Milking the Profits
Steven Judge started Vermont Milk Producers, a marketing group of struggling family farmers, to create and market a premium brand of milk and keep a greater share of the profits on the farm. One big question: Will consumers pay 49¢ more per half gallon?
Every morning at 5, Steven Judge heads down to his 200-year-old barn, on his Shoreham, Vt., farm, to start his day by milking 50 cows. Once he's finished, it's on to the daily chores: feeding the cows, cleaning out the barn, tending to the calves, spreading manure in the fields, and rotating the herd from pasture to pasture. It's a 7-day-a-week, 365-day-a-year job. And it doesn't stop there. Continually struggling to better his farm's efficiency, Judge squeezes in time to test out new electrical fencing or try out a new feed or new machinery. By 5:30 p.m., it's time to start milking, cleaning, and feeding the cows again. Around 7:30 p.m., 14 hours after the day began, Judge calls it quits and heads back to the house . . . ready to begin work on his second business.
This past spring that second business, Vermont Milk Producers Inc. (VMP), rolled out a new premium whole milk bound for northeastern metropolitan markets. Judge has planned on creating a brand name in what many consider the ultimate commodity: milk.
To the well-educated, environmentally concerned buyer -- often a parent -- Judge will offer his milk, called Vermont Family Farms (VFF), with an unusual set of promises posted boldly on the side of the carton. First, Judge promises that his milk is superior, better tasting, and usually fresher than what stores now offer. Second, he promises that the cows that produce it are humanely treated. Next, that the farmers supplying this milk "will manage the land as a living resource vital to the survival of our planet." The consumer can rest assured, knowing that the extra money paid for VFF doesn't end up lining the pockets of some corporate middleman but instead makes its way to the family farmer.
In the sea of white-on-white that is the dairy case in most grocery stores, Judge intends VFF to stand out like a beacon. The carton pictures a pastoral dairy scene with cows grazing, a red barn against rolling hills, and a clear blue sky. The red-orange logo for VFF is designed to catch the consumer's eye, and the lettering is slightly lilting, with an almost hand-drawn quality, to suggest days gone by.
To bring this milk to the consumer, Judge has formed a marketing group owned by 10 small to midsize Vermont dairy farmers. As VFF moves into more dairy cases, Judge envisions bringing more small Vermont farmers into his group -- possibly as many as 75 in six years. He thinks there are plenty of family farmers who are finding it harder to survive and yet are unwilling to call it quits. Their salvation, he believes, is in reconnecting with the consumer, becoming marketers. "Over the years, the farmer has handed marketing and his margins over to the middlemen, the milk processors who store and pasteurize the milk," Judge explains. The perception was that those middlemen added the value to the product and therefore deserved the healthy margins. Most small to midsize farmers became simply a supplier of a raw product. Judge and his fellow farmers intend to change that.* * *
In 1950 more than 2 million dairy farms dotted the national landscape, where the average herd size was 10 cows. Today there are fewer than 150,000 farms, and the average herd size hovers around 500. What has led to the exodus of the small farm (often called the family farm) is a subject of passionate debate. Some say that it's simply a question of advanced technology allowing the larger, better-capitalized farms to compete more efficiently than the smaller ones do. Others blame government programs favoring the large farm over the smaller one. And still others say it's the result of being in a commodity business in which demand inches up a measly 1% a year while supply rises 2% to 3%. No matter what the cause is, the milk market, like the poultry and grain markets, is becoming concentrated in the hands of a relatively few "factory farmers." Those farms are so large and technologically proficient that they can make money at $10.10 per 100 pounds of milk -- a price that doesn't even come close to the typical break-even price for the family farmer, which is $17 per hundredweight.
To understand why the family farm is in trouble is to understand the economic complexities of the milk market, which has been both hurt and helped by government intervention. Back in the 1930s, under the New Deal, President Franklin Delano Roosevelt created the Farm Bill to stabilize a sector of the economy that was in crisis: agriculture. Technological innovations of the 1920s -- like the tractor -- had unleashed higher levels of production and sent the price of commodities, like milk, swirling downward. Price supports were one solution.
Under the Farm Bill the government agreed to purchase all surplus dairy products from farmers for set prices, called the "federal support price." For a while the system ensured a relatively high milk price for farmers, but beginning in the 1980s the government -- faced with an ever-increasing budget deficit and warehouses brimming with milk products -- decided it could no longer afford to support farmers. The government systematically began pushing down support prices, and farmers who'd built their businesses within the tight price constraints of the government found their businesses had been altered radically.
