and cost savings. For example, backward integration might cut transportation costs, improve profit margins, and make the firm more competitive.

Costs can be controlled significantly from production through to the distribution process. Businesses can also gain more control over their value chain, increasing efficiency, and gaining direct access to the materials that they need. In addition, they can keep competitors at bay by gaining access to certain markets and resources, including technology or patents.

Cons

Backward integration can be capital intensive, meaning it often requires large sums of money to purchase part of the supply chain. If a company needs to purchase a supplier or production facility, it may need to take on large amounts of debt to accomplish backward integration.

Although the company might realize cost savings, the cost of the additional debt might reduce any of the cost savings. Also, the added debt to the company’s balance sheet might prevent them from getting approved for additional credit facilities from their bank in the future.

In some cases, it can be more efficient and cost-effective for companies to rely on independent distributors and suppliers. Backward integration would be undesirable if a supplier could achieve greater economies of scale–meaning lower costs as the number of units produced increases.

Sometimes, the supplier might be able to provide input goods at a lower cost versus the manufacturer had it became the supplier as well as the producer.

Companies that engage in backward integration might become too large and difficult to manage. As a result, companies might stray away from their core strengths or what made the company so profitable. 

What is a Real-World Example of Backward Integration

Many large companies and conglomerates conduct backward integration, including Amazon.com Inc. Amazon began as an online book retailer in 1995, procuring books from publishers.

In 2009, it opened its own dedicated publishing division, acquiring the rights to both older and new titles. It now has several imprints.

Although it still sells books produced by others, its own publishing efforts have boosted profits by attracting consumers to its own products, helped control distribution on its Kindle platform, and given it leverage over other publishing houses.

In short, Amazon used backward integration to expand its business and become both a book retailer and a book publisher.

How do Dairy Companies Grow?

Dairy Business is a profitable venture provided the person is aware of what he is doing and how to take care of cattle. Dairy farming requires enough resources, capital and adequate land for keeping the desired number of cows.

It also involves growing good quality fodder, grasses and legumes to feed the cows sufficiently. You should be prepared to have enough food to feed the cows according to the requirements during winter and dry season.

Besides the mentioned elements, the budget also plays a vital role in planning and growing your dairy in a profitable way. Every cow should be given necessary nutrients, vitamins and should be properly fed. Every dairy business should have a Fatomatic which is a fat measuring machine.

It helps the farmers to know the fat amount in the milk and if it is less than desirable, it means that the cow is malnourished. In this way, farmers can increase the diet of cattle to enhance milk quality.

On the decision to grow a dairy farm, you should gain adequate skills in managing the dairy cows regardless of the counts. One can gain the knowledge and experience by working with experienced dairy farmers or with livestock extension personnel.

This attempt can help you avoid costly mistakes and losses while making your venture in dairy farming profitable.

 1. Dietary Requirements

Although cows mostly eat grass, there are also man-made supplements given to them to produce nutritious milk. Generally, cows survive on the grass, however, with the agricultural produce reducing in recent days, they tend to depend on artificially produced supplements for extra food.

Cows require many dietary components to stay healthy. Dairy cows that produce more milk require a higher amount of protein such as mixed grass-legume pasture, alfalfa, and other protein supplements. They also need salt and minerals.

Keeping them energetic and healthy is very important to grow the dairy business.

Some of the feeding options for cows are:

Hay: This is the best option for those who cannot spend on alfalfa which is expensive. Oat and wheat hay are affordable, and they are also a good option to meet the supplementary requirements of the cows.

Silage: This is a very common option farmers choose to feed their cows. It is a high-quality feed for the cows, and some of the options include silos, haylage, and others.

Grains: Grains meet the nutritional requirements of cows. It is the highest energy food with high nutritive value. Although cows consume grains naturally in the wild or farm lands, meeting the required amount is important on which the farmers should focus to fulfill by providing extra grains.   

2. Health and Hygiene of the Cattle

It is important to focus on the health condition of the cows in your farm, especially during the winter season. Winter season is difficult for them for the obvious reasons, and if they are bathed it is essential to dry them, otherwise, they will fall sick or catch diseases.

Besides, maintaining the cows in good and nominal weight is very important to ensure their health. It is recommended to assess the cows once in every two months. It is also equally important to maintain the body fat level, which can be increased or decreased by feeding appropriately.

3. Morning boost

Physical Activity of cows is very important to keep them healthy and increase dairy production. Try to give the cows a little push in the morning and give them hay to get warm.

