What You Need To Know About Starting a Value-Added Dairy Business

- [Host] Hello and welcome.

Hopefully you can all hear me all right.

Welcome to the inaugural webinar presentation by the recently formed value-added dairy working group at Penn State Extension.

This team is comprised of Sarah Cornelisse, Dr. Kerry Kaylegian, and Dr. Ginger Fenton.

During the presentation, please use the chat feature that's located at the bottom of your screen to ask questions.

We will respond to questions at the end of the presentation.

A link will be shared in the chat box where you can access the information presented in the slides.

Please note this webinar is intended to be an introduction to value-added dairy.

Sarah Cornelisse will begin our presentation with an overview of value-added dairy.

- [Sarah] Thank you.

I was just notified that my sound was off.

I apologize for that.

I will back up really quick and start over.

Okay, starting over. (laughing)

So if we start by taking a look at what value-added dairy is.

Value-added is the incremental value that is realized by a producer from an agricultural commodity or a product as a result of a change in physical state such as processing a product, differentiated production or marketing, or through product segregation.

From a processing standpoint, there are many types of dairy products that can be made from familiar products such as cheese, ice cream, or yogurts, to new to us products, for instance, (mumbles) is an emerging dairy product in the US, one that is more well known by Europeans.

Organic, grass fed, or animal type are all ways of differentiating products under the production umbrella.

And finally, differentiated marketing can be accomplished through on farm or farmer's market CSAs or the use of branding programs such as the PA Preferred program.

Before starting a value-added dairy business, you want to make sure you understand what's motivating you as your motivating factors will influence how you build this new business.

In 2017, a needs assessment was sent to 289 businesses in Pennsylvania and the top four motivations for starting a (mumbles)

or farmstead dairy processing operation were maintaining a small family operation, improving the financial stability of the dairy business, having the passion for the dairy product processed, and providing a business opportunity for current and future generations.

So think about is one of these your motivating factor or do you have a different motivation for considering a value-added enterprise?

The same needs assessment asked about the most challenging aspect of operating a value-added dairy business.

The top three challenges identified were knowing or understanding relevant government regulations, the filling testing and other regulatory requirements, and marketing.

As mentioned previously, improving the financial stability of the dairy business was the second most highly ranked motivating factor for starting value-added processing and over 60% of farms that responded to the needs assessment indicated that more than 50% of their gross farm revenue came from value-added dairy product sales.

This highlights the potential importance of a successful value-added enterprise to the whole dairy business when value-added is pursued.

Along the same lines, in 2011, a survey was done of Vermont grass based livestock operations and the subset of dairy data was analyzed and three groups were compared: those selling value-added, those interested in value-added, and those not interested in value-added.

Average sales from the value-added dairies was just over $75,000.

On a per cow basis, the value-added operations had the greatest profit for cow while profit for cow is the least in those dairies who were interested but not yet doing value-added processing.

Before diving into decisions on products for marketing, take the time to thoughtfully consider some important start up questions beginning with whether value-added is something you really want to do.

How driven are you to start a new endeavor that while closely aligned with dairy farming, will be a complete new world?

Are family members or key employees in agreement to pursue a value-added enterprise and is this right for the farm?

These are some questions that Ginger will be addressing more later on.

Whether you have or have access to people with skills and knowledge necessary in key areas for the value-added business.

From processing aspects which Kerry will cover to marketing or public relations and customer service which may be new to you.

What can you do and where might you need to hire additional people or expertise?

Finally, spend time on the financial aspect to determine what your profit potential may be and whether it is great enough for you to pursue with the risks and responsibilities that come with operating a value-added dairy business.

There are barriers to starting a value-added dairy enterprise.

The most tangible is an investment in facilities and equipment.

What any one individual's investment may be will be based on the specific product that you want to process as well as what your current facilities and location have to offer.

You may have to start from the ground up or you may be able to retrofit existing facilities to meet your needs.

Less tangible are the additional labor requirements and the responsibilities that come with dairy processing.

You have to be prepared to work with multiple agencies such as local zoning and regulators.

Processing, marketing, and selling any food product brings with it risk and liability.

Food safety and appropriate and adequate risk management is essential.

Finally from a marketing perspective, you have to flexible and willing to adjust your products as dictated by your consumer markets.

If you have products that no one wants to buy, you'll quickly be out of business.

Thorough planning includes developing and understanding dairy product market trends.

While I'll be reviewing national consumer trends, it's important to also research and understand more localized or regional trends.

Consumption of dairy continues to increase from approximately 540 pounds per person in 1975.

We're now at 646 pounds per person in 2018.

At the household level, dairy expenditures are approximately 1/3 fresh milk and cream and 2/3 other dairy products which would include processed dairy products such as cheese, ice cream, yogurt, et cetera.

We're all aware that fluid milk consumption continues to decline, however, we can see here how cheese consumption has increased over this same time span from approximately 14 pounds per person in 1975 to about 38 pounds per person in 2018.

Looking at total fluid milk consumption however fails to reveal shifts there occurring at the milk type level.

If we look at fluid milk sales by type, we see that whole milk and flavored milk are increasingly being purchased and consumed.

From 2014 to 2018, whole milk consumption increased five pounds and now stands at 49 pounds per person.

