Cost of production rules... no different than raising corn or anything else. Yes, land productivity will vary, but it doesn't affect total profitability of a dairy very much. If it did, you'd see a lot more dairy farms left in the corn belt. Better land is usually more expensive, and so carries a higher cost- more rent, more debt, etc. Nice if paid for, but there are opportunity costs then ,too.
Cow care is important... a herd that can sell replacements in excess of its needs year in year out will have an income advantage over somebody who always is buying a cow or two to keep the barn full. Dead cows are a great way to increase ones "replacement cost."
Productivity is another area that lowers cost. Within a management system, a herd that ships more lbs of milk per cow (or fat per cow) has more units sold to spread fixed costs over. If they are able to manage their expenses, they will outperform a low producing herd.
Or one could use really low fixed coss in a grazing system to make things work.
Cost of production is also of course affected by debt structure, cost of living, machinery buying habits, repair costs, etc. Austerity gets you a little of the way, productivity with what you've got gets you further. Risk management gets you further yet. Those confident enough in their costs can lock in a good price for a year or more in advance. Yes, they may miss some better times, but if they lock in a profit, they are at least gauranteed a good (or at least decent) time.
Big gets you nothing if your costs are high... zero times a 1000 is still zero. Economies of scale can work, but they go the other way, too.
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