Big Agriculture Gets Its Sh*t Together

A huge U.S. dairy is tackling the farm pollution problem by turning cow manure into fuel. Will others follow suit?
January 20, 2016, 11:30 AM UTC
Photograph by Ryan Donnell for Fortune

A huge U.S. dairy is tackling the farm pollution problem by turning cow manure into fuel. Will others follow suit?


When Wayne Pacelle visited Fair Oaks Farms in northwest Indiana, he was fully prepared to be horrified.

As president and CEO of the Humane Society of the U.S., the animal welfare watchdog, Pacelle makes it his business to tour dairy farms across the country, on the lookout for livestock abuses. Pacelle has seen operations where cows live in suffocating overcrowding, standing deep in a brew of mud and manure, with some so heavy—because of the way they’re bred for productivity—that they struggle to walk.

“When I heard it had 36,000 cows,” Pacelle says of Fair Oaks, “I just expected a completely industrialized process.”

Instead, on his 2012 visit, Pacelle found a healthy herd, comfortable bedding for the cows, and a ban on tail docking, the industry practice of cutting off parts of cows’ tails. He also found a farmer who was doing something revolutionary in an industry not known for innovation. Fair Oaks co-founder, Mike McCloskey, was recycling the cows’ waste—turning tons upon tons of manure into an energy source—as part of a quest to reduce his business’s greenhouse gas emissions.

Last but not least, in an industry often closed off about its practices, McCloskey and his partners had opened up their operation, not just to Pacelle but to thousands of visitors who could see the dairy in action. “He’s saying, ‘I can defend this, and I’m going to do this in a way that’s consistent with the values of the public,’ ” Pacelle says. “That doesn’t mean I agree with everything he’s doing, but from a perspective of protecting ag, it’s a bold, smart move.”

Many people expect the worst when they think of Big Agriculture, and sometimes with good reason. Industrial-scale farming practices have made food cheaper and more abundant than ever before, but they have also contributed to pollution, resource shortages, and unhealthy eating habits. Some consumers now have an inherent bias against “big” when it comes to what they eat, using it as shorthand for all that’s wrong with our food system. In part because of such sentiment, the 25 biggest food and beverage companies in 2009 have since lost the equivalent of $18 billion in market share, according to Robert Moskow of Credit Suisse.

Fair Oaks is challenging the assumption that big can’t be good. It’s because the 12 family-run dairies that make up Fair Oaks have 36,000 cows (only 1% of U.S. dairy farms have 2,500 or more) that it’s economically viable for McCloskey, his wife, Sue, and their partners to convert manure into fuel that runs their farms and powers a fleet of trucks. “The key piece under all of this is they can do things you can’t do at a smaller operation,” says Ronald Turco, a professor of agronomy at Purdue University.

Fair Oaks co-founder Mike McCloskey inspects feed.Photograph by Ryan Donnell for Fortune

Agriculture is a major contributor to climate change, accounting for about 9% of U.S. greenhouse gas emissions, and the farming sector hasn’t succeeded in reducing its output as much as the transportation and energy industries have. At the same time, farms are among the biggest victims of weather associated with climate disruption. In 2014 alone, the U.S. Department of Agriculture paid out $10 billion in disaster programs and crop insurance.

Mike McCloskey is working to change the mind-set of the industry, demonstrating that farms can tackle environmental problems and still make a profit—and the bigger the farm, the bigger the impact. “Mike had a vision that he was willing to articulate and sell to an industry that was skeptical about sustainability,” says Tom Gallagher, CEO of the industry promotional group Dairy Management Inc.  “My dream and Sue’s dream—and people look at me like I’m crazy—is to have a zero-carbon-footprint dairy,” Mike says. “And I believe I can get there.”

Fair Oaks, which the McCloskeys and their partners have run for almost two decades, is the hub of Select Milk Producers, America’s sixth-largest dairy co-op by volume. Select markets and sells milk from 92 dairies in Texas, New Mexico, and the Midwest, producing 6 billion pounds of raw milk a year and reaping nearly $2 billion in annual revenue. (Prairie’s Edge, the group of farms within Fair Oaks that the -McCloskeys and a partner directly own, is Select’s largest dairy.) The co-op works with some of the world’s biggest food businesses, from Coca-Cola (with which it markets the Fairlife milk brand) to Kroger, the country’s largest supermarket company.