Feed them enough in the morning with all nutritious foods. Sitting in the shelter all day will make their bones weak, so one should leave them in open fields twice a day as it keeps them active. Doing so also gives the cattle some fresh air to breathe.

4. Proper shelter

It is normally observed in the dairy business that people lock the cows back in go down or build a hall and keep dozens of cows in a single hall. Building a proper shelter also plays a crucial role in growing dairy.

The shelter you develop should also ensure maintaining appropriate weather condition indoor, both during summer and winter. Try to keep the place warm and dry to make the cows feel comfortable, and there should be a separate shelter room for pregnant cows with continuous availability of food and water.

5. Protect cow’s teats

This is very important. Try to ensure that their teats are dry, especially when leaving the milking stall or feed area. If their teats are dirty and not properly washed, it can catch the infection, itch them and also affect the quality of milk.

So for a healthy and long life of your farm animal and adequate supply of milk, it is essential to keep their teats clean and dry as the cooperative societies and dairy farms have milk analyzer that can easily determine the quality of milk.

It is also important to develop a detailed business plan. Adopt appropriate ways to market the milk produced. Try to hire the right people who are not only dedicated but experienced.

Try to buy bulk feeds at the best prices, however, never compromise on the quality. Moreover, try to reduce your unwanted expenses when attempting to grow dairy farm.

Is Dairy Farm Profitable?

It’s long been assumed that large dairies enjoy economies of scale that allow them to have lower costs, be both more competitive and more profitable than their smaller neighbors who milk fewer cows and farm fewer acres.

But analysis of farm financial records of dairies which participate in the University of Minnesota’s (U of M) Center for Farm Financial Management show that’s not always true, says Jim Salfer, a U of M Extension dairy specialist.

“Herds over 500 cows on average tend to be more profitable, but profit is much more variable on large farms,” he says. Averages of farm financial records from 2015 through 2018 show that large farms can be in the lowest 20% of profitability and in the top 20%.

“I think some of these farms just can’t handle expansion very well or are just too far in debt,” Salfer says.

Still, on average, large farms show the most profit per cow at about $275 per cow. Farms with less than 200 cows have profits of about $160 per cow. Herds with 200 to 500 cows are seeing profits of just $84 per cow.

“The challenging size are the 200- to 500-cow farms,” he says. “They tend to be too big to be primarily family managed and too small to take real advantage of the scale of size.”

Production per cow is also not necessarily a determining factor, either. Most herds that participate in the program have production per cow that exceeds state and national averages, and 80% of them have herd averages that exceed 24,000 lb/cow.

“I’m not saying high production is not important [to profitability]. Rather, the data show all farms are becoming high producing,” Salfer says. In other words, high production in and of itself does not lead to profit, he says.

High-profit farms, however, have five characteristics:

• High-profit herds sell more milk per worker. High profit farms sold about 1.85 million pounds of milk per worker. Low profit farms sold less than 1.5 million pounds per worker.

• High-profit farms have higher gross margin. The highest profit farms average $4,416 of gross margin per cow, driven largely by high milk income and lower net replacement costs.

• High-profit farms produce higher value milk. From 2015 through 2018, the highest profit farms averaged $17.66/cwt while the lowest profit farms averaged $1/cwt less. Since large farms were in both categories, volume premiums weren’t the likely driver of these price difference. Milk components and milk quality likely were.

• High-profit farms have lower feed costs per cow. The high profit farms averaged $1,916 per cow in feed costs while the low profit farms’ average feed costs were nearly $200/cow higher. High profit farms tend to have higher forage quality and lower supplemental feed costs.

• High-profit farms do a better job of controlling all costs. High profit farms had $14.36/cwt in direct and overhead costs. Low profit farms had costs that were a third higher at $19.23/cwt.

These trends and differences demonstrate the dairy industry is ever-evolving, says Salfer. “In the 1960s, if you simply worked hard you succeeded. In the 1980s, the focus was on forage quality. In the 1990s, it was milk quality. Then, in the 2000s it was cow comfort, and in the last decade it has been reproduction.

“What will it be in the future? Will it be driven by efficiencies? Both labor and moving toward a knowledge and technology-based economy?” he asks. “Business acumen and efficient asset use will also be important.”

The critical thing is to develop a strategy for your farm moving forward. “Staying the same is likely not an option,” Salfer says.

One option is scale-adapted dairies, with herd sizes in excess of 1,200 cows. “The intention here is to compete by economies of scale and volume in the face of tightening margins,” he says.

