Strengthening community through enhancing the economic viability of dairy farming

Final Report for CNE08-040

Project Type: Sustainable Community Innovation
Funds awarded in 2008: $10,000.00
Projected End Date: 12/31/2010
Region: Northeast
State: New York
Project Leader:
Becca Jablonski
Colorado State University
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Project Information

Summary:

Kriemhild Dairy Farms LLC (KDF) was organized in October 2009, and officially incorporated in 2010 with 4 farms, and an additional 2 Amish farms as contractors, to develop a line of branded grass-based dairy products. To date, agreements are in place with Queensboro Farm Products, Inc. to process KDF’s first product – butter. Additionally, 3 local food distributors and 1 grocery store chain have agreed to carry KDF’s butter. KDF is planning to take advantage of the emerging market for grass based dairy products, which represent an attractive price point versus organic with nearly all the same product attributes such as antibiotic free, no pesticides, etc. Product testing of the grass-based butter will begin in July/August 2010 and KDF anticipates their butter to be on the shelf by September 2010. Prior to forming KDF, the participating farms were constrained by selling their raw milk at commodity price whereas consumers have been willing to pay premium prices for pastured dairy products.

Project Objectives:

The independent producers who formed KDF believe that adding value to their milk will result in much less dependence on volatile commodity prices and thus higher profits. KDF is envisioned as a family of branded products with the first product lines being grass-fed butter. Grass-fed yogurt and cheese will follow and are anticipated to follow in 2011-2012.

• Convene farmer stakeholder group (grass-based dairy producer) meeting to discuss the production of a new grass-based butter at Queensboro Farm Products, Inc. (March 2009);
• Hire consultant to complete feasibility study for regional branding initiative (March 2009);
• Convene farmer stakeholder group (grass-based dairy producer) meeting to discuss contract with Queensboro (ongoing);
• Choose name for new business (April 2010);
• Incorporate business with 4 farm owners and 2 farm contractors (April 2010);
• Raise funding for and complete business and marketing plans (April 2010);
• Position business to raise additional capital in support of grass fed butter test market for 2010 (April 2010);
• Send out RFP for logo/label design for Kriemhild Dairy Farms LLC (May 2010);
• Hire marketing/graphic design firm and complete logo, labels, marketing materials and website (July 2010)
• Product testing at Queensboro (August 2010);
• Market and distribute product (September 2010);
• Demonstrate that value added production will result in significantly higher sales volumes and improved profitability for farmer/owners (ongoing);
• Continue working with the CNY Ag Council on the regional branding initiative (CNY Harvest) such that once up and running, it will be able to assist in incubating KDF.

Introduction:

Madison County is experiencing a broad change in its agricultural industry. The number of farms has declined dramatically over the last 70 years, and many of the remaining farms are diversifying and/or shifting their operations (Madison County had 2,752 farms on 318,159 acres in 1940, and 750 farms on 186,400 acres in 2008). Dairy farming has long been the mainstay of Madison County agriculture. However, according to the National Agricultural Statistics Service (NASS), the 315 dairy farms documented in 1997 were reduced to 205 in 2007, a 35% decrease. Given the current constraints with rising energy costs, low profit margins, and the recent dramatic decline in milk prices from $18.76 per 100 pounds in April 2008, to $11.83 per 100 pounds in April 2009 (Syracuse.com, June, 2009), staying in business is becoming a daunting task for the Central New York dairy farmer. Nevertheless, the sale of milk and milk products continues to be among the top two largest revenue generators (along with cattle and calf sales) in Madison County agriculture – thus ensuring the economic viability of dairy farming is critical to the economy of Madison County.

By working with farmers to form KDF, Madison County’s Agricultural Economic Development program aspires to address some of the above mentioned constraints – thereby ensuring farmers a stable milk price, which consistently covers their costs, provide a profit margin, and allows them to properly plan for future sustainability without greatly increasing their work load or labor demands.

Consumers are becoming better educated on the healthiness and sustainability of the food products they purchase. The growth in organic and locally branded products clearly represents this change. According to a Roper poll completed for Organic Valley, 73% of consumers say that it is important to know whether food is grown locally or regionally, and 38% believe it is very important. 71% percent of these consumers believe that smaller-scale family farms are more likely to care about food safety, and 70% say that they are more likely to use techniques that won’t harm the environment.

