Big Rewards In Small-Scale Dairy Processing
by Kristin Johnson
JUNE 2000

Today’s dairy farmers face difficult times. Low raw-milk prices, rising farm costs and environmental concerns combine to create obstacles which are difficult to overcome. One possible way for small- to mid-sized dairy operators to improve their situation involves processing their own milk into byproducts, a move offering an efficient way of adding value. Strong interest exists for reviving the old way of marketing products if it can be accomplished profitably. Many view this as a way of going to market with fresher products that are locally processed and meet all of today’s standards while also developing a stronger community support program.

Operators of small dairy farms (35 to 300 cows) know they can control more of the profits in their raw-milk product by directly marketing the finished products to consumers. Though FDA regulations and the Pasteurized Milk Ordinance remain the strictest codes worldwide confronting dairy farmers, they still allow for on-farm processing as an alternative to a raw milk-pricing situation. If done properly, this can prove an excellent value-added opportunity.

Carving Out a Niche

The key issue is marketing. Key products that can be produced efficiently are milk, yogurt, soft and hard cheeses, ice cream and butter. Developing a “niche” market is vital to achieving success with an on-farm processing plant. Also important is deciding whether to pursue direct sales or utilize established, independent retail stores as a distribution channel. Dairy farmers that have met the organic requirements are one step further in having available markets open for their products. Many supermarkets are readily available for organic milk, yogurt, butter, ice cream and cheeses. U.S. dairy farmers realize what’s occurring in Europe, Israel and other nations, and how dairy farmers are adding value to their milk via on-farm processing systems. Time will tell how many farmers will consider this opportunity and whether they can step out of the box and develop a local market. Dairy farmers who have large metropolitan markets near their farms possess an advantage in developing all kinds of ethnic products for these markets. Pursuing this avenue will require them to go off the farm or hire a marketing company to help them develop these markets.

Farmers have been limited in pursuing on-farm processing primarily because no companies were manufacturing pasteurizers, homogenizers and tanks small enough to meet the needs of this specialized market. Now, farmers can obtain properly sized equipment from various suppliers to realize viability in the select markets they serve. Today, pasteurizers exist ranging in per-hour capacity from 55 gallons to 265 gallons. Insulated tanks are offered in sizes starting from 50 gallons up to 275 gallons. Butter churns are available in either 5-gallon or 8-gallon versions. Bottling machine range between 100 gallon per hour capacity up to 500 gallons per hour. Making this modest-sized equipment available is vital to on-farm processors since they typically are serving just 5% to 10% of the entire dairy market by realizing profits in selling to an upscale market, often through gourmet food stores. This is where these types of farmers can gain a premium for their products, not by pursuing big markets that the mega-sized processors serve.
In all cases, farmers must consider the following issues:
Is this right for their farm?
Do they have family that is interested in this concept?
Is the family in full agreement in this concept?
Will they have to hire off-farm individuals to work in the processing plant?
Are they willing to develop long-term financial plans for this venture?
Are they willing to hire a marketing consultant or work with a university to do their marketing and product planning?

Making the Conversion

Two Pennsylvania farms already have made the conversion, and more are planned in other states as well. Picqua Valley Farm, Ronks, PA, is a small operation, processing 2,000-lb of milk daily for its own products, 90% of which are sold through wholesale channels with the remaining percentage sold via retail. An Amish farm located near Lancaster, PA produces stirred yogurt in seven flavors that possesses a three-week shelf life without using preservatives. They also produce various flavored cream cheeses and soft cheeses. The facility has been up and running three months and still is shipping part of its output to the local dairy co-operative. Brown Cow Country Market, near York, Pa., realizes a daily milk production capacity of 12,000-lb, of which 2,000-lb is processed on-site and the remaining output is sold to a co-op.

These efforts represent out-of-the-box thinking in which the co-ops are being bypassed in terms of processed product. Though the three example farms currently do raw-milk-supply business with their co-ops, the goal is for them to eventually become a 100% on-farm processing operation. Co-op reaction has been mixed to the concept, although some groups have been cooperative and have helped farmers in their on-farm processing efforts. Though FDA states that the minimum price co-ops must pay farmers is Class III, farmers involved in this on-farm processing effort have continued to receive Class I prices.
 
The on-farm processing movement isn’t trying to take customers away from the co-ops; it’s trying to save the small, family farm. As an example of the difficulties facing small farms, a North Dakota farmer with a 60-cow herd in a remote location recently was informed by his co-op that the organization determined it wasn’t financially feasible to continue picking up his milk output. For this type of operation and situation, on-farm processing makes sense.

Grape growers have made the conversion to managing small wineries. Fruit orchard owners have realized improved situations by processing their own apple sauce or apple butter and selling either wholesale or retail.
Dairy farmers also have the opportunity to realize the benefits of adding value to their raw farm products. On-farm processing isn’t for everyone; but the prospect for the small dairy farmer to make bigger profits is predominant. With the right environment, planning, marketing mix and equipment, this concept can add substantial value to their product.