A second option is the more traditional dairy of less than 600 cows, with most smaller than 200. “The intention here is to compete from an established base of facilities and equity,” Salfer says. To do so, you must be good at asset use and need to have high margins per cow.

The third option is a niche-based dairy. “The intention is to compete by significantly expanding the margin between income and expenses,” he says. Options include grazing, on-farm processing, organic or specialty markets such as selling genetics.

Will the Dairy Industry Recover?

When 2020 began, the dairy industry appeared headed for a recovery period. But now, thanks to the COVID-19 pandemic, the industry is likely to face yet another difficult year. Milk prices could fall to their lowest point in the last five years, according to one dairy policy expert.

The entire dairy industry is struggling to remain profitable in these unprecedented times and is facing several different issues, including drops in both domestic and export demand. But financial help for the industry could be on the way from the federal government.

Many Concerns

In a webinar titled “Considerations for Landspreading Milk” on April 7, Mark Stephenson, director of dairy policy analysis at the University of Wisconsin-Madison, said there is long list of concerns facing the dairy industry right now.

Near the top has to be the considerable drop in fluid milk prices. Milk production is up 1.7% across the country in early 2020, and this additional production was already going to keep a lid on prices even before the COVID-19 pandemic surfaced, he said.

With the virus concerns, the CME milk contract price has crashed in the last 120 days, Stephenson said. In January, prices were at $17.50 to $18 per hundredweight (cwt). Last week, (first week of April) prices for Class III and Class IV milk had dropped $5 to $6 per cwt.

This year originally looked to be a recovery time for milk prices after six years of low prices. But now, 2020 could produce the lowest milk prices in the last five years, he said.

“It could be a brutal year,” Stephenson said.

In some cases, farmers could see milk price so low the price might not even cover their operating costs. Because of that, Stephenson said, farmers should meet with their bankers to make sure they are on the same page in terms of financial needs.

Dairy Demand Down

Stephenson said the dairy market has seen demand severely affected by the many COVID-19 closings.

About two-thirds of fluid milk is consumed at home, while the remaining third is consumed out of the home, he said. While milk sales are up right now, reversing a long-standing trend, the net negative demand is 5% to 10% with the loss of out-of-home consumption.

The same holds true for cheese and butter products. Total cheese consumption could see a net-negative effect of 5% to 10%, while butter demand could be down 10% to 20%, he said.

In addition to lessened dairy demand domestically, Stephenson said export disruptions are another major concern right now. The virus has affected the number of orders in the export market.

Mexico, for instance, imports a significant number of U.S. dairy products, and the virus has resulted in fewer orders coming from south of the border, he said.

Problems with closed or limited services at ports are yet another concern in the export market for dairy products, Stephenson said.

“This could tailspin into a worldwide recession because of virus-induced supply chain disruptions and not just dairy,” he said.

Dumping Milk

Stephenson said the plentiful supply of milk, combined with shrinking demand, has led to some cooperatives sending out letters to dairy farmers asking them to participate in voluntary supply management protocols. In some cases, milk has been dumped with processors not having any storage facilities available.

Though no definitive numbers are available, Stephenson estimated maybe 100 dairy producers in Wisconsin have been forced to dump milk already. He advises dairy farmers to perhaps not push production so hard, in order to limit the supply of milk and also help reduce feed costs.

Stephenson said he is also concerned how the dairy industry will continue to operate if COVID-19 is found both on dairy farms and at processing facilities. Needless to say, it would be bad if the virus affects farms and further downstream, he said.

In many cases, milk haulers are smaller businesses with a couple trucks, and if the virus affects milk haulers, milk may not get delivered to processing plants. It would be difficult to find replacement haulers who are well trained, he said.

At processing facilities, the virus could shut down a plant if it was found there. Finding a home for that much milk could then become a real problem, he said.

Federal Help

Stephenson said the federal government could intervene and send aid to the dairy industry. Agriculture has been deemed a critical sector, so some sort of aid is expected, he said.

The National Milk Producers Federation (NMPF) and other dairy organizations are asking USDA for a milk crisis plan. The plan (https://www.nmpf.org/…) calls for as many tools as possible to be used to bridge the supply and demand gap and provide aid to dairy producers and processors.

Stephenson said that among the producer initiatives is a plan to pay producers $3 per hundredweight on 90% of their production if they cut production by 10%.

This would run from April to September, and payments during any one of those months would be suspended if the average of the Class III and Class IV prices for that month exceeds $16 per hundredweight.

On the processor side, a forgivable loan program would be available to processors.

