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.

Sprout Agribusiness Programme & Who Wants To Go Mobile Milking?

For the last 2 years I’ve been working full time to set up an experimental prototype dairy system. The plan has always been to "pave the way"so other people, like me can go farming even if they don't have any land or very much money.

I believe it was Peter Brock who said “Bite off more than you can chew and then chew like crazy”. 

That describes my last two years quite accurately.

Without going into all the details, I’ve learnt a lot over the last two years and now it's time to crank things up and get this show on the road for real.

A Quick update

In order to move to the next step I need more money, as I've used all I have setting up the prototype system.

I’ve been accepted into the Sprout Agritech business accelerator. The programme is designed to help boost agricultural technology companies with potential to go on to become successful global businesses.

They had 60 applications; they interviewed 22 and finally selected 8 businesses to participate in the programme.

The Sprout programme is based in Palmerston North and is funded by:

LIC

Gallagher

MIG Angels (Palmerston North)

Ellison Holdings (Larry Ellison from Foxton not San Francisco)

K One W One (Sir Stephen Tindall)

Enterprise Angels (Tauranga)

A big thanks to those organizations for putting the cash up and supporting agricultural development in NZ.

The Sprout organisation have taken an equity stake in my company and I’ll spend the next few months working alongside some pretty cool people and getting myself ready for the investment showcase which is held at the end of the programme in March 2016. 

This is an opportunity for the 8 businesses to pitch for investment from agri focused investors.

We're Selling Milk

In the past year I’ve established that people actually want to buy my milk (thank goodness!) and the steady stream of emails from people wanting to set up their own little businesses like mine has shown me that there actually are people out there who think this is a good idea!

You never really know if your idea is any good until you try it.

In this case, when I told farmers about my mobile project they all said it was a bad idea. But when I told my town friends and acquaintances, they all said it was a great idea. 

Who to believe?

Anyway I gave it a crack and it turns out that there are good number of people who like the concept. So it's now worth taking these ideas beyond my own little project.

The Plan

The plan now is to make what I’ve leant available to others and to set up a system that people can “plug into”. This system will take care of all the crappy, time consuming, tedious stuff that real people don’t really need to know about.

I’ll give you an example,

If you’re a farmer and you wanted to set up a dairy farm, and let's say you choose to supply Fonterra.

Fonterra give you the “Fonterra Handbook” which includes all the rules and specifications that farmers have to abide by in order to comply with Fonterra’s risk management programme to produce milk.

The farmer then buys a milking plant and has a cowshed built. The milking machine company sells a machine that complies with the food safety code and the builder builds a cowshed that complies with the code as well. 

These items are reasonably priced because there are lots of milking machine companies & builders who can supply cowsheds and milking plants.

The farmer doesn’t need to know all the food safety regulations for every aspect of their business because their equipment suppliers & Fonterra know all about their particular parts and they pass onto the farmer what they need to know.

There’s no one who provides a solution like that for small scale dairy producers.

When you look at the small cheese makers or milk producers, they have to do everything themselves. They have to write their own RMP and then maintain it and then cover the costs of audits and inspections and when they buy equipment that complies with all the regulations, it tends to be a “custom, one off solution” which comes with an eye watering price tag.

Providing small producers have the time and the patience to get setup and accredited. They then have to compete against all the big boys in their market. And these big corporates get really aggressive, once you start to make a dent in their market share.

So it’s no wonder there are just a handful of small-scale dairy businesses around.

But small scale farmers have lots of advantages too and there are real opportunities available around the world that smaller farmers can access. You just have to do it the right way.

Turnkey Dairy Business

I’ve started the Nature Matters Milk Company to serve small scale dairy farmers and to make it easier for them to succeed.

The two main areas that bring down small dairy businesses are regulatory compliance issues and lack of a strong brand, which affects profitability.

I’m currently building and testing the systems that other small farmers can utilise. These systems have to ensure every individual farmer complies with all the regulations and also ensures that they don’t get anybody sick. That alone is a big job and much more complicated than I thought. Which is the story of my life.

I’m also slowly building a proper brand (although it's not public yet).

You Can Go Farming Too.

Once I've got all that sorted, I'll be able to provide you with all the equipment (at reasonable prices) needed to milk cows, pasteurise milk, package milk & deliver milk to their local community. By the way, it won't look anything like my current setup either.

You'll operate under my RMP & I'll provide you with complete training and step by step manuals on everything you need to know.

I'll audit you regularly and my system will ensure you are recording & complying with everything you are meant to.

