Risky business down on the farm
McCarty Family Farms in Colby, Kan., has linked its fortunes to one major customer. The four G4 brothers who run the business say the gamble is paying off.
Risk taking has paid off handsomely for McCarty Family Farms in Colby, Kan. In the last few years the McCarty family has become known for its partnership with Dannon, the global yogurt brand—quite an accomplishment in the dairy farm industry.
While many business owners might say risk goes with the territory, for this family business it has been a game-changer. The company’s profits are in line with historical industry averages, but the partnership eliminates the financial peaks and valleys, and the resulting financial consistency allows for better long-term planning and reinvestment.
Four fourth-generation brothers run the 103-year-old company, which consists of four dairy farms: three in northwest Kansas (Rexford, Bird City and Scott City), and one in southwest Nebraska (Beaver City). The company headquarters is in Colby, Kan., and the Rexford site includes a milk-processing operation.
Ken McCarty, 35, handles public relations and manages “a large chunk” of the partnership. David McCarty, 38, supervises financial operations and general main-office functions. Mike and Clay McCarty, 45 and 43 respectively, split responsibility for operations at the four dairies, managing two apiece. Mike is also in charge of milk quality, and Clay oversees crop farming and raising the heifers (young female cows that have not had a calf). Their parents, Tom and Judy McCarty, are advisers.
Don’t look for executive titles in this family business; the brothers don’t use them. “We’re just co-owners,” Ken says. “I think titles might even be intimidating to some of our employees,” adds Dave.
It may seem odd to an outsider that the two youngest brothers, those with animal science degrees, aren’t the ones with the day-to-day animal responsibilities, but Ken is quick to point out that they all have taken care of cows since they were very young, and whether animal science is learned in the classroom or in the barn, they’re all skilled at it. “You don’t need a degree to care about cattle,” he says.
Betting the farm on a Midwest move
Taylor McCarty, the brothers’ great-grandfather, started the dairy business in 1914 in Sugar Run, Pa., near Scranton, and his son, Harold, took over in 1945. Harold’s son, Tom, assumed the lead role in 1970. “My dad just moved the cows up the road,” Dave jokes, noting that his father significantly expanded the operation.
As the brothers grew, Tom and Judy had to consider the future. Their sons wanted to make farming their career. Ken was in high school at the time, Dave was in college, and the two older sons had graduated and were already working on the farm. Pennsylvania farmland was expensive and the logistics weren’t right for expanding at the current site, so the parents decided to take the family’s first big risk: In 1999 they moved to Rexford, Kan., bought a wheat farm and converted it to a dairy farm. The opportunities for growth were greater in Kansas, Ken says.
Partnering with a top brand
The family took a second risk when they left their producer co-op and partnered with Dannon, becoming the primary milk supplier for the yogurt made in Dannon’s Dallas/Fort Worth manufacturing plant. (McCarty Farms provides condensed skim milk and pasteurized cream.) The two companies were introduced through the Cargill Dairy Enterprise Group, consultants to the dairy industry, after the McCartys approached the group for assistance in exploring new business opportunities.
Ken recalls, “We started talking with Dannon in 2010 and were ready to ship by mid-2012.” The McCartys needed to increase their volume, so they leased the dairy in Scott City, expanded the Rexford and Bird City facilities and built a huge milk processing/condensing plant—the first of its kind in North America—which expanded their capacity even further. Kansas State University Research and Extension helped with site selection, budgeting and facility design, and sat in on meetings with a lender unfamiliar with dairy lending.
Originally the McCartys had a five-year contract with Dannon, but it’s been extended for the foreseeable future. Neither Ken nor Dave will reveal much about the financial arrangement except to say it’s a cost-plus business model. “It’s as simple as it sounds,” Dave says. “I have a cost per gallon, or per hundredweight, of my milk, and there’s a margin on top of that.” Volume varies each week, largely owing to seasonal trends. “We just had to communicate that to Dannon, and we work through the volume changes,” Dave notes.
Also, Dannon’s demand for product isn’t static, explains Ken, so there are times when the McCartys fill only 95% of what Dannon needs. At other times, they produce 120% of Dannon’s requirements, so they either transfer the extra milk to other Dannon plants or market it to outside parties. “Dannon is our preferred customer and has the right to purchase all the milk we produce,” Ken says.
McCarty Family Farms also sells milk and a small amount of cream to Daisy Brand (known for its sour cream and cottage cheese), but the primary recipients of its pasteurized heavy cream are Dannon and Grassland Dairy, for its butter products.
Dave describes what the farm does in even simpler terms: “We produce condensed skim milk, which is what Dannon wants, and cream and water. The water we’re pulling out of the condensed skim milk [close to 65,000 gallons per day] stays on the farm.” Condensing milk on site allows the company to reduce the environmental impact of shipping. As Ken explains, “We take three-and-a-half loads of raw whole milk and condense it into one load of condensed skim milk and the subsequent cream, thereby reducing the carbon footprint associated with those four loads.”
The main benefit of reusing the water reclaimed during condensing is providing water for the dairy cattle. Aside from that, it’s used in the processing plant and for irrigating the crops. The McCartys grow primarily corn for silage as well as grain corn. (Silage is produced by harvesting most of a plant, grinding it, storing it and letting it ferment before using it as food for the cows.) They also grow sorghum silage and a variety of small-grain crops for the young cows.