“There is a 10% surplus milk on the market,” Stephenson said. “I wouldn’t be surprised if this (milk crisis plan) happens.”

The dairy industry also has asked USDA to buy more of their perishable products and distribute them to food banks and shelters.

On a press call Wednesday, U.S. Agriculture Secretary Sonny Perdue said it’s a possibility that could happen, but Perdue also acknowledged some logistical challenges providing perishable dairy products to food banks.

For one, some food banks have capacity for cold storage while others do not. Last year, USDA purchased $50 million in fluid milk, but Perdue said it took nearly a year to make that happen.

“The challenge is scale and scope and the amount of oversupply in the dairy industry with the disruption in the food locations and schools and others,” Perdue said.

How can I Success in Dairy Business?

To be a success in dairy farming, you have to know your stuff. That’s easier said than done, however. With the number of dairy farms falling across the UK, how can you make sure your farm carries on putting food on the table.

The answer lies in the community. The dairy farming community is stronger and closer than ever before, with opportunities for the sharing of know-how and techniques flourishing both online and offline. 

Know the playing field

You should always stay aware of what other farmers are doing. Make time to visit other farms, especially those that operate differently from your own – these are the ones that are the best sources of new ideas to take back.

You may think the way you do something is the best it’s going to get. That is until you spot someone doing things another way. This really could be anything: from a latch on a gate to the layout of a calf shed.

Listen to advice

Never turn your nose up at free advice. After all, what do you have to lose? On the other hand, when it comes to paying for advice, be very careful about who you choose.

Mathew Crossman tells us, “‘I have learnt so much over the years by attending ‘Grazing Groups’ and inviting farmers/professionals to look round the farm to suggest improvements. This can bring fresh ideas to the farm and help take the business forward.”

Don’t isolate yourself

A farm can never be a one-man show. Working with others inside and outside the farm is always a smart move for your business.

William Maxwell told us: “It doesn’t matter if it’s a 1,000 cow farm or a 40 cow family farm. Listen to and communicate with vets, nutritionists, advisors or even just the neighbours who drop in for a chat. Every pair of eyes sees your farm differently to you!”

Take a break

Remember: you have a life outside work. You might feel like dedicating 100% of your time to the farm is the best way to maximise your profits. But this can often do more harm than good. Burnout and stress are not profitable, and that’s why it’s vital to give yourself time to unwind.

William Maxwell advises farmers to “take time out for at least one holiday in the year, time to switch off and unwind, go out for a meal, to the cinema or a concert.

 Plan often and well

Mathew Crossman pointed out that creating a plan for the farm is a great idea: “A 3-5 year business plan for all aspects of the farm can give everyone direction and goals to work towards.”  That plan should be reviewed at least once a year, ideally with a professional who can act as a neutral third party and offer advice.

Be ready to adapt

You may be out in the sticks but that doesn’t mean you have to be a stick in the mud. The best farms are those that are always adapting. The industry doesn’t stay the same for long, so why should your farm? Always be ready to respond to changes in your business and the industry.

Focus on your strengths

Farming requires so many different skills, and very few of us can be masters of all of them.

According to Mathew Crossman, “Farming requires so many different skills and I don’t know many farmers that can do it all themselves. So admitting you’re not an expert in certain fields can be a positive thing! My weakness would be nutrition so I always work closely with our nutritionist and stick to what he says.”

Beware trends and fads

Finally, you’re a farmer; you’re no sheep. Maxwell is keen to warn against being taken in by fads in farming: “Don’t be swayed by ‘trends’ and ‘fashions’! By all means consider them and if they might help you give them a try, but don’t do something just because the two farms either side of you are doing it!”  

Looking to others

Your farm doesn’t exist in a vacuum. The dairy farms that are the most successful are those that are most ready to look to others for advice and ideas. You can think of it as a time-saving exercise.

You might not have the time to learn about each and every new technique in farming, but by considering others’ successes and failures, you can efficiently tweak your farm to perfection. This is how you can stay ahead of the curve and be ready for anything this industry throws at you.

How is the Dairy Industry bad?

Urbanization has taken so many people off of farms and into the city. Because of that, there is a major disconnect when it comes to the average person and what they believe when it comes to their food.

Most people don’t know what happens on a farm or how the food they eat gets to their plate.

The complexity of today’s food system is known to very few people.

So it shouldn’t come as a surprise that many people aren’t aware that factory farming plays a huge role in climate change. It isn’t something that is talked about openly in the mainstream media.

Even major organizations that fight for the environment fail to take animal farming seriously when it comes to trying to find solutions.

