| | Business summary | Production basics | Production/market mix targets | Financial benchmarks | Capital investment | Market basics | Development strategies - direct market cheese enterprise | Projected revenue and expenses - direct market cheese start-up enterprise | Sensitivity analysis | Capabilities | Definitions | Management strategies | Regulatory considerations
Business Summary
This factsheet provides specialized economic information on establishing and operating a start up cheese production and marketing enterprise. This information was generated by a group of cheese processors who arrived at a consensus of opinion on investment, production, marketing requirements, costs and revenues associated with developing a viable cheese enterprise.
This information is intended as a business planning tool. Managers will have to assess all the key production and financial variables that would influence the success of their enterprise.
Production Basics
The enterprise would be a one-person operation with a 1,200 litre vat producing Farmers cheese. It would process 120,000 litres of milk per year at two vats per week, 50 weeks of the year. With this production capacity, 11,500 kilograms of cheese would be produced. Allowing for 1% loss for shrink, spoilage and home consumption, 10, 350 kilograms of marketable cheese would be available.
Production/Market Mix Targets
| Package sizes | Mild | Medium | Old |
Prices ($/kilogram) |
| 300 grams | $12.50 | $14.50 | $16.50 |
| 500 grams | $12.00 | $14.00 | $16.50 |
| 750 grams | $11.75 | $13.75 | $16.50 |
| 1,000 grams + | $11.50 | $13.50 | $15.50 |
Financial Benchmarks
| . | Start up | Expansion |
| . | Established Market | Wholesale
Market |
| Gross operating profit1 | $15,534 | $67,394 | $151,873 |
| Return to management2 | $1,414 | $53,274 | $117,152 |
Capital Investment
This investment reflects a start up operation. Building costs reflect a completed building with power, heating and plumbing installed. Individuals can reduce the investment cost by doing their own costruction. Processors may also want to consider a large raw milk storage tank with suitable access if they are bringing in milk for processing.
 | Investment |
| Land (3 acres) | $9,000 |
| Improvements |
| Utilities (50% share) | $7,500 |
| Facilities |
| Building (1200 sq. ft.) | $72,000 |
| Equipment |
| Vat (1,200 litres) | $10,000 |
| Cooler | $3,000 |
| Press | $5,000 |
| Molds | $7,000 |
| Shelving | $5,000 |
| Small tools | $5,000 |
| Vacuum packer | $5,000 |
| Pumps | $2,500 |
| Tables | $200 |
| Brine vat | $2,000 |
| Total equipment | $44,700 |
| Vehicles |
| Delivery van/truck (50% share) | $5,000 |
| Other Capital |
| Office equipment | $5,000 |
| Market development | $5,000 |
| Total other capital | $10,000 |
| Total Capital Investment | $143,700 |
Market Basics
Marketing activities should build a reputation as a reliable supplier of a good quality product. Managers must know both the buyers and sellers that make up the industry.
Marketing activities should include:
- Developing sample labels
- Promotional activities
- Printing brochures and business cards
- Providing sample cheese products to potential buyers
Development Strategies - Direct Market Cheese Enterprise
A key challenge in developing a new cheese plant is finding a balance between developing production capabilities, developing a market and gaining regulatory approval. A common strategy for developing a cheese enterprise is to stage into the industry over time which would allow individuals time to develop both their production capabilities and their markets.
In this development process a key decision will be what size of new (initial) facility to build. This decision reflects the challenge of balancing the production/marketing mix in a developing enterprise. Factors to be considered in making this decision include risk exposure, viability of the operation and market potential.
A critical future decision is scaling up from a start-up operation to one that attains desired economic performance through the production and marketing of larger quantities of cheese. One expansion strategy is to increase production and sales in existing markets utilizing the same equipment. Processing would take place four times per week, processing 240,000 litres of milk and producing 22,248 kilograms of cheese.
