With fluctuating milk prices, many dairy producers desire a more reliable, less cyclical income stream. At the same time, the local food movement has increased demand for locally produced foods. Throughout the country, dairy producers are considering on-farm processing to add value to the milk produced on their farms.
Dairy producers may bottle milk or process their milk into cheese, ice cream, butter, yogurt, or cream. Generally, adding value to a product consists of transforming a product from its original form to an alternative form that will allow it to bring more value and income to the business. Through this process, consumers receive a high-value product and dairy producers may receive a new revenue stream for their business. These products often have a distinguishing marketing feature (i.e. organic, grass-fed, or natural) in addition to being locally produced. As an individual farm enters an on-farm processing venture, non-monetary benefits come from new connections with consumers and local families. On-farm processing increases interactions between farmers and consumers and consumer education.
The decision to enter this venture should not be taken lightly. Like many small businesses, the failure rate for dairy on-farm processing enterprises is high. Additional food safety and liability risks must be considered. While many producers are attracted to the potential for increased value for their milk, to realize this value, consumers have to actually purchase the product. Moreover, successful operation of a dairy on-farm processing venture requires a completely different skill set than the skills needed to manage a herd of dairy cows.
How do I know whether I should start a business?
A business plan is one of the most difficult but most important parts of starting an on-farm processing enterprise. When dreaming up a new business, especially an on-farm dairy processing enterprise, excitement takes over, and it is easy to become overly optimistic and blind to potential pitfalls. A business plan helps organize the overwhelming amount of information and ideas into one document.
Why is a business plan important?
- Lays out plans into a written form
- Helps to set a timeline of practicality and priorities
- Documents goals and purposes
- Forces inclusion of details often overlooked
- Helps managers to consider parts of an operation that may not have been considered without a business plan
What should be included in a business plan?
- Market and product research
- Cash flow and profitability projections
- Location plans
- Financial plans
- Extra insurance
- Business structure
- Product manufactured
- Future short- and long-term plans and goals
Multiple websites and organizations are available to assist in the writing or outlining of a business plan. The Small Business Administration website outlines everything from how to write it, how to find a niche, workshops offered, and much more. The Agricultural Marketing Resource Center provides sample plans, free online worksheets, and a host of business assessment, planning, and management links from across the nation.
How will I fund the new business?
Funding an on-farm processing enterprise can be challenging. This reality check can prove to be a major obstacle for many. First, each business owner must realize that some internal financing is needed. Without your own equity, lending institutions will not be able to help. It is extremely important that estimations are made ahead of time for costs related to installation, management, and maintenance. While developing these estimates, professionals familiar with these enterprises, should be contacted. For equipment and consulting fees, be sure to obtain multiple competing estimates. Once estimates are established, a true understanding of the cost requirements can be in place. Bank loans, agricultural based loans, and grants may be available to start your new business. Lending or granting agencies will want to see business plans, cash flow projections, break-even points, advertising, distribution, labor, and packaging costs, fees for permits, and expected sales before providing funding.
What regulations will I need to consider?
Before beginning an on-farm dairy processing enterprise, many regulations, and restrictions for producing a specific product must be considered. The Dairy Practices Council’s “Guideline for on-farm and small-scale dairy products processing” (GL-90) is an excellent resource for all phases of establishing this business including regulatory requirements. Regulations in production can include anything at the national, state, or local levels, including health requirements. Different products require different methods of production, and regulations are directed at safe and healthy production for consumers. Along with safety requirements, labeling requirements must also be considered. All dairy processing plants must adhere to state and national regulatory requirements depending on what product you choose to create and these regulations are important to consider when making a business plan. For example, the time, buildings, and equipment needed to bottle your own milk are not the same requirements to make aged cheese. Considering the items needed to efficiently produce your product is essential. In addition, consulting with other farmers who have produced the same product is very helpful in beginning an on-farm processing venture. Regulations vary by state and when deciding to start an on-farm dairy processing enterprise, the producer must consider all the regulations and determine whether they are willing and able to oblige to all the regulations.
Article by By: Jeffrey Bewley, Ph.D., Brianna Goodnow, and Elizabeth Chaney. Published in Kentucky dairy Notes