June 15, 2009 / 1:52 AM / 9 years ago

Organic dairy farmer bets on customer investment

(Reuters) - If Dante Hesse’s hunch is on the money, the people he sells his organic milk to will also become the people who fund his growth.

What started as a series of “low key” one-on-one conversations with customers at local farmers’ markets near his Ghent, New York farm, has escalated into a serious attempt to raise $850,000 - in as little as $1,000 increments - directly from the dairy-loving consumers who buy his milk by the quart.

“I learned pretty quickly that there was a lot of interest, but I also needed to find some council who could tell me how to do this legally,” said Hesse, who founded Milk Thistle organic dairy farm with his wife, Kristin, three years ago. He intends to use the bulk of the money to build an onsite processing plant that will help him ramp up production and diversify into making other milk-based products like yogurt, butter and ice cream.

“If it has to be 850 people at $1,000 each then that’s what we’ll have to do and I think we could get it,” said Hesse, who was twice rejected by local First Pioneer Farm Credit, a Northeastern co-operative that specializes in agricultural loans. “They never want to have anything to do with us. If they’re not going to lend to a farm, the regular bank on the corner is not going to do it either.”

While Hesse has found his stride as a dairy farmer, his initial foray into the business was anything but smooth.

He began with a fleet of 20 cows selling raw milk to a local processor, who would come by once a month with a truck and pay him a flat fee for every 100 pounds. Hesse tried this for 18 months, but couldn’t produce enough milk to make the margins work.

He was also hit by the high cost of grain and diesel fuel, which he used to operate his machinery and refrigerate the milk. “A year after we started grain prices doubled. All of a sudden any margin that you thought you might have had was gone.”

Hesse, who has been financing his dairy operation through loans from family members totaling about $90,000, decided to change his business model and bottle and sell his own milk. Claiming to be the only “certified organic” dairy operating in the New York City green market system, Hesse sells his milk at farmers markets, which accounts for about 75 percent of his sales. The rest of his sales come through Whole Foods stores in the area.

Hesse charges a premium for his milk -- $4 per quart and $7 per half-gallon, which is nearly double the national average of $4 per half-gallon. But he says customers never quibble and regularly tell him his milk is the best they’ve ever tasted. One customer told him he hadn’t drank milk in 30 years, but that after tasting Milk Thistle he “couldn’t stop drinking it.”

THE PITCH

According to the Organic Trade Association, sales of organic milk in 2007 totaled more than $1.3 billion in the United States. While organic accounts for just 3 percent of the U.S.’s total milk sales, it has been growing at an annual average rate of more than 20 percent over the past decade (last year it dipped to 10 percent).

Hesse knows the math behind the milk and feels if he’s properly capitalized, he can move into more “value-added” products like butter, yogurt and ice cream, where the gross margins are 20-30 percent higher.

Recently Hesse released a “red herring” prospectus, offering potential investors promissory notes with a 5-7 percent annual rate of return, on terms from 5-15 years in length. He anticipates most of the $850,000 sought will come in $1,000-$3,000 bits, but is hoping for investors to take bigger chunks.

Hesse is betting the farm on his milk finding a willing market of investors, local or otherwise, who believe in the value of sustainable agriculture and want to support local, small businesses like his.

TAKING IT TO THE EXPERTS

A bottle of organic milk from Milk Thistle organic dairy farm is seen on sale at the Grand Army Plaza farmers market in Brooklyn, New York May 30, 2009. What started as a series of "low key" one-on-one conversations with customers at local farmers' markets near Dante Hesse's Ghent, New York farm, has escalated into a serious attempt to raise $850,000 - in as little as $1,000 increments - directly from the thirsty consumers who buy his milk by the quart. Hesse founded Milk Thistle organic dairy farm with his wife, Kristin, three years ago. REUTERS/Brendan McDermid

Josh Dorfman, author of “The Lazy Environmentalist on a Budget” and host of “The Lazy Environmentalist” television show, believes Hesse can find the investors to back him.

“I think he’s tapping into a real demand,” said Dorfman, who points out that the per-capita income of New Yorkers is one of the highest on the planet. He also noted that that there aren’t that many opportunities for community-minded people to invest in local, organic businesses.

“He may very well find people who have the disposable income and whose values are directly aligned with this and feel like it’s a good investment in a down economy,” surmised Dorfman, who also owns and operates Vivavi, a high-end, eco-friendly furniture business in Brooklyn.

Dorfman said it would help if Hesse explained on his website <www.milkthistlefarm.com> how customers can invest in his farm.

“He could certainly market it better,” admitted Dorfman, who thinks like-minded individuals across the country may also want to invest.

Woody Tasch, formerly a venture capitalist and now the author of “Inquiries into the Nature of Slow Money: Investing as if Food, Farms, and Fertility Mattered”, explained that Hesse’s alternative funding approach is not unprecedented.

Tasch said Organic Valley used the same investment model 25 years ago to grow itself into a multi-million dollar organic powerhouse.

“When they were doing it people were laughing and saying no investors are going to give you what is essentially venture capital for a six-percent return and they had no trouble doing it,” said Tasch.

The Organic Valley co-operative raised $25 million from 1,300 investors, Tasch said. Tasch, who recently started the Slow Money Alliance, feels the current economic volatility has redefined the nature of risk, which could work in Hesse’s favor.

“The uncertainty is so great now that people are really looking seriously at alternatives,” said Tasch, adding that people are also more concerned about the adverse effects big corporations have had on the environment and food systems.

Fay Benson was one of the first organic dairy farmers in New York State back in 1994 and knows firsthand how big a market it is.

Benson, who now runs the New York Organic Dairy Initiative, struggled to maintain his conventional dairy farm for the first 13 years and only managed to make a real profit when he switched to organic milk production before selling it.

Benson suggested that Hesse work with some of the farm incubators in the state, so he can hone his new products, like yogurt, before he tries to build his own facility and produce them himself. “You practice getting your products made - getting your techniques down and getting it to taste well - because once you borrow the money you have to start paying on it immediately,” said Benson. Benson said one of the reasons he got out of the business was the decline in the price of milk over the last 30 years, which has dropped from $14 per 100 pounds in 1983 to about $11 this year.

While organic milk is currently about $26 per 100 pounds, Benson said there are fewer processors where farmers can go to sell their milk.

That being said, Benson is still bullish on the organic dairy market, which he added is an $80-million annual industry in New York State.

“The model that he’s got going now is an excellent one,” commented Benson, who nevertheless thinks Hesse should think long and hard about the risks of expanding too fast and bringing in that much debt. “Do you really want to be big, or are you doing it just because you want to make more money? If you’re trying to do it to make more money, there are probably better ways to do it.”

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