2% milk consumption has decreased and is now less than whole milk.

Consumption of flavored milk was 13 pounds per person in 2000 and rose to 14 pounds in 2018.

For the year July 2018 to July 2019, USDA Ad Marketing Service reported that sales of conventional whole and whole flavored milk increased 3.6% and 10.4% respectively.

Additional, AMS estimated that total organic fluid milk sales increased 4.6% over this time period with increased sales for whole milk, 2% milk, and flavored milk.

Looking at consumption of yogurt, butter, and cheese, we can see that there are general increases in per capita consumption for each of these types of dairy products as well.

Since cheese is a popular dairy product for many new value-added dairy businesses, it's interesting to take a closer look at consumption trends by cheese varieties.

While cheddar and mozzarella are the most consumed types of cheese, several others have been seeing double digit growth over the past 10 years.

American other than cheddar, Munster, and Hispanic cheeses have all seen per capita consumption increased by more than 40% over the past 10 years.

Only one cheese type, Swiss, has seen a decrease in consumption.

Continuing our look at national market trends from a consumption standpoint, yogurt stands out along with cheese as the products that are driving the increase in dairy consumption.

Yogurt has experienced a 570% increase in consumption over the past 40 years.

And while consumption has declined since 2014, we've seen great diversification in the styles of yogurt products available to consumers.

Butter is also making a comeback with consumers as demonstrated by the 35% increase in consumption.

Ice cream is the other dairy product along with fluid milk that continues to experience a national downward trend in consumption.

Remember that what I have presented here were national product trends.

What you see regionally or locally may differ.

To highlight another aspect of value-added dairy, consumer surveys from 2018 and 2019 indicate that consumers have increased the frequency of consumption for goat and sheep's milk cheese.

Of those who ate these types of cheese in the past three months prior to the survey, in 2018, 18% ate goat and sheep's milk cheese multiple times per week.

This increased to 24% in 2019 and I have those numbers circled.

As consumers are becoming more familiar with dairy products from other dairy animals or are looking for new eating experiences, we see consumption increasing.

I want to wrap up market trends by looking at two aspects of value-added dairy in Pennsylvania.

First, from a production perspective, we see an overall increase in milk goat numbers.

Recall that producing milk or processing dairy crops using goat or sheep milk qualifies as value-added under the USDA definition.

Second, permit numbers for raw milk production bottling and cheese manufacture has been fairly steady over the past few years.

Keep in mind that raw milk production and manufacture permits are just a subset of all permits for dairy food manufacture, and therefore, isn't a complete picture of the value-added dairy in Pennsylvania which would also include pasteurized milk bottling and product processing.

Market trend information can be gathered from numerous sources and can address trends from several perspectives.

From national production and consumption data collected by the government, to consumer trends shared by marketing services such as Neilsen and Mintel, industry associations and publications are valuable for information on specific products or in geographic regions.

Social media can be a vehicle for staying on top of current hot topics as well as getting the (mumbles)

on consumer needs and wants.

Kerry will now discuss product processing.

- [Kerry] Okay, thank you, Sarah.

So while we do the hopefully graceful transition from one screen to the next.

Hey, that worked actually great.

So good afternoon everybody.

I'm Kerry Kaylegian.

I'm over in the Food Science Department.

I specialize in processing.

And what I'm gonna give you today is probably maybe a 10,000 foot view and maybe the 30,000 foot view of dairy foods processing 'cause there's a lot that goes on.

We're starting with milk which is a really versatile ingredient.

We can make a lot of different products out of it, but it's also important to realize that it's a delicate product and through mishandling and poor quality, we can get off flavors in the raw milk.

We can get them in the finished products.

We can get poor shelf life and poor manufacturing characteristics.

But another thing to think about is that milk has been associated with pathogens which are organisms that cause illness among consumers.

So we want to make sure that everything we're doing as I talk about processing that we do in the best possible way to make sure that our consumers don't get sick.

So starting with this really wonderful versatile ingredient, we can do something as simple as make fluid milk products.

These include beverage products.

The first thing we're gonna think about is milk.

If we do whole milk, we can standardize it to 3.25%.

We can make skim milk.

We can do two or 1%.

We can make flavored milks and I'm gonna talk a little bit more about manufacturing of fluid milk in just a minute or two.

We can also make cream and half and half which can be used for coffee or ingredients at home.

We can freeze milk.

We can make ice cream, gelato, sherbet, and a while host of wonderful frozen deserts out of it.

We can ferment it and make cultured products, things like yogurt.

Again, in the yogurt category, a very diverse category.

A whole range of fat contents.

They can be spoonable, they can be drinkable.

We're seeing more specialty yogurts such as Greek yogurt, Australian yogurt, Icelandic skyr, so a lot of subset in the specialty yogurt category.

We can make sour cream which can be used as the base for dips.

And likewise, cream cheese can be made and used as the base for flavored spreads that we can go out in the marketplace with.

The category of cheese itself is a huge category.

I just got done teaching a four day short course and we barely got to the 10,000 foot view of cheese making.

So I'm gonna kinda introduce the category here and some of the key aspects of cheese making.

But as you can see from this list, there's a lot of different things to choose from.