While much anecdotal information is available, local foods have not been tracked as an industry for any length of time, thus the market size and trends are not well known. However, a 2007 USDA study indicated that the local foods market is growing at a 75% annual rate. Packaged Facts also completed a study in 2007 that attempted to quantify the local foods “industry” in the U.S. The study indicated that sales of local foods grew from $4 billion in 2002 to $5 billion in 2007, and is expected to reach $7 billion by 2011. While this growth figure is less than the USDA reported figure, the market is growing at a much faster rate than the overall food business and represents an attractive option for new entrants. Organic dairy products continue to be a fast growing market with near term growth on the order of 10-15%.

According to several agencies and distributors in the area to be served by KDF, the demand for local foods far outstrips the supply. This coupled with lack of a consistently supplied, attractively priced local, organic or grass based branded butter in the region represents an excellent market opportunity for KDF Pastured Butter.

KDF has introduced the business concept to three different specialty farm product distributors, and to an institutional buyer, all of which have expressed a strong interest in carrying the product.

Research

Materials and methods:

Though the original application to SARE was written such that the grass-based dairy product would be marketed under a regional brand, we quickly realized that creating the regional brand would have to be a larger initiative and could not get off the ground as quickly as KDF could by itself. Additionally, our consultant warned us against marketing the product under a non-farm label. We continue to work on CNY Harvest (CNYH), although now envision it as a dairy incubator, and hope that KDF will be the first incubated business under the label, but its scope became outside the realm of the funding from SARE. Additionally, though Madison County’s Agricultural Economic Development (AED) provided funding to a graphic design company to create a logo for CNYH, the company never produced a logo with which we were happy.

After many meetings with farmers interested in pursuing product development, 4 farms came forward to set up an LLC. Additionally, 2 Amish farms wanted to be involved, but due to religious observances could not 1) be part of an LLC; and 2) be part of an entity that purchased product liability insurance. Therefore it was decided that the Amish farmers would enter into a contractual relationship with the LLC to supply milk for KDF. KDF utilizes the same supply chain for their raw milk as did the individual farms prior to forming the LLC. Farmers milk their cows and a milk truck arrives at a set time to pick up the milk and to take it to Queensboro Farm Products Inc (Queensboro). Queensboro is a dairy processor, broker, and balancer in Canastota, NY. Farmers continue to receive a check from Queensboro (all of the participating farmers are independents who ship to Queensboro – we decided this would be a requisite for partnership in the LLC as we did not want to get involved in negotiations with cooperatives) for the commodity price of their raw milk. Queensboro agreed to segregate the milk of the participating grass-based dairy farms, and process butter under KDF’s specifications (including butterfat content and packaging requirements). KDF is about to begin product testing. Once the butter is processed, KDF will buy it from Queensboro at a wholesale price and then market the butter to distributors, grocery stores, institutions, and direct-to-customers through farmers’ markets. Profits will be dispersed amongst KDF’s owners.

KDF has worked with a local lawyer to incorporate them as an LLC, and also to draw up a contract with the two Amish farmers. The name Kriemhild Dairy Farms LLC was chosen as a way to tie in the rich agricultural history of the region. Central New York was once the premier dairy region of the nation, especially for Holsteins. Gerrit Smith Miller of Peterboro, Madison County, kept the oldest purebred Holstein herd in the United States. His herd was called the “Kriemhild herd”.

KDF recently sent out an RFP for logo designs, and marketing materials. KDF anticipates selecting a graphic designer by mid-July. KDF will use an old milk bottle cap from one of the participating farmer’s farms as a model from which to derive a logo. After the logo design, the packaging will be the final piece to get in place before the product can be tested, marketed, and distributed.

Research results and discussion:

This is an ongoing project, so it is hard to know many of the outcomes and impacts. I anticipate that we will know a lot more by March, 2011. The Madison County Agricultural Economic Development Program has invested a substantial amount of time trying to find ways to help the struggling dairy industry. However, without the ability to control pricing, the costs of inputs, the availability of labor, etc. it is quite difficult. One of the impacts of this project to date is the fact that the community seems to have rallied around it. It has provided some hope to a flailing dairy economy. And, without funding from SARE, KDF would not exist.