What this means is you can start a small dairy business that is likely to be profitable from day one and you don't have to worry about the large regulatory costs, as they are split across all farmers using the system.

I'm not mother theresa, so I'll probably charge a percentage of your turnover as my fee. This means if you're not successful then neither am I.

That's just a quick run down on the principle of how the business will run. Essentially I'm taking away the costly boring stuff and letting you get on with farming and providing outstanding customer service.

Who's Keen?

These things cost quite a bit of money to develop, which is why I approached the Sprout programme. I hope to be able to bring on a financial partner or partners who can provide the funding to fast track the development so we can get rolling.

In the meantime, if you think you might like to set up your own micro dairy then drop me an email glen@naturematters.co.nz.

I’ve got no further info at this stage, so please don't email me with lots of questions.

I'm just creating a list of people who are interested in going farming in the Nature Matters Milk style.

If you're keen, email me with:

Your name

What you doing at the moment

Where you from

Why you are interested.

I've got no other information, so please don't ask me questions. I'll let everybody know when I've got more to say.

Cheers

Glen

Bobby Calves, Palm Kernel, N Caps Are Beautiful Opportunities, Not Constraints

I’m reading a book called the beautiful constraint.

The premise of the book is that the thing that constrains your business can also turn out to be your biggest advantage.

  

I can’t help but think New Zealand agriculture and our dairy industry in particular could benefit from looking at their current constraints in a different light.

The book gives examples of people or businesses that had to deal with a constraint.

Often the constraint forces you to look at the problem differently and explore other options that you would never have thought of, if it were not for the original constraint.

The result can be a unique solution that is truly unique and beautiful.

Dairy Farmers Constraints

Dairy farmers in New Zealand feel like they are being subjected to a number of constraints in recent times.

A few examples from recent weeks are:

Palm Kernel

Fonterra asked farmers to reduce the use of Palm Kernel to 3kg/cow/day.

Palm kernel is a result of the palm oil industry, which is a major cause of deforestation in parts of Asia. The use of palm kernel is a major issue for many consumers.

Farmers viewed the suggestion defensively; many see this cheap feed as a necessary part of their system & to not be able to use it is a threat to their financial viability.

Bobby Calves

Last week a television show ran a story onthe treatment of bobby calves in New Zealand. While much of the public know the footage was from a very small minority. The show highlighted the practice of sending infant calves to the freezing works.

The response from farmers was “robust”, with farmers defending their treatment of calves and the hashtag #caringforcalves being formed.

Many farmers missed the point that the public were concerned that a milk dependant calf can be transported to the works and killed at such a young age.

I don’t use palm kernel & we don’t send our calves away to the works either. In fact we leave our calves with their mothers to feed naturally. Once the calves are weaned they are grown as a beef animal.

PKE & bobby calves are opportunities

While many farmers see the lack of palm kernel and having to keep their bobby calves as a constraint. I’ve found them to be a wonderful opportunity.

Two of the most common questions I get asked at farmers markets or while delivering milk to cafes is; what do you do with your calves? & do you use palm kernel?

My answer ensures that I attract a new diehard fan.

I’ve faced a number of constraints while setting up my milk business

I had no money to buy land, so I leased bare land. But a major constraint is, how do you milk cows on leased land? The answer is the mobile cowshed.

Many people wouldn't even get to that stage, the logical answer is "You need a cowshed so you can only lease an existing dairy farm". There are lots of other options.

But then I was constrained again because no dairy company would take milk from a mobile cowshed. 

The solution was to start my own milk factory. This is something I would not have considered had the dairy companies being more welcoming of a mobile cowshed.

Again I was constrained by the lack of funds, I could only afford a small herd. How can I make money from a small herd when all over the world the small scale farmers are going out of business? 

The solution is to sell direct to the consumer. Again this is something I had not considered, but by consistently asking myself “how can I make this work?” l eventually came to that answer.

Which then led me onto what consumers want? They want high levels of animal welfare and low environmental impacts. I put a self-imposed limit on farming within a Nitrogen cap of 20kg N/ha/yr, and I set about learning how to do it.

Overseerer tells me we leached less than 13kg of N/ha/yr in our first year.

After working through each constraint with a truly open mind I’ve come to a place where I have the Nature Matters MilkCompany.

Dairy farmers will be receiving about $5/kgms this season. The most they have ever received is $8/kgms.

I’m receiving $32/kgms for my milk.

Every single one of the constraints listed above is actually a key reason why people choose to buy my milk. They are not constraints at all; they are actually key points of differentiation.