And a cheddar cheese is different from a Swiss cheese.

It's different from a mozzarella, from a blue cheese.

You get the idea.

So we've got a lot of different ways we can go from making cheese.

We can also look at concentrated products, seeing more people making artisanal butter in their small shops.

And on a more industrial scale, things like dry milk and whey ingredients are made from milk.

So just this slide illustrates all of the different directions you can go starting with that same batch of milk.

So that being said, before you start processing, you really want to know the target characteristics of your final product.

Because even if you're going down to make one particular product, there's gonna be different ways for you to get there, different things you want to be thinking about.

So I'm gonna cover three products today.

I'm gonna cover fluid milk, I'm gonna cover ice cream, and I'm gonna cover cheese.

So let's start with fluid milk.

And the characteristics of those products and your anticipated sales outlets are gonna dictate a lot of things.

When I say anticipated sales outlets, you may be selling at farmer's markets, you may be selling to a family consumer audience, or you may be selling to a white table cloth restaurant or a high end shop.

So some of those are gonna dictate those products that you're making which are gonna dictate your ingredient choice.

The products you're making are gonna tell you what you need for your manufacturing procedure.

And they're gonna tell you what you need for regulations and standards.

And the dairy industry is probably one of the most highly self regulated industries in the food processing area, so we have a lot of things you need to think about and standards to be aware of depending upon what product you're making.

Once you've decided what product you're making and how you're gonna make it, that's gonna help you determine what equipment you need, what your facility, and your storage, and distribution needs are, both for the type of equipment as well as the capacity.

If you're gonna make 100 pounds of cheese once or twice a week, it's gonna be different than if you're making 1,000 pounds of cheese every day as far as what your facility needs, your storage distribution.

If you're selling ice cream, you're gonna need a lot more frozen storage and frozen distributing trucks.

If you're making blue cheese, you need an area where that blue mold can grow as opposed to making cheddar.

So you're gonna have some different facility and equipment needs based on that product.

But everything you do up until this point gonna try and give you the best optimal ingredients and manufacturing situation to reach your target flavor and texture and a long shelf life for your products 'cause that's what your consumers are gonna look for.

You want to know what that product is gonna be.

You want to deliver on that flavor and texture consistently and you want that product to last as long as possible.

So just a really brief overview of these products.

So when we think about manufacturing fluid milk, these are some things I want you guys to consider is first of all, your product.

How are they gonna use it and what's the fat level?

Most when we're looking at fluid milk, we're looking at the use of a beverage, but are you selling whole milk that you're bottling just straight off the farm or do you also have a market for skim milk or one or 2% milk where you need to kinda standardize that?

Is there an interest in creams or half and half where you're gonna need to kinda concentrate that fat?

The use of flavored milks is quite popular.

I think most of us grew up with strawberry and chocolate milk, but we didn't see many other flavors.

And now, you can go out to the grocery store and there's a whole host of different flavors out there.

Strawberry mint flavors, peppermint flavors.

Things like seasonal flavors.

Egg nog actually.

I grew up with egg nog, so egg nog's been out there for a long time, but we're seeing much more interest in seasonal flavors in limited editions.

Limited editions has been one really great way for small processors to kinda get repeat business.

Hey, this part of the year, we're gonna have this flavor.

And in the spring when the strawberries are coming in, we're gonna have fresh strawberry milk or fresh peach milk.

So that's something you can think about bringing in.

You also need to consider what kind of packaging you're gonna do.

Are you gonna do gallon bottles for the family?

Are you going to do small individual bottles for consumers?

Packaging materials will also be important.

Even if you're choosing plastic, you can look at clear plastic which shows the product, but it also has some potential for having some light deteriorated flavors.

You can do translucent which is traditional packaging.

You can look at opaque packaging, the opaque white and yellow containers you may have seen on the market.

Those are specifically there to protect against light off flavors which is the exact opposite of those people marketing in clear containers 'cause consumers want to see the inside.

So these are some of the things you need to think about and then depending upon the equipment, the type of container you have, will dictate the type of fillers that you need.

Again, regulations come into play.

If you're gonna make a skim or a 1% milk, you may need to fortify that with vitamin A or D to get back to the nutritional balance of what that whole product is based on regulations.

So being aware of what those regulations are is going to be important.

So I want to take a look at just a simple flow chart for manufacturing fluid milk.

We're gonna start with raw milk.

It's gonna go into some type of holding tank.

We're gonna pasteurize that.

As we look at pasteurizers, we have some options.

We can go into a vat pasteurizer, so this is a batch pasteurizer.

Comes in all different sizes.

Or we have a high temperature short time unit.

This is a continuous pasteurizer.

Milk is flowing through.

You get a lot higher volumes out of it, but again, different equipment costs, different footprint in your facility.

The pasteurization conditions are regulated.

We have a certain time and temperature condition that has been determined to kill the most heat resistant pathogen.

And whether you're in an HTST system or a vat system, there are different time and temperature conditions you need to have.

Pasteurization equipment is very specific.

We've got a lot of regulations, so make sure you're working with your inspector that meet all of the regulations for that equipment 'cause there's some design features that need to be there according to our regulations.

