Financial Performance and Other Characteristics of On-Farm Dairy Processing Enterprises in New York, Vermont and Wisconsin

Abstract

In the last decade or two there has been a resurgence of interest in value-added agriculture, driven by consumer characteristics and the desire of farmers to capture a larger share of the consumer dollar. Federal, state and local governments have funded various efforts to support value-added agriculture, often implicitly assuming that the enterprises would be profitable and that the transition from commodity producer to producer-processor-marketer-distributor would be relatively easy. Some analysts (e.g., Streeter and Bills, 2003) have questioned both of these assumptions, noting that available aggregate data do not allow assessment of the financial performance of value-added enterprises. In the major milk-producing states, on-farm processing of milk is seen as a way of adding value to milk, but previous research on value-added dairy consists largely of ex ante budgeting or qualitative case studies. Our study collected detailed financial information from 27 value-added dairy enterprises with cows, goats or sheep in three states. These businesses processed and marketed cheese, fluid milk products and yogurt; 17 had begun processing during the previous three years. The financial information was used to develop income statements and balance sheets for both the milk production and the dairy processing and marketing enterprises. Our results suggest that value-added dairy is not a panacea: despite much higher revenues per unit milk produced or processed, mean net income for the processing enterprise and for the combined milk production and processing business were modest at best and often negative. More than half of the on-farm processors had negative net incomes from processing, and seven processing enterprises had negative net worth. On average, returns per cwt milk processed were $90 per cwt and $209 per cwt (for cow and goat/sheep milk producers, respectively) lower than the full economic costs of production and processing that accounted for the value of owner/operator labor and the equity cost of capital invested. Total labor requirements for production, processing and marketing were roughly double those for milk production alone. Caution should be exercised about generalizing the results of this study because the number of businesses analyzed is small, many of the businesses are relatively new and data was collected for only one year. Future research efforts should seek to increase the sample size, collect panel data and explore in greater detail the reasons for observed financial performance. Efforts by governments can require better documentation of the financial performance of value-added enterprises, provide improved support for ex ante analysis of business opportunities by potential value-added processors and assist with identification of production and management strategies that are likely to be more successful.