Looking back I can see that these constraints acted like a filter and forced me to distil my ideas into something that was a workable solution.

I’m not saying my system is for everyone, but I’d encourage farmers not jump to the logical answer and to instead keep asking “what if” or "how can we".

What if we didn't use plam kernel? what if we devised a different model for our unwanted calves?

The logical answer is holding Fonterra back

The world is looking for high quality, sustainable dairy, produced ethically that stands against the industrialisation of food production. 

I've spoken to people within Fonterra in recent months. A comment I've heard more than once is "our farmers just wouldn't accept that".

If New Zealand dairy farmers would open up to doing things differently, there is a whole world of high value opportunity.

To me, that’s the logical path to follow. 

But I’m aware most farmers think the exact opposite way to me and we'll continue to see farmers "fight back" with articles like this one, which just reinforces the public's opinion that farmers are a bit slow & simple, resistant to change and are stuck in a low value, production focused business model.

And we'll continue to see low value, undifferentiated milk powder sold to the world for the same price as factory farmed milk powder produced in the US or Europe.

Sigh.

So You Want To Set Up Your Own Small Scale Milk Business? This Is What You Really Need To Know.

Well, it appears that there are lots of people in New Zealand (and the world) who want to either set up their own milk business or want to go mobile milking.

My goal is to set up a streamlined system that will allow others to start their own small scale dairy business. 

My inbox is full of people asking me questions about how to set up their own milk business. I would spend 45 minutes to an hour replying to these emails from complete strangers. I did it because I want to promote small scale dairy & I want others to do well.

But of all these emails I've replied to, less than 10% of these people actually reply back to me. I think it is just good manners to at least flick a quick response back to me saying "Thanks Glen". 

So I'm reluctant to devote much time to tyre kickers. I'm more than willing to help people who are serious about setting up a micro dairy. Any enquiries I get from now on will be directed to this blog post.

The equipment is the easy part

Lots of people are asking questions about the mobile cowshed or the pasteuriser or various equipment questions. But in many respects the equipment is the least of the issues that need to be faced.

To build a mobile cowshed you simply need to talk to an engineer and your local milking machine guy and you'll be able to get something made up.

The mobile milking equipment simply allows people to get into the milk production business at a lower cost. 

People still need to have willing customers, provide customer service, match supply to demand and generally be better than their competition. All the while dealing with the regulations and the significant ongoing regulatory compliance.

The real issue you worry about is Too much work for too little money

Small business is hard

Small businesses have a terrible success rate. Studies from around the world all seem to show a pretty bleak picture.

"8 out of 10 new businesses fail within the first three years"

"80 percent of new businesses fail within the first five years"

"53 percent of small to medium-sized enterprises (SME) fail within the first three years"

Is it really worth it?

I recently spoke to a cheese maker who was shutting down their business. They had an award winning product that was stocked in major supermarkets. But when all things were considered, it was just too much work for too little money. 

I think many of the business failures we see in the statistics amount to the owners saying to themselves "for the amount of effort and stress I'm going through. The money is just not good enough. I may as well just get a job" 

Anyone can start a business, the hard part is creating a business that provides a healthy margin and does not require the owner to be over worked.

You need to overcome the following issues

Regulations

Any business that processes milk (or meat), comes under a whole extra range of food safety regulations. It's not like starting a cafe where the local council inspector does your audit once in a while.

These extra requirements are particularly difficult for small dairy producers. The story of Biddy is a classic example. MPI have to ensure she meets all the regulations. I support MPI's position, but at the same time the burden is huge on a business her size. I spend more time doing paper work than I do actually milking my cows. 
Don't underestimate the time it takes to be compliant. If you don't do it properly you will get smashed at your regular audits. 

Time off

Many small businesses are dependant on the owner. The owner has all the knowledge. The thing I have noticed with small food producers is that the operators find it very hard to take time off. The purpose of being in your own business is to have more options and a better lifestyle. When you are processing milk you can't just hire a relief milker, you need fully trained and competent people. How does a one man band justify the training expenses of someone who will only milk a few weeks a year. Don't forget, there is paperwork that needs to be done for new staff & this will be audited.

Time efficient operations

When you are small scale, you can't afford to be messing around all day. You will be amazed at how quickly your day disappears. 

Before you know it it's 4:00pm and all you've done is milk & feed 10 cows, pasteurise the milk and deliver it. 

This is when you work out the $/per hour and you realise you may as well just get a job!

You need a system that is automated and designed with time efficiency in mind. The problem is, if you're going to build your own system (like I have) you won't know what is going to take up all the time until you've built it. 