So once we've pasteurized, the most simple thing is to go into filling and you can go into storage and distribution.

Now, should you want to homogenize, you now have to have a homogenizer before the filling so that adds a piece of equipment.

But it also means you may want cream line milk or you may want the consumer to get the same amount of fat at the bottom of the container that they do at the top and that's done through homogenization.

If you are packing into milk cases or you want to do be doing glass bottles, you now have added a case or a bottle washer to that.

If you want to add flavors, now you've got a flavor inventory, whether they're refrigerated or dry storage.

Then you have some type of a blending tank that you need to have before you go to the pasteurizer.

Should you decide you want to separate, make low fat milks or creams, you've now added a separator to that equipment.

You've got two streams, the cream and the skim stream, that then need to be brought back and standardized.

When I say that, if we're gonna make 1% milk, you're gonna blend the correct ratio of skim milk to cream to give you 1% fat or 2% fat.

And again, as I mentioned, you may need to fortify this with vitamins and then homogenize.

So you can see how something that we think as being really simple of just putting milk in a container can get to be a little more complicated depending upon what you want to do.

And knowing what your markets are, what products you want to make, is gonna give you a lot of good information so that you pick the right equipment right from the beginning.

So the next product I want to talk about is ice cream.

And when we're looking at ice cream, we also again, you want to look at your target product and composition.

What do you want to make?

Where are you gonna sell that?

Are you gonna make ice cream?

Are you gonna make something like gelato, or frozen custard, or sherbet, or soft serve?

You gonna sell that right in your own backyard or are you gonna distribute that?

When we look at ice cream, I get calls a lot from people saying, "Can you send me a recipe for ice cream?" And when you're working on a really small scale or a home scale, you might look at a recipe where you're taking so much milk and so much cream and mixing that together.

But when you move to a commercial scale, you want to make sure that your composition is the same every time.

You want to pick a target fat content and a target sugar content and solids.

And you may decide you need stabilizer and emulsifier if you're doing a lot of storage and that product's gonna last a long time because on a day to day basis, the milk coming off your farm may have a slightly different fat content or your cream may be 40% fat one day and 42% fat the next day.

And if you blended the same recipe, you may have varying composition in your finished products.

If you want to have 14% fat in your ice cream and your cream is a little bit low today, then you're cheating the consumer by not having that level of fat that you want to have.

If your cream is 44% and you use the same amount, now you've got more fat so the consumer is kind of benefiting from that, but you're losing money.

So standardizing your composition to a percent fat, a percent sugar, and percent solids is the way to go and then you adjust what ingredients you need on a batch by batch basis.

So starting to look at what that product is gonna be, what that composition is gonna be is a place you want to start.

Then you want to consider what your flavor line's gonna be.

Despite the fact that vanilla is the most highly purchased product when it comes to ice cream, you're probably not gonna have a successful business just selling ice cream.

So are you gonna look at having other flavors?

Are you gonna add nuts?

Are you gonna add variegates or a swirl like this strawberry swirl here?

Are you gonna put inclusions in like peanut butter cups, or cookie dough, or pecans in a butter pecan?

Once you start dealing with nuts and things like cookie dough, you get into nuts and wheat which bring in allergens and there are some specific regulation on how to deal with allergens, how to store them, how to incorporate them so that you're not cross contaminating the products that don't have allergens 'cause you don't want somebody that's eating your chocolate to get a peanut allergy from mishandling things.

Again, with ice cream, even more so with milk, we see seasonal and limited editions.

The holidays always bring around a pumpkin pie or a cinnamon.

Again, limited editions, so ways to bring back customers.

So a lot of things that you can think about when you're manufacturing ice cream.

Again, packaging and regulations come into play.

Packaging, are you going into a dip shop where you want to package in three gallon containers?

Or are you packaging in pint containers?

Or are you just having a store where people are gonna come in and buy soft serve?

All of these things need to be considered as you're looking at putting together your facility.

This is a general slide.

This is actually an example from another course that we teach on chocolate peanut butter ice cream.

It's a flow chart.

So just the things to think about.

Here, we're receiving our ingredients.

We're receiving dry ingredients such as our milk powder and sugar.

We're receiving refrigerating ingredients such as cream and our peanut butter variegate.

And then we have our raw milk receiving and then our dry packaging.

All of those need to go into the appropriate storage area, so making sure your facility is large enough to accommodate all of these things.

When we go into the blending tank here where we're blending all of our ingredients.

We're blending the cream, we're blending a stabilizer, our nonfat dry milk for our solids.

But in this particular example, we're making a slurry from cocoa, and sugar, and water to add that.

So now, you've got another blending tank.

You've got a clean water source coming into that.

So we've now added a blending tank in this operation.

We're gonna go through a pasteurizer and homogenizer.

Usually, you're gonna go into an aging tank to allow all the ingredients to hydrate properly particularly if you're using a stabilizer and an emulsifier.

If you're doing a continuous freezer, this is the equipment.

We bring in filtered air and it's a continuous freezer and ice cream comes out the front.

You may also be looking at a batch freezer.

This is something you would see in a small ice cream shop where you're just going based on a couple of gallons at a time and the ice cream comes out the front.

