In today’s competitive dairy industry, additional cattle come with a price that is not a fit for every dairy. What if there was a way to increase profit without increasing cow numbers? Enter value-added dairy opportunities.

Everyone has seen or heard of them. You might even have a neighbor who is experiencing success with value-added dairy products. Buying local is all the rage. From ice cream and artisan cheese to farm-bottled fluid milk and yogurt, consumers in many areas are willing to pay a premium for products produced and sold on farms.

However, value-added dairy is not for the faint of heart. Success with a value-added dairy enterprise requires significant planning by thinking through the financial, marketing, production and pricing implications of the potential business venture.

So don’t bet the farm just yet.

The USDA defines the term “value-added” with three key elements: First, the product needs to change from its original form, such as milk to ice cream. Next, specialized production methods (based on a business plan) should enhance the value of the product.

Finally, separating the product from the rest of the marketplace should create additional value. Overall, for a product to be considered value-added, a real economic benefit should be realized from on-farm production.

“It’s important to examine why a value-added enterprise may or may not work for your farm,” said Sarah Cornelisse, senior extension associate at Penn State University, during a presentation at the 2014 World Dairy Expo in Madison, Wisconsin.

Increased profit, farm location, nostalgia, inability (or unwillingness) to grow the herd, support for another generation or passion for specialty dairy products are just a few of the reasons to explore a value-added enterprise. Whatever the reason, the value-added business model is catching on.

Developing your business plan
When exploring value-added opportunities, there are several very important questions that need to be addressed, starting with “Why do I want to do this?”

Are family members interested in being part of the business? Is the farm location and size right for the business? Do you have the necessary skills (or access to someone who does)? Is it the right time for the business? Are other aspects of the current dairy going well?

“People are scared by the term ‘business plan,’ but value-added enterprises require significant additional personal and capital investment and should not be undertaken without thoughtful planning,” Cornelisse added.

In many scenarios, there is one person who is the driver, and they need the support of the entire farm for the business to be successful. In addition, the farm needs to be financially stable for a bank to agree to fund an [untested] enterprise.

“Most value-added enterprises have significant start-up costs, and if your farm is struggling in its current state, a bank might not be willing to give you a loan,” she said.

In addition to the financial implications, it’s important to consider other factors like production, marketing and even human resources.

“Completely different sets of management skills are needed for a value-added enterprise. Ask yourself: ‘What do I know about marketing? Can I manage people? Am I equipped to handle added human resource needs?’” Cornelisse said.

Bring on the product options
The sky is truly the limit when it comes to value-added products. In dairy, there are a few main areas that make up the majority of the market: cheese, fluid milk (including raw and cream line), yogurt, ice cream and miscellaneous products such as butter, cottage cheese, sour cream and kefir.

“It’s important to know the federal regulations and standards for the products you are interested in producing,” Cornelisse said.

This is particularly true when exploring value-added products using raw milk. Despite the controversy, raw fluid milk and raw cheeses are gaining popularity, but they are not legal in every state and in most cases cannot cross state lines. Cornelisse recommended becoming educated on your state and federal regulations and consulting your state’s regulatory body with questions.

“Many land-grant universities have short courses in dairy processing that cater to individuals in value-added enterprises,” she said. “Penn State, the University of Wisconsin, Cal-Poly and Cornell University are just a few of the well-known programs.”

Cornelisse recommends short courses as a way to learn how to make the product itself and to learn about food safety, including developing a hazard analysis and critical control points, or HACCP, plan.

Turning an idea into reality
With a strong business plan developed, it’s time to determine what is needed to produce and market the product.

There are facility requirements for manufacturing, storage and retail, and specialized equipment for each area. Marketing supplies like packaging are also a major consideration. Based on the business plan, employees may be needed to produce and market the product.

Regardless of the product under consideration, Cornelisse encouraged would-be value-added enterprises to tour other farms to learn what works and what doesn’t. Have a strong understanding of the targeted end user. Market research will help determine the demographics of potential buyers.

“Consumers often say they are willing to pay more for locally sourced premium products, but then they shop at big box retailers,” she said. “It’s important to know how sensitive potential buyers are to price.”

Because value-added opportunities come with their fair share of risk, it’s best to start small and see how consumers respond to the products. Starting small also gives farmers time to understand supply and demand.

For example, if a 50-cow dairy dedicates only 10 percent of its milk to an on-farm yogurt enterprise, it will be producing 38,144 6-ounce containers per week. Since yogurt and fluid milk are extremely perishable, it’s critical to know what the demand is for the product.

“Currently, only 3 percent of all dairy products are bought through direct marketing. People ages 25-34 purchase up to 6 percent directly,” Cornelisse said.

Sales trends support the notion that today’s consumers are looking for more natural dairy products – especially cheese. Natural cheese (as opposed to processed) is responsible for 69 percent of all cheese sales in the U.S. This is a 9 percent increase from 2008-2013.

“Specialty cheese sales increased 16 percent from 2011-2013. Roughly 22 percent of cheese sales result from a focus on health, preparation options (like recipes) and taste testing,” she said. “Make sure that tasting and sampling events are built into your marketing strategy.”

It’s all about marketing
The most important consideration of any value-added enterprise is promotion.

“You can have the best product on the market, and if your customers don’t know about it, your business will fail. Marketing is everything – and you might need to hire someone who specializes in this area,” Cornelisse warned.

“Marketing is the cornerstone of success for every value-added product,” Cornelisse added. A mixture of advertising, events and social media will help drive awareness.

The final consideration is pricing. Cornelisse urged farmers to have a firm understanding of their cost of production.

“If you know how much it costs you to produce your product, and you price your products correctly, you have a better chance of being successful,” she said.

Even consumers with the best of intentions and passion for local foods are affected by price. It’s important to conduct a competitive analysis on the price of similar products to make sure yours are appropriate.

“Get feedback from your customers. Ask them what they think about the price,” Cornelisse said.

You’ve considered the risks – and you’re still interested
After taking into account all the aspects of starting a value-added dairy enterprise, it’s easy to see why it’s considered a niche. If it were easy, everyone would be doing it.

“Make decisions based on facts, study the market and have a business plan,” Cornelisse said.

Transitioning from a traditional dairy farm model to a value-added enterprise is complex, but if done correctly, there is financial reward.

“The playing field for value-added dairy is open; it only requires passion, commitment and planning,” she said. PD

Maria F. McGinnis is a freelance writer based in Sun Prairie, Wisconsin.

PHOTO
In her work at Penn State, Sarah Cornelisse focuses on agricultural entrepreneurship, with an emphasis on business planning, decision-making, marketing and value-added agriculture. Photo courtesy of Maria McGinnis.