An alternative expansion strategy is to focus on producing for wholesale markets which would require more equipment and more storage capacity. Approximately 750,000 litres of milk would be processed, producing 71,280 kilgrams of cheese for these markets.
| Additional Capital Investment for Expanded Operation in Wholesale Markets |
| Total Cost |
| Vat (5,000 litres) | $25,000 |
| Addition to building | $96,000 |
| Plate pasteurizer | $85,000 |
| Total Additional Investment | $206,000 |
| Projected Revenue and Expenses - Expanded Operation in Different Markets |
| Established Markets | Wholesale Markets |
| Projected Revenues |
| Cheese sales | $271,245 | $724,784 |
| x |
| Projected Direct Costs |
| Production costs | $169,720 | $518,870 |
| Marketing costs | $27,000 | $34,000 |
| Interest on operating | $7,131 | $20,042 |
| Total Projected Direct Costs | $203,851 | $572,912 |
| x |
| Projected Indirect Costs |
| Depreciation | $6,235 | $16,535 |
| x |
| Total Projected Direct & Indirect Costs | $210,086 | $589,447 |
| x |
| Gross Operating Profit | $61,159 | $135,337 |
| x |
| Interest on Investment | $7,885 | $18,185 |
| x |
| Total Projected Economic Costs | $217,971 | $607,632 |
| x |
| Return to Management | $53,274 | $117,152 |
Projected Revenue and Expenses - Direct Market Cheese Start-Up Enterprise
| Projected Revenues | Revenues | Your Snapshot |
| Cheese sales | Mild | Medium | Old | | |
| 300 grams | $15,525 | $18,009 | $10,247 | $43,781 | |
| 500 grams | $14,904 | $17,388 | $10,247 | $42,539 | |
| 750 grams | $16,418 | $19,212 | $5,123 | $40,753 | |
| 1,000 grams + | $5,356 | $6,288 | $1,604 | $13,248 | |
| Total cheese sales | | | | $140,320 | |
| Less: wholesale adjustment (10%) | | | | ($14,032) | |
Total Projected
Revenues | | | | $126,288 | |
| x | | | | | |
| Projected Direct Costs | | | | | |
| | Litres | $/litre | | |
| Milk purchases | | 120,000 | $0.565 | $67,800 | |
| Ingredients | | 120,000 | $0.05 | $6,000 | |
| Cleaning supplies | | 120,000 | $0.02 | $2,400 | |
| Whey management | | 120,000 | $0.02 | $2,400 | |
| Power | | | | $2,400 | |
| Building repair & maintenance | | | | $720 | |
| Building insurance | | | | $2,000 | |
| Equipment repairs | | | | $2,500 | |
| Telephone | | | | $1,200 | |
| Heating costs | | | | $1,200 | |
| Professional fees | | | | $500 | |
| Vehicle insurance | | | | $1,000 | |
| Vehicle operating | | | | $1,000 | |
| Marketing costs | | | | | |
| xxxVehicle operating | | | | $4,000 | |
| xxxLabel & packaging costs | | | | $3,260 | |
| xxxMarket stall rental | | | | $2,500 | |
| xxxAdvertising & promotions | | | | $1,000 | |
| xxxTrade shows & meetings | | | | $1,000 | |
| xxxCasual labour | | | | $4,000 | |
| Interest on operating 3 | | | | $3,874 | |
| Total Projected Direct Costs | | | | $110,754 | |
| x | | | | | |
| Projected Indirect Costs | | | | | |
| Depreciation4 of facilities & improvements | | | | $3,475 | |
| Depreciation of equipment & vehicles | | | | $2,485 | |
| Depreciation of other capital | | | | $525 | |
| Total Projected Indirect Costs | | | | $6,235 | |
| x | | | | | |
| Total Projected Direct & Indirect Costs | | | | $116,989 | |
| x | | | | | |
| Gross Operating Profit | | | | $ 9,299 | |
| x | | | | | |
| Interest on Investment 5 | | | | | |
| Facilities & improvements | | | | $4,475 | |
| Equipment & vehicles | | | | $2,485 | |
| Other capital | | | | $275 | |
| Land | | | | $900 | |
| Total Interest on Investment | | | | $7,885 | |
| x | | | | | |
| Total Projected Economic Costs | | | | $124,874 | |
| x | | | | | |
| Return To Management 2 | | | | $1,414 | |
Sensitivity Analysis
The profitability of a direct market cheese enterprise will be strongly influenced by the price per kilogram received for different package sizes and cheese types.
