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“We produce around 2.1 million lbs (950,000 litres) of milk a day here - Our economies of scale mean that we are able to take advantage of a market where the long- term price is determined by the cost base of smaller family dairies” “Based on current feed prices, we can produce a workable return at a milk price of $15 per cwt while most of the US dairy industry works on a break-even price of $18”, but he was quick to point out that “there was no room for complacency as 50% of US milk is now produced by the largest 2% of producers so that price dynamic was changing.
“Falling prices in real terms over the longer term horizon will continue to drive high cost producers out of the industry. We need to constantly improve our performance in all areas of our operations to maintain our competitive advantage and stay ahead of the game. Effective management of both business risk and customer relationships are key components of that process”
All of the milk produced by the two companies is sold through Continental Milk Producers, the Midwest sister co-operative of Select Milk Producers. Continental like Select is a relatively small group of approximately 30 large (2,000 cow+) producers who are able to offer the kind of logistical economies of scale and consistency of supply that allows them to deal direct with major retailers and processors.
Milk from the two co-ops (Select & Continental) is brokered by a single company, Quality Milk Supplies, set up and managed by McCloskey & den Dulk. Despite having less than 100 farmer suppliers in total, QMS is now reportedly the 3rd largest supplier of milk in the US after Dairy Farmers of America and Land O’Lakes.
Principal customers include the Kroger supermarket chain, Dean Foods and Wal Mart. While the Coops have a processing agreement with Dairy Farmers of America, price negotiation with the end customer is essentially done by QMS.
This lean and responsive supply chain model is able, by keeping tight control on overhead and logistics costs, to maximise the share of the milk value returned to the producer while offering an attractive value proposition to the customer. Traceability and Quality control are the other key components of the offer that strengthens the competitive position of these large dairies.
It is an evolution of the co-operative concept that I believe UK producers can learn from. Tightly focused groups of similarly sized and progressively minded producers, that are better able to meet a specific customers needs than the more unwieldy traditional, ‘one size fits all’ co-operative model, where any perceived value created by absolute volume is often eroded by higher admin & logistics costs, organisational politics and a general inertia with regard to the implementation of new technologies and practices By better matching supply to the specific needs of individual high value retail customer accounts, QMS and its suppliers were able to reduce the volatility of their milk price and at the same time command a premium over the market for higher service levels, significantly mitigating one of the major risk factors associated with large scale milk production.
Corbett appeared quite comfortable with how the business was positioned to deal with the impending weakening of the US milk market. “Our average milk price for the 12 months to October 2008 was over $20 per cwt, with many commodity inputs fixed at pre ‘price spike’ levels, so we’re quietly confident about our competitive position, despite an expected drop in milk prices in 2009”
In 2008 Fair Oaks Farms & Bos Dairies were, between them, milking 30,000 cows and were permitted to expand to 40,000. They were carrying sufficient heifer stock within the business to replace culls and populate this expansion, but were waiting to see how the market developed before committing to build 3 new dairies. Build cost was estimated at $5,600 per cow space in 2008 compared to $3,300 when they built the original 4 units in 1999.
The business typically carries 2 years supply of forage in stock which Gary considered a “cheap insurance policy against weather and market movements”. In 2008 corn silage had yielded an impressive 30 tonnes to the acre, well above the five year average of 18t. This would prove particularly beneficial in the following 12 months as milk prices dropped below cost of production allowing Fair Oaks Farms to eat into their existing stock of forage whilst harvesting and selling a significant proportion the 2009 season corn silage crop as dry corn to ease their cash flow position.
Fair Oaks Farms & Bos Dairies employ a total 450 people across all their business operations. All dairy staff below management level is Hispanic, an increasingly common practice on large US dairies.
Contrary to the popular myth, good Hispanic workers are not cheap to employ but are as a general rule, reliable, hard working and conscientious and tend to work well together in teams often made up of members of the same extended family.
At 35-40 staff per dairy, this equates to 1 labour unit per 80-90 cows. Corbett’s view was that this was close to the optimum level. “There are plenty of dairies operating at a higher cows-per-labourunit figure, but our view is that overall business performance can slip very quickly if labour is overstretched. We need to be adequately resourced to maintain optimum performance” The technical standard of all operations at Fair Oaks Farms & Bos Dairies was extremely high and much of the technology employed, cutting edge. Craig Martins, US Sales Manager for Westfalia Surge, who supplied the parlours and milking equipment for the 5 Bos dairies summed it up succinctly as we toured one of their cross-ventilated dairy units... “There is no shortage of innovators and early adopters in US dairying, but these guys are right on the ‘sword point’ of the industry. What you’re seeing here will be common practise throughout the industry in 5-10 years” The cross ventilation system uses banks of evaporative cooling pads, hollow paper filaments filled with water, located along one side of the buildings and high volume fans on the other side to draw ambient air through the pads. The evaporative effect of the ambient air flowing over the permeable pads cooled it by up to 20 degrees F as it entered the barn. Warm air was drawn out the far side by the banks of extractor fans creating a cool breeze through the building.
Cross ventilated free-stall barn, Bos Dairies Indiana The resultant effect was an extremely cool and pleasant environment for the cows and they appeared to respond well, especially in the summer months where heat stress can have a marked effect on both milk yield and fertility. Both had been maintained at target levels through the summer since the installation of the system.
The downside to this system is that, for it to work effectively, the buildings need to be closed denying the animals natural light. On balance the net welfare benefits in this climate, where summer heat stress is a major issue, would appear to favour the cross ventilation approach but it is, understandably, a difficult sell to consumers, which is why the Bos dairies do not feature in what is the most innovative and effective Agricultural PR exercise I have ever seen..
