Case Study 1: Family Enterprise

Cow comfort: a case study in sustainable entrepreneurship

Joy M. Pahl

Introduction

The 2015 World Dairy Expo welcomed over 80,000 visitors to Madison, Wisconsin, in late September. For anyone in the dairy industry, the Expo was the event of the year, but for Jess Heemeyer, and her parents, Lynn and Cindi, it was particularly significant because it was the first time their family business, Alternative Animal Bedding (AAB), was an official exhibitor and vendor at the Expo.

On her two-hour drive home to Northeast Wisconsin, Jess considered her future. AAB, a business founded by her parents five years earlier, sold a paper byproduct as animal bedding to dairy farmers, and had just reached its highest level of sales to date. Her parents had spent countless hours visiting farmers around the state to introduce them to this new bedding product, and their hard work had really paid off. Jess had committed herself fulltime to the business only six months earlier; however, she had played a role in AAB right from the start and had helped with some of the accounting duties, with her mom, Cindi, who managed all of AAB’s billing and financial records.

Jess knew that AAB had room to grow, but how best to grow the business was the question. She also wondered what steps should be taken to maintain control over the resources and capabilities that made AAB an increasingly valuable enterprise.

Inspiration and entrepreneurship

In 2010, as an accounting student at a college near Green Bay, WI, Jess landed an internship at Fox River Fiber Co. (FRF), a company that purchased post-consumer waste paper to convert it into high-quality pulp for use in printing and writing papers, tissue paper, and FDA food-grade packaging[1]. After FRF’s process of decontamination, de-inking, washing, and screening were used to produce the high-quality pulp, a paper byproduct waste remained. It was this paper byproduct waste that caught the attention of Lynn Heemeyer the day that Jess gave her dad a tour of the plant.

Lynn Heemeyer grew up in South Dakota on a small dairy farm, which he eventually owned and operated. According to Lynn, every dairy farmer’s goal is to keep his or her cows as comfortable as possible. The more comfortable the cows are, the more relaxed they are, and the more milk they produce. One key to cow comfort is the bedding used. Most farmers used one of the following materials as cow bedding: straw, sawdust, sand, or reclaimed solids. Each of these materials had its advantages and disadvantages, but ultimately farmers looked for bedding materials that allowed them to minimize their costs while maximizing their cows’ comfort. While Lynn farmed in South Dakota, he had attempted to do this by purchasing ground chipboard from a nearby Larson Doors plant. He used this for bedding for his own 60 cows, but he had also sold it to other dairy farmers in the area to make additional income.

Eventually it had become clear to Lynn that in order to survive in the dairy farming business, he would need to expand the size of his herd significantly (to at least 400 cows, in his estimation). Given that neither his son, already an adult pursuing a non-farming career, nor his daughter, Jess, a 12-year old at the time, were interested in dairy farming, he decided to leave the dairy industry and move to Wisconsin.

Disclaimer. This case is written solely for educational purposes and is not intended to represent successful or unsuccessful managerial decision making. The authors may have disguised names; financial, and other recognizable information to protect confidentiality.

Joy M. Pahl is an Assistant Professor at the Department of Business Administration, St Norbert College, De Pere, Wisconsin, USA.

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Once in Wisconsin, he started a rustic home décor and log furniture business. Nevertheless, the dairy farmer instincts were always in play, and when he saw the soft, fluffy paper byproduct waste on his tour of Fox River Fiber, his entrepreneurial wheels started to turn.

Getting started

The Heemeyers approached FRF about taking some of the paper byproduct to test it in cattle stalls at a University of Wisconsin test farm nearby. Lynn and Jess explained that if the cows responded well to this bedding alternative, they would be interested in taking more of the byproduct. FRF produced 2,300 tons of byproduct per week which had to be disposed of at two local landfills at a fairly significant cost to FRF, so the thought of avoiding some or all of these landfill costs appealed to the folks at FRF.

After the initial testing of the byproduct in the cow stalls proved to be successful, Lynn was ready to move forward to begin building a business; however, he knew that the Department of Natural Resources (DNR) would need to be involved. This paper byproduct was biodegradable, nevertheless it was classified as an “industrial waste product,” and in order for it to be used for another purpose, the DNR needed to determine that using it as bedding would not be harmful to the soil or ground water. The testing process required by the DNR cost $25,000, and having satisfied the tests, AAB was granted a five-year trial run by the DNR. During this five-year period, Heemeyer needed to provide samples of the product for testing (screening for PCBs and heavy metals), and each year Heemeyer needed to verify that FRF’s manufacturing processes had not changed.

