A Low Debt Approach to a Successful On-Farm Processing Enterprise

“If one side of the business is not doing well financially, don’t think by hopping into the other side you’re going to save both ends,” he says. “You’re going to invest a bunch of money just like you would to build a new dairy.” ( Anna-Lisa Laca )

On any given day, you’ll find Isidro Alves up bright and early checking in with his employees as they start processing milk. Alves’ parents immigrated from the Azores Islands and made a life in the U.S. working on dairy farms in California. That’s where his passion for cows was born. 

After working for a genetics company for a decade, Alves decided to start his own dairy in 2003. Today, his Fallon, Nev., operation consists of 500 cows and on-farm processing to provide local milk and cheese products throughout the state.

“Years ago, my intentions were to milk a lot of cows. I love cows,” he says.

In 2012, Alves started dreaming about processing his own milk. While he never thought he’d go that route, the revenue diversification was appealing.

“I think every dairyman looks at the retail market and says ‘man I’d love to have a piece of that,’” he says. “We look at some success stories and think we can do it.”

While Alves has done it, the road to success was marred by challenge.  

“I’ll tell you one thing: this isn’t an easy deal,” he says. 

The decision to enter this venture should not be taken lightly, says Jeff Bewely, of University of Kentucky Extension.  

“Like many small businesses, the failure rate for dairy on-farm processing enterprises is high,” he adds. 

According to Alves, the processing side of his business falls into three enterprises: product production, marketing and logistics.  

Making a Good Product

Initially, Alves just planned to diversify by making cheese. 

“I started making queso fresco because I knew a guy who knew how to make it,” he says. “We had all these bright ideas to make this Mexican cheese because they are the largest population, and all of the Mexican restaurants will want it.” 

That’s not exactly how things went, though. It turns out Mexican restaurants just want shredded cheese that melts nicely. 

Alves says nothing he has done in terms of product development has gone how he planned. About a year after starting the cheese business, Alves began dabbling into the milk bottling business because it seemed like the next right thing to do.
Today his business is 60% fluid milk and 40% cheese. 

“A lot of people have this great business plan, and I guess I'm terrible that I didn't do that. One thing just led to another,” he says.

Sand Hill dairy produces cream top whole milk, cream top chocolate milk, cream top strawberry milk and they just launched 2% milk and heavy cream. 

Alves warns other producers one of his biggest challenges has been sourcing packaging. 

“Packaging companies don’t want to work with a little guy,” he says. “Until we were big enough to order a truckload of bottles at a time, most companies weren’t willing to do business with me.” 

Selling the Product

“While many producers are attracted to the potential to increase value for their milk, consumers have to actually purchase the product to realize this value,” Bewely says. “Moreover, successful operation of a dairy on-farm processing venture requires a completely different skill set than the skills needed to manage a herd of dairy cows.”

While consumers are increasingly asking for local food, producers have to determine if they can sell enough volume to justify expenses. 

“We’re dealing with restaurants, which are tight-margin businesses. How much more can they afford for your products versus what they buy off the Sysco truck to satisfy customers?” he says. “Some customers see benefit in a local product but you can’t ask a foodservice place to spend 50% more for your product because it's local.”

Getting space in a grocery store is one of the biggest challenges small dairy processors face. Alves has developed a great relationship with the Safeway manager in his town, but dealing with corporate is a totally different story. Ultimately, it’s for the best if the store manager values local products because that’s who you deal with on a weekly basis, he says.

The relationship Alves has built with his local Safeway store manager paid off during the first weeks of the COVID-19 pandemic. 

“The first week of the virus gave us an opportunity to sell a lot of milk because we were the only ones who could get product to the store,” he says. “That’s part of being the little local guy. They called and said we could fill the case, so we did.”

Before you launch a product, consider your retail opportunities and costs, Alves warns. 

“I’ve seen some farms do really well where they can have a storefront on a busy highway in a bigger population,” he says. “People might see a gallon of my milk on the shelf at the store for $4.99 and start doing the math in their head. What you have to realize is the store doesn’t let you put it on the shelf for free. Whether you use a distributor or not, getting the milk to the store also comes with costs.”

Logical Logistics

One of the biggest obstacles Sand Hill Dairy faces is the logistics required to get their product from the farm to the consumer. 

Sand Hill Dairy, which is 60 to 75 miles from the heart of their business, makes all of their own deliveries. The “you should” people, as Alves calls them, say a distributor is his best solution, but according to Alves you will never get an established market unless you’re the one selling your product. 

“A distributor will not push your product for you,” he says. 

On Mondays, Alves leaves the farm at 1:30 a.m. to make deliveries to several stores and restaurants in Las Vegas. He was in the process of working with a distributor to get into the 11 Sprouts grocery stores in Las Vegas as well as several of the casinos, but the pandemic put those plans on hold.  

He has tried to delegate the 14-hour round trip to an employee, but the long drive means most employees don’t want to do it. Instead, he makes the drive to handle deliveries himself and meet with his customers. 

“We are just not set up to point to a pallet and say take this pallet to X location,” he says. “I’m selling this program every day.” 

On-Farm Processing Won’t Fix Your Finances

When asked the No. 1 thing he’d caution producers who are considering processing their own milk because of the recent market situation, Isidro Alves of Sand Hill Dairy says on-farm processing won’t save your finances. 

“If one side of the business is not doing well financially, don’t think by hopping into the other side you’re going to save both ends,” he says. “You’re going to invest a bunch of money just like you would to build a new dairy.”

The funding reality check can prove to be a major obstacle for many, says Jefferey Bewely of  University of Kentucky Extension. 

“First, each business owner must realize some internal financing is needed,” he says. “Without your own equity, lending institutions will not be able to help.”

Dairy processing plants, regardless of size, must adhere to state and national regulatory requirements depending on the product. For example, the time, buildings and equipment needed to bottle your own milk are not the same requirements to make aged cheese, says Brianna Goodnow of University of Kentucky. 

“Considering the items needed to efficiently produce your product is essential.” 

Alves and his wife, Heather, weren’t interested in additional debt. They took baby steps into the processing side, relying on a sound financial position on the cow side to keep things moving.

“I know one thing, if I didn't have my farm in a secure position to do what I've been doing, I would have never made it,” he says.

A Balancing Act

Isidro Alves of Sand Hill Dairy has what most would consider a successful on-farm processing business. Still, he only processes 10% of the milk from his 500 cows. The remainder he sells through his cooperative. 

“If I only had 10% of my cows, I couldn’t justify my mortgage on my dairy or anything,” he says, warning farmers to consider this aspect of the decision to process your own milk. 

Would your cooperative be willing to balance you? Would there be any additional expense involved in that transaction? 

“There’s not enough volume to do this without shipping the remainder of my milk somewhere else,” he says. “I don’t know where the sweet spot is in terms of herd size, but I know I couldn’t make it work with fewer cows. I’ve tried.”