Dairy farmer's 'back to basics' business plan finding success.

My name is to" the CEO of Shatto Milk Co. tells a Girl Scout troop visiting his Missouri farm, "and this is my place and my wife's place and my banker's place."

Shatto's debt to Citizens Bank of Norborne is more than financial. Mike Craven, the bank vice president who extended a Small Business Administration-backed loan to Shatto in 2002, has become one of the dairy farmer's closest business advisers, talking with his client about once a week.

Craven is one of several advisers that Shatto has called on to help him develop and fund the business plan that turned a struggling family farm into a farm trying to keep up with demand for its products.

"Every time I talk to (Craven), I say, 'I need more milk,'" Shatto said. "He says, 'There's no way you are going to supply the milk for everybody.'"

Shatto serves customers within a 90-minute drive of Osborn willing to pay about $3 more a gallon than average for fresh milk from cows that aren't treated with growth hormones. Shatto milk is differentiated further by its packaging. Glass bottles, carrying a $1.50 deposit, rekindle childhood memories among buyers of a certain age.

Before Shatto found Craven, his problem wasn't funding--it was pricing. The Kansas City dairy cooperative that bought his milk paid him less than the milk cost to produce.

What if he quit the cooperative and bottled and sold his milk directly to retailers? To find out, Shatto got a $17,325 grant from the Missouri Agricultural and Small Business Development Authority in 2000 to determine his idea's feasibility. A year later, he got a $23,890 grant to finish the study and write a business plan.

Shatto, 52, understood cows, having risen at 4 a.m. since 1974 to milk them. But he was less certain about marketing, which would put him in competition with the cooperative. For advice, he turned to the Service Corps of Retired Executives, a nonprofit better known as SCORE that partners with the SBA to offer free counseling to entrepreneurs.

SCORE volunteer Ken Bayer, who had retired from Hallmark Cards Inc., liked Shatto's business plan. Bayer was versed in marketing but knew little about dairies. So on his second farm visit he brought George Lancaster, a SCORE volunteer who grew up on an Iowa dairy farm and worked at a big agribusiness.

Bayer met with Shatto monthly for nearly a year and they'd also correspond by phone or email, a practice that continues.

Through SCORE, Shatto learned about Mo-Kan Development Inc., a St. Joseph, Mo., economic development agency that helps startups. Mo-Kan suggested Shatto contact Billy Campbell, Citizens Bank president.

By this time, Shatto said, he was growing desperate because his loan inquiries had been rebuffed by banks in the nearest big cities. Campbell's response was different.

"He just looked this (business plan) over and said, 'I think this may work.'"

Campbell enlisted Craven, who specializes in agricultural lending. Decisions tend to be collaborative at the six-person bank, where two-thirds of its nearly $18 million loan portfolio involves farmers.

Craven, a farmer himself, didn't know Shatto but trusted his gut. "'You read the commitment," he said.

Shatto's location on the edge of the Kansas City area's nearly 2 million residents boosted Craven's confidence.

But the startup carried more risk than Craven wanted to carry alone, so he arranged for the bank to finance half of $542,500 that Shatto needed to equip a milk-bottling plant.

Mo-Kan provided $217,000 through the SBA's 504 loan program. The 20-year loan carries a fixed below-market rate of 4.57 percent.

The 504 program provides long-term financing for fixed assets such as land and buildings. Typically it involves a loan secured with a senior lien from a private lender for half the project cost, a junior lien from a certified development company, in this case Mo-Kan, backed by the SBA for 40 percent of the cost, and 10 percent equity from the business.

Production started in June 2003. To break even, Bayer estimated Shatto would need 2 feet of display space in 12 stores. Within a year, his milk was in 44 supermarkets.

To keep up with demand, Shatto got a fixed-rate loan from Mo-Kan's revolving loan fund to buy 80 cows in August 2003, doubling his herd. He wouldn't discuss the loan's amount or interest rate.

"Leroy knows what he needs to do," Bayer said. "He's one of the most intuitively intelligent people I've ever worked for."

After hiring a driver for his delivery truck, for example, Shatto spent a week riding along so he could introduce him to the gatekeepers who received the shipments--trading on his rapport to make sure they'd keep stocking his milk.

On a rare day with no pressing chores, Shatto drove to Des Moines, where he visited Hy-Vee Inc.'s headquarters with milk for executives of the supermarket operator that's now one of his biggest outlets.

Shatto's herd has grown to 240 cows. Sales continually rise, to more than 29,000 gallons in December, and grew 119 percent in 2006. But more customers than ever are shorted. So Shatto has stopped making 1 percent milk and specialty lines such as banana- and strawberry-flavored milk until he gets more cows.

"I don't want people getting mad at me because we don't have milk in the store," he said.

The dairy doesn't advertise. But Shatto does welcome visitors to his farm, where they can milk cows, watch milk get bottled and buy milk at a store that also stocks items such as milk soap. Nondairy items also are sold on a Web site.

Further expansion is imminent for the farm, which has annual revenue of less than $5 million. Shatto is negotiating to buy a neighbor's cows and hopes to start selling cheese and ice cream after introducing blue-ribbon-winning butter in 2005.

He also plans a product in what amounts to vertical integration. Cows' compost will be sold to landscapers and gardeners. *

Shatto Milk Co. * CEO: Robert "Leroy" Shatto * 9406 N. Highway 33, Osborn, Mo., 64474 * [phone] * www.shattomilkcompany.com Year founded: 2003 * Employees: 22 and 240 cows * Revenue: Grew 189% in 2004, 9% in 2005 and 119% in 2006