The U.S. dairy industry continues to struggle with balancing supply with demand, making it increasingly difficult for dairy farmers to know if and when they will have a good year or a bad year. Milk producers in the U.S. are becoming increasingly more dependent on dairy products being exported so that the ever-growing supply does not overwhelm the anemic domestic demand.
During 2015, U.S. dairy exports declined dramatically from 2014, resulting in a $7 per cwt drop in price for dairy farmers. The average price paid for milk in the Northeast Federal Milk Marketing Order in 2015 was just over $17 per cwt. The forecast for 2016 remains bleak with the average for the year predicted to be just above $16 per cwt. The milk-feed margin is predicted to remain below $10 per cwt – indicating that the cost of feeding cows will continue to eat up a large percentage of a milk check.
In December 2012, the University of Connecticut released a study on the cost of production for dairy farms in Connecticut in 2011. The conclusion of the study placed the typical cost of production for the average dairy farm in Connecticut at over $30 per cwt. This figure included depreciation of equipment and the opportunity costs of unpaid labor, which amounted to almost $10 per cwt for the combination of the two. Removing these costs from the study still placed the average cost of production at over $20 per cwt. Studies conducted in other New England states produced similar numbers.
Federally regulated prices that dairy farmers are paid throughout New England do not cover the costs of production for most years. The dynamics of supply and demand for dairy products is constantly shifting and the continuing national increase of milk adds to the volatility. Most dairy farmers would eagerly welcome an additional $10 per cwt on their milk checks. However, history shows that as soon as there’s more money being made, more cows are then added, which quickly results in additional supply of product and a repeating downward trend in price.
Marketing their own way
Although the tendency is for U.S. dairy farms to increase the size of their herds and continually produce more milk at a lower margin, many dairy farmers are not moving in that direction. More dairy farms have begun processing and marketing their own milk and dairy products in local markets, adding value to those products and capturing more of the retail dollar that they do not see with the federal pricing system.
Starting in 2011, Larry Hastings and his family did exactly that. Four generations of Hastings have dairied in the verdant Connecticut River valley in Suffield, Connecticut. But in 2009, the family ran into a rough patch. Larry was so frustrated that he told his two daughters, who were in their early 20s, he’d had enough and it was time to sell.
“We had a family meeting and we were all in agreement,” the older daughter, Megan, said. “It was time to get out. Then after a couple days of thinking it over, I said, ‘Why don’t we start bottling our own milk?’ And for some crazy reason everyone went along with it.”
Megan took the plunge and began researching what it would take to start pasteurizing and bottling – equipment, rules and regulations, etc. – and took a one-day class at Cornell University to learn about the Pasteurized Milk Ordinance (PMO). The family was soon pasteurizing and bottling some of their milk. Soon customers were asking Megan if she might consider making yogurt, too.
Mixing it up with Greek yogurt
Megan did her homework again, teaching herself how to make yogurt – and there was quite a learning curve. The first time she attempted to make yogurt was an “epic failure.” But she slowly figured it out and was soon selling a Greek-style yogurt at a local lumberyard that has a small store. Later, Megan began experimenting with different flavors, and the little business took off. As luck would have it, it was at the lumberyard that she met her future husband, Dan Smyth.
Smyth immediately recognized that the yogurt was a wonderful product and saw the potential of the nascent business. Together he and Megan began working in earnest to develop and grow the business, and somewhere along the way they got married.
Smyth introduced the yogurts and bottled milk to local stores throughout the state. He found that many people were eager to bring in locally produced dairy products. “It took off,” he said.
The yogurt is processed and milk is bottled with the butterfat content straight out of the tank. The butterfat level runs over 4 percent, so “low-fat” and “skim” are not part of the lexicon at the Hastings Farm.
It didn’t take very long and the couple tried their hand at making aged cheeses on Saturdays to expand their product line. “The milk tank was overflowing,” Smyth said. “We had to do something with the milk.”
Developing and growing the business continues to be a work in progress, with the family taking small, well-planned steps as they expand. The processing equipment was assembled piecemeal for the most part. Some came from neighboring dairy farms, some came from auctions and some was built from scratch. A family friend built the cheese press.
Along with growing their business throughout the state of Connecticut, the husband-and-wife team has set up a store at the dairy as well. For now, they are only selling their dairy products in Connecticut. “But we’re working on that,” Megan said.
Learning to interact with the public – and a sometimes fickle consumer – has been an interesting experience. The success of any business that deals directly with the public is completely dependent on the consumers’ trust and acceptance of your product. Quality and safety is absolutely critical in the food industry. You must listen to the consumer even when sometimes you would rather not. Megan is especially attentive to customer feedback when developing new flavors for her yogurt.
The couple has had their fun moments in dealing with the public as well. They share that one customer once told them that their yogurt was so good, they should just sell the cows and concentrate on making yogurt.
At the heart of the value-added dairy model is capturing and keeping a portion of the retail dollar coming from the consumer and not selling the milk just above cost. Smyth said that he and Megan are currently using about 15 percent of the milk being produced by the 100-cow herd for yogurt, cheese and bottling. However, that 15 percent of the total milk volume contributes to over 50 percent of the farm’s gross milk revenue. The bottled milk goes out the door for over $60 per cwt and the yogurt fetches over $90 per cwt equivalent. There are manufacturing and marketing costs that must be taken out of those prices, but their net revenue is still much better than the $18 to $20 per cwt they currently receive for the remainder of the milk. The long-term goal is to get a greater percentage of the dairy’s milk being bottled or made into yogurt and cheese at the farm.
Smyth said that they have now reached a point at which they can’t grow any more with the current facilities and equipment. “The market is there,” Smyth said. “We just don’t have the time to make any more product.”
Robotics system underway
Time and labor have become the limiting resources preventing further expansion. Essentially, labor efficiencies must be improved throughout the dairy farm operation.
A plan is in place to install a robotic milking system by next year. Two robots will be enough to handle the 100 cows, allowing for the current milking parlor to be removed. That space will allow for a complete redesign and expansion of the processing facilities and the retail store.
The man-hours that will be taken away from milking cows can be transferred into manufacturing more product. The yogurt sales are what will take the business to the next level. Hastings Farm will be the second operation in the state to have a robotic milking system.
When moving into the value-added spectrum on dairy farms, a new business is created alongside the one already underway. Sales and marketing of the dairy products brings a whole new dimension to the business – but don’t forget about the cows. The cows are what makes this business possible. Paying attention to cow comfort and health – as well as the quality of the milk – becomes even more critical. The consumer is demanding a higher standard of excellence.
Like other New England dairy farmers, Hastings and his family have found it necessary to adjust to this new paradigm. Competition in all industries, not just agriculture, has forced many businesses to shut their doors because they could not or would not make the necessary changes needed to stay in business. Smaller dairy herds also face challenges with volatile milk prices that don’t always pay the bills. They must decide on a business model that will keep them in business and provide an acceptable living.
Dairy farming across the country has varied styles and certain regions of the country are more conducive to large dairy herds with economies of scale and low-profit margins. The population in New England continues to have a growing interest in locally grown food products, and the consumer is willing to pay a premium for them.
With its higher population density, limited land base and environmental concerns, smaller-sized dairy farms that can make the transition to a value-added business model will have a better chance of remaining profitable, staying in business and continuing the rich and vital tradition of agriculture.