That’s one of the main points of Kip Andersen’s groundbreaking documentary Cowspiracy. In the film, he searches high and low for answers from major corporations that simply ignore the obvious fact that animal farming is playing a major role in the accelerated heating of our planet.

So where does dairy farming stand in all of this?

Water Usage on Dairy Farms

People who pay attention to factory farming and its consequences know that factory farms consume a lot of water.

Did you know it takes 15,415 liters of water to produce just one kilogram of beef?

The average American will consume approximately 40 kilos of beef per year. That’s 616,600 liters of water just for beef consumption per person.

What about the water needed to run a dairy farm?

Drinking Water For Cows

Cows consume a lot of water on a daily basis just to stay hydrated and healthy. A single dairy cow can drink as much as 150 liters of water per day. In 2018, there were approximately 9.4 million dairy cows in the US alone.

Just in drinking water, that is approximately 1,410,000,000 liters of water every single day that is being used to hydrate dairy cows so they can produce milk.

But that’s not where the water use on a dairy farm stops.

Water Usage to Produce Food for Cows on a Dairy Farm

On factory farms, cows don’t eat the different kinds of grass that they are designed by nature to consume. Instead, they consume different types of grains, corn, and soy.

Growing soy and grain takes immense resources when it comes to water. Especially considering a lot of it is grown in regions where the soy is grown all year.

Take Brazil, for example. Brazil grows more soy than any country in the world besides the United States. But what makes Brazil different is that it can grow all year because of the climate. The weather can permit two to three harvests per year.

However, it doesn’t rain all year in Brazil.

The state of Mato Grosso produces the most soy out of any Brazilian state. But there are many months throughout the year that see very little rainfall. Water irrigation systems are put in place that use large quantities of water to grow the soy that is used to feed dairy cows.

Cleaning Facilities on Dairy Farms

It’s important to remember that factory farms are filthy places.

Imagine living with tens of thousands of people in extremely confined spaces. Now imagine not having the ability to use a bathroom.

Factory farms get very dirty very quickly. And the dirtier they get, the higher the risk of cows becoming contaminated with bacteria and spreading diseases.

Because of that, it’s necessary for farmers to keep the animals and the facilities as clean as possible. That requires a lot of water.

According to the United States Department of Agriculture Natural Resource Conservation Services, dairy operations can use upwards of 150 gallons of water per day per cow in total, including the water used for drinking and cleaning.

The Impact the Dairy Industry Has on the Environment and Climate Change

There are many factors on a dairy farm that negatively contribute to the environment.

Cow’s produce a copious amount of waste. Each cow produces on average 37 kilos of waste every single day. That is more than one ton of waste

Now let’s multiply that by 9.4 million dairy cows in just the US alone and you can see that we have a major problem.

That waste needs to go somewhere and not all of it is properly taken care of.

According to the USDA, the waste from just 200 dairy cows produces as much nitrogen as the sewage from a community of up to 10,000 people.

This waste, if not treated properly, can contaminate local drinking supplies and the soil. If a farm closes, the land will take a very long time to recover. While some farmers might argue that fertilizer is good for the soil, that isn’t the case when it comes to waste from factory-farmed animals.

Bad Manure Handling Can Affect Prairies, Wetlands, and Forests

Taking care of manure on factory farms is no walk in the park. It takes a lot of resources, water, and labor to do it right.

And because many farms like to maximize profits above all else, the handling of manure can be an ecological disaster for surrounding areas.

The manure from animals on a factory farm is full of antibiotics and chemicals. Because these cows are living in mass in confined spaces, they need to be heavily medicated in order to prevent the spread of disease.

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These chemicals can plague native ecosystems. The local wildlife can suffer dramatically as well as foreign toxins enter their water and food supply.

Toxic Air from Dairy Farms

Beyond waterways, aquifers, and soil contamination, another thing that plagues local residents surrounding dairy farms is the air.

That might be hard to understand until you get close enough to a factory farm and see for yourself.

Dust is a major issue in rural communities close to factory farms. This is a problem that goes beyond the dairy industry. Poultry farms and pig farms are also complicit in this pollution problem.

The toxic dust that is kicked up by tens of thousands of animals can hover around the farm like a low-lying cloud and spread for miles beyond.

Many farmers suffer from respiratory illnesses because of ammonia-laden dust. People in the surrounding communities also suffer from this. And while the humans are able to take medicine or wear masks, the animals on the farms themselves cannot and suffer the most from living in and breathing in the toxic dust.