The nitty-gritty of vertical integration
Karen and Jerry Dakin offer a full line of fluid milk products—full fat cream, chocolate and half-and-half.
Like most dairy farmers, Jerry Dakin and John Harrison dreamed of breaking the grip of commodity milk markets. They envisioned greener pastures by processing their milk into products that local consumers would flock to their farms to buy.
So Dakin started processing fluid milk products just a few feet away from his milking parlor near Myakka, Fla. Harrison started making and selling cheese from his Philadelphia, Tenn., dairy.
And then reality hit. On-farm processing is one thing. Marketing to a fickle market is another. Both men share their journeys below and will be featured speakers on a Vertical Integration panel at this year’s Elite Producer Business Conference in Las Vegas, Nov. 11 to 13.
Briefly describe the current size and scope of your on-farm dairy processing enterprise. Who is your primary target market?
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Dakin: We have 2,300 milking cows with all milk piped over to the bottling plant. Our primary target is distributors, restaurants and primary milk retail venues, including on-farm retail sales.
Harrison: Our plant is sized to process one load of milk (54,000 lb.) in 10 hours. However, we only run 50 to 75 production days per year. This translates into 5,000 lb. per day or more than 250,000 lb. of cheese a year. Our cheeses are priced from $6 to $8 per pound, meaning a $1.5 to $2 million gross a year. We do this with four production and packaging employees and six to eight
retail employees. Our facility is about 10,000 sq. ft. Our target customers are travelers on Interstate 75, local shoppers, regional gifting, and higher-end grocers, retail shops and restaurants.
What prompted you to vertically integrate your dairy and go into on-farm processing? How long was the planning process?
John and Celia Harrison produce more than two dozen varieties of cheese on their Philadelphia, Tenn., farm.
Dakin: I had the mistaken presumption that we could draw a higher margin by controlling both sides of the market. The planning process was approximately four years.
Harrison: Originally, it was a means to get away from the Federal Milk Marketing Orders and sell most of our fluid milk around the system.
I always had an interest in making my own cheese, going way back. Once I got serious about it, I took about a year to look at other operations and make the decision.
What type of investment was needed? Did you buy new or used equipment?
Dakin: The investment was more than what we borrowed, about 200% more than our initial budget. We acquired the proper used equipment. However, buying used equipment makes the process slow and tedious.
Harrison: We invested about $1 million in addition to the initial inventory, which I forgot to plan for. Most of the equipment was older. The building was new.
How did you obtain processing expertise? Did you attend schools? Hire experienced personnel? How did you find and recruit them?
Dakin: We hired experienced personnel, prayed a lot, and we continue to strive to be surrounded with the right people. Recruitment is a huge challenge, and we do so mostly through word of mouth throughout the industry.
Harrison: I started making my cheese relatively early in the specialty cheese business, so it was hard to gain information. I relied on our local pilot plant manager at the University of Tennessee, attended a short course at Washington State, leaned on suppliers for help and later hired some consultants.
How did you develop your marketing plan?
Dakin: Our marketing plan changed mid construction as we shifted our focus on strictly bottling fluid milk. We made connections with distributors through digging, researching and building local relationships, since the market for large volume fluid milk is mostly through distributors. We also spent a lot of time locating and hiring the right person with experience in how to get into retailers to become their primary source of fluid products.
Harrison: My marketing plan was a very simple: I thought I could sell 400,000 lb. of cheese annually for $4 per pound to corporate gift buyers, fund-raisers and wineries. As it turned out, we never did that much volume to those sources. However, lots of people came to the farm, retailers were very interested in local products and we sent lots of gifts all over the country. My main concern was to capture an additional $1 to $2 per pound on the rest of my raw milk, which did not work out. Basically, all my plans were wrong, and we were stuck with trying to make a processing business work.
What has been your biggest challenge in developing your dairy processing enterprise?
Dakin: One of our biggest challenges has been maintaining high enough margins while trying to establish our position in the marketplace. The other challenge has been staying tightly on top of receivables.
Harrison: See my response to the previous question. The biggest challenge is making our business plan work.
What advice do you have for other dairy producers who are considering on-farm dairy processing?
Dakin: Pick something other than fluid milk that has a respectable margin. Then start small, and leave plenty of room for expansion as you grow.
Harrison: Ask yourself the following questions:
- Why do I want to do it?
- Does it complement my existing business plan?
- Do I have family members to help?
- Do I have other options for growth?
- Is my current business profitable?
Remember that if it doesn’t work on paper, it won’t work in reality. If it works on paper, it might work in reality. Be flexible, have fun and work harder.
2013 Elite Producer Business Conference
Dairy Today’s 2013 Elite Producer Business Conference (EPBC) will again be held at the Bellagio in Las Vegas, Nov. 11 to 13.
For the first time, the EPBC will start at 3 p.m. on Monday, Nov. 11, and wrap up at 10 a.m. on Wednesday, Nov. 13. The revised start and end times allow attendees to participate for the entire conference and still make cross-country flight schedules.
Michael Swanson, chief economist for Wells Fargo, will keynote the meeting with his much-in-demand views on global dairy economics.
Along with the producer panel on vertical integration, there will be panels on how sustainability feeds profitability, relocation and satellite dairies and the popular Dairy Today Dollars and Sense farmer panel.
For more on the 2013 Elite Producer Business Conference, go to www.dairytoday.com.
- October 2013