A Story about Rural Development:

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A Story about Rural Development
Entrepreneurship, Cows, Grass and MOMILK
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Presenters
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Agenda
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Agenda
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Basics of U.S. Dairy Production

• Joe Horner
• Extension Dairy Economist
• University of Missouri Commercial Ag

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Missouris Dairy Industry

• Since 1994, 52 of Missouris dairies have gone
  out of business.

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Cost of Milk ProductionFeb. 2008
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Preparing for a LookerMUs Role in the
Emergence of Pasture- Based Dairies

• Rich Crawford
• Southwest Research and Education Center,
  University of Missouri

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In addition to the economic reasons for dairying
decline in Missouri
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Dairying Decline
Economic
Social
Environmental
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1960s ?mid 1990sResearch and Extension Models
Economic
Social
Sustainable
Environmental
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Research Prior to Kiwis Arrival
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MU Pasture-Based Dairy Team

• David Baker
• Rich Crawford
• Stacey Hamilton
• Joe Horner
• Rob Kallenbach
• John Lory
• Tessa Marshall
• Ryan Milhollin
• Scott Poock
• Wayne Prewitt
• Ted Probert
• Tony Rickard
• Gene Schmitz
• Barry Steevens

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Monthly Workshops Promoting Pasture-Based Dairy
Production

• Pasture Management
• Species selection
• Paddock design and layout
• Pasture monitoring
• Animal Management
• Nutrition
• Reproduction
• Bio-security

• Financial Management
• Record keeping software
• Key economic indicators
• Environmental Compliance
• Manure handling systems
• Lane design
• Animal management to limit environmental impact

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Training Materials

• Missouri Dairy Grazing Manual
• Interactive web resources
• Forages and Weeds of Pastures

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Our Efforts, 1994-2008
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Agenda
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Opportunity Identification

• Randy Mooney
• Chairman of Grasslands, LLC
• Vice Chairman of DFA
• Dairy Producer, S.W. MO

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Why I Switched to a Pasture-Based Dairy System
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DFA Overview

• Farmer-owned cooperative
• 10,500 member farms
• 20 of U.S. milk production produced by members
• 33 of U.S. milk marketed by DFA
• 12 billion in sales
• 62 billion pounds

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Organizational Structure
Area Councils
Value-Added
Area Councils
Common
Hauling
Marketing
Fluid Sales
Agencies
Fluid
Joint Ventures Alliances Fluid Manufacturing
Governance
Dairy Food Products
American Dairy Brands
Formulated (FDFP)
Dairy Foods Group
Ingredients
Member
Services
Kellers Creamery
American Cheese
Italian Cheese
Borden
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DFA Marketing Reach
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DFA Member DemographicsQuartile 1 (January 2008)
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DFA Member DemographicsQuartile 2 (January 2008)
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DFA Member DemographicsQuartile 3 (January 2008)
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DFA Member DemographicsQuartile 4 (January 2008)
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DFA Member DemographicsAll (January 2008)
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DFAs Role in the Southeast

• Efficiently marketing member milk
• Paying a competitive price
• Providing services to members
• Working with other cooperatives
• Balancing supply and demand
• Encouraging supply growth
• Discouraging non-fluid milk use

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DFAs Role in Networking with Pasture-Based Dairy

• Provide information to members
• Facilitate new ideas
• Link interested producers with available
  resources
• Bring resources to producers

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The Hard and Soft Components of Opportunity
Identification

• Gary Townshend
• CEO, Grasslands LLC
• Monett, Missouri

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Hard Components
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Hard Components
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Hard Components
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Hard Components
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Soft Components
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Soft Components
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Soft Components
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Soft Components
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Soft Components
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Scale

• Initial scale
• Biggest discussion point and risk profile among
  shareholders at start-up
• Target the right business partners
• Dreams are free but acting takes a massive leap
  of faith

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Agenda
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Organizational Innovations

• Fabio Chaddad
• University of Missouri

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Dairy Career Path
Net Worth Millions
Equity Partner
Owner
5050 Share Milker
Low Order Share Milker
Contract Milker 1 to 4 years
Net Worth 0
Manager 1 to 3 years
Employee 1 to 4 yrs
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Key Elements of the Organizational Innovation

