Economies of Scale: Slow and Small Turn Profit
by Sara Bredesen of Argonne, WI. Originally appeared in January 2006 edition of Farm Country, The Newspaper That Cares About Rural Life.
John Davis said he remembers tractor salesmen coming to the family farm when he was a kid. Their pitch was that you could sell four horses, fill the stalls with six cows, and buy a tractor that wouldn’t have to be fed all winter.
“If you just use arithmetic, that works,” Mr. Davis said, “but if you do the math, six cows won’t support that tractor, and if you get enough cows to support the tractor, you need a bigger tractor. It won’t work unless you get bigger, and bigger, and bigger.”
For Mr. Davis and his wife, Judy, economies of scale mean staying small and doing the math.
All of the work on the Davis’ 80-acre farm in Price County is done with draft horses. Fields are rotated through corn, soybeans and pasture for the 10 to 14 Holsteins that supply the family’s main business.
Six years ago, Mr. Davis ran some calculations that changed his tiny dairy into one of the state’s handful of farmstead milk bottling businesses.
“At $9 a hundred weight in the year 2000, milk was not profitable at any weight.” He said that increasing the herd size and going to bigger equipment didn’t add up to a net profit.
“I chose to do this (bottling) to increase the value from 9$ to $32 a hundred weight, and then it sounded real good.”
It took Mr. Davis two years of research, collecting and repairing used equipment, and working through food safety regulations to get the plant up and running.
“I didn’t know what I was doing, and nobody would tell me,” he said. “The only advice I could get from anybody was ‘don’t do it.’ You’re destined to fail as soon as you accept that as the Gospel, so I just ignored them and did it.”
Mr. Davis describes his plant as “even smaller than family size.” He constructed the building and learned how to weld stainless to put it all together himself. The plant has the basics of bulk milk storage, a cream separator, batch pasteurizer, plate cooler and bottle washer.
He added a glass-front cooler and self-service display area for on-farm sale of whole milk, 2 percent, cream, chocolate milk, eggs and cheese.
Even with sweat equity, the investment came to about $86,000, but Mr. Davis said the business is profitable.
Production is as small as the plant. Mr. Davis bottles two to three times a week, putting up 450 half-gallons.
Excess milk is sold to NFO in exchange for credits on cheese for the shop. His wife, Judy, delivers milk to area ‘mom and pop’ grocery stores in a refrigerated truck.
Mr. Davis said he chose returnable glass bottles for visual appeal and economics, although it created some problems.
“Right at first, it didn’t work at all, especially the cream bottles. They’re just too cute,” he explained. “I couldn’t get any back, and I was making the bottle company rich. I said there’s nothing we can do. We’ll just have to fill everybody’s knick knacks and kitchens with a flower vase, and when they’re all full, they’ll start coming back.”
The Davis’ have ten-year-old triplet sons who help on the farm. Mr. Davis said he would like to increase his herd size to about 20 when the boys are big enough to do more work. He said the farm doesn’t have the capacity for more animals, and he isn’t interested in getting bigger.
“I have a hard time not selling heifer calves and heifers,” he said of the high demand and prices they bring, “but I’ll have to start keeping more pretty soon.”
His herd is mostly older cows, with the youngest being 4 and 8 years old, and the oldest at 15.
He said he averages only 30 to 40 pounds a day from the cows but doesn’t push for much more.
“I don’t try,” he said. “With an older cow, you can’t push them. They’ll just quit.”
Mr. Davis grows all his own feed, working the fields with his horses and hauling beans and corn to the local elevator with the same animals.
Mr. Davis said he doesn’t make any claims to environmentalism, although his business methods might look like it. He uses glass bottles and horse power, because they are economically sound. He farms organically, although he is not interested in buying into “organics” or its politics. He doesn’t tout ‘natural’ on the label.
“I’m calling mine ‘milk,’” he said. “My customers see the farm, they see the milk, they taste the milk, they come back. It’s that simple.”
“I don’t promise them that it will cure cancer or prevent it. I don’t promise them that it is going to put the ozone back,” he said. “And, I don’t promise them that it’s going to make them feel any better tomorrow than they feel today. I just put good, healthy milk on the market at a reasonable price, and I farm in a conservative method that is not polluting.”
Mr. Davis admitted that he prefers working with horses, but he gets some benefits from those tractors that the salesmen touted when he was a kid.
“At one time, I had saved up enough money to buy a John Deere,” he explained. A good friend said, ‘John, if you’ve got enough money to buy that tractor, just buy some stock in John Deere and go rent one for as long as you need it.’ I still have the stock in John Deere, and I haven’t had to rent that tractor in 25, 30 years. The John Deere stock is doing real good… and so are the horses.”