Hit especially hard were small farmers like Judge. But while Judge, like his fellow farmers, will engage in the debate over the viability -- and the value -- of small farms, he's not waiting around for the debate to be resolved. He's busy crafting a plan to survive, whatever the outcome.* * *
Judge's passion for farming began in high school, when he'd work weekends helping a local dairy farmer in his hometown of Marshfield, Mass. From there he took odd jobs working in heavy construction, before landing a position as a consultant with the Franklin County Regional Planning Agency. While at the agency, Judge conducted a study on ways to protect farmland and forests. For the first time he saw how removed the dairy farmers had become from their market. It was a realization he never forgot.
In November 1988, sick of viewing farming from the sidelines, Judge and his wife, Wendy, sold their house in Ashfield, Mass., and with the proceeds bought a 300-acre dairy farm in the hills of Vermont. At the time it seemed like a smart investment. Judge planned to use a system of rotational grazing that would vastly reduce his feed costs -- by almost 60%. In addition, the price he'd paid for the farm seemed like a steal. Unfortunately, Judge miscalculated on both counts. The grazing system failed, and the farm required unexpected, hefty up-front investments. The Judges quickly found themselves struggling just to survive. After the first few years, they were more than $150,000 in debt. Searching for new sources of funds, Judge took out a second mortgage on his home, sold the development rights for his land, and hunted for ways to increase his farm's efficiency. "I was running out of tricks," he says.
And prospects for better times were looking grim. "We were talking about selling the cows," admits Wendy Judge. But then Steven Judge heard news that made him too angry to quit. Between 1989 and 1990, word started spreading about bovine growth hormones, synthetic hormones that, when injected into a cow, reportedly would increase that cow's milk production by 10%.
While groups like the National Dairy Promotion and Research Board, in Arlington, Va., promoted the breakthrough, they did warn farmers like Judge that the public would at first be skeptical of hormone use. "They told us to expect consumption to drop 10% to 15% for three years but then pick up," recounts Judge, still horrified by the notion. This was it. Small farmers like Judge couldn't take a 15% drop in demand. Moreover, many of the small farmers were as skeptical about the hormones as consumers were.
The episode gave Judge an idea: "The 10% to 15% that would reject hormone milk was the 10% to 15% that would buy a premium-quality milk." What if he zeroed in on the consumer's sensitivity about milk and came to market with a better-tasting, fresher brand of milk?
"It was a chance to save my own farm and others like me," reasons Judge. Banding together with other small farmers, Judge penciled the plans for a marketing firm that would operate almost like a shell company, passing all profits on to the individual farmers. In theory, the plan driving VMP is undeniably simple. The company charges a higher price for a better-tasting milk. The price guarantees that VMP can pay both the processors and the grocery stores a tad more to handle its milk while still holding to its ultimate aim of paying the farmer a fair, economically viable price.
As simple as it sounded, Judge still lacked some cold, hard facts. Unfortunately, when he sat down with a market researcher, Judge also realized he lacked cold, hard cash. "I couldn't afford the cost of original research," he confesses. So instead, the researcher dug through statistics kept by the National Dairy Promotion and Research Board. The news was good. Consumers' concern about the freshness, quality, and nutrition of beverages was on the rise. Witness the popularity of premium juices, bottled water, and gourmet coffees -- all of which were once commodities, like milk. Consumption of bottled water, perhaps the greatest commodity of them all, grew 173% from 1979 to 1989. Judge was convinced that milk could be part of that premium beverage growth.
To recruit his partners, Judge sent a series of three mailings in the spring of 1990 to a list he'd gathered from registered cattle clubs. He figured the farmers that went to the trouble of registering their cows probably were more quality oriented and were better candidates for VMP. The response was overwhelming: 25% replied with interest.
