Dairy Science Department
BS in Dairy Science
Value-added agriculture has grown in recent years and is often promoted as a rural development or business survival strategy. For dairy operations, value-added often has meant adding a processing enterprise to an existing dairy farm. This case study examined whether it was profitable to transition to a value-added operation, comparing and contrasting the business characteristics and financial performance of three businesses of similar size in Vermont, Wisconsin, and New York.
The methods included the development of income statements, balance sheets, and economic costs and returns in order to evaluate the profitability of the farming and processing enterprises for each business. The financial data were collected from a previous study done by Nicholson and Stephenson (2006) for the fiscal year 2003. Tabular summaries of the key information from these statements were constructed to facilitate comparisons of the farming and processing enterprises separately for the three businesses.
Results indicated that similar size operations in terms of cow numbers can have highly different production and financial outcomes. For two of the three businesses, the processing enterprise was profitable based on net income, but only one business had a positive (and small) rate of return on assets (accounting for equity capital and operator labor costs). None of the three processing businesses were profitable when the full economic costs of milk production and processing were accounted for. It is also important to note that none of the three operations had positive net incomes for both the dairy and processing enterprises, which appears to question a basic premise underlying value-added businesses. Although this study will be beneficial for the business owners and others interested in value-added operations, a more in-depth and up-to-date study would be beneficial to determine the specific factors involved in a successful value-added enterprise.