With the University’s successful testing, the DNR’s blessing, and FRF’s cooperation, Heemeyer started AAB. Beginning in September 2010, AAB started selling dairy farmers recycled paper byproduct as bedding.

Livestock bedding

Dairy farmers used a variety of materials for animal bedding – straw, sawdust, sand, and reclaimed solids. Each material had advantages and disadvantages.

Straw was the most traditional bedding. After the grains and chaff have been removed from cereal plants (e.g. wheat, oats, barley, rye), straw remains. The straw needed to be collected from the fields and bundled or baled. Straw is natural and biodegradable. Traditionally, dairy farmers grew their own feed for their cows (alfalfa, corn), had pasture land for the cows to graze on in the late spring and summer seasons, and produced sufficient straw for bedding when the cows were in the barn. However, dairy farms had become increasingly large in order to take advantage of economies of scale, and now many dairies did not grow their own feed, pasture their cows, nor grow sufficient amounts of straw-yielding grains for bedding. Thus, farmers often turned to the market to purchase bedding. In addition, if the cows were not pastured, the need for bedding year-a-round increased. Thus, straw had become expensive ($125-$150 per ton) and was in short supply.

Sawdust was viewed as a fine alternative to straw, and used to be quite inexpensive, since lumber mills used to produce an abundance of sawdust and the demand for it was fairly weak. This situation had changed, however. Given the shortage of straw, demand for sawdust had increased dramatically ($2,200 per 53 ft. trailer load at peak demand times), and timely delivery was undependable. The quality and softness of the sawdust was variable, also.

Sand had become a popular bedding material. It was inorganic, so bacteria would not grow in it. It was widely available and inexpensive. However, sand was costly in other ways. Any bedding material needed to be removed from the stalls on a regular basis (anywhere from three-times per week to one-time per week), disposed of, and replaced with fresh bedding. Disposal usually meant placing the soiled bedding material into a large lagoon or pit. This pit needed to be emptied periodically. Emptying the pit involved breaking up solids, pumping out the contents, and digging out the material – sand – that had settled on the bottom. This was a time-, equipment-, and labor-intensive process. One dairy farmer estimated an annual cost of $170,000 per year to

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remove sand from his pit. Once the material in the pit had been removed, some of it could be reclaimed for reuse through the use of a sand reclamation system, and the remainder spread on fields as fertilizer. Sand was a very abrasive material. Every piece of equipment that processed the sand was negatively affected by handling the sand. Farmers who used sand as bedding and hired out their manure spreading and hauling were charged a premium by the professional spreaders because of the costs associated with the equipment damage inflicted by the sand.

Reclaimed solids: some farmers invested in a “digester” which was equipment that processed manure by removing moisture and methane gas from it. The remaining material was a byproduct that could be reused as bedding. Some farmers believed that this was not an ideal bedding because when the byproduct became wet, it lacked absorbency and bacteria levels shot up. Some farmers mixed the reclaimed solids with other materials (e.g. sawdust) in an attempt to address these issues.

AAB: the value proposition and the challenge

The paper byproduct sold by AAB was available year-round, unlike many of the alternative beddings whose availability was dependent on the weather or season. In addition, AAB’s bedding appeared to offer several other advantages over the bedding alternatives. First, it was a softer consistency than any of the other options, so cows would likely prefer to lie on this bedding. Heemeyer verified this hunch when a farmer who was using sand agreed to test AAB’s bedding in the stalls on one half of his barn. After just one day, cows returning from milking were seen waiting for a paper-bedded stall to become available rather than to lie down on a sand-bedded stall (see Exhibit 1).

Second, the paper byproduct was less expensive than the alternatives – less than half the price of straw. In addition, because AAB’s product was so much cheaper, farmers were often willing to use more of the bedding in each stall. This additional bedding meant that cows were more comfortable and that they would be less likely to get sore hocks (the back of a cow’s legs) from rubbing on the base of the stall when it was not covered with a sufficient amount of bedding. Cows with sore hocks were reluctant to stand up to eat and drink often enough to maintain optimum health and nutrition which could reduce the cows’ milk production.