Even if you are awesome and you designed the perfect processing room/trailer/cowshed you need to be aware that nothing works as it should straight away. That gas hot water system won't keep working as they said it would, the pump they sold you will turn out to be inadequate 2 months into milking etc etc.

The hidden costs

Add $20,000 to your budget for unknown costs. You will need it.

Example 1
I've spent $3,500 on milk testing to determine where a bug was coming from. We found the source of the the bug, but no one can explain how that bug was making its way into the milk. It seemed like this bug was defying physics. The result was I modified my pasteuriser at a cost of $3,500. There's $7K of unbudgeted costs that you would never have anticipated.

Example 2
The stainless steel fittings used in the milking plant do not comply with the milk processing standards for the milk processing area. I only found that out during my inspection. Thats another $2,500.

I could go on and on. 

Glen's grand plan

My goal has never changed. It's been to create a dairy business that our best young New Zealanders want to be involved in and more importantly, can afford to be involved in.

There are three issues that I care about:

1. Attracting our best young people to agribusiness
2. Moving New Zealand agriculture up the value chain
3. Truly sustainable dairy farming

Shortly I will officially launch my milk brand, Nature Matters Milk Company.

My vision is to set up a financially viable, environmentally sustainable, small scale dairy business that can be replicated throughout New Zealand by others.

My vision is to have a network of great people all around New Zealand supplying their local community with real, sustainable milk.

This is a network of people who understand, eco dairy farming, who understand processing and food safety, who also live and breathe customer service and understand marketing and how to build a branded business.

But there are many obstacles that need to crossed before this can happen. 

The most obvious obstacle is that, I don't even really know how to create a "financially viable, environmentally sustainable, small scale dairy business" as I described above. 

But I'm pretty sure I'll know in about 6 months time. 

We must join together

It makes no sense to have lots of individual farmers all operating and administering their own 20,000 word Risk Management Programmes, while competing against each other and working themselves into the ground. 

We need join together.

Fonterra farmers don't have to worry about dealing with MPI, because Fonterra have people to do that. Fonterra create the systems and procedures that the farmers need to follow.

I'm currently creating the systems and procedures and developing the equipment that will enable other small scale dairy farmers to comply with all the regulations, while also getting the daily tasks done quickly, efficiently and profitably. Doing it profitably is the hard bit.

For small scale farming to be viable we need to:

• reduce the regulatory burden on individual farmers
• co-ordinate fluctuating supply with fluctuating demand (don't underestimate this, it relates to profitability!)
• ensure operators can get some time off

A network of micro dairy farmers

The idea is to create a network in which small scale farmers can "plug into".

I believe a network of savvy young (or young at heart) farmers, can secure at least 5% of the New Zealand milk market.

I'll detail some rough numbers to give you an indication of how big the market is.

5% of the NZ fresh milk market equates to about 20.25 million litres of milk per year. If we assume that a cow will produce around 3,000 litres (low estimate, equivalent to 270 kgms) in a year. Then we would require 6,750 cows to be in milk at any one time. Which is the equivalent of around 8 Canterbury dairy farms.

If we assume that a viable business requires 30 cows (not proven yet) then we would need
225 farmers. Maybe 50 cows will end up being an economic unit, in that case 135 farmers will be able to meet 5% of New Zealand's milk needs.

How can 30-50 cows be an economic unit?

The model I'm proposing is that the micro farmer is also the processor and the retailer, so they receive the total retail amount for their milk.

Below is a very rough and ready spreadsheet with some ballpark figures & estimates.

I still have no idea what the actual numbers are going to be.

My assumptions are conservative.

Production per cow is low, most dairy cows will be producing well over 400 kgms. I've assumed an eco cow in a dryland environment is much lower.

Revenue is also low, when you consider organic milk retails for $3.65/litre. Anchor blue top supermarket milk retails for $2.45. 

I've budgeted farm expenses at double that of the NZ dairy industry. I'm not sure what they will actually end up at. Staffing numbers will have a big impact on the final number. Remember there are no economies of scale in a small scale business.

Owner's drawings at $100,000. I want to attract our best young people, these people have options and the ability to earn good money elsewhere. For small scale eco farming to spread it has to be financially attractive. 

I want to stress these are rough estimates, experience has shown me that you never make as much money as you think you will. 

The reason for outlining these numbers is I want to show that it's entirely possible to farm sustainably on a small scale and still make a good living.


So If you're interested in being a small scale eco dairy farmer, then watch this space. 

Feel free to post a comment below or you can email me at glen dot herud at gmail dot com.