One of the farmers in KDF learned about a large-scale fast food chain that was interested in having two grass-based cheeses processed somewhere in the Northeast. The farmer invited representatives from the company out to visit before KDF was formed. The company representative was clearly looking for an organized grass-based dairy group (not certified organic) with whom they could contract for a very large amount of cheese. Now that KDF is legal and the group has formed important and meaningful connections with a processor, they are starting to make progress in wooing the company to use their product. If successful in pursuit of this relationship, this project would have a very large-scale impact on the KDF farmers, and the farmers who would be sought to join the entity.

Participation Summary

Education & Outreach Activities and Participation Summary

Participation Summary

Education/outreach description:

KDF will do more formal outreach about the project once there is a product on the shelf. However, to date the formation of KDF was included on the Madison County Agricultural Economic Development Program website (www.madisoncountyagriculture.com), the Madison County Agricultural Economic Development Program annual report, and in the Cornell Cooperative Extension of Madison County monthly newsletter.

Project Outcomes

Project outcomes:

Through the initial work funded through SARE and done by the Madison County Agricultural Economic Development Program, a consultant – Wayne Mellor, and the farmers involved in KDF, KDF received a USDA Value-Added grant for $17,000 to continue work on the project. Additionally, KDF received $5,000 from a private donor. All of the funding is final in place to properly test, package, and launch the grass-based butter.

Another accomplishment is getting an extremely diverse group of dairy farmers to work together on a common goal. This project brought together dairy farmers ranging in size from milking 20 cows to 800. Two of the participating farms are Amish and the non-Amish farmers worked with them in many meetings to figure out a way for them to participate without having to compromise their religious beliefs. Two of the participating farmers are the fifth and sixth generation farming the same land, and four of the farmers have lived in the area less than 10 years. One of the participating farmers breeds, sells, and milks registered Holsteins and has been very active in the Holstein Association. Another of the farms believes that Holsteins are a waste of money and only milks mixed breeds. There were many very interesting and animated conversations in this group as they were working through the details of incorporation, but they always took the time to listen to each other and really understand the other farmers’ point of view – even if they did not agree with it.

Assessment of Project Approach and Areas of Further Study:

Potential Contributions

If successful, KDF’s model could be replicated around the U.S. to help dairy farmers derive added value from their raw agricultural product – thereby assisting the small and medium sized dairy farms that are struggling to survive. However, until we have proved the model, it is hard to tell exactly how successful the project is and the impact it will truly have on dairy farmers in Central NY and around the Country.

Future Recommendations

There is a clear need for an agricultural incubator in Central NY. The current and future needs of KDF are similar to that of many other new and growing agricultural businesses – namely, legal assistance, marketing, processing, and distribution. We have included information below that our consultant, Wayne Mellor, put together to illustrate the need for and uses of an agricultural incubator.

Central NY Harvest White Paper

Central NY’s Ag Council proposes the establishment of the Central New York Harvest Agricultural Incubator – without – Walls. This incubator will help established farmers achieve greater profitability and is the next logical support needed to grow New York agribusiness.

Background

For start up businesses to succeed they need financing, technical assistance, access to knowledge, facilities and equipment (which can also be considered financing). According to a study done by Inc. Magazine and the National Business Incubator Association (NBIA), 80% of new businesses fail in the first five years. Business incubators are a viable option for many start ups to obtain necessary skills and tools they need to succeed. “Incubators are economic development programs designed to nurture the success and growth of businesses.” Typically they involve providing office space, internet access, some accounting or bookkeeping services, shared equipment, etc. According to the NBIA, 87% of incubator graduates are still since when in business and 84% remain from when in their communities and continue to provide a return to investors. In addition, incubators that are publicly supported create jobs at a cost of $1,100 per each whereas other publicly supported job programs cost more than $10,000 per job created.

Agricultural incubators have existed for several years. Typically these are designed for the new farmer and are production oriented to train aspiring farmers in certain production techniques at a specific incubator farm. Prospective farmers are provided some land to produce a product, equipment is available to share, and they are given marketing and business development assistance. Once the farmer and the business are deemed viable they are spun off the incubator farm to go out on their own. Examples of these are the Intervale Foundation in Vermont, the Agriculture and Land Based Training Association (ALBA) in California, and Raft Swamp Farms in North Carolina. These are great programs that provide necessary skills for aspiring farmers.