Finally, AAB’s bedding, because of its weight and moisture content, stayed in place better than the alternatives. Most dairy cows were housed in well-ventilated, free stall barns. The fans that provided the ventilation created a constant eight-mile per hour breeze through the barn. This breeze dried out the top layer of straw and sawdust bedding and eventually blew it out of the stalls and into the barn’s alleyway.

These notable advantages persuaded a number of dairy farmers to purchase the paper byproduct bedding from AAB beginning in September of 2010. Sales had continued to grow throughout that Fall, Winter, and Spring. However, when Summer temperatures began to climb, some of AAB’s customers started to report problems. Somatic cell counts in the milk were high. This was an indication of elevated levels of bacteria in the milk, which was due to mastitis. Mastitis is an infection of the udder of a cow, which is caused by bacteria invading the teat canal. This disease is potentially fatal to the cow and is the most common and costly disease in the cattle industry (Ruegg, 2015).

The dairy farmers quickly linked these elevated somatic cell counts and incidents of mastitis to the only thing that had changed in their farming routines – AAB’s bedding. This was disastrous. The infected cows needed to be separated from the herd, and some never returned to service. Plus, the farmers were paid less for their milk, since they were penalized for having milk with elevated somatic cell counts. This situation had the potential to close down the fledgling AAB before it concluded its first full year of operations.

AAB’s recovery

As soon as news of the problems started to reach Lynn Heemeyer, orders for the byproduct bedding slowed to a near stop. Lynn understood the issues. The byproduct emerged from the paper recycling process was hot and wet (40 percent moisture content). Alone, these issues

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were not problematic; however, after the paper byproduct was placed in the stalls as bedding and the cows used the bedding, animal waste (urine, feces, and some milk) was added to the bedding. When this waste was added to the warm, moist paper byproduct under warm, moist weather conditions, the bedding became a bacteria breeding ground.

Lynn knew from his farming experience that it was possible to dry the paper byproduct with the same automated drying system used to remove moisture from corn. This would be prohibitively costly, however. Specialized equipment, liquid propane gas, and electricity were all required for drying systems. In addition, as soon as the paper byproduct was installed as bedding, it became wet once again. Alternatively, a drying agent could possibly be added to the paper byproduct to address the moisture issues. The first thing Lynn thought of was lime (calcium oxide or calcium hydroxide) – a natural, fine granular mineral derived from limestone or chalk. Most farms kept 50-pound bags of “barn lime” on hand to dry and sanitize wet spots in barns and pens. Over a period of several months, Heemeyer mixed several different types of lime with the paper byproduct; however, each time he had done this, the temperature of the byproduct climbed. When lime was mixed with water, the mixture became hot. Given that the paper byproduct had 40 percent water content, this was not surprising. So, by adding lime to the paper byproduct, each time the bedding became wet, it would also become somewhat hot. While this was not ideal, in 2012 AAB began to sell paper byproduct bedding with lime in order to stay in business.

Heemeyer was determined not to give up his quest to find a better solution. He felt confident that lime was the answer, but he also knew that the ideal solution may require other ingredients in addition to lime.

Lynn discovered the solution at a nearby lime and limestone plant, Carmeuse. The plant manager said to Heemeyer, “Well, we have this dust that is produced in the lime production process and we don’t really do anything with it. What do you think about trying that?” This lime plant was coal-fired, and a lime kiln dust byproduct resulted from the plant’s production process. This lime kiln dust was tinged with coal dust and was a light gray color, and thus could not be sold by Carmeuse. The lime kiln dust turned out to be the perfect additive to AAB’s paper byproduct bedding. When added to the paper byproduct, it did not raise its temperature. In addition, the lime kiln dust was organic industrial waste that Carmeuse was simply disposing of. AAB became a new customer for this lime byproduct – a byproduct that used to create an expense for Carmeuse! AAB introduced the lime kiln dust to its paper byproduct bedding in March 2014.

AAB’s operations

Fox River Fiber allowed AAB to set up its customized hopper and mixing system, and the lime kiln dust storage tank, on its premises, adjacent to the supply of the paper byproduct (see Exhibit 2). AAB invested $200,000 in its customized hopper, storage, and mixing system, and another $130,000 in a loader. The lime kiln dust was trucked to FRF in tankers from the Carmeuse plant, 35 miles from FRF. The lime kiln dust was the consistency of baby powder and was handled and stored like a liquid.

