Dave Natzke
Published in Midwest Dairy Business (April 2008)

More vertical integration, what many consider the “evil empire” afflicting segments of food production, is headed toward dairy. As in other industries, most vertical integration pressure will come from the top down, in an effort to squeeze as much money out of incremental margins as possible. But in an evolving business climate, I think more dairy pressure will ultimately come from the bottom up.

As I mentioned previously (February 2008 Midwest DairyBusiness, “Who’s sustaining what?”), I attended the International Dairy Foods Association Dairy Forum ’08. I wish I would have counted how many times I heard the comment – or a variation of it – from a speaker who said “it is the responsibility of the cooperative/processor/marketer/retailer to protect the perception of the consumer.” It’s pretty tough to build a case against that comment, since consumers ultimately pay the bills and, if you believe conventional wisdom, “the consumer is always right” (purchasing imitation pet testicles for their neutered pets’ self esteem, aside).

Disheartening in my conversations was not once did I hear a single comment claiming any responsibility to protect the integrity and livelihood of the supplier/producer. I asked. That’s troubling at a time when producers are being attacked on so many fronts, especially in animal welfare, production technology and environmental areas.

The checkoff-funded Midwest Dairy Association and others are creating tools to “promote” producers. Some small dairy companies base their entire marketing programs on producer integrity. But many others have focused so hard on the products that they have lost sight of producers and, in my 30 years in ag journalism, I have never heard from so many producers who believe they are being hung out to dry by their business and organization leaders. I guess it’s a cruel world.

So my first case for more bottoms-up vertical integration is that, if those on top are throwing you under the bus, why not get your own bus?

Second, playing into bottoms-up vertical integration is the emerging trend of consumers seeking locally sourced food from someone they know and trust. Numerous studies show farmers rank among the highest on the consumers’ reputation meter. What better way to put a face on a product than to put your face on your product?

Third, each step in the food chain – from production of the raw product to processing, packaging, marketing and transporting – adds value, costs and friction. As producers become more savvy marketers and are able to manage volume processing and packaging, it enables them to embrace those steps, instead of outsourcing them.

That ties in with a final ingredient – capital. Many “artisans” strive to make a direct connection to consumers on a small scale, but often lack the financial resources. As larger producers combine knowledge with capital, vertical integration becomes possible. Throw in the ability to reduce transportation costs and generate energy from manure, and the path becomes even smoother, with social and environmental pluses.

There are reasons why processing, packaging and marketing have become specialized. It’s a tough business, compounded by competition, policies and regulations at every level. Bottoms-up vertical integration takes work and money, and undoubtedly many will fail. It adds risks at every level. There are business cemeteries full of people who have already tried. It will take the right people, with the right products, in the right markets.

But I’m hearing from more entrepreneurs who, when push comes to shove, would rather press their noses up against their own bottoms, and not against someone else’s.

Posted with permission.