Bucking the Trend

Small dairy co-ops adding value for
members by targeting niche markets

By Carolyn Liebrand, ag economist
USDA Rural Development


he 1990s was a period of continued adaptation by the dairy industry to dynamic, rapidly changing market conditions. These changes included advances in production technology (both on the farm and in the milk plant), consolidation and growth of retail food chains, vertical and horizontal integration in milk manufacturing/processing sectors, new trade rules and practices, and changes in government programs.

These factors contributed to the trend of consolidation and mergers among dairy cooperatives, which accelerated during the waning years of the century. As a result, just four cooperatives marketed 49 percent of all the milk marketed by cooperatives, or 41 percent of all milk sold to plants and dealers in the United States in 2002 (Ling).

Furthermore, the four largest dairy cooperatives marketed 74 percent of the natural cheese, 76 percent of the nonfat-dry milk and 80 percent of the butter produced by cooperatives. (The make-up of the top four cooperatives varies, depending on dairy product).

However, in spite of these trends (or perhaps because of them) there was another marketing development in the 1990s. While many dairy cooperatives were growing larger in size and scope, there was corresponding growth in interest by milk producers in “niche marketing.”

Niche marketing means that members’ milk is manufactured into specialty or branded dairy products for specific market segments. These activities are typically conducted on a small scale.

The idea of niche marketing is to add value to member milk by producing a unique product, capitalizing on its specific attributes and selling it to a relatively narrow target market. The increasing interest of consumers in where their food comes from and how it is produced has created a growing market for products with attributes such as “organic,” “artificial hormonefree,” “pasture-based” (grazing), locally produced and “freshness.”

Co-ops and niche markets
While some producers have delved into these activities individually, others have banded together with like-minded dairy farmers to form small cooperatives to market milk into these niche markets. These efforts have been spurred on by several factors: the need to preserve a market outlet, milk production style, and/or producers’ desire to generate added returns on their milk above what their traditional outlet offers.

In at least two cases, niche-market co-ops were formed when milk buyers would no longer accept producer milk via their established delivery method. Thus, to preserve an outlet for their milk, they decided to own the outlet themselves. The option of adopting new technology on the farm to meet market demands was not available to them due to religious considerations.

Similarly, another group of producers found that the payment plan they had enjoyed from their milk buyer was being terminated. They banded together to seek markets that would continue to pay them premiums based on the quality and composition of their milk.

Other producers that formed nichemarket co-ops shared the belief that consumers desire, and will pay for, certain special attributes of their milk. These select characteristics arise from production techniques that they believe affect the quality of their milk (and resulting dairy products). These include no use of artificial hormones, pasture-based production, organic production, the breed of dairy cow, the location of the farms and the size and ownership of the dairy farms.

Furthermore, some of the members were small-scale producers, hard pressed to make a living in an environment of increasing costs and volatile milk prices. They sought continued viability for their farms by capturing a higher return through these specialized cooperatives.

These producers may look for additional revenue from niche markets rather than attempt to gain efficiencies through traditional means (such as increased size of farm operation). In addition, part of their motivation may be philosophical — a belief in a certain scale of agriculture or production practices (for instance, family farms and/or organic production).

A number of articles in this magazine in recent years have profiled various producer-group efforts to add value to their milk in this manner (see the January/February 2005, September/ October 2003, and July/August 2002 issues for examples). This article attempts to summarize the niche-marketing efforts by U.S. dairy cooperatives.

Traditional niche dairy co-ops
Traditionally, a niche-marketing dairy cooperative was one that processed all of its members’ milk in its own plant to manufacture and market specialty or branded dairy products (typically cheese) for particular markets. In 1992, USDA documented 25 of these cooperatives, labeling them “branded cheese” cooperatives (table 1). A couple of these co-ops also produced minor quantities of other products, such as butter, nonfat dry milk or whey products in addition to cheese.

These branded-cheese cooperatives captured some marketing margins, in addition to processor margins, by moving operations closer to the consumer and by marketing distinctive products that commanded premium prices. They are predominantly located in the East North-Central region, especially Wisconsin.

Following the overall trend of declining cooperative numbers, the number of branded-cheese cooperatives fell by 7 cooperatives (28 percent) between 1992 and 2002. However, the net decline masks the dynamics of what occurred.