AAB employed one non-family member, Kevin, as their loader operator. Kevin managed the mixing process, which was monitored by software on an iPad. He also maintained the equipment, monitored the supply of lime kiln dust, and scheduled lime kiln dust deliveries and replenishments. The mixing and loading system allowed a semi-truck trailer to be loaded in 12 minutes.

FRF created 2,300 tons of paper byproduct per week, all of which was available to AAB. This was the equivalent of 100 loads of bedding per week. AAB took just 53 truckloads of paper per week for sale to dairy farmers. Each truckload consisted of a mixture of 23 tons of paper byproduct and five tons of lime kiln dust, for a total weight of 28 tons. One truckload of bedding could support 350 cows for 7-14 days. AAB sold its bedding for an average of $30 per ton ($840 per truckload) to farms in the 11 counties that were within 125 miles of the plant. AAB’s prices were closely tied to its transportation costs, which were determined by distance. AAB had customers in 26 different Wisconsin counties, Michigan’s Upper Peninsula, and Northeast Iowa. Customers in Iowa were charged significantly more than customers with farms closer to AAB ($50 per ton vs $30 per ton).

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AAB used a local, family-owned trucking firm to deliver its bedding to farmers and to transport the lime kiln dust from Carmeuse. Transportation costs were AAB’s single largest expense, consuming 59 percent of the company’s $2.3 million in revenues from dairy farmers. Other operating expenses as percent of sales were: lime kiln dust (12 percent), wages and salaries (7 percent), and administrative/other (6 percent). This left an operating profit of 16 percent. Only the wages and salaries of Jess and Kevin, the loader operator, were included as part of AAB’s operating expenses. AAB was organized as an limited liability company, owned by Lynn and Cindi Heemeyer. Under this structure, the owners reported the income of the business as personal income.

Sales and marketing

When Jess decided to join AAB on a fulltime basis in March 2015, the father-daughter duo went on a “road show” of sorts, to introduce Jess to current and prospective customers. This was an important transition for AAB. Customers had come to trust and respect Lynn and Cindi Heemeyer as people who knew the dairy farming business and who had their best interests in mind when doing business. The Heemeyers clearly wanted these strong, mutually beneficial relationships to continue, but Lynn also knew that he wanted to change his role in the business to one focused more on product development and diversification. (Lynn was researching other additives that would allow AAB to place its bedding in 50 lb. bags. This would make the bedding more portable and convenient to handle in smaller quantities and would allow it to be used as bedding for other animals. These bags of bedding could be sold in retail stores, pet stores, or farm cooperatives. Lynn also considered developing a specialized piece of equipment, a stall groomer. This groomer could be sold as a complement to the paper byproduct bedding and would be used to redistribute the bedding in the stall to freshen the bedding).

Jess was excited about meeting AAB’s current customers, winning their trust, and assuring them that she was every bit as committed to serving their needs as her parents were. She was also motivated to grow sales and to introduce herself and AAB’s product to as many prospective customers as she could. Because Jess had been involved with AAB since the start and because Jess understood a great deal about the dairy farming industry, the dairy farmers were comfortable talking with her. “Farmers can smell a phony a mile away,” Jess remarked. Being a 27-year old female in this business did not appear to be hindrance. According to Jess:

If you can speak the language of dairy farming and if you have a product that serves a particular need at a higher quality and a lower cost than alternatives, that’s all that matters. Plus, more and more of these farmers have daughters and daughters-in-law who are in the business. They are comfortable with me. Also, the fact that AAB is a family business seems to help.

Not every encounter with dairy farmers had been pleasant, however. At times, Jess had visited farms, introduced herself and her product, and had been promptly asked to leave. Those farms were those that had used AAB’s bedding prior to the addition of lime and had cows with serious infections. The Heemeyers understood that some of these farmers would never give AAB another chance. However, some might – particularly if their neighbors could attest to the quality of the current bedding and if the reluctant farmers could observe cows using the bedding on neighboring farms.

