With so many value-added options available to dairy producers, it can be overwhelming to evaluate each possibility and determine how to move forward. At the 2020 Pennsylvania Dairy Summit, Ginger Fenton and Sarah Cornelisse from Penn State Extension led a breakout session about feasibility analysis frameworks.
Cornelisse began the session by describing value-added products available to dairy producers, including cheese, butter, flavored milks, ice cream and more. On the production side, she highlighted opportunities in grass-fed, organic, and animal and breed-specific spaces.
“What do you want to do in the future? You may have a lot of ideas that come to mind,” Cornelisse said. “Do you want to direct sell your milk? Do you want to transition to organic or switch out breeds? Do you want to make cheese? A feasibility analysis framework can help you consider those options, consider the best fit for you and determine how to proceed with planning.”
Throughout the session, attendees learned how to evaluate the viability of their ideas and understand the research that’s required to make a value-added change.
Market analysis
Cornelisse described market analysis as the first step in creating a feasibility analysis framework. Dairy producers must understand their demand, target market, competition, market channels and outlets. With cheese outpacing fluid milk consumption, and whole milk having a resurgence in the fluid milk category, she encouraged producers to look at these types of consumer trends and determine their target market.
“Are you selling to end users or intermediate buyers? Make sure you understand who your target market is,” Cornelisse said. “You can use demographic, geographic and psycho-geographic behavioral traits to discover what people value and how they act. How far are you willing to go to reach that consumer geographically and communicate with them?”
After identifying their target market, Cornelisse urged dairy professionals to break out primary market segments and identify secondary markets. By taking the time to understand consumers’ behavioral traits, including how sensitive they are to price, dairy producers can adjust their messaging to those audiences and market segments.
Cornelisse also shared tips for selling through the right channels and wholesale versus. retail considerations. “Dairy producers should consider their personalities. For example, my strength is not in direct marketing. I’m not a people person, so wholesale might be better,” she shared. “But if you like having more interaction with people, retail might be a good option.”
Wholesale operations are known for lower prices, less seasonal business models, low levels of interaction with end users, and a higher volume of sales. Retail businesses, on the other hand, typically have higher prices, more seasonal business models, high levels of interaction with end users and a gateway to potential wholesale customers.
Cornelisse reminded dairy producers that they will be using the market analysis phase to evaluate their strengths and determine which channels meet their business goals.
Technical and production analysis
The next step in a feasibility analysis framework is the technical and production analysis. Fenton asked the crowd to think about hypothetical questions and consider their motivations.
“Think about why you farm. Do you enjoy working outdoors? Do you value independence and working at your own pace? Do you enjoy working with your animals every day?” she asked. “The value-added portion could change some of that. It’s important to think about that.”
When dairy producers decide to pursue a value-added opportunity, Fenton said she encourages them to closely consider their skill sets and time restraints. Venturing into the value-added space could impact the amount of time they have to invest in certain parts of their operation, including the time they spend educating consumers.
“Are you willing to educate consumers? A lot of value-added businesses involve educating consumers and sharing the value of your product,” Fenton said. “Are you willing to take the time to talk to them and share why they should be buying something you’re manufacturing locally?”
Fenton shared that the next step in the technical and production analysis is considering quality parameters and ensuring a consistent supply. Dairy producers will need to evaluate how much milk they will need and whether they will be responsible for 100% of production, a portion of production or purchase the milk from another source.
To maintain strict quality parameters, Fenton encouraged dairy producers to outline standard operating procedures for milking, herd health and sanitation. She added that one of the best ways to ensure consistency is to train all employees across the board.
Fenton also discussed the importance of labor and management planning to ensure farm employees have the support they need to propel the business forward. “Value-added businesses will add extra labor. Everyone needs to buy in and help,” she shared. “You also need a support network. Bring in experts and take the time to know your numbers, including cost of production.”
The last step of the technical and production analysis involves facilities and equipment. When establishing processing facilities, Fenton reminded dairy professionals to develop a model that eliminates cross-contamination risks and review their plans with regulators before construction. If they decide their farm isn’t the right fit for a processing facility, Fenton shared alternatives to processing on the farm, including manufacturing in off-site facilities, contracting with their label, forming a cooperative or purchasing product to retail.
Financial analysis
After analyzing the market and carefully considering technical and production factors, one of the most important parts of a feasibility analysis is the financial components. Cornelisse described specific factors producers should be considering such as start-up costs, operating costs, financing, revenue and profitability.
She went on to explain the process of creating an enterprise budget, which includes income, variable expenses and fixed expenses. After completing these steps and working with a financial professional, dairy producers should ask themselves:
- Am I comfortable with my current level of debt?
- Have I investigated all of my financing options?
- Are financial resources available for start-up or transition?
- What is the projected profit potential?
Cornelisse added that determining breakeven costs can be one of the key steps in deciding whether financial goals are feasible. “Complete a breakeven analysis to see if you are you going to be able to produce and sell the quantity you want based on your total costs. That ties back into the market analysis,” she explained.
From evaluating variability and studying consumer trends to considering risk factors and understanding regulatory requirements, the breakout session helped dairy producers understand how they can find value through feasibility analysis.