To farmers like 29-year-old Joe Hescock, VMP offered a chance to farm the way he'd like. "I like to produce the best possible milk, but on $12.50 per hundredweight, it's real hard," he says. "I'm looking forward to answering real consumer needs and being paid for it." Wilfred Lamoureux, one of VMP's largest farmer investors and a farmer for 35 years, puts the choice a little more starkly. "Without the hope of this, my farm would be for sale."* * *
According to Judge, VFF milk will taste better simply because it will be held to stricter quality standards than generic milk. Two measurements will be key: somatic-cell count, which reflects the cow's health, and preliminary-incubation (PI) count, which reflects bacteria in the milk. For somatic-cell count, the government asks that milk headed for grocery shelves keep to a maximum of 750,000 per milliliter; VMP will hold its milk's count to a maximum of 300,000. As for PI count, VMP will go no higher than 50,000 per milliliter, while generic milk tries to keep to a maximum of 100,000. VMP will also increase the fat content of its milk by .25% -- not a lot, but enough to boost the flavor and consistency. At the farm level, VMP plans to hire a milk taster, who, like a wine taster, will discern the subtleties of milk flavor. And on the shelf, Judge will stick with a cardboard half-gallon container to combat the off-flavors created by the fluorescent lights hitting the milk in see-through plastic containers. Although Judge plans to branch out into lower-fat milks later, for VFF's entrÉe into the dairy case he's sticking with whole milk, which is the biggest single seller, at 45% of all milk sold.
Perhaps the greatest guarantee of VFF's better taste, says Judge, will be that, unlike traditional milk, VFF will never be mixed with potentially inferior milks. Most milk is collected by truckers, called handlers, who travel along a route from farm to farm, loading milk into their bulk tanks. While some farms might produce a premium milk with exceptionally good flavor, that milk might very well be mixed on the route with a not-so-exceptional milk. At the end of the trip, the counts for each bulk tank are taken, and as long as those numbers even out to an acceptable level, the milk goes through. "That means you can have a superior milk being sullied by a borderline milk," Judge points out. "In our system, that can't happen."
Beyond the taste difference, Judge thinks his milk offers an environmental choice. VMP's farmers will consciously work to prevent soil erosion and water pollution and to increase the soil's health. And Judge and his cofarmers have set strict guidelines about the treatment of their cows, covering everything from providing clean, comfortable bedding, to requiring that they be exercised regularly.
Judge will visit the farms monthly. The rollout started with only 10 farmers producing 25,000 pounds of milk weekly for VMP. All of them live within 10 miles of one another, so Judge doesn't see the visits as arduous treks. Plus, most of the screening will be done on the front end. "The farmers we take on will already be meeting our standards," he says.
To ensure that the higher prices VMP pays don't tempt farmers to increase production, Judge will contract to buy only as much milk as the farmer currently produces. As for the size of the farms, Judge wants to make sure that he's reaching out only to farmers who need help. That's why he'll try to take on small farms with a maximum of 200 cows. Not that his rule is hard and fast. He cites a case in which one farm has 500 cows but is supporting three families. "We don't want to penalize a family for milking as many cows as it needs to support itself," he notes.
VMP itself isn't on a money-making mission. Yes, 9¢ per half gallon will be collected from the farmer to cover marketing costs, but once those costs have been met, profits will pass on to the farmer in the form of dividends. All the farmers will be owners of VMP -- on a 100-shares-per-farm basis. VMP keeps a lid on capital costs by "piggybacking on an already-existing system," explains Judge.* * *
With producers waiting in the wings, it was time for Judge to talk to the consumer. For that he hired Peter Lovis in February 1992. A salesman and marketer, Lovis has logged 15 years in the specialty-food business, most recently for Crystal Foods, a high-end cheese importer. Judge couldn't afford Lovis full-time, so the marketer works nights, weekends, and odd weekdays. Judge liked Lovis's background, particularly his lack of background in the dairy industry. "I wanted someone who wasn't tied to the old ways," he explains.
Lovis's first tactic was to set up a booth at the New England Dairy Deli Show in April 1992. Armed with only a color flier about VFF, Lovis raked in 100 qualified leads -- most of them wholesale dairy buyers. Many buyers expressed an eagerness for change. "I'm sure willing to give this premium milk a try," says the dairy buyer for one grocery chain. "We need a new product. The dairy case has been dead for years."
Then, in May, Lovis headed directly to the consumer. He stood outside almost 100 supermarkets from New York to Connecticut to Boston, catching shoppers on their way out. What he found confirmed his best hopes. More than 50% still bought whole milk. Fewer than 10% had any idea what label they'd bought -- indicating little brand loyalty. And most shoppers had only a vague notion that milk should cost somewhere over $1 and under $2 a half gallon. Judge and Lovis could now feel comfortable with a retail price of anywhere from $1.79 to $1.99 for their milk.
Lovis next needed to locate a processor to pasteurize and package the milk. It wasn't easy. "We had some special needs," he explains. For one, the processor for VFF milk must agree to treat it separately from all the other milks; for another, the processor would have to be close to the Boston metropolitan market so freshness would be maintained; and finally, that processor needed to have competitive prices.