The Fair Oaks Dairy Adventure
Large, intensive, zero grazed dairy farms are not typically keen to open their doors to the general public. This type of dairying, however well run, tends to jar with many consumers’ view of how milk is or should be produced. And the industry has and continues to receive more than its fair share of criticism, some justified, much not, on both environmental, food safety and animal welfare grounds.
As was discussed earlier this is both a major PR issue for the industry and has profound consequences for dairy entrepreneurs wishing to raise capital for such ventures, with many mainstream banks steering clear of ‘Big Dairy’ on PR grounds as much as for any inherent financial risks associated with the business.
Fair Oaks farms have however approached this issue in a very innovative way and have turned what for many would be seen as a major liability into a PR triumph and a significant revenue stream in its own right.
The Fair Oaks Dairy Adventure is an extremely well thought out and executed concept that has captured the imagination of hundreds of thousands of American consumers and is now the largest Agri-tourism destination in the Mid West if not the entire US.
Based around a very professionally designed and operated education & visitor centre, it presents large scale dairying in a sympathetic and professional light and explains in great detail the philosophy behind Fair Oaks Farms business, how milk and other dairy products are produced, their importance as part of a balanced diet and farming’s role in sustainably managing the environment.
They make no attempt to hide any aspect of what they do and how they do it, but rather explain clearly and without patronizing the audience, the reason behind why this system of dairying works best for the cows and the environment. It is an engaging and interactive experience and manages to get the message that well run large dairies are both environmentally sound and have the cows’ welfare at the heart of their business model.
As well as the excellent visitor centre, visitors get to take a guided bus trip around one of the 4 dairies, where the bus actually drives down the central feed passage of a 1,500 cow free-stall barn allowing the visitors to see the cows in their working clothes. They then get to observe milking from a gallery overlooking one of the rotary parlors before being returned to the visitor centre for the ‘piece de resistance’, watching a live birth in the recently constructed birthing barn.
With an average of 90+ calvings a day across the business, there is never a shortage of cows to watch giving birth. Close-up cows are monitored and moved in pairs from the dairy to the birthing barn, as required, at the first sign of labour.
They have had to perform live caesarians on occasion, which only adds to the theatre and as is inevitable have to deal with the issue of still births, which is done in an honest but sympathetic way.
Since the birthing barn was opened visitor numbers have jumped 30% and in the 15 months prior to my visit the Dairy Adventure had hosted 450,000 visitors from all over the US and beyond.
The experience ends with a trip to the restaurant and gift shop, where visitors can sample a range of Fair Oaks dairy products such as ice cream and a range of ‘award winning’ cheeses that are manufactured on site. The cheese dairy, which utilises less than 1% of the milk produced on the farm, is co-located with the restaurant and visitors can observe the cheesemaking process through large plate glass windows as they enjoy their meal and reflect on their visit.
The whole process is extremely well thought out and professionally run. It is a growing part of the business generating a significant revenue stream as well as an almost incalculable PR value for the business and the wider industry.
They were aware of the risks of opening up their business to public scrutiny from the animal rights and environmental lobbies but felt that this proactive approach was far more constructive in the longer term than adopting the siege mentality that too many in the industry have done, to its ultimate detriment.
As visitor numbers have shown, there is genuine and growing public interest in the venture and while it has inevitably attracted the attention of the animal rights lobby, they have invariably gone away with their tails between their legs, unable to gain any traction with the visiting public, when faced with such a compelling and well presented message.
The funding of the visitor centre is equally ingenious. All US dairy farms are legally obligated to pay 15c per cwt of milk sold towards milk marketing activities. 5 cents of that goes into a centrally administered fund, whilst the individual producer can choose what they do with the remaining 10cents, subject to it being channelled through a USDA approved scheme.
Co-operatives qualify as appropriate marketing vehicles and as all of Fair Oaks milk is marketed through Continental Milk Producers, the co-op set up and administered by Michael McCloskey and Timothy den Dulk, then their 10c is retained by the co-op and used to fund the dairy visitor centre at Fair Oaks.
The USDA rules state that such ventures must be run on a not-for-profit basis, so in the case of the Fair Oaks Dairy Adventure, despite appearing to be a single seamless enterprise, the visitor centre itself is funded by the co-op (using the 10c/cwt levy) whilst the dairy tours, cheese dairy, restaurant and gift shop are separate privately owned entities, with all profits retained by the business.
Gary Corbett would not be drawn on exactly how much money the Dairy Adventure franchise was generating, but it certainly wasn’t being subsidised by the farming business.
By my rough estimations it was generating a revenue stream considerably in excess of $6million dollars per annum. The PR value is harder to quantify but could be considered invaluable given the Looking to the future, Fair Oaks Farms has 600 acres around the visitor centre earmarked to develop into an agricultural theme park...a kind of ‘Agro-Disney’, with the bus tours even replaced with a mono-rail system if visitor numbers top the 1 million a year mark! However Gary was keen to point out that in doing so the core message should not be trivialised. ‘We are first and foremost a commercial farm and intend to stay that way’
Environmental Management, Manure handling & Energy Generation.
All the dairies process their manure through anaerobic digesters and most generate electricity on site using integrated Combined Heat & Power (CHP) plant. The Bos dairies each has its own AD plant as does one of the Fair Oaks units, with the remaining three Fair Oaks dairies sharing a new central manure processing and AD facility.