Seventeen cooperatives left the category during that period. Of that total, 12 branded-cheese cooperatives (48 percent of the 1992 total) went out of business, nine of which ceased operations altogether under stressed financial conditions, while three merged with other, larger cooperatives or were acquired by an investor-owned firm.

At the same time, four niche dairy co-ops grew to the extent that their expanded product lines moved them into a new category, which USDA calls “diversified dairy cooperatives.” These dairy co-ops have multiple product lines, including commodity dairy products such as bulk cheese and butter, and also sell a large amount of milk in bulk. One co-op took the opposite track and ceased manufacturing cheese, but continued marketing members’ milk.

In contrast, 10 cooperatives were added to the branded-cheese category between 1992 and 2002. Five were existing cooperatives that began (or resumed) manufacturing cheese and the other five were newly formed cooperatives. Therefore, there were 18 niche marketing cooperatives operating in 2002, representing 9 percent of all dairy cooperatives. Because these cooperatives tend to be rather small, they handled less than 1 percent of all milk handled by dairy cooperatives.

Long-established
branded-cheese co-ops
In 2002, 13 niche-marketing cooperatives were long-established businesses, having been in operation for many decades. This indicates that manufacturing non-commodity cheese has long been a viable alternative for some groups of dairy producers.

However, as was noted earlier, more than one-third of the branded-cheese cooperatives went out of business between 1992 and 2002 due to poor financial performance. These smaller, specialty-cheese makers must offer superior and unique products and service in order to survive in an environment where large cheese manufacturers have considerable market clout due to the latest technology in their highvolume, low-cost plants.

These long-established, brandedcheese cooperatives are almost all located in Wisconsin (with one each in Ohio and Pennsylvania). They use all of their member milk in their own plants, and typically are small operations (10 of the 13 cooperatives handled less than 50 million pounds of milk annually) and all have grade-B milk producer-members.

These long-established cheese-marketing cooperatives averaged $10.03 in assets per-cwt of member-milk in 2002 (Liebrand), while $5.80 (58 percent of the total assets) was provided by members.

This level of asset use was far higher than for other operating types of dairy cooperatives. However, these cooperatives also generated higher average net margins per-cwt of milk handled than did the other types of cooperatives: 32 cents vs. 21 cents for all dairy cooperatives in 2002.

New niche-marketing co-ops
USDA identified seven cooperatives that were formed after 1992 that market distinctive, niche-dairy products. Moreover, most of these (5 cooperatives) were formed between 1992 and 2002. These are all small cooperatives marketing milk or milk products that have unique attributes attractive to certain consumers.

Two of these newer cooperatives marketed bottled milk under their own label while the other five made a wide variety of cheeses and flavored cheeses; and at least one of these co-ops made butter in addition to its specialty cheese. Several were located in Wisconsin with others in Massachusetts, Minnesota, Ohio and Pennsylvania.

All of these new niche-marketing cooperatives attempt to capitalize on the “natural” production practices of their members. They want consumers to know that their products come from family farms and that no artificial hormones are used to enhance milk production. Several emphasize their practice of keeping cows on pasture (which some view as more humane) and say this affects the composition of their milk in a health-promoting way.

The two co-ops that sell bottled milk emphasize the milk’s local production and therefore its freshness. They maintain they can deliver the milk from cow to consumer in far less time than it takes the large, regional milk bottlers.

A couple of the new niche cooperatives were formed by Amish producers who were seeking a market outlet for their milk because the milk plants they traditionally dealt with would no longer accept milk in cans. These two cooperatives operate much like the traditional branded cheese cooperatives — all their milk goes through their own plant to make cheese.

For the Amish in particular, though they own the plants, they do not operate them because it would violate their religious tenets. A hired cheesemaker carries out the manufacturing, often for a portion of the gross income. (Note: some traditional, brandedcheese cooperatives also operate under this type of arrangement with a cheesemaker who furnishes the equipment, labor and tools to make the cheese out of members’ milk in plants owned by the cooperative. In exchange, the cheesemaker gets a share of the gross income or profits.)

Plant ownership rare
Only one other new niche dairymarketing cooperative owns a plant. However, this cooperative only processes a small portion of its members’ milk in its plant. It sells all of its member milk to a larger, more established cooperative, then “buys back” the milk it needs for its own operations. The other cooperative bottling specialty milk has a similar relationship with a larger cooperative and is searching for its own plant, but does not own one at this time.