Since the partnership began, the McCartys have increased their workforce from 105 to about 175 employees. They anticipate having well over 200 in the near future. The number of cows at each farm has increased significantly, as well.
An appetite for risk
You might think that having their fortunes linked to just one customer would keep the McCartys up at night, but they say the partnership mitigates risk for both parties. Dannon’s risks include market volatility, variation in product source and possible variation in quality, Ken notes. The McCartys say they benefit by gaining a greater understanding of what a major client wants and, in turn, being able to modify their operations to match that goal. The arrangement also removes market volatility related to milk prices for them; they don’t have to worry as much about negotiating for the best price.
Ken says the brothers’ appetite for risk was nurtured by seeing their parents remain steadfast once they were satisfied a plan had a good chance of panning out. “Our parents reminisce often about how people thought they were crazy building the dairy I grew up on in Pennsylvania,” Ken says. “People again thought my parents were crazy buying certain farmland, and they definitely thought my parents were crazy for packing up and moving to Kansas to build a dairy. But in each case, my parents had spent a great deal of time thinking through their decision and the pros and cons, building the business case and doing the math, and they were confident they were making the right decision. And they also taught us that when all else fails, work harder.”
Ken acknowledges that the family has all its eggs in one basket. “But we try to mitigate that risk,” he says, “by engaging in continuous improvement, focusing on being innovative and continually trying to raise our level of performance.” They also continue to look for other opportunities.
In May, the dairies received certification in four areas from Validus, an independent certifying company that uses the international standard ISO 9001 to ensure food is produced using socially responsible on-farm production practices. The areas are animal welfare, environmental care, on-farm security and worker care. Dannon required the first one, but the McCartys’ dairies achieved the others voluntarily. In addition, the processing plant has been awarded Validus Traceability certification and is SQF-certified (for “safe quality food”) by the SQF Institute. Finally, McCarty Family Farms as a whole—both the farms and the processing plant—has achieved Non-GMO Project-Verified status through a Validus sister organization.
Given their ties to a major brand, “We realized that their risk becomes our risk and vice versa,” Ken explains. The partnership with Dannon has opened the McCartys’ eyes to other possibilities, and from all indications they are well aware that exploring future opportunities is crucial should Dannon be sold to another company with its own preferred supplier, for example.
How they manage it all
To manage this huge operation, Dave says, “We have monthly meetings with our farm management staff, after which we sit down as brothers and discuss everything.” Ken adds that when it comes to decision making, the majority rules if it becomes difficult to reach consensus. Also, Ken says, the brothers are in constant contact with one another and are “humble enough to admit when we’re wrong and will defer to the right opinion.”
The siblings are the only board members, and no one has been designated as the sole, final decision maker for McCarty Family Farms as a whole. “However, we trust each other enough to accept the decisions each makes in the areas that each individually manages,” Ken says.
They addressed the fact that the siblings entered the business at different times by assigning different levels of ownership across the various entities, based on the date of each entity’s creation and each individual’s years of service. Learning from their parents and grandparents that they need to be patient with and trust each other also helped, Ken says. “We believe that we are stronger together than separate, and that we would not want to be on this journey without one another,” he says. “With those beliefs, a great deal of the struggles simply become background noise.”
In 2016, McCarty Family Farms took a third leap: The company partnered with yet another family farm, VanTilburg Farms in Ohio, a full-service agricultural retail provider and grain elevator. The dairy will produce non-GMO project-verified whole raw milk to be sold to a Dannon yogurt plant in Ohio. Construction of the MVP Dairy, as it will be called, was expected to start in the fall.
The VanTilburg family will be vested financial partners in MVP Dairy and will supply feed for the cows as well as an outlet for nutrients (dry cow manure and water) generated on the dairy. These will be applied to their farmland, as well as other area farmland, to help offset the use of commercial fertilizers and improve the health and productivity of the land.
The VanTilburg operation was attractive to the McCartys for several reasons, including that the Ohio family business farms a sizeable amount of ground to provide feed for dairy cattle. “By bringing their row crop farm into the fold with the dairy farms, they’re closing the loop from soil to cow and back to the soil again,” says Ken.
“The idea of joining with another farm is new to us,” Dave says. “It’s always been just us, and now we have a new set of partners, which will create plenty of challenges, just in communication and understanding everybody’s role.” The McCartys are young, he notes, and the group they’re partnering with is, too. “And we all need to continue to grow. As my dad would always say, ‘If you’re not growing, you’re dying.’ ”
Dave says he and his brothers weren’t seeking another partnership, but teaming up with the VanTilburgs offered the best chance for further growth. “As we were there looking for opportunities, the two groups came across one another, and we found, similar to our Dannon relationship, there was synergy,” Dave says. “We knew we could work together.”
Dave notes that the new venture has to align their cultures initially. As an example, there are those pesky job titles. The VanTilburg family uses them.
Patricia Olsen is a business writer based in New Jersey.
Copyright 2017 by Family Business Magazine. This article may not be posted online or reproduced in any form, including photocopy, without permission from the publisher. For reprint information, contact firstname.lastname@example.org.