Jess was visiting a particular farmer who extended this greeting: “You know you really have some guts setting foot on my property after what happened to my cows on your bedding!” Jess apologized, and respectfully explained the changes that had been made; she also shared the success stories of some neighboring farms using AAB bedding. The disgruntled former customer listened, and finally said, “Well, I’m desperate. I’ll be out of straw in a week, and I have nothing lined up for bedding. Can you bring me a load before the end of the week?” Jess agreed. Four weeks later, Jess was representing AAB at Farm Technology Days when she spotted the customer making a beeline for her booth. Jess held her breath as he blurted, “I have to tell you, whatever you did to your product, it’s amazing. I’ll be ordering another load.” Winning back the trust and business of those early, disappointed customers had been a big job, but a crucial one for AAB.

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Jess admitted that some farmers tried AAB just because their paper bedding was cheaper than the alternatives or because the traditional alternatives simply had not been available. Some farmers bought AAB bedding to mix with other types of bedding to reduce bacteria growth and to absorb moisture in their bedding. She did not seem to care what motivated the farmer’s initial purchase, but she did care about keeping the customers after delivery of the initial load.

Jess sometimes offered a free load of bedding to a prospective customer for a trial. Other marketing efforts included asking current customers to allow AAB to take promotional photos of the bedding in their barns and of their pits, and in some cases, to allow AAB to bring prospective customers for a tour of their farm. In exchange, AAB offered to deduct charges from their bedding bills.

A great deal of promotion occurred via word-of-mouth among farmers, but also via testimonials from other trusted professionals like veterinarians, nutritionists, and hoof-trimmers who attested to the good health and comfort of the cows living on the farms that used AAB bedding.

Farm shows were another effective marketing tool for AAB. These venues attracted large numbers of farmers because they were interested in learning about new farming techniques. The shows allowed Jess to gain access to many farmers in a single location, so it was very efficient for both AAB and the farmers. Jess would set up the AAB exhibit so that farmers could see and touch the bedding. Pictures and videos of the bedding in use were also on display.

Each year, many Wisconsin counties also sponsored “dairy breakfasts” as community events to promote the dairy industry in the county. For each breakfast, a dairy farm in the county served as the host farm. If the host dairy farmer was a customer of AAB, Jess was invited to be at the breakfast to answer questions about the bedding. She stated:

These dairy breakfasts attract a lot of non-ag people around the county who want to see how a modern dairy farm works. Sometimes these folks are also concerned about how the cows are treated and about what farming practices are being used. The other guests at the breakfast tend to be the neighboring farmers who are there to support the host and to support the industry. The dairy breakfasts allow AAB to provide a “live demonstration” of the bedding in use. Visitors can see for themselves what the stalls looks like and how the cows react to the bedding. Plus we have the host farmer – our customer – saying to the guests, “I wouldn’t be using this stuff if it wasn’t working well.” We reach a lot of people this way, and we also get good feedback from these events.

Jess also attended county fairs, 4H sales shows, and the Northeast Wisconsin Youth Livestock fair. Many children of dairy farmers participated in these fair events by showing their animals. By attending these events, Jess met with some of AAB’s customers, thus building rapport and strengthening these relationships.

Additional industry and business details

In 2015, the state of Wisconsin had 9,793 dairy farms and 1,280,000 dairy cows (www.eatwisconsincheese.com/media/facts-stats/farm-dairy-statistics). The state was second only to the state of California in milk production. Wisconsin ranked first in the production of cheese, producing 25.7 percent of the block cheese and 46.0 percent of the processed cheese in the country. Approximately 90 percent of the milk produced in the state was used to produce cheese (USDA/ERS, 2014).

Wisconsin’s dairy farming industry had undergone significant farm consolidation and milk production growth. While the number of dairy farms had declined dramatically over the years, milk production had increased steadily (Exhibit 3). This consolidation trend was evident in Wisconsin dairy farming. Exhibit 4 shows the ranges of herd sizes in the state; the average Wisconsin dairy farm milked 131 cows (www. eatwisconsincheese.com/media/facts-stats/farm-dairy-statistics). However, these were considered tiny farms by California standards, where 1,748,000 cows were housed on 1,438 dairy farms, for an average of 1,215 cow per farm (Exhibit 5) (California Dairy Statistics Annual, 2015 Annual Data, 2015).