From Mike’s point of view, that size and reach come with great responsibility. Everything we eat has an environmental price tag—the cost and impact of water used, fertilizer applied, soil tilled, and waste produced. In the production and consumption of a gallon of milk, the equivalent of 17.6 pounds of carbon dioxide is emitted. That’s a cost Fair Oaks wants
to reduce.

What drives the dream of a zero-emissions dairy is cow poop—and lots of it. Fair Oaks’ cows produce about 430,000 gallons of manure every day. The heart of what the McCloskeys do is turn that waste from what could be a liability into an asset.

Fair Oaks cows are milked at a rotary.Photograph by Ryan Donnell for Fortune

The first step is to collect it. Cow living quarters at Fair Oaks are designed so that the animals defecate and urinate only in alleyways on either side of their bedding. The setup keeps the cows’ beds (and their udders) clean and makes it easier for workers to gather the manure three times a day while the cows are milked. The manure is separated from sand and dirt and deposited into the farms’ anaerobic digesters. Inside the tanks the manure mixes with microbes for 21 days, replicating the process that takes place in a cow’s stomach and breaking down into compost-like material while releasing biogas, which is captured in pipes. About half that gas, which is 60% methane, powers Fair Oaks, generating the electricity that runs the farms and digesters.

Figuring out what to do with the rest of the gas wasn’t easy. When they started exploring their options, in 2006, Mike and his colleagues wanted to sell the gas into the power grid, but the local utility couldn’t pay enough to cover their costs. They instead decided to sell the gas as fuel after purifying it to 99% methane. But in 2008 natural-gas prices started to fall, making that option unprofitable too.

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Their solution was to use the gas themselves. The McCloskeys and their crew started looking for milk trucks that would run on compressed natural gas (CNG). The CNG trucking industry, then in its infancy, offered only nine-liter engines, undersize for the weight of the dairies’ loads. The crew managed to make the nine-liters work—though wear and tear kept causing engine failures—until the first batch of 12-liters became available from engine maker Cummins in 2013. Fair Oaks’ CNG fleet of 42 trucks now runs 24/7 to keep costs down, with each truck traveling an astounding 270,000 miles a year. “I don’t think there’s any other CNG fleet in the U.S. that has the miles on them that those trucks do,” says Frank Walter, president of Palmer Leasing, which provides Fair Oaks’ vehicles.

It took more than 30 contracts, $30 million, and a decade of work to get the stool-to-fuel project where it is today. “This had never been done before,” says Mark Stoer-mann, Fair Oaks’ then project manager. The endeavor ultimately required everything from building two CNG fueling stations—one on the farm and another on the Kentucky—Indiana border—to finding a partner to buy enough milk to justify the expense. In 2010, Kroger committed: “We wanted to be a little bit of a beacon for the industry,” says Mike Nosewicz, head of Kroger’s fresh dairy operations.

Today there are some 200 dairy farms that use digesters, Mike says, but no other farm has gone as far as Fair Oaks has. “We have our own co-op, we sell our own milk, and we have dedicated routes,” Mike explains. “We were the right people to take this risk.” The McCloskeys’ next move: helping other farms adopt the model. Select owns a piece of Newtrient, a new company whose plans include developing Fair Oaks–style technology that can scale down affordably for smaller farms. Mike is also a partner in a company that grew out of the original project, AMP CNG, which owns and operates CNG filling stations across the U.S.

Manure being suctioned up.Photograph by Ryan Donnell for Fortune

Biogas isn’t the only product of the McCloskeys’ entremanureship: There are also nitrogen and phosphorus, which remain in the slop left over after digestion. Those chemicals behave as nutrients in fertilizers, and recently the team figured out how to press the water out of the slop, producing a fertilizer-friendly paste. An outside company is building a fertilizer plant on Fair Oaks property: The farms will use some of the product on the 36,000 acres where they grow the cows’ feed. But Mike is already using the slop, achieving nearly total recycling of the farms’ waste.

