University of Tennessee, Knoxville TRACE: Tennessee Research and Creative Exchange Masters Theses Graduate School 8-2012 Feasibility of On-farm Milk Processing, Packaging, and Marketing for Tennessee Dairy Farmers Jonathan Joel Moss [email protected] Follow this and additional works at: https://trace.tennessee.edu/utk_gradthes Part of the Agricultural and Resource Economics Commons Recommended Citation Moss, Jonathan Joel, "Feasibility of On-farm Milk Processing, Packaging, and Marketing for Tennessee Dairy Farmers. " Master's Thesis, University of Tennessee, 2012. https://trace.tennessee.edu/utk_gradthes/1301 This Thesis is brought to you for free and open access by the Graduate School at TRACE: Tennessee Research and Creative Exchange. It has been accepted for inclusion in Masters Theses by an authorized administrator of TRACE: Tennessee Research and Creative Exchange. For more information, please contact [email protected]. To the Graduate Council: I am submitting herewith a thesis written by Jonathan Joel Moss entitled "Feasibility of On-farm Milk Processing, Packaging, and Marketing for Tennessee Dairy Farmers." I have examined the final electronic copy of this thesis for form and content and recommend that it be accepted in partial fulfillment of the equirr ements for the degree of Master of Science, with a major in Agricultural Economics. Kimberly L. Jensen, Major Professor We have read this thesis and recommend its acceptance: Margarita M. Velandia, Burton C. English, P. Michael Davidson Accepted for the Council: Carolyn R. Hodges Vice Provost and Dean of the Graduate School (Original signatures are on file with official studentecor r ds.) Feasibility of On-farm Milk Processing, Packaging, and Marketing for Tennessee Dairy Farmers A Thesis Presented for the Master of Science Degree The University of Tennessee, Knoxville Jonathan Joel Moss August 2012 Acknowledgments I would like to give thanks to my Lord and Savior Jesus Christ for giving me this opportunity and being by my side throughout this project. I would like to thank my parents for their support and encouragement. I greatly appreciate Dr. Jensen’s guidance and helpfulness. I am grateful to the members of my thesis committee and to Hal Pepper, Eric Goan, and Tommy Burch for their assistance in building the value-added budgets. I am also thankful to the professors in the department and the dairy farmers and processors that have assisted in this research. ii Abstract The Tennessee dairy industry has experienced a milk price and feed cost squeeze over the past several years, resulting in declining dairy farm numbers. Many dairy farmers are looking for ways to capture more of the food dollar. One alternative is employing a value-added enterprise. With added managerial and financial responsibilities, it is important that a market and financial feasibility be examined prior to entering into such an undertaking. This study focused on the feasibility of on-farm processed milk, cheese, and yogurt. The feasibility analysis consisted of two major components: market potential and financial feasibility. Market potential was examined for five major metropolitan areas (Memphis, Nashville, Knoxville, Chattanooga, and the Tri- Cities). The financial feasibility for these value-added activities was projected for a representative dairy farm for the state of Tennessee. iii TABLE OF CONTENTS Chapter 1: Introduction .............................................................................................................1 Introduction .......................................................................................................................1 Chapter 2: Literature Review ....................................................................................................7 Milk and Dairy Products Feasibility Studies ....................................................................7 Milk .......................................................................................................................8 Other Dairy Products ..........................................................................................13 Consumer Demand and Preferences ...............................................................................14 Milk and Dairy Products .....................................................................................14 Organic/Natural...................................................................................................15 Locally-Produced ................................................................................................16 Grass-Fed ............................................................................................................17 Animal Welfare ...................................................................................................18 Demographic Effects on Consumption ...........................................................................19 Consumer Preferences for Type of Outlet ......................................................................20 Farmers Market ...................................................................................................20 On-Farm Stores ...................................................................................................21 Role of Feasibility Analysis ............................................................................................21 Chapter 3: Methods ..................................................................................................................23 Market Feasibility Analysis ............................................................................................23 The Tennessee Dairy Industry Overview ...........................................................24 The Dairy Markets in Metropolitan Areas ..........................................................25 Consumption Trends and Projections for Milk and Dairy Products .......25 Major Retailers........................................................................................26 Niche Sellers ...........................................................................................26 Prices .......................................................................................................26 Product Attributes ...................................................................................26 Financial Feasibility ........................................................................................................27 Dairy Budget of a Dairy in the State of Tennessee .............................................27 Costs of Employing a Value-Added Activity .....................................................27 Projections...........................................................................................................28 Comparison of Market Opportunities .................................................................28 Net Present Value ...............................................................................................28 Internal Rate of Return (IRR) .............................................................................28 Break Off Level ..................................................................................................29 Sensitivity Analysis ............................................................................................29 Chapter 4: Results.....................................................................................................................31 Market Feasibility Analysis ............................................................................................31 The Tennessee Dairy Industry Overview ...........................................................31 The Dairy Markets in Metropolitan Areas ..........................................................41 Consumption Trends and Projections for Milk and Dairy Products .......41 Major Retailers........................................................................................44 Niche Sellers ...........................................................................................47 Prices .......................................................................................................48 Product Attributes ...................................................................................49 iv Financial Feasibility ........................................................................................................49 Dairy Budget of a Dairy in the State of Tennessee .............................................49 Costs of Employing a Value-Added Activity .....................................................52 Projections...........................................................................................................64 Comparison of Market Opportunities .................................................................66 Net Present Value ...............................................................................................67 Internal Rate of Return (IRR) .............................................................................67 Break Off Level ..................................................................................................67 Sensitivity Analysis ............................................................................................68 Chapter 5: Conclusion ..............................................................................................................70 References ..................................................................................................................................72