Wisconsin dairy cows produced an average of 62 pounds of milk per day (www.eatwisconsincheese. com/media/facts-stats/farm-dairy-statistics). Milk was sold in units of 100 pounds. The average price per 100 lbs of milk was $17. This meant that each cow averaged $10.54 per day of revenue, or $3,847.10 per year. Costs for dairy farming included feed, overhead (barns, pasture lands,

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equipment – milking, feed loaders and distributors, and bedding shooters), bedding, labor, herd health care, electricity, and fuel. Bedding costs represented between 10 and 15 percent of a dairy farm’s operating expenses; given the razor-thin profit margins of dairy farming, dairy farmers were known to negotiate regularly with their suppliers[2].

AAB concentrated its sales efforts in 11 Wisconsin counties: Brown, Kewaunee, Outagamie, Calumet, Manitowoc, Sheboygan, Shawano, Winnebago, Waupaca, Fond du Lac, and Oconto. These counties were home to approximately 356,000 cows (Gould, 2015). Jess estimated that at any given time, about 37,000 cows were resting on AAB bedding.

AAB had 150 regular customers; however, some of those customers had very small herds, and thus did not buy a great deal of bedding, and some pastured their cows all Summer, and therefore did not need bedding for that season. Other customers were very large. For example, AAB had four customers in Kewaunee County each of whom milked an average of 2,500 cows.

The future

As the Heemeyers looked to the future and considered their near-term and longer-term goals, they felt certain that they had a product with a distinct competitive advantage with strong growth potential.

AAB generated enough sales to take 53 percent of the paper byproduct waste produced each week by FRF. This meant that AAB could grow by another 47 percent before exhausting the FRF supply of raw material. Jess was confident that this sales growth could be achieved in a short time, given the numerous advantages offered by this bedding material and given how quickly sales had increased since Jess came on board fulltime. Lynn and Jess had considered bringing on another sales person, but decided against it for now. These bright growth prospects came with their own set of challenges, however. Jess considered these challenges:

What happens when AAB sells all of the paper byproduct FRF produces and there is no more room to grow? Would FRF actually start charging us for the byproduct? Also, could FRF suddenly decide that they don’t need us anymore? They control the raw material, all of the equipment is housed on their site, and they possibly could get our customer list from the trucking company that hauls all of our loads.

AAB was in the process of negotiating a new five-year contract with FRF. Jess believed that there were certain conditions in place that made it unlikely that FRF would pursue these tactics. First of all, by having AAB take the paper byproduct, FRF saved the costs it would otherwise incur to have the byproduct landfilled. Second, the leadership at FRF had established a trusting relationship with the Heemeyers that had proven to be mutually beneficial. FRF had turned over complete responsibility for managing the paper byproduct to AAB. After taking the byproduct AAB needed, Jess arranged for the rest of it to be processed by the Brown County Landfill or by Waste Management. Essentially, FRF viewed AAB as a partner, and now that Jess had come into the business on a fulltime basis, FRF seemed even more confident about the prospects of this relationship continuing to produce positive outcomes for the long term. Third, FRF did not appear to be interested in diversifying its business by directly entering the animal bedding industry. Selling animal bedding to dairy farmers was very different than collecting, recycling, and selling paper.

Jess also wondered about growing the business beyond the FRF supply of paper byproduct. Were there other paper waste materials that could be used? In addition to the huge dairy farming industry, Northeast Wisconsin was home to many paper mills, so there might be alternate or additional suppliers that would allow AAB to grow more – there certainly were ample numbers of dairy cows that needed comfortable bedding. Two other paper mills had approached AAB about the possibility of giving AAB its paper byproduct waste instead of sending it to a landfill. Unfortunately, neither waste product met AAB’s moisture content specifications, even after the lime kiln dust was added. It appeared that there were paper mills eager to find “green” uses for its waste, unfortunately, not all paper waste was appropriate for animal bedding.

The supply of lime kiln dust from the Carmeuse plant had been abundant, however, any significant slowdown in demand for Carmeuse’s main lime product could potentially create a shortage for AAB. The Heemeyers understood this possibility and had connected with a second

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source of lime kiln dust in the state. Of course this supply was farther from their mixing and loading station, so transportation costs would be higher when using the secondary lime supplier.