In October 1992 Lovis found all of that in the processing arm of Crowley Foods Inc. One reason Crowley is willing to gamble on such a little-known operation is that VMP is making it worth the company's while.
The system from farm to dairy case works this way: With generic milk, farmers are paid (based on current prices) 57¢ per half gallon by the processor. The processor then sells that half gallon to the store for $1. The store then passes the milk along to the customer for about $1.40. With VMP milk, farmers receive 77¢ per half gallon from the processor. The processor sells the milk to the store for around $1.50. The store then marks it up to about $1.99. For both generic and VFF milk, the store captures about a 25% gross margin, but because VFF's price is higher, the store's take exceeds what it makes on generic milk. On VFF milk, both the processor and the retailer will make 10¢ more per half gallon than they'd make on generic milk.
"We need to make sure that the hard work we do at the farm reaches the market," says Judge. "That means paying the processor and the store more." Because VFF milk has to be treated separately, it behooves the processor to move the milk through fast, often within 12 hours; generic milk, on the other hand, can sit for days, waiting to be processed. In the beginning Peter Lovis will oversee this part of the puzzle -- making sure the milk moves through the process smoothly and meets all the freshness requirements and criteria for taste. At the stores, Lovis will do spot checks to make sure the milk doesn't sit on a pallet on the sidewalk while an employee takes a coffee break. Fourteen grocery stores have already agreed to clear shelf space for VFF milk.
Because of money constraints, VMP has no immediate plans to advertise but will depend on less costly point-of-purchase materials: brightly colored stickers on the dairy case; "shelf-talkers" telling buyers why it's necessary to preserve the family farm; and supermarket-parking-lot demonstrations -- showing children how to milk a cow, for example.
Judge does worry that he's lost some marketing clout by using a cardboard container for VFF rather than glass. "Glass has undeniable pull . . . a reminder of the old days," he admits. But in the end he opted for cardboard because of its lower shipping costs and its ability to guard the milk from the dairy case's lighting.
After a couple of months, depending on sales, VMP plans to launch radio spots. The total advertising and promotion budget for year one: $137,000.
VMP's most nettlesome problem has been, and continues to be, money. Judge and his fellow farmers lack any capital reserves. Only a handful have been able to invest funds, and for most it was a couple thousand dollars.
Judge, who is closed off from traditional sources of money because of his less-than-impressive cash-flow picture, has found an alternative financial lifeline, a Boston-based foundation willing to lend $75,000 to VMP as well as cosign a loan of $50,000 from a local bank. But the foundation attached one caveat. For the first year, the dairy farmers should invest in VMP by reducing their price for the milk from $17 per hundredweight to $16.
Despite Judge's eagerness to pay the farmers substantially more from the get-go, he agreed to the pay drop. The $16 per hundredweight is still better than the $12 price the farmers are currently getting. And once the company is operationally sound, the price will jump back to $17.* * *
After more than two years of planning, Judge is tired. Rubbing his red eyes, speaking gravely, he explains the difficulty of building one company while running another. Meetings are held on the fly -- a quick sandwich with truckers to talk over milk routes; pinning down marketing plans with Lovis while milking the cows. But despite the unconventional air of VMP, local businesspeople and lawyers have stepped up to offer free help. For example, one Time Inc. executive, now retired to Vermont, acts as VMP's finance chief, free of charge, because he "believes in the idea."
But perhaps the most vexing question of all is how a group of farmers with no business background plan to pull all this off. "At this point, to make this thing go, what we need is focus, intensity, and stubbornness beyond all reason," Judge says. What's happened here, he insists, is a far cry from professionals churning out spreadsheets: "This is like the guys on the assembly line at GM turning to marketing and saying, 'Hey, wait a minute, something isn't right here, and we can't wait around for you to figure it out. We're taking over.' "
Vermont Milk Producers Inc., in Shoreham, Vt.
Concept: To band together a group of in-state dairy farmers to produce a premium milk that will not only taste better but also return more money to small family farms -- a group that's finding it increasingly difficult to stay profitable, because of the low price of milk
Projections: Expand to include 75 farms in six years, paying those farmers at least $4 more per hundred pounds of milk than they now get. Sales of $268,000 in the first year and a pretax loss of $47,000; by year two, sales will jump to $666,000, with pretax income of $348,000
Hurdles: Creating brand awareness. Convincing consumers that premium milk is worth a higher price. Successfully launching a business when the founders are farmers with little marketing or business background
Steven A. Judge
Family: Married, with four children
Personal funds invested: $20,000
Equity held: Each of the 10 farms involved -- including Judge's -- has 100 shares
Salary: None to date
Education: Two years at Ohio Wesleyan University
Other companies: Owns a dairy farm
Last job held: Strategic land-use planner for Franklin County in Massachusetts
Vermont Milk Producers Inc. Income Projections
Revenues $268,000 $666,000
Operating expenses $315,000 $318,000
Pretax income ($47,000) $348,000
WHAT THE EXPERTS SAY
John Rowan, director of dairy and frozen foods for Mel Markets-Foodtown, a 16-store chain in Long Island, N.Y.
