Special Focus: Determined to Dairy

Bottle at your own risk
Interest in farmstead milk processing is growing, but two AURI studies advise producers to be cautious.

By E. M. Morrison

You probably paid about $1.85 for that half gallon of milk in your refrigerator. What portion of the retail price went to the farmer?

Not much.

The farmgate value of your milk is about 35 percent of the retail, according to the U.S. Department of Agriculture. And the gap between what farmers get and consumers pay is growing wider. “When producers look at the price for raw milk, compared to prices for retail milk, it’s discouraging for them,” says Lane Loeslie, AURI program specialist in Crookston.

That farm-to-retail price spread is one reason Minnesota dairy farmers are showing interest in new processing ventures, especially farmstead bottling, says Michael Sparby, AURI project director in Morris. “We’ve had many recent inquiries from growers who want to do on-farm processing.”

To help farmers understand the opportunities and risks of these ventures, AURI organized two studies. The research examines the retail dairy market and assesses the economic feasibility of farmstead bottling. AURI officials and other ag leaders also toured several East Coast “mini-dairy” plants, gathering information on behalf of Minnesota farmers.

Their conclusions? “We’re advising caution,” Loeslie says .

Retail bottled up?

An AURI- and Small Business Development-sponsored study in 1999 for Agassiz Valley Dairy Cooperative advised against competing head-to-head with established suppliers in the price-sensitive fluid milk market.
Agassiz Valley Co-op, a group of 25 milk producers in Otter Tail and Becker counties, was looking for value-added opportunities, says Karl Hanson of Perham, co-op secretary-treasurer. Before moving into fluid milk processing, growers asked for accurate information about dairy product consumption trends, wholesale and retail distribution channels, retail slotting and promotional fees, local demand for specialty milk products such as organic, and interest by retailers in private-label processing contracts.

The market study, conducted by Strategic Performance Group of Minneapolis, surveyed 157 groceries, restaurants and institutions in central Minnesota. The survey found high satisfaction with current dairy suppliers and products and warned that consolidation in the food industry “makes it more challenging to gain access to accounts at the local level.”

About a third of retailers expressed interest in dairy products bearing their store’s private label. However, private label products generally sell at a discount, forcing lower processor margins.

Four large dairy companies dominate the Minnesota market, along with several smaller ones. The study concluded that “competing on price against well-established (milk suppliers) will lead to price concessions and marginal profitability.”

Hanson says the study caused Agassiz Valley to shelve the idea of building a processing plant, which would have required a capital investment of at least $1.5 million. “The guys weren’t willing to put their equity on the line.” The co-op is now attempting to win a collective supply agreement with an established milk processor.

Again, be careful

Another AURI-sponsored study in farmstead bottling found similar obstacles to competing in the fluid milk sector.

Designed by David Hoff, a University of Minnesota-Crookston agricultural business professor, the study was carried out last fall by ag marketing management students. “The purpose was to identify economic and market barriers to on-farm milk processing,” Sparby says. “We wanted to know if it is economically feasible to overcome these barriers.“

Confirming the Agassiz Valley study, the Crookston study found that the biggest hurdle for independent bottlers is market penetration.

“The fluid milk market is highly concentrated,” Hoff wrote in the study’s executive summary. “The major players have an established distribution system in place with recognized and respected brand names. They have established themselves as reliable suppliers. Furthermore, they are more likely to be in business for many years into the future, something a new venture will find places them at a disadvantage when seeking retail outlets.”

Independent milk processors are also likely to face a growing array of retail slotting fees, promotional costs, demonstration allowances and store rebates for unsold product, the study revealed. At the same time, “It is unlikely that a small bottler will be able to become a low-cost competitor.”

Specialty dairy products offer the best opportunities for independents, the Crookston study found. But established processors are already moving aggressively to fill and promote those niches. “This makes it increasingly difficult for the small processor to gain comparative advantage.”

In summary, Hoff says: “There are very limited opportunities in fluid bottling.”

Openings for a few

Still, that doesn’t mean there are no opportunities for small, independent milk processors, says Kai Bjerkness of AURI in St. Paul.

Last November, Bjerkness joined Minnesota Commissioner of Agriculture Gene Hugoson and other state ag leaders on a tour of farmstead creameries in Pennsylvania and Virginia. “We were interested in how these mini-dairies operate, and the results they’ve had.”

Bjerkness toured three mini-dairies, all established within the last year. The dairies are processing from 2,500 to more than 8,000 pounds of milk a week, producing milk, yogurt, cheese and ice cream.

All the mini-dairies are located in high-traffic areas, Bjerkness says, and are serving specialty markets. “You can’t make it competing with big players that operate on thin margins and high volume. It has to be a niche.”

The largest plant, located on a 200-head dairy and vegetable farm in the Chesapeake corridor, supplies milk, cheese and ice cream for the farm’s retail store. The dairy products augment a successful vegetable and bakery business, Bjerkness says. “They already had a strong market established for produce.”

Another creamery, run by a 28-member Amish cooperative, makes kosher yogurt for the New York and New Jersey markets. Although demand for kosher dairy food is strong, marketing has been expensive, Bjerkness says. And the co-op’s access to retail shelf space has been hindered by missteps in package design, he adds.

A third cooperative dairy, which also operates a farm store, reported that finding retail vendors was a problem. “Service issues were cited as the primary reasons,” Bjerkness says.

It’s the m-word

It’s still too early to judge the financial success of these ventures, which required capital investments of $750,000 to $1.2 million, says Minnesota Milk Producers Association Executive Director Bob Lefebvre, who also toured the East Coast dairies.

Lefebvre, whose organization represents 3,200 Minnesota dairy farmers, believes farmstead dairy processing “may work for a few producers. It’s obviously not the answer for all.”

Bjerkness agrees: “You have to ask questions first: Do you have the financing? ... the location? ... And what is your market?

“Market,” he adds, “that’s the beginning and the end.”