• Sharemilking Model
• Equity Partnership Model

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Sharemilking Model

• Contractual Arrangement
• Landowner
• Sharemilker
• Share the costs/benefits of operation
• 35 of NZ dairy farms
• Two general types
• Variable order (low order)
• Herd owning (50/50)

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Sharemilking Incentives

• Landowner
• Exit strategy (retirement)
• Generates cash flow, decreases involvement
• Aligns sharemilker incentives
• Sharemilker
• On-the-job training
• Shares cash flow (and risks) with landowner
• Capital accumulation
• Path to farm ownership

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Dairy Career Path
Net Worth Millions
Equity Partner
Owner
5050 Share Milker
Low Order Share Milker
Contract Milker 1 to 4 years
Net Worth 0
Manager 1 to 3 years
Employee 1 to 4 yrs
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Dairy Equity Partnerships

• Joint venture Farming Enterprise
• Investors
• Farmers
• Outside investors
• Ownership
• Proportional to investment
• Share in income stream and capital growth
• Legal Entity
• Company, partnership or trust
• Owns all assets

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Dairy Equity Partnerships

• Pooling of Resources
• Capital
• Knowledge
• Skills
• Networks
• Complementarity
• Investment in dairy operations across the globe

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Equity Partnership Model
FARMING COMPANY LIMITED Owning all Land, Stock,
Plant and Shares MAIN TRADING ENTITY
LENDERS -Term Debt -Current Account -Farm
Insurance -Key person insurance
Debt
All Expenses
All Income
Security Interest
Employment Contract
Shareholder Capital
Shareholder Dividends
Shareholder Guarantee
SHAREHOLDER A DIRECTOR OF COMPANY Owning (x) of
Company Shares
SHAREHOLDER B DIRECTOR OF COMPANY Owning (y) of
Company Shares
SHAREHOLDER C FARM MANAGER DIRECTOR OF
COMPANY Owning (z) of Company Shares
COMPANY CONSTITUTION
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Dairy Equity Partnerships

• Critical Success Factors
• Common vision
• Among Shareholders
• Team-based approach
• Level of farm and business performance
• Efficiency
• Scale
• Operational
• Clearly defined roles and expectations
• Governance team vs. management team
• Constitution and shareholders agreement

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Agenda
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Lessons Learned Public-Private Interface

• Rich Crawford
• Southwest Research and Education Center,
  University of Missouri

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How did we generate success?
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Generating Success
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Generating Success
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Missouris Pasture-Based System was in place
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Lessons LearnedA debt providers point of view

• Daryl OldvaderCEO, FCS Financial

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Financing Ideas
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Why Lenders Finance Ideas
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When is it not a good idea?
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System MissionInvestment Objectives

• Stimulate economic growth and development in
  rural areas
• Advance the institutions mission through asset
  and income diversification
• Recognize need for different investment
  strategies to address diverse needs of rural
  communities
• Establish reporting and oversight processes
• Provide opportunity to analyze financing gaps in
  rural markets

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Current Lending Environment
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Lessons learnedForeign entrant point of view

• Entrepreneurial Representative

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Agenda
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Pasture-Based Dairy System
Profitability Cash Generation Wealth Accumulation
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The Academic Story
Peter Klein University of Missouri
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The Academic View

• Peter Klein
• University of Missouri

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Entrepreneurship Research The Big Questions

• What exactly is entrepreneurship?
• What role does entrepreneurship play in a market
  economy?
• What determines the quantity and quality of
  entrepreneurship?

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Entrepreneurship and Economic Theory
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The Unit of Analysis
Individuals Demographics (age, income,
education) Attitudes toward risk Ways of
thinking
Opportunities Discovery or creation?
Industry analysis Psychology of alertness
Insider/outsider
Investments Resources Economic
organization Networks Exit / liquidity
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Lessons Learned

• The limits of economic planning
• Measuring success
• Observed (manifest) startups, self-employment
  rates, economic growth, innovation (maybe)
• Not observed (latent) creativity, leadership,
  risk-taking, judgment, alertness to opportunities
• The firms perspective versus the economys
  perspective
• The Halo Effect