Thus, five of the seven new nichemarketing cooperatives deviate from the model used by the long-established cheese-marketing cooperatives. With one exception, they do not own or operate any plants. Rather, they contract with established manufacturers to make their products on a batch, or copack, basis.

Because the markets for their specialty products are still limited, only a small portion of their members’ milk is needed to manufacture their specialty products. So, the bulk of their milk continues to be sold through established outlets. This also contrasts with the long-established cheese-marketing cooperatives, which use all of their members’ milk in their own plants.

It is apparent that for most of these cooperatives, the fledgling niche-marketing effort is an attempt to garner supplemental income for members, rather than a market outlet for all of their milk production. The volume of milk moving through these new nichemarketing cooperatives is quite small — a majority (four out of the seven niche dairy co-ops) handled less than 5 million pounds of member milk per year. In 2002, these new niche-marketing cooperatives produced just 16 percent of all the cheese manufactured by niche-marketing cooperatives; the rest was produced by long-established cheese cooperatives.

Continued interest in niche co-ops
The idea of niche marketing continues to attract the interest of dairy producers. Since 2002, at least seven more producer groups have formed cooperatives to pursue specialty markets. All ship to established milk handlers (cooperatives for the most part) and look to use a portion of their members’ milk for their specialty product(s).

Several co-ops in the Northeast emphasize that they are “local producers” and encourage consumers to buy their products as a way to preserve the family farms and rural landscapes in their state. Most look to bottle and label milk as being produced locally, in-state, but a majority (four cooperatives) has not settled upon a specific dairy product.

Except for one Amish group, none own or operate processing facilities. Most of these efforts (five of the emerging cooperatives) are in the North Atlantic region, where there is interest among residents, consumers and state officials in preserving their state’s agricultural heritage and open space.

Market potential
The very nature of niche marketing implies a limited market. However, that is not to say these niche-marketing cooperatives are precluded from growing into large, successful ventures. For instance, the Coulee Region Organic Producer Pool (CROPP) started out as a small cooperative with seven members marketing to the organic niche market (see Rural Cooperatives January/February 2000 and May/June 2005 issues). It is now a large, nationwide cooperative marketing a variety of organic dairy products under the “Organic Valley” brand name.

Large cooperatives such as Tillamook and Cabot Cooperative (now part of Agri-Mark, Inc., a dairy marketing cooperative — see the May/June 2000 issue of Rural Cooperatives) have grown broad regional, if not national, markets for their premium, branded cheeses. (These three cooperatives are classified as diversified cooperatives by USDA due to their wide scope of activities and are not counted in the number of niche-marketing cooperatives. In fact, many of the large, diversified dairy cooperatives offer a variety of branded dairy products.)

A number of long-established cheese-manufacturing cooperatives continue to thrive by focusing on quality and supplying specific markets with specialty cheeses. These successful cooperatives provide evidence that niche marketing is a viable alternative for interested farmers.

Synergy with established
cooperatives
Most of the newer niche-marketing cooperatives continue to sell the bulk of their milk to other handlers. They direct just a portion of their milk to a plant to have their specialty products made.

For some, these shipments for their niche products are only done occasionally. Others ship all their milk to their handler (typically a cooperative) and “buy back” the amount of milk needed to make their specialty product. In this case, the handler diverts shipments of the niche marketing cooperative members’ milk to the selected plant.

These arrangements give the members market security (a market outlet for all of their farms’ milk). At the same time, it allows them to seek added returns on a portion of their milk.

The relationship between these new niche-marketing cooperatives and established cooperatives appears mutually beneficial. The niche-marketing cooperative can focus its efforts on its niche products, leaving the tasks of managing milk routes, producer payroll and balancing milk supplies to the larger cooperative.

The established cooperative benefits by having members who, due to the added revenue they gain from their niche products, are thriving and happy members. Moreover, the established cooperative gains another outlet for member milk, however small.

References
Cheese Market News, Midwest
Education Program Raises Awareness
of Organic Farming, Seeks Interested
Parties, pg. 10, Vol. 25, No. 12,
April 22, 2005.

Elitzak, Howard. Food Marketing
Costs at a Glance. Food Review,
Economic Research Service, USDA,
Vol. 24, Issue 3, September-
December 2001.

Liebrand, Carolyn. Financial Profile
of Dairy Cooperatives, 2002, Research
Report 203, Rural Business-
Cooperative Service/USDA,
September 2004.

