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Dairy Farmers Who Milk the Past

By Stacy Perman Five years ago, dairy farmer Robert Shatto found himself at a crossroads. Shatto Milk Co., his family's 100-year-old farm in Osborn, Mo., had been operating at a loss for two decades, and the situation was only getting worse. Facing plummeting milk prices, industry consolidation, and increasing competition from mega-farms, Shatto was "plugging along, while my dairy buddies were getting smart and quitting," he says. "Every time I crossed the road to milk the cows, I was wondering, 'Why am I doing this?'"

Although the 400-acre farm's profits were a distant memory, Shatto had both a financial and familial stake in the company, and he refused to sell out. "I figured the only thing we could do was keep milking the cows," he says, "but we had to find a way to make money for a change."

He conducted a feasibility study and brought in a marketing firm for advice on rejuvenating his brand. The verdict? He believed he could survive as a small family operation, but he needed a clear way to differentiate his milk from that produced by modern, corporate dairies.

AWAY FROM THE BRINK. So Shatto returned to his roots -- playing up his milk's fresh, hormone-free advantage, using retro glass bottles bearing the slogan "Milk at its Finest," and, having broken ties with his dairy cooperative, charging more for what he would now brand as a premium product. "We hit on something," he says. "There was no other glass in the stores." Thanks to a trendy, throwback image and higher price tag, revenue has climbed more than 70%.

Shatto is among a growing number of farmers who have found that the future of the small dairy might just lie in its homespun past. By returning to a wholesome, simpler time, when milk was delivered fresh to your door in bottles, these farmers have taken their family operations from the brink of extinction to profitability. Resonating with consumers increasingly concerned about food safety, this new breed of cow juice has also struck a chord with environmentalists who like the idea of recycling glass bottles. Indeed, a longtime kitchen staple has become something of a hip brand.

Like many small farmers, Shatto lost money for years by selling to a cooperative, receiving, say, only $10.80 per 100 pounds of milk that cost him $11.25 to produce. With his new business model, where he bottles the milk himself and sells directly to stores, he now gets $35.

TOUR OPERATOR. Although Shatto didn't expect sales to move for at least seven months, within one month of the shift, he sold out his initial supply. To keep up with the continued demand, he has increased his herd of cows from 80 to 160, and his employees from 2 to 14. And small farmers from all over the country now consult him about how they can keep their farms afloat.

"Last year, when I went to my accountant, he said, 'You better sit down,'" Shatto recalls. "I had to pay taxes. After all those years, I showed a profit for the first time."

The newly popular Shatto brand has had residual effects -- farm tours that draw as many as 1,000 visitors a week, and a recently expanded product line including orange- and root-beer-flavored milk.

DE FACTO MONOPOLY. Though other farms have started taking a page from Shatto, challenges remain. In just the past decade, more than 50% of America's small dairy farms have disappeared, leaving under 100,000. In Wisconsin, the leading dairy state, an estimated five farms close each day. Pressure from large corporate farms and grocery chains, not to mention Wal-Mart's (WMT) continued rise in the supermarket world, have generally forced prices down (despite a sudden surge to record levels this year), while production costs remain the same.

Dairy cooperatives, established a century ago to help small farmers combine resources and increase market influence, have merged in recent years, creating a de facto monopoly. "There are two to three large cooperatives," says Larry Swain, director of Swain & Associates, a River Falls (Wis.) strategic planning firm that advises small family farms. "They control the milk supply. There's a lot of value added to the product they market, but it doesn't get back to the farmer."

A 2004 study by the Cornell University Program on Agriculture & Small Business likened the trend in dairy consolidation the "Wal-Martization of milk production." Unable to compete on size or volume, small dairy farmers have started milking the past, so to speak -- increasing their visibility and market share, and drawing interest from regional grocery stores and supermarket chains, including natural-food giant Whole Foods (WFMI).

HOME DELIVERY. According to Swain, more than 100 small farms nationwide now actively promote their traditional dairy roots -- including the return of the milkman. "What they're doing is taking control of the marketplace," he says. "Something they haven't done in 60 years. They're producing a wholesome product and marketing a lifestyle. It's a huge opportunity to reverse the trend of the disappearing family farm."

The high-end branding moves have afforded small dairies a way to insulate themselves -- with built-in margins -- from the fickle market forces that have wreaked havoc on milk prices. Farmers who sell their milk to the cooperatives at a set price -- which for years has typically meant lower than the cost of production -- can now demand their own price, anywhere from $35 to $45 per 100 pounds of milk to retailers directly, in contrast to $10 to $16 to the cooperatives.

Oberweis, a large family-owned Chicago-area dairy, has built a high-end brand around its glass bottles, and the company, which also owns retail franchises, continues a huge home-delivery business, dropping off its signature containers to some 45,000 customers.

NEED FOR COWS. At 100-year-old Mapeline Farms in Hadley, Mass., the Kokoski family has been successfully selling milk in glass bottles for several years and now delivers it to customers' front porches in galvanized steel buckets, just like the milkman of yesteryear. The Kokoskis used to run a trucking company to help sustain the dairy, but that's no longer needed. The new strategy, says third-generation farmer Paul Kokoski, "definitely saved the farm."

And farmers like Robert Shatto can barely keep up with the demand. "I keep getting asked by stores to sell them more milk," he says. "But I can't until I get even more cows. You can't imagine how that sounds to me." You might say he finally Got Milk. Perman is a reporter for BusinessWeek Online in New York

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