I recently turned down a premium milk like VFF for our chain. Based on my 30 years of experience in the retail business, I think VFF milk will be accepted only in large cities where high prices are the norm and upscale consumers seek out newer, trendy items. Some wealthy suburban areas may provide additional sources. But the majority of the suburban trade will refuse to pay more for an item that is generally consumed as an ingredient in other food products.
VFF will not be purchased for children's consumption because of the price and the fat content, since many consumers in our market are going out of their way to avoid fat. And without additional financial resources, it would seem that the advertising needed to reach potential customers will be sorely lacking. Word of mouth is not enough to make sales jump 150% in one year, and further, it's risky to think that operating expenses will remain basically the same as they were the first year. To create a currently nonexistent category and cultivate demand is a costly endeavor at best.
Richard Bennett, dairy adviser for 15 years with the University of California in Santa Rosa
VMP's biggest challenge is convincing the customer that its product really is different. The milk quality in this country is good, and most people can't differentiate between milk tastes. Producers have tried to keep milk tasting fairly bland, and most milk drinkers grew up with that taste and like it. VMP is going to have to educate its customers. Maybe one panel on the carton could include a narrative about milk taste and some instructions on how best to handle milk.
On the other hand, I know of only a few people in the country who are trying to do this. Creating a product that has a quality difference and comes from the bucolic family farm has an appeal. Our society has matured to the point where getting enough food is not a question for most of us. Now the consumer can apply some external values to food purchases, like whether food comes from family farms versus multinationals or is environmentally friendly versus environmentally harmful. Those are selling points that agriculture has not yet exploited, but certainly a lot of other product developers have, to great benefit.
Mack Graves, president and CEO of Coleman Natural Meats, a $30-million producer of all-natural meats based in Denver. Graves previously assisted Frank Perdue in creating a brand
name in poultry
To create a brand, the product has got to be better, and it's got to be different. In any food product the preeminent difference is taste. VMP is on the right track because it says its milk tastes better. That's exciting, and for that reason alone VMP may have a viable business. But it can't create a business just to return more money to farmers. First, the product has to be better for the ultimate judge -- the consumer.
I question whether there's a match between the customer VMP is going after and whole milk. I have a feeling the environmentally conscious consumer VMP targets is drinking more skim and low-fat milk. Now if VMP could find a way to make skim milk taste better, it would have a double benefit and a much larger market.
Where is VMP vulnerable to competition? Price. Although consumers may have only a vague notion of what their milk should cost, they will surely know when a more costly milk sits right beside the cheaper generic label. Milk is scrutinized by the shopper for shelf life and price. That means VMP has to document its product's difference so clearly that the consumer doesn't even have to think about the price difference. Maybe it should say on each carton, "This milk was packaged on June 2, at 10 a.m.," so the consumer knows exactly, in terms of hours, how fresh it is. All in all, exciting, but VMP still has lots of details to work out. My only advice -- ready, fire, aim.
Hilary Glantz, president of Vermont Country Milk, based in Shelburne, Vt., a one-year-old processor of premium milk distributed to supermarkets, small groceries, and cooperatives throughout Vermont
It's risky to premiere with whole milk alone. We don't find whole milk is the best seller. We sell 10% more 2% milk than we do whole, and the same amount of skim as whole. I think people are looking to reduce fat in their diets.
VMP needs to do a lot to make sure that the product it's taken such care to make reaches the customer that way. I question whether Crowley, a plant set up to produce milk as a commodity, can process premium-quality milk, given all the systems and quality controls VMP will impose on its product. And can drivers, used to delivering commodity milk, handle VFF's special requirements? Drivers will have to oversee everything from special temperatures maintained on the trucks to rotating the product in the grocery cooler to reporting back if an account is mishandling the milk.
Last, I think VMP's pricing strategy is bold -- asking almost 50¢ more of the consumer. We sell our premium milk for only 20¢ more for a half gallon, and we've found that can be a hard sell at times.