Need for an Agricultural Incubator

In our area, central New York, there are many farmers and agribusinesses which could become viable and sustainable if they were given the necessary tools to develop a value added product, a formal business structure, or necessary financing to expand their business and take it to the next level. Missing from this equation is the entity which can make this happen. We believe creation of an agricultural incubator without walls will address the needs of farmers and agricultural entrepreneurs who already are farming and who want to develop a more profitable product using their current commodity production. An example is the dairy farmer who wants to switch from non organic to organic milk production and add a line of cheese, which he knows how to make. What he needs is loan funding for purchasing equipment, marketing support, financial planning, proper accounting and other items necessary for the new business. These are the services the proposed incubator will provide at a reasonable cost.

Regional Identification

CNYH will establish a regional brand under which local farms which participate in CNYH will place their individual brands. The farms that use the CNYH brand must be developed, owned and /or managed by CNYH. CNYH will only develop businesses which market products using the commodity production of a Central New York farm(s).

CNYH believes that the true value in local farm based product and business development is a direct connection with the farm that is manufacturing the product. Thus CNYH will develop farm brands that have the following attributes: local, healthy, environmentally sound and economically vibrant.

In the spirit of keeping energy inputs as low as possible and supporting our local economy, CNYH will promote the sourcing of local processing and packaging companies. Production protocols and third party certification and verification will be used when appropriate to ensure the long-term quality of our products.

To further enhance and reinforce the local branding of the CNYH product line(s) we will use the Central New York Harvest name as the sub messaging text in the promotion and advertising campaigns for our businesses. As additional farms and products are developed we will continue to use Central New York Harvest messaging in the marketing of these products.

Funding Support for CNYH

Initially, CNYH will be an incorporated for- profit incubator owned by non-profit organizations.

These incubator owner entities currently support the development of agricultural businesses and products to increase farm profitability and resultant economic development. They provide business development support, technical service and seed capital for new, start-up ventures and product lines.

When a new business reaches market viability and can raise or generate sufficient working capital to make it on their own, sustaining further growth and profitability, CNYH will incorporate each venture. As each venture is spun-off, CNYH will take either a contractual return of the capital invested in the venture and or will acquire an appropriate equity position based on the monies invested by CNYH, the proposed capital structure, risk and potential return. The exception is for any cooperative venture. In these cases CNYH will enter into a contractual agreement for payment of services. Any profits or losses that accrue will be passed to the non-profit owners based first on the CNYH ownership position in the business and then on the owners’ percentage of CNYH. In the future, private donors (foundations, individuals) may invest in the incubator.

Selection of Farm Businesses for Incubator Participation

All farm businesses wishing to receive services from CNYH will engage in an application and selection process. Applications will be reviewed by the owners of CNYH or their designee. Farm ventures deemed worthy of inclusion in the incubator may be selectively recruited and asked to apply. These applicants will have the same review as a self selected farm business which applies.

Marketing

The initial markets for CNYH products will be the Syracuse and Utica-Rome/Mohawk Valley media markets. While the population of the region is over 1,200,000 residents the area still retains a large rural farming presence. However, as markets are established we expect our products to occasionally grow to regional, statewide, and in some cases national distribution.

Capitalizing on the growing trends of consumers wanting to know where their food is coming from, the globalization of the food business and their better understanding what constitutes sustainable agricultural practice, CNYH will position its products in the organic or near organic categories at an attractive price point. While organic foods have grown to represent over 3% of total food consumption in the U.S., the torrid 20% annual growth is slowing somewhat. Still over 60% of households have consumed an organic product in the last month.

While the U.S.D.A. standards for organic foods have allowed for larger agribusiness firms and retailers to enter the market, there continues to be a sustainable food movement focused on crop diversity, conservation, local food networks, and reducing the reliance on fossil fuels for production and distribution.

As further products are developed we will emphasize that any non-organic product lines will need to adhere to the primary product attributes and be capable of being positioned in the “near organic” category.

Any opinions, findings, conclusions, or recommendations expressed in this publication are those of the author(s) and do not necessarily reflect the view of the U.S. Department of Agriculture or SARE.