If you're going into a batch freezer, you may have to add the variegate by hand or the inclusions by hand.

If you're doing a continuous process, you may be able to have another piece of equipment called a fruit feeder or a variegate feeder that helps for that flavor addition.

Then again, going into your filler, you're gonna go into a hardening room.

You want to make sure that that really wonderful texture you just made in the freezer is going to stay with you, so you're gonna go into a hardening room, get that really well frozen, and then into frozen storage.

So a lot of different things to think about when we're making ice cream.

Cheese, same kind of thing although cheese to me is more complicated.

I spend a little bit more time working with cheese makers.

The first thing that's gonna dictate what you need is the cheese variety.

This picture shows you there's a cheddar cheese over here.

There's what I think is a flavored cheddar right up here.

There's a Gouda.

There's a smoked cheese.

There's a Swiss cheese that has eyes in it.

There's a blue cheese that you need to have blue mold growing.

There's a brie type that has a white blooming mold growing on it.

And depending upon which types of cheese you're gonna make is gonna dictate the ingredients and the cultures that you need.

You're also gonna start from the beginning and look at your milk quality and composition.

We see you can make it from different milks.

You can make it from mixed milks, but your composition, your percent fat and protein is going to be important as well as your milk quality.

Cheese is something we're gonna age out for a period of time and your initial bacteria counts and somatic cell counts are gonna be important.

High bacteria, high somatic cell bring enzymes that cause deterioration later on.

So if you're making cheddar cheese curds that are gonna sell in a week, you might not have the same issues that if you're making something like a blue cheese that's going to be at least two months old before you eat it or if you're making a cheddar cheese that's gonna not be sold until four years.

If you're a small herd and you're on grazing, you may have, late lactation milk has different characteristics that you need to take into account as high somatic cell count, it takes a little bit longer for it to coagulate.

So understanding these things will help you at the cheese vat.

Depending upon the type of cheese and what you decide if you're gonna make a raw or pasteurized cheese.

Gonna help with the requirements for your facilities.

Again, we have all kinds of different pH targets and special applications depending upon the type of cheese we're making.

And regulations.

We have different regulations for cheddar cheese versus blue cheese, raw versus pasteurized.

So just be aware that these regulations are out there.

This is a really simple flow chart of how to make cheese.

You start with raw milk.

We may pasteurize or heat it.

If you're making cheese from raw milk, there's a legal requirement that it must be aged for at least 60 days before it can be sold.

So that's something you need to consider.

We inoculate with a starter culture and a lot of nonstarter bacteria.

If we're making Swiss cheese, we're gonna put in the culture that makes those eye holes.

If we are making blue cheese, we're gonna add the blue mold up here.

We're gonna give that some time for the cultures to grow.

We're gonna add some rennet which is an enzyme that helps it coagulate.

We're gonna cut the curds.

We may cook them a little bit.

We're going to, unlike Miss Muffet, we're gonna sit down and separate our curds from our whey.

We may have to do, we're gonna do some type of texturing or potentially some type of salting.

All cheeses are salted.

They may be dry salted or they may be brined.

And then we're gonna form the cheese.

If we want to put cheddar cheese in a block like this picture up here, that's gonna have one kind of an aging characteristic versus making a cheddar cheese like this that's aging out on shelves over time.

This is a naturally rinded cheddar.

Different flavor profiles, different characteristics, different price points.

If we're making a Swiss cheese, it's gonna take a couple months, certain conditions for the bacteria to make the gas to make these eye holes.

This is the piercing of blue cheese.

There's a needle right here that's being punctured to allow air to get inside for the blue cheese to grow.

And this is mozzarella.

This is going through what we call a mixer molder.

This is stretching the curd to give you those characteristic strings of a mozzarella.

So depending upon what you're making is really gonna kinda dictate what you have in your facilities.

So with the last few minutes of my section, I want to just briefly talk about regulations.

We have both federal and state regulations you need be aware of.

Federal regulations, we have product standards called the Code of Federal Regulations.

So there's a standard for yogurt that says you need to have certain bacteria.

There's a standard for cheddar that says you need to have a certain moisture fat level.

So be aware whatever product you're making that you need to go out and see if there are regulations that apply to your products.

All food manufacturers have to register with the FDA.

This is a free registration.

It's biannual, but it needs to be done.

And then we have things like the Food Safety Modernization Act.

These are regulations for food safety purposes.

They include things like having everybody be trained in food safety knowing how to do their job, having all plants follow good manufacturing procedures, making sure the documentation is correct, having a food safety plan that looks at the hazards associated with the particular food that you are processing, and how to manage those hazards, what you need to do for any kind of sanitation or allergen prevention, and routine testing for your environment or your products.

There are also other rules that apply to animal feed.

So if you're sending a lot of waste products to be used by pigs for feeding, you need to be aware of those.

You need to be aware of transport rules and there are some other rules out there that you may want to be aware of.

We also have regulations in the state.

The state is gonna be your person that comes out and approves your facility.

So looking at the Pennsylvania Chapter 59a regulations to see what you need.

They're the ones that are gonna give you your permit.

They will defer a lot to the pasteurized milk ordinance 'cause that has the regulations for facilities, equipment, and pasteurization conditions.

