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Valued-added opportunities: Are they right for your dairy?

Lynda Taylor and Trish Tetz for Progressive Dairy Published on 16 November 2020

Thanks to increasingly tight margins, dairy producers are searching for returns wherever they can find them. For some, that means exploring value-added opportunities outside their core operations.

These types of opportunities may include:

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  • An on-farm retail store offering beef or cheese, butter and ice cream made from the milk you produce
  • Home-delivery business of the above and/or retail milk and cream offerings
  • Agritourism, which can include a petting zoo, bed-and-breakfast lodging, a corn maze or hayrides
  • Providing a hobby farm or vegetable garden opportunity
  • Farmers market (on- or offsite)
  • Specialized offerings such as custom milling
  • A microbrewery or microdistillery using products, such as hops or grains, grown on the farm

Producers are understandably attracted to the potential benefits: Value-added opportunities can bring customers closer to your products, improve brand recognition and—in the best-case scenario—diversify your income. But, it’s crucial to determine whether adding a new business model to your dairy is not only right for your operation but right for you.

Explore the possibilities

A good place to start is by asking what the most natural extensions for your operation might be. If you’re considering agritourism, for example, you’re probably in a better position to succeed if your farm is relatively close to a population centre.

Also, consider if the new business model is something you would actually enjoy doing every day. Beyond any possible payoff, opening a retail shop or a bed-and-breakfast means you’re about to add complexity to your life, both professionally and personally. If you’re not passionate about the opportunity you’re pursuing, you’ll likely be starting out a step behind.

Once you’ve settled on an opportunity, you’ll need to assess its viability from a business plan perspective. That means asking questions like the following:

  • Why am I doing this? What does success look like?
  • What set of skills are required?
  • Do I have the right people in place to handle marketing and manage the processes involved?
  • Will it be a cash-based business, or will it focus mostly on internet sales?
  • Will customers come to my location? Or, will home delivery be the primary means of sales?
  • How will I set prices? 
  • What does the cash flow cycle look like?
  • Will I need to carry inventory?
  • Do I have the necessary infrastructure in place (such as ample parking for an agritourism business)?
  • What can I learn from looking at others who have successfully gone down this path? Have I reached out to those who have done it successfully?
  • Does it make sense to partner with someone who has the expertise or resources to help develop the project, such as a restaurateur or chef looking to launch an artisan cheese product or a tour company that specializes in agritourism?

Making the assessment

These types of value-added opportunities are often not a quick fix for offsetting shrinking margins. Ultimately, you’ll need to explain why a new business venture is better than shoring up your core business. It also includes carefully choosing a venture based on your risk level and whether you can ensure the highest safety protocols are in place, with plenty of backstops and checkpoints. To start, you’ll want to consider completing a checklist like the following:

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Take stock of your resources. Do you have the land, cows, water and location to make your venture work? Do you have the staff, advisory team and time required to make the venture work?

Seasonality. Will your new venture be year-round, or will it have a seasonal component? If you need to create infrastructure – such as a small greenhouse to grow flowers for a roadside stand – will the seasonal business be able to cover expenses in the off-season? Alternatively, cheese or milk will likely involve a year-round production cycle and require more intense infrastructure needs with heavier regulatory requirements.

Understand the impact on your working capital. Any new business venture will almost certainly drain the working capital of the base operation. This is particularly true if the growing, processing, aging or marketing timelines of the product you’re planning to sell are longer than your current cycle. It’s critical that you plan for this by modeling the cash flow timelines of the venture you’re considering.

Consider the market. Having 20,000 cars a day going by your farm does not guarantee people will stop and buy your product. Developing a market takes time. What’s your strategic advantage, and how will you capitalize on it?

Understand the rules. Regulations between provinces can be drastically different, and what works in one region may not be allowed in another. For example, does the milk have to leave the farm and be tested and pasteurized at a federal plant? Or, can it go straight from the on-farm bulk tank to the cheese manufacturing facility located on the same property? Also, the inspection process impacts where you plan to distribute your products. If you want to ship outside of your province, you need to be in line with Canadian Food Inspection Agency (CFIA) regulations, as well. Meeting with your provincial marketing board can help you gain an understanding of the regulations within your province. On a national level, how would your venture comply with the supply management system? Make sure that you explore all the regulations that could impact your venture, such as tax laws, insurance and liability, food safety rules and labeling.

Weigh the risks. A new venture brings a whole new set of risks. How would a food recall impact your reputation? Once you begin direct marketing, you’re exposed to a whole different set of liabilities. Will insurance cover it all? Should you establish a business structure to limit liability? Understand and explore all the tools that may be available.

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Model the income statement. As with any venture, an honest analysis of real net income potential is critical. While gross revenue typically gets larger farther up the chain from the farm, that’s not always true of net profit. Make sure you understand the potential net revenue and how you’ll get it.

Taking the leap

Given all the steps involved in making a new business venture a reality, your initial idea likely won’t match the final concept. That’s why exploring value-added opportunities requires an ability to adapt. It’s also why you’ll need a good advisory team in place, including legal experts, business consultants and financial experts. Also, keep in mind, you’re not reinventing the wheel. Run your ideas by other dairy operators who have done it successfully.

For producers, the value-added thought process almost always starts with a discussion about how to capture more profits in the food supply chain. But, success will likely take longer than you think. While the lure of enhanced revenue is intriguing, make sure you take careful consideration of the factors outlined above before jumping into the fray.

For those who have the necessary mix of a good idea, a passion for the vision and a realistic plan to achieve it, however, the rewards can be very satisfying. Direct-to-market is becoming more common as producers look to expand beyond conventional markets. We love seeing farms take this kind of initiative.  end mark

PHOTO: Value-added opportunities, like selling cheese from your farm, require a business plan to assess their viability. Photo by Karen Lee.

Lynda Taylor is BMO’s senior vice-president and national head, agriculture and agribusiness.

Trish Tetz is BMO’s agriculture manager, agriculture and agribusiness.

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