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Considerations for Establishing a Dairy Co-Packing Business

For established dairy food processors, offering co-packing services offers the opportunity to fully utilize resources and generate additional revenue. This article reviews considerations before venturing into co-packing.

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Updated:

September 25, 2025

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Table full of cheese products. Photo credit: BigStockPhoto.com/NejroN Photo

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Are you already manufacturing dairy products with the desire and potential for expansion? You may be interested in becoming a co-packer for other dairy food entrepreneurs. A co-packer is a food processor with additional manufacturing capacity that offers its manufacturing services to other businesses for a fee.

Reasons a Dairy Producer May Hire a Co-Packer

Partnering with a co-packer to launch a line of value-added dairy products can be advantageous to dairy producers for several reasons. These include

Not incurring the cost of building and operating their own processing facility.
Reducing the possibility of a negative impact on the dairy farm operation/business stemming from a lack of managerial and/or labor availability.
Lack of dairy processing expertise, experience, or a lack of desire to develop the expertise.

Established small or farm-based dairy processors may also pursue working with a co-packer. For instance, if they would like to add a product to their brand that they do not have the expertise to make, or would like to make an innovative product and establish a market before making a substantial financial investment.

Advantages of Offering Co-Packing Services

For small or on-farm dairy food processing businesses, the advantages of offering co-packing services include,

Fully utilizing dairy processing facilities and equipment
Providing more opportunities for permanent, full-time work
Improving or stabilizing cash flow
Helping dairy farms realize their goal of launching or scaling up their value-added dairy food venture.
Supporting the dairy industry

Challenges That May Accompany Offering Co-Packing Services

Dairy processors contemplating adding co-packing services to their business should thoroughly consider and develop plans for mitigating the potential risks that accompany co-packing. These risks include,

Transportation of raw ingredients and/or finished products
Milk segregation requiring additional storage and handling procedures
Added controls for receiving raw ingredients to minimize potential contamination
Revision of the food safety plan
Scheduling to maximize production and minimize risks
Plant management to balance the added workload and demands
Facility sanitation and maintenance that accompany additional production

Business Considerations

As with any significant change to a business, thorough research and planning should take place before taking on clients. The following questions should be explored.

How much milk can be processed? The number of clients and the amount of product that you can process as a co-packer will need to be determined. The capacity of processing equipment (pasteurizer, vat) and raw milk storage will impact this.
What products can you make? At the highest level, you will need to determine whether you will process Grade A products, Grade B (or manufacturing grade) products, or both. As a reminder, processing Grade A products requires that your facility be constructed to meet Grade A requirements and inspected as such (the specifics of this are beyond the scope of this article).

Additionally, as an existing processor, you have the expertise to manufacture the same products that you currently process for your own business. However, it is important to distinguish between product categories and specific product types. For example, skilled manufacture of hard cheeses requires different expertise than that needed for bloomy-rind cheeses. Alternatively, specific products may require special equipment or facilities, such as a temperature-controlled warm room for cup-set yogurt.

The variety of dairy food products requires familiarity with the Code of Federal Regulations (CFR) and standards of identity for individual products. Therefore, it is important to define clear boundaries about the products (and their characteristics) that you can make.

Similarly, when defining or expanding the list of products that you will co-pack, focus on establishing and growing your co-packing business around your strengths. As Jason Frye of The Creamery at Pleasant Lane Farms shared, "If you have found your niche and determined that you do a great job of making a certain product, then focus on that product. Grow your business around your strengths, then branch out. Your expertise related to manufacturing that product or product line may be invaluable to a customer who is relying on you to create a superior product for their label."

What product package formats can you provide? In addition to the products that you can make for clients, give consideration to the product packaging and formats that you can offer. For example, if you offer co-packing for yogurt, can you package the product in individual single-serve containers, bulk containers, or pouches?
What additional services will/can you provide? In addition to product processing, clients may want to work with a co-packer that can assist or facilitate other aspects of a value-added dairy food business. Desired services may include product formulation, packaging, aging, cut & wrap, transportation/distribution, marketing support, or new product research and development (R&D).
Will you need to hire additional help? Adding co-packing services, while more efficiently utilizing equipment and facilities, may require you to hire additional employees. To determine your need for additional help, think about how much additional processing time will be required for the products that you intend to offer your services for, the processing skills you have, and those that will be needed. With a framework of needs determined, you will be able to decide whether to pursue hiring additional part-time or full-time assistance.
What is your minimum client contract timeframe or quantity? As outlined in the article Considerations for Hiring a Dairy Food Co-Packer there are several factors impacting contract length, such as experience manufacturing the product, product uniqueness, or the need to develop the product formulation. Especially if performing R&D for clients, you need to be able to recoup those non-tangible costs

Financial considerations

Part of your planning process prior to offering co-packing services should be to fully consider the financial implications associated with providing this type of service for a fee. Consider the following questions:

What does it cost to manufacture the product? When providing a service to others, you need to cover fixed and variable costs. It is important to allocate your fixed costs (depreciation, interest, repairs/maintenance, taxes, and insurance) to co-packing clients. In addition to overhead, variable costs may include:
- Milk and/or finished product transportation costs
- Conversion costs
- Aging fees
- Laboratory and testing fees
- Cold storage fees
- Certifications and third-party audits
- Miscellaneous expenses

You should have cost estimates for products that are currently being processed that only require a slight adjustment based on the individual client agreement. New products will require the development of specific, detailed budgets.

