Betting the farm on your customers
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 his dairy-loving consumers.
“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.
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.
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).
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.
“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.
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.
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.
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,” said Benson, who nevertheless thinks Hesse should think long and hard about the risks of expanding too fast and bringing in that much debt
What do you think of Hesse’s business plan? Would you invest $1,000 in his farm for a 6 percent return? Leave your answer in the comments below.