So just to kinda summarize and give you a couple of key points to take home with you.

Milk is a really versatile starting material.

We can start with one product and make some really spectacular diverse products out of it.

But it's delicate and it needs to be handled with care so that you keep that optimal flavor and manufacturing properties so that you get that best product out to the consumers.

But milk is associated with bacteria that cause human illness, so understanding where those hazards come from and the best practices are essential for food safety.

We want to keep customers coming back to our business.

It's also important to know that the dairy food industry is highly regulated.

Now, I didn't mean to scare you, but dairy food processing is not simple, but it is attainable.

It requires that you understand everything and be prepared.

So a successful business is the result of a strong understanding of the products you make.

You want to know the target properties of your product so you can learn the science behind how to get there safely.

You want to use the right ingredients and manufacturing process.

You want to have the right equipment and the facilities and you want to know and follow the regulations that apply to you.

So depending upon what you want to make and your markets, you'll be prepared.

So at this point, Sarah's gonna tell you a little bit about marketing and I'm gonna turn this back over to Sarah.

- Thank you, Kerry.

I get to hit control here.

Okay.

So now that you have a better feel for possibly the products that interest you for a value-added business and understanding of the processing aspects that Kerry just covered, for each of those products, let's now turn to assessing the market and developing a strategy.

A successful marketing strategy is based on an understanding of your target customers and consumers and the competitive landscape.

So most importantly when producing a value-added dairy product is to understand whether the consumers are interested in what it is that you want to process and sell.

A profitable and sustainable business requires that you be able to sell the product that you produced.

And understand that everyone is not your market as much as you may like it to be.

So take the time to identify and quantify consumer market groups that may be interested and that you're going to target through your marketing.

Start with determining who are your customers.

Do you want them to be individual consumers or are you gonna target businesses such as food service, specialty stores, or restaurants?

Assess the demographic, geographic, psychographic, and behavioral traits of these different groups.

Demographic aspects include age, gender, income, and family status.

And geographics has to do with where consumers live and work.

Psychographics considers the values that consumers hold that may be influencing their purchasing.

What is most important to your consumers when choosing the products that they purchase?

While psychographics look at what consumers believe and the values they hold, assessing behavior, on the other hand, will give you information on the actual actions that they take.

This might include how much a consumer buys, where they make their purchases such as whether they purchase from a grocery store, a farmer's market, or online, and how frequently do they buy different dairy products.

Through this process, you should be able to identify primary and secondary markets.

The primary consumer group will be that group that you want to target first with your marketing and you feel will be the most likely to purchase, while the secondary consumer group is just that, those who you think won't purchase as much as the primary group.

Another aspect to look at is price sensitivity which has to do with how consumer behavior is affected by price.

Price sensitivity is tied not only to demographic factors such as income, but also to the values that they hold.

Try to determine the needs and values that your products meet for each consumer group and then how you can communicate this with them.

As an example of how consumer values can impact purchasing, consider this study out of the University of Vermont that looked at consumer preferences for various cheese attributes.

The researchers were able to group consumers into either a price sensitive group or a quality seeking group.

Both groups had the highest willingness to pay for a cheese market that's local and that's this top (mumbles) columns here in the middle.

Even though the premium percentage they were willing to pay for the local attribute differed.

So in both cases, we can see the bar is the highest for willingness to pay for local.

So it's also important to understand the competitive landscape that you'll be entering with a value-added dairy business.

Assess the size of competitor's businesses both by quantity and mix of products they sell as well as by market share.

Try to get to know and understand the competition's product attributes such as quality, composition, and price points, and the consumer groups that are being targeted by those businesses.

So it's entirely possible for two businesses to have the same or similar products.

You have to target different consumer groups through different marketing mixes which I'll cover next.

Also consider the image and public perception of different competitors and the resources available to them such as perhaps a prime location for an on farm store or financial resources for expansion.

The marketing mix is where you will make decisions based on your market assessment and your business goals.

It's typically considered from the standpoint of the four Ps.

The first P is the product.

And the product component includes things such as quality, flavor offerings, brand elements such as the type of packaging and label design, and any product related services including recipes or pairings that you might provide to consumers.

Product size is another element here, one that can influence consumer purchases.

As snacking continues to be an important aspect of consumer life, snack size products have greater appeal.

Think about how your product mix will also contribute to cash flow for the value-added business.

And product attributes can be both production and marketing related.

For example, 21% of milk launches in 2018 had the grass fed claim which was up from 4% of milk product launches in 2014, so that's great growth there in just four years.

The quantity of product processed and supplied also needs to be considered when determining your market mix.

Consider how quickly you can process and accumulate large quantities of the dairy product that you want to market.

And so I have it here on the screen an example of how much yogurt you could really start to process in a year's time just on a small amount of milk being dedicated to yogurt processing.

So a thorough assessment of your consumer market and forecasting expected sales can help you determine whether your processing quantities are on target.

Price is the second P of the marketing mix and price not only factors into a customer's decision on whether to purchase, but also how to position your product in their mind on aspects such as perceived quality.

Product attributes may offer the opportunity to utilize premium pricing.

You also want to try and think forward to how your pricing may allow you to use or avoid discounting tactics.

