Monday, September 5, 2016

Thinking Of Starting a Micro Dairy. Don't Do It!

I've been selling milk from my micro dairy for over 1.5 years now. I started with 7 cows and I'm now milking 55 cows and selling milk all over Christchurch to some of the top cafe's and restaurants.

I'm selling direct to the public as well and we are about to start supplying supermarkets too.

So things are going well. At least from the outside it looks successful.

Internally, it feels like a complete shit show in which I'm only just hanging on.

I now employ 2 full time staff and I literally work 14 hours a day 6 days a week. Which is exactly the opposite of what I set out to achieve.

Over the last 6 months, I've spoken to most of the small scale dairy operators around the country who are doing a similar business. 

The common theme is, no one is really making any money.

My advice is, Don't do it.
I'm very reluctant to encourage anybody to embark on a similar venture. It's so much hard work and so much more complex than you would think.

I don't say this lightly, after all this is has been my dream for the past 5 years.

But every week I get calls from people all around New Zealand. Some are thinking about doing a similar thing, some are already under way with the set up. I enjoy chatting and hearing their plans and I like to offer my advice.

Knowing what I know now, I'd say 90% of the people who call will fail. If they don't fail they will get the shock of their lives and scramble to make the changes that are needed. (which is kind of what I've done.)

Some common comments are:

"My plan is to just undercut everybody"
Well, if you think you can milk 50-100 cows, process, package your milk, deliver it and be cheaper than Fonterra or the budget milk brands. You're dreaming.

"With the payout so low, I'm looking for other ways of bringing in more income. I thought I could just divert a couple of hundred litres out of the vat and deliver it into our local township"
Sounds like a good plan. But you don't "just" divert a few hundred litres out of the vat. That few hundred litres will consume all your time and will be more work than the rest of your operation. 

"I'm going run the farm and employ someone to do all the sales for me"
No. You have to do the sales. If you can't rock up to a cafe owner and peddle your milk your self, then no employee is going to be able to do it either. This type of business is a sales and marketing business with about 10% of your time taken up farming.

"I've spoken to a few cafes and they all said they'd love to buy my milk"
Almost all cafe's will say they want to buy your milk. It's a completely different story to actually deliver milk to a cafe. 
Most cafe's are buying their milk at $1.25 to $1.50 per litre. You can't make money at $1.50/litre and in fact you probably won't make much money at $2.50/litre either.

You will need to be able to go to a cafe owner and convince them to stop buying milk from the Meadow Fresh or Anchor guy, who they are now friends with because they have seen him every day for the last 5 years. 
You need to convince them to give back the $5,000 worth of fridges that Anchor or Meadow Fresh have provided to them for free and on top of that you then need to convince them to pay twice as much for your milk. 
When you think about it, milk is the major ingredient in their most popular product. You are asking them to pay double for that.

So you better shine up your snake skin salesman shoes and get used to rejection.

"I dont need any fancy equipment, I'm only going to be milking 20 cows"
Actually, the smaller you are the more efficient you need to be. That's because you don't have lots of labour. Labour makes up a disproportionate proportion of your costs. Your equipment and processes and systems need to be super easy to use and clean and operate. Everything needs to be planned and well designed. If its not, you will end up spending hours and hours just fiddling around.
This is my biggest learning. We are very inefficient and it's costing me a fortune in unnecessary labour costs. 
The problem is you probably don't know what equipment you need or how your systems will run before you start. 
Make sure you have the cash to redo everything after 6 months.

All my budgets had shown that I needed to sell 300 litres per day to make money. I now think you need to sell at least 600 litres per day to be profitable. You will need to sell your milk at a minimum of $2.50/litre and preferable more than that.

That's actually quite hard to do. 

The other thing to consider is competition. I've had calls from multiple people from almost every part of the country. 

There are currently over 135 dairy RMP applications before MPI. Many of these are micro dairies. There will be competition in the future. 

It's hard enough trying to compete against Goodman fielder and Fonterra. If you add two or three farmers also competing against each other. It makes for very uncertain profitability.

My advice is to seriously consider if you really want to actually set up a micro dairy.

I would not recommend it. It is seriously hard work.

Having said that, it is possible to make a success of things, but it is not easy and it needs to be done a certain way.

I've blogged before that the answer to making small scale dairies viable is for these farmers to collaborate and work together by pooling resources and knowledge.

It's my plan to organise something in the future. But right now my priority is to try and stop hemorrhaging money every month.