The table below shows the effect on return to management of the changes in prices (across the board) for cheese products.
| . | Percent increase in prices |
| Enterprise | 10% | 15% | 20% |
| Start up | $14,043 | $20,356 | $26,672 |
| Expansion |
| Established market | $80,398 | $93,961 | $107,523 |
| Wholesale market | $189,631 | $225,870 | $262,109 |
Capabilities
Personal Capabilities Required for Developing a Cheese Enterprise
- People skills
- Marketing skills
- Capacity to put in long hours
- Capacity to be flexible with time
- Have a passion for cheese making
- Developed style or techniques
- Pay attention to details
- Patience and perserverance
- Practical experience (one year)
- Formal or informal training
Key Marketing Activities/Capabilities for Developing a Direct Market Poultry Enterprise
- Finding a unique targe (niche) market
- Knowing competitors in the market
- Making market contacts
- Determine quantities required by target market
- Determine the distribution system required by the target market
- Determine marketing activities required to access market
Definitions
1Gross operating profit: The amount remaining after direct and indirect expenses have been paid.
2 Return to management: An amount left of compensate the owner-operator for risk and management.
3Interest on operating: The interest on an operating loan, calculated at 7.25% for 6 months.
4 Depreciation: The reduction in the value of an assets over its lifetime.
5 Interest on Investment: The cost of investing in capital assets rather than in a financial investment. Valued at 10% on all asset categories.
Management Strategies
Key management strategies that will contribute to the production and economic performance of the enterprise:
- Developing a niche market.
- Choosing a product that is unique rather than competing with imported products.
- Be fully aware of the significant level of market development required to become established.
- Responding to customer needs by making the type of cheese requested.
- When considering expansion, expanding the product line is a strong option along with expanding production capabilities. Opportunities for different types of cheeses should be thoroughly investigated.
- Communicate with other producers.
Regulatory Considerations
The regulatory requirements for developing a cheese production and marketing enterprise are significant. If the product will be marketed outside of the province, the plant must be federally licenced and inspected. This will require the submission of blueprints for the facility, a business plan with five years of projections and inspection by Canadian Food Inspection Agency (CFIA) inspector.
If all the product will be marketed in Alberta, a provincial inspector with the Food Safety Division of Alberta Agriculture and Food (AF) would inspect the facility and recommend that the Alberta Dairy Board grant a licence.
Processors will also have to be licenced by the Alberta Dairy Board for their supply of raw milk. A licence will be granted upon inspection of the facility by either the CFIA or the Food Safety Division of AF.
At time of printing, legislation was introduced to change the Alberta Dairy Board to a producer run organization to be called Alberta Milk.
For more information, contact:
Alberta Agriculture and Food
Production, Marketing, Economics, Business Planning & Development - Contact the Alberta Ag-Info Centre at 1-866-882-7677 or visit our website at http://www.agric.gov.ab.ca
Regulatory Issues - Contact the Alberta Dairy Board at (780) 361-1231 or Prevention/Investigation Unit, Regulatory Services Branch at (403) 340-7172.
The following people contributed to the preparation of this factsheet:
Dennis Dey, Farm Management Consultant, Olds
Bill Grabowsky, Beef Specialist, Wetaskiwin
Dean Dyck, P. Ag., Farm Management Specialist, Red Deer
Source: Agdex FS410/821-3. April 2002. |
|