The key to pricing is to know your cost of production, making sure that fixed and variable costs are covered.

You want your price to cover marketing costs and any certifications that you may want or need as well.

Distribution costs should also be considered when setting prices.

And from here, you can include competitive analysis, pricing objectives and methods of which there are many, and forecasted consumer demand into your final price determination.

You may also want to study how your pricing impacts forecasted revenue and its impact on an investment analysis which is a long term view of the decision to invest in the capital needed for this value-added enterprise.

Things to consider are the rate of return that you expect for any non farm investments that you make, returns that you're currently seeing in your business, and with non-business investments, the level of risk that you place on the value-added venture and current inflation rates.

So you want to make sure that you're comfortable with the results of an investment analysis before moving forward with actually making those investments in facilities and equipment.

Product placement is the third P of the marketing mix and covers how your product will make it to the buyer through distribution and marketing outlets.

You have many options when it comes to market channels and distribution.

While you may start with just one market outlet, if you decide to grow and expand your value-added business, you may find yourself utilizing more than one of each of these.

For instance, one value-added dairy started with sales at farmer's markets and then added restaurant and retail store sales.

So also keep in mind that some distribution decisions may be determined by the market channel you wish to pursue.

And distribution decisions should take into consideration factors including time and labor commitment, capital and equipment requirements, product characteristics, and market outlet characteristics.

When considering the market channel options, thoroughly consider what are the pros and cons of each to you.

While one person may enjoy the high level of customer interaction they get to experience with direct sales, another person may wish to avoid that and instead focus on wholesale markets.

The final piece to the marketing mix is promotion and promotion is not just advertising.

Rather, it is everything you do to make your product and business known.

Your goals here are to create excitement and demand for your product while providing product information, promoting good well, and generating repeat sales.

Promotion is all about creating a consistent image and message that you want to convey to your target market groups.

Sampling is an important aspect of promotion, especially for food products.

For example, 70% of consumers surveyed want to try a cheese before sampling.

And 77% are more tempted to try something new when they're offered a sample.

So earlier, I had mentioned snack sizes.

So think about how offering products and cheeses is a good example of this in snack sizes and how that can assist with sampling and promotion of new products, flavor offerings that you might be wanting to try and considering, or expanding the purchase sizes that your customers make.

Some final questions to consider are related to marketing include understanding the marketing claims that you can make on your labels and marketing materials, any resource availability that you have a need for marketing purposes, and then business planning.

And Kerry, or I'm sorry, Ginger will address how that fits into production.

- [Ginger] Okay.

As we switch gears here, I'd like to talk about some of the considerations related to the production side of value-added dairy.

So the first thing I would do is challenge you to think about the questions that we have on the screen.

How would you answer them?

First one is why do you farm?

Do you like to be outdoors?

Do you enjoy long hours, fatigue, and hard work?

Do you value independence and working at your own pace?

A value-added business could change your responsibilities and your job description.

Next, do you consider yourself to be a cow person or possibly goat or sheep depending on what you have?

Some producers enjoy working with their animals every day.

A food processing business could change the amount of time that you are with your animals because of a need for separation due to food safety concerns including possible cross contamination.

Your time also may be devoted to other tasks away from the farm such as manufacturing and marketing your products.

Finally, are you passionate about creating a product?

Becoming a dairy food processor may require you to learn a new skill set.

A genuine desire and excitement for your product may be reflected as you manufacture and market it.

Do you want to share the goodness of your dairy product with others basically?

So as you think about the products that you intent to manufacture, you want to consider the amount or the volume of milk that your value-added business will require.

Will you use all of the milk that you produce for your value-added product or will you need an outlet for the surplus?

This can be a really tricky topic to navigate.

Some processors may continue to work with you or be willing to work out an agreement that will allow you to purchase back milk from them.

Others may stop taking your milk altogether.

If you intend to use your own milk, or do you intend to use your own milk or to manufacture products with milk that you have purchased?

Some value-added businesses rely on other producers to supply milk.

Another option might be to form a co-op for processing your product or to work with another business to manufacture the product under your label.

The volume of milk that you will need will be dependent on the products that you choose as was previously discussed by Kerry.

You also may need to plan for seasonal variation such as if you're planning to make soft serve ice cream and you might not sell that product year round.

Another consideration is the need for storage tanks or silos for surplus milk or additional purchased milk.

Think about if your herd fits the bill for the value-added product that you intend to manufacture.

Some things to consider include milk quality and components.

As was previously noted, the stage of lactation for consistent production and also possible effects on the product, and the genetics and composition of your herd, if you intend to use a certain attribute for marketing your product such as A2 or grass fed.

If you're considering a transition in the production system for adding value, then you may need to allow time for that transition such as to organic or grass fed.

Keep in mind the effect that the possible changes in diet and grazing requirements and exercise, possibly due to frequent movement from pasture to pasture, adjustments in housing, and changes to your herd health program, the impacts that all these may have on your production levels, on your components, and also on the quality of your milk.

Remember consistent inputs are needed to produce a consistent product and to meet your consumer expectations.

Management is critical for value-added dairy.

I can't emphasize that enough.

If the farm is managed separately from the value-added business, communication and support in both directions are needed.