What is the product’s market price potential? You should also give thought to the marketability and price potential of the client's product. Are you being asked to co-pack a product with a low sales forecast or a low price point? Is it a unique product with little insight into market demand? It's not enough to make a product because you have the equipment and skill to do so. Do not risk the ability to process your own product(s) by taking on client products with questionable sales potential. You may find that, as a co-packer, clients may rely on you for market information and assessment – don't be afraid to ask a potential new client to share their market research.

Will the client be able to pay for services before a product goes to market? As a co-packer, you will incur the variable expenses associated with product manufacture (energy use, labor wages, etc.). It is important to have a thorough understanding of your business’s cash flow structure. This will assist you in determining your fee structure and how you may wish to have clients pay for co-packing services.

Fee structure and payment schedule

The fee structure for co-packing services may be influenced by several factors. For instance, it may differ based on the type of product, quantity of milk being processed, or uniqueness of the product. Key factors that the fee structure may cover include:

Research and development
Product manufacture (including sourcing of cultures and other ingredients)
Ageing and/or storage
Marketing

For example, you may manufacture a cheese and give the client the green cheese for them to age, or you can age and convert the mature cheese, giving the client a retail-ready finished product.

Also, consider how you want or need to be paid. Your business’s cash flow needs may lead you to require clients to pay a portion of the co-packing fee upfront, or at different stages throughout the course of a manufacturing run, in addition to a payment upon completion. Payment schedules (monthly, quarterly, etc.) may be ideal for clients for whom you are manufacturing larger quantities on a regular basis. The fee structure and payment schedule should be determined by both your needs and those of the customer.

Positioning Yourself for Success

Communication is fundamental to developing successful co-packer-client relationships. Dairy food processing is complex, and when you make products for other farms or brands to market under their label, you must understand their expectations for everything from product quality and characteristics to safe manufacturing requirements and be confident that you will be able to meet them.

Questions to expect from a prospective dairy farm client (as adapted from Berry, 2014, and MA Dept. of Agricultural Resources)

Can you make the product(s) they want?
Can you segregate the dairy's milk?
What kind and size of raw milk storage is available?
How much milk is used per processing run?

How many units of product can be processed per run?

Will a confidentiality agreement be required?
Which party is responsible for sourcing ingredients?
Do provisions need to be made for the segregation of ingredients?
What are each party's requirements for quality assurance and quality control?
Who will source packaging materials?
Will additional regulatory requirements accompany the added production?
Do additional sanitation requirements accompany the products?
What additional records need to be kept and who will have access to them?
Are there requirements surrounding traceability of the product(s)?

See the article Considerations for Hiring a Dairy Food Co-Packer for more information and greater detail regarding topics that prospective co-packing partners should discuss.

It is important that co-packers and dairy farm clients trust one another and view each other as partners. Both parties need to have confidence that the other is fulfilling their responsibilities as agreed upon, will work together to solve problems, and is working to achieve product success.

Licensing and Regulatory Considerations

Whenever making changes to a dairy food processing operation, whether the facility or processes, you should meet and discuss the proposed changes with your inspector or other relevant regulatory officials. It will be up to you to determine if any additional regulatory requirements need to be met.

Federal, state, and local regulations
- Pasteurized Milk Ordinance
PDA Milk Processing Permit Application
Third-party food safety audits

Other Considerations

Business planning. Having a business plan is important for several reasons, including providing a roadmap for decision-making, assessing strengths and weaknesses, and determining business viability (Cornelisse and Kime, 2024).
What are your co-packing goals? For example, do you want to work with start-ups or established clients? If so, consider the following questions.
- How much milk can they provide, or want to provide?
- How many units do they want to have processed?
- What are their plans for future processing needs, such as scaling up, maintaining, or scaling down their value-added dairy business venture?

Understand farm/client goals. The dairy farms that approach you for co-packing services will have goals of their own. It will be helpful to understand the farm or business's mission or vision, short- and long-term business goals, and how they define their brand. For instance, do they want to position themselves as providing unique or niche styles of cheese? Are they attempting to market to a specific consumer audience?
Develop products (cheese, etc.) that are a fit for dairy farm clients. The characteristics of the milk a dairy farm client supplies may differ considerably from your own milk supply. Therefore, you should understand the types of products that can be made with a variety of milk characteristics. Work with the client to develop products that utilize the attributes of the milk provided or meet the goals of the client to reach a desired market.

Is your co-packing facility a "fit" for the dairy farm client? You need to determine whether the goals of the potential client align with the capabilities and goals of your co-packing enterprise. Don't be afraid to turn away a potential client if you feel there is not alignment. Taking on less-than-ideal clients simply to launch or grow a co-packing business may prevent you from accepting clients who are a better match.
Contracts. Whenever entering into a fee-for-service arrangement, having a written agreement is advisable. This topic and contract aspects were also covered in the article Considerations for Hiring a Dairy Food Co-Packer.

Summary

If you have surplus dairy food processing capacity, offering co-packing services for other new or existing value-added dairy foods businesses may be a profitable addition to your business. Co-packing can benefit dairy farmers by reducing operational risk or overcoming gaps in processing expertise. Existing dairy food processors can more fully use their facilities, enhance cash flow, and offer support to dairy farmers wishing to diversify their business.

There are numerous financial, regulatory, and logistical aspects to consider before introducing co-packing services. Success will require trust and clear communication about each party’s responsibilities and short- and long-term goals.