The Heemeyers could envision expanding beyond the 11-county region – even beyond Wisconsin – but only if additional paper byproduct and lime kiln dust supplies could be secured. They were motivated to grow AAB not only to achieve financial security for themselves but also to extend the environmental and sustainability benefits of the business to as many customers as possible. According to Jess, “You can’t beat taking two industrial waste products, combining them, and providing a biodegradable bedding for thousands of cows. Plus, it’s better for the cows and less costly for the farmers! We want as many cows as possible to enjoy this bedding.” She noted that it may even be possible to create and sell bagged bedding for use with small pets, like rabbits, gerbils, hamsters, and guinea pigs. “I know the price per pound for retail bedding is extraordinary compared to our prices – a 10 pound bag of hamster bedding retails for $15!. So it looks like we could make a lot more money doing that, but I also know that there are a lot more costs and risks associated with expanding in that direction,” she added.

The Heemeyers also considered growing via diversification. Jess knew that there were products that dairy farmers viewed as complementary to bedding. Some farmers actually invested in mats or mattresses for their cows, and these could cost anywhere from $100 to $400 per cow. Mats were placed between the concrete floor and the bedding. Also, there were stall groomers that were used by some farmers to redistribute the bedding in the stalls after cows had been using it for a few days. The groomers helped to “fluff up” and freshen the bedding to make it more comfortable for the cows. Jess and Lynn thought it might be possible to work with a local engineering and machine fabrication company to develop a stall groomer designed to be used with AAB bedding. The mats and mattresses were a slightly different matter. There were a number of companies that made mats and mattresses. If AAB were to sell these to its customers, they would do so as a sales agent of the manufacturer.

So, Jess wondered, which growth path(s) should be pursued? How should the various growth opportunities be evaluated? What steps should be taken to protect the sources of its unique value proposition to ensure that AAB could continue to grow?

Notes

1. Fox River Fiber website: http://foxriverfiber.com

2. Interview with Greg Verhasselt, dairy farmer in Brown County, Wisconsin, August 11, 2016.

References

California Dairy Statistics Annual, 2015 Annual Data (2015), available at: www.cdfa.ca.gov/dairy/pdf/ Annual2015/2015_Statistics_Annual.pdf (accessed September 4, 2016).

Gould, B. (2015), “Understanding dairy markets”, Agricultural and Applied Economics, UW Madison, available at: http://future.aae.wisc.edu/data/annual_county_value/index/3 (accessed November 1, 2015).

Ruegg, P.L. (2015), “Dairy cow welfare and udder health”, PDF University of Wisconsin-Madison, available at: http://milkquality.wisc.edu/wp-content/uploads/2015/10/welfare-and-udder-health-Poland-2015.pdf

USDA/ERS (2014), “Dairy data, 2014”, available at: http://media.eatwisconsincheese.com/assets/ images/statistics/MilkProductionSnapshot.pdf http://media.eatwisconsincheese.com/assets/images/pdf/ WisconsinDairyData.pdf (accessed November 2, 2015).

Web reference

www.eatwisconsincheese.com/media/facts-stats/farm-dairy-statistics (accessed October 1, 2016).

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Appendix

Exhibit 1

Figure A1 Free stall barn with AAB bedding

Source: AAB

PAGE 96 j THE CASE JOURNAL j VOL. 14 NO. 1 2018

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Exhibit 2

Exhibit 3

Figure A2 AAB storage, mixing, and loading equipment

Source: AAB

Figure A3 Wisconsin dairy farms and milk production, 1930-2014

0

5

10

15

20

25

30

0

20

40

60

80

100

120

140

160

180

1930 1940 1950 1960 1970 1980 1990 2000 2010 2014

M ilk P

ro d u ctio

n (in

B illio

n s o

f P o u n d s)

N o.

o f F

a rm

s (i n T

h o u sa

n d s)

Farms Production

Source: USDA/NASS, Milk Production

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Exhibit 4

Exhibit 5

Corresponding author

Joy M. Pahl can be contacted at: [email protected]

Figure A4 Wisconsin dairy farms herd size, 2012

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

1 to 19 20 to 49 50 to 99 100 to 199 200 to 499 500+

818

3,278

4,181

1,584

815 387N

u m

b e

r o

f F

a rm

s

Head of Cows

Source: USDA/NASS, 2012 Census of Agriculture

Figure A5 Milk production, Top 8 states, 2014

All Others, 33.30%

California, 20.50% Wisconsin,

13.50%

Idaho, 6.70%

New York, 6.70%

Pennsylvania, 5.20%

Texas, 5.00%

Michigan, 4.70%

Minnesota, 4.40%

Note: Total US production = 206.0 billion pounds Source: USDA/NASS, Milk Production

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