As you've already heard, consistency is a key and that goes back to good management with attention to detail for quality and production levels.

Additional management responsibilities may be related to balancing help from family or hired labor to cover both the on farm tasks and the processing tasks.

Expertise is needed in multiple areas when another venture is added to the farm business.

So this may require outside help or someone involved in gaining additional training.

For food safety reasons, a segregation of duties between the farm and processing is required.

Production schedules may need to revolve around times when extra labor is needed on the farm.

Signage, training, and other majors may be needed to maintain that separation in the processing environment to avoid cross contamination.

This is especially true for outsiders who are less familiar with the farm operations such as salespeople, neighbors, or others who may call on your farm.

Also consider who's going to be responsible for the transportation and retail of your product.

A support network, excuse me, of experts, consultants, dairy industry professionals, and peers that have value-added experience can be an invaluable resource.

Continuing with the production side, employees, family members, or others who help on the farm should be trained to minimize variability in production and to save time and money.

Some of the key quality parameters to monitor include the somatic cell count as is a regulatory requirement and a key indicator for herd health.

Research has also demonstrated that an increased somatic cell count over 400,000 can decrease product yield.

Other bacteria counts to monitor include the standard plate count or SPC, preliminary incubation count, or PIC, the laboratory pasteurize count, or LPC, and the coliform count, along with your components.

Written standard operating procedures for the farm staff can be used to ensure all are following the same procedures from milking routine related to herd health practices, for sanitation of the facilities, and for other routine practices on your farm.

Some value-added businesses involve the farm as a retail outlet or involve the farm through agritourism as visitors are encouraged to come to there.

Think about the appearance of your farm.

What image do you want to convey?

And I would like to note the picture on the left is an extreme example.

That farm had had a fire recently, so that is not typical.

Location is crucial if you're doing direct sale or wholesale.

Consider that consumers will be coming to the farm or you may have to travel a long distance in order to get that product to consumers.

If you intend to sell products directly from the farm, additional bias security measures and general security may be needed.

For example, will you control access to certain areas of the farm such as the milk house?

Additional fencing, gates, and even security cameras as appear in the picture on the left may be needed to control and monitor visitors to the farm.

Transparency, accessibility, and the backstory associated with the product are increasingly gaining importance to consumers.

So is agritourism part of the business plan?

Are you planning to offer tours of the farm, to host school groups, or other events to educate your consumers about your farm and your products?

Some have said that a value-added dairy enterprise will require as much time, resources, and effort as is required on the production side of the farm business.

If you have a strong desire and feel that value-added dairy is a viable option for your farm, be diligent about putting in the time to do adequate research and to explore your options.

Gather as much information as you can from many resources.

If your farm doesn't have a profit team, consider forming a team to help with the exploration of the value-added possibilities.

That team may include experts and professionals to guide you.

Consider all aspects from your market to your intended product, the food safety regulations, and the needs on the farm related to production.

And as we wrap up, this webinar was intended to provide a broad overview and general introduction to value-added dairy.

We encourage you to seek out more information if you're interested and look for more from our group.

Here are some references or resources where you can look.

Industry groups provide great information.

Associations and guilds.

The Penn State Extension site.

And I'll put in a plug.

We have an upcoming webinar on February 24th at one o'clock.

You can find this on the extension website.

It's titled considerations for on farm processing and it will focus on the farm management aspects related to a processing enterprise.

You also can find additional information.

Kerry mentioned the short courses that she teaches on the Penn State Food Science Department website that is listed on the slide, and your regulatory agencies can provide information.

I'd like to thank you for your time.

Our emails are listed on this slide and with that, we will take questions.

I'm going to exit and look at the chat box.

I'm also going to post a link to an evaluation.

We would greatly appreciate your feedback and more information from you as to additional topics that we can cover in the future.

And I see we have some questions in the chat.

Okay, I'm going to there.

I believe share the, okay.

That is the link to the evaluation that we would appreciate you completing.

I'm also going to share a link to the presentation slides and then we will address questions in chat.

- [Sarah] And I see the first question here has to do with marketing and sales forecasting so I'll just jump in and address that.

So a good place to start with sales forecasting and projecting quantities here if you're thinking about direct sales is to start with some census data information for the geographic region.

And so you can find it on the census website and then start diving down in and looking at different groups.

And then comparing the information that you find there and you should be able to get the numerical information for the number of people that fall into different demographic categories and compare that with some of the trend information that you can find through marketing surveys and information that's shared by some of the consumer marketing groups such as Mintel, Neilsen, and maybe some of the guilds and associations as well.

And so then it's just a process of kind of drilling down, starting at that high level and drilling down and then going out and talking to people, okay?

I mean, you can hire consultants to assist you with that process, but if you really want to understands that yourself, I would encourage you to either start that process or to be involved if you do hire a consultant.

So hopefully that helps with that question.

Thank you, that's a good one.

- [Ginger] We're all still on the line if anybody has any additional questions.

You have our emails.

Again, I encourage you to go.

If you'd like to print a copy of the handouts and please complete our evaluation at the link.

Feel free to reach out and contact us.

We thank you very much for your time and that's it.

I'll hang out just a couple more minutes in case you have any more questions.

Thank you very much.