In 1993, 36 percent of the nation's milk originated from dairy operations with 200 cows or more. In 2000, that number grew to roughly 54 percent.

Despite this trend toward large dairies producing the majority of the nation's milk supply, small dairy operations will not shrivel up and disappear, especially if they take steps to adapt to changing market conditions.

"Dairy farmers, particularly smaller operations, can be successful in the current market environment if they make appropriate changes," says Ken Bailey, agricultural economist at Penn State University.

Changing the way you think about your dairy operation - as a business entity rather than a lifestyle - is one of the first steps toward success. "Many dairy farm families find it difficult to contemplate significantly restructuring their farm business in order to become more competitive."

In some cases, becoming more competitive means you might want to consider expansion - even if it's just a few cows per year. "In many cases, it's the least risky strategy you can do," Bailey says.

In addition to a moderate expansion, Bailey outlines the following strategies that small dairies can use to achieve success:

1. Consider value-added enterprises. If you simply don't want to, or can't afford to expand your business, consider adding value to your operation - but only if it makes good economic sense. A number of value-added enterprises such as operating farm tours, bottling your own milk, or running a bed and breakfast, are possible alternatives to expansion.

2. Increase milk production per cow. The more milk you get from each cow, the lower your per-unit expenses and the greater your profits, Bailey says.

3. Establish an asset turnover ratio that makes sense. "Sit down and pencil out your annual sales," Bailey says. Then, make sure they match up with farm assets. For example, if a dairy operation has 100 cows, an 18,000-pound rolling herd average and faces a $12 per hundredweight milk price, the total investment in the business must line up with the dairy's annual sales of $216,000.

4. Make use of a strong business plan. "Pencil out where you want to be in five years," Bailey says. Once the big plan is in place, sketch out an annual operating plan that includes number of cows, milk production and the milk price needed to generate a profit.

5. Develop a detailed management plan. Establish a list of daily activities that everyone is going to do each day.

"In 10 years, we're going to continue to have a diversified industry," Bailey told producers at World Dairy Expo, held in Madison, Wis., in early October. Use these strategies to help you remain competitive and achieve success in this diversified industry.