Liebrand, Carolyn. Structural
Change in the Dairy Cooperative
Sector, 1992-2000. Research Report
187, Rural Business-Cooperative
Service/USDA, October 2001.

Ling, K. Charles. Marketing
Operations of Dairy Cooperatives,
2002. Research Report 201, Rural
Business-Cooperative
Service/USDA, February 2004.








































































Hurdles to niche-markets

Niche-marketing co-ops face several challenges. Most arise because of the small volume of milk they have to market. These hurdles include:



How big are “middleman” profits?

Some farmers have been stirred into cooperative action when they noted the gap between the price of their milk as it leaves the farm and the prices of dairy products in the stores. In 2000, for example, the average retail price for one-half gallon of milk and of cheddar cheese was around three times the farm value of the milk used in making the retail products.

Thus, many a farm group has been exhorted to addvalue to members’ raw agricultural products to capture higher revenue. However, the gap between the price of milk at the farm and the price of end-products from milk represents the total marketing bill: the cost of getting the raw product off the farm and into consumers’ hands. “These costs are likely to be incurred regardless of who conducts the middleman operations.”

The bulk of what may be thought of as “middleman profits” actually represents the expenses associated with getting farm products into consumers’ hands: labor, packaging, rent, transportation, advertising, depreciation, taxes, fuels and energy, interest and repairs. Of course, there is opportunity for profit in these activities, otherwise there would be no incentive to perform them.

Yet, in order to capture any profits, the middleman functions must be conducted efficiently. Any higher-than-average costs due to inefficiencies related to small scale or inexperience would erode profit margins quickly.

According to USDA’s Economic Research Service (ERS), pretax corporate profits made up just 6 percent of the marketing bill for all food in 2000 (Elitzak). Labor was the largest marketing expense, which accounted for 47 percent of the difference between the farm value of food and what consumers spent on food in 2000. Packaging was the next largest expense, accounting for 10 percent of the marketing bill, followed by profits.

This suggests that if farmers take on some, or all, of the middleman functions, they may be able to retain a portion of the profits generated by middleman activities. In addition, since labor costs are a major contributor to the value added between the farm gate and dinner plate, farmers may be able to benefit by providing their own “sweat equity.”

Any of the middleman steps the members carry out themselves may allow them to retain a portion of the labor charge.

Alternatively, producers could try to raise the value of their milk as it comes off the farm. This is what the organic milk producers have been able to do. For example, the farm value of organically produced milk received a premium of $4.16 per cwt in 2004, according to Organic Valley (Cheese Market News). By stressing the benefits of their particular milk to consumers, niche-marketing cooperatives may command a higher price for their milk and dairy products.

If these premium prices more than compensate for the relatively higher production and marketing costs that are likely to accompany organic and specialty milk production, these producers may indeed capture greater returns.

— By Carolyn Liebrand



Micro co-op finding success in local markets

PastureLand in southeastern Minnesota is an example of a new, branded-cheese and butter micro co-op that has had considerable success penetrating local and regional markets. Marketing efforts emphasize that freshness is enhanced by local production and that it comes from small family farms that help preserve a rural way of life and that have a low impact on the environment.

PastureLand’s member farms have all recently been certified organic. Its members’ cows are all kept on pasture.

“Our job is to manage solar energy,” says board President Dan French. “We harvest it in the form of grass, using animals. The healthier the system is, the healthier our product is going to be.”

PastureLand’s artisan cheeses are produced in small batches for the co-op by Eichten’s in Center City, Minn., using only fresh milk from members’ pastured dairy herds. The co-op produces a wide range of Gouda cheeses, including aged, mild, herb, jalapeno and dill flavors. It also makes baby Swiss and cheddar cheese, as well as cheddar curds.

The co-op’s Summer Gold salted and unsalted butter is also made in small batches at an old-fashioned, local creamery in Hope, Minn., using only sweet cream from the coop’s grass-fed cows. Business has been increasing at a rate that recently justified hiring its first fulltime manager, Jean Andreasen.

PastureLand, formed in 1999, was awarded honors in three divisions by the American Cheese Society in its 2004 competition, including: first place salted butter, first place unsalted butter and third place herb Gouda cheese.

“It is important to us to be an organization that is small enough that the members have say in future membership, farm certification and other business matters,” says French.





July/August Table of Contents