The leftover water from the slop still looks a little brown. Would Mike drink it? “That’s the last stage I’m working on,” he says. His goal is to use that water to create artificial wetlands where he’ll grow something like high-protein duckweed to feed his cows. Sue wants to distill the potable water that will be filtered through the wetlands and use it to brew beer. “When you drink that beer,” Mike says, “it’s going to be the water that the cows drank that made the milk that produced the gas that ran the trucks that created the fertilizer that grew the crops that created the protein that the cows ate and now is the water we use to make the beer.”

The brand name? Shitty Beer. “I’m thinking a Shitty IPA and then a Milk Cow Stout,” Sue says.

Most dairy farmers are born into it, their land passed down from generation to generation. But Mike came to large-scale farming later in life. He started out as a veterinarian in the San Diego area, where he and Sue first met—Mike was Sue’s landlord. “I figured out how to get cheap rent,” Sue jokes. “I got the best part of the deal, I guarantee you,” Mike says.

The two built a successful veterinary business, but Mike was itching to implement his ideas about best farming practices. The couple decided to start their own farm, with the same partner they have today and 250 cows, to see if they could do better. In 1990 they committed to farming full-time and moved to a bigger dairy in New Mexico, where all four of their children were born.

Eventually manure is converted into fuel for Fair Oaks trucks.Photograph by Ryan Donnell for Fortune

Eventually dissatisfaction with the co-op selling their milk led the couple to consider starting one of their own. To break out independently, they needed a commercial buyer to commit to their milk. The McCloskeys set their sights on Texas-based grocery chain H-E-B. Bob McCullough, now H-E-B’s senior vice president of manufacturing, was intrigued by the quality of their milk, and he had never heard farmers refer to their cows as “she” and “her” before. “I walked away saying these guys are the real deal,” he remembers. H-E-B committed to buying a third of its milk from the McCloskeys and their partner, beginning in 1994, allowing them to launch their co-op, Select Milk Producers, with Mike as CEO.

The McCloskeys moved from New Mexico to Indiana in 1999, starting Fair Oaks on acreage that had originally been intended as the site for a third Chicago-area airport. The move coincided with what they saw as growing public resentment toward large farms. Mike believes the animosity was fueled by the agendas of animal-rights groups like PETA, but he acknowledges that it was also born out of the farming culture of the 1970s and 1980s, which prioritized productivity over sustainability and animal care. Rather than explain their practices, many farmers became insular. The McCloskeys wanted to change the narrative. “We thought, Hey, wait a second. We lived all our lives being proud of what we do,” Mike says, “and we thought we should open our doors.” Fair Oaks opened to the public in 2004. More than 50,000 people showed up in the first 12 months; in 2015, half a million visited the farm.

Fernando Volken
Fernando Volken Togni

Fair Oaks is no petting zoo. Visitors hop on a bus to tour the cows’ quarters and watch as they’re milked on a rotary, a system the McCloskeys believe is more efficient and less disruptive for the cows. You can watch a calf being born or see cheese, yogurt, or ice cream made while you sip a milkshake. And if you need a reminder that in the end human appetites trump animal comfort, you can eat a steak made from Fair Oaks beef at the upscale Farmhouse Restaurant.

Inviting the public led the McCloskeys to reexamine their practices, knowing they would be opening themselves up to scrutiny. That’s what led them to give up, in 2004, the practice of tail docking, which is meant to keep the cow’s tail from picking up manure and to keep the milker from getting swatted. The National Milk Producers Federation has since changed its guidelines to eliminate tail docking by next year. That decision, which the McCloskeys lobbied for, has upset a faction of farmers. “There’s a lot of producers out there saying, ‘What are we going to give up next?’ ” Mike says.

That said, Fair Oaks’ practices don’t align perfectly with the ideals of the Whole Foods demographic. While Fair Oaks produces some organic milk, most of the output from the cows in Mike’s carbon-reduction project is conventional. For their milk to qualify as organic, cows have to be out on pasture at least 120 days a year, which makes it impossible to collect all of their manure for the digesters. Fair Oaks organic cows also aren’t as productive as their peers, in part because they can’t be fed the feed mixture Mike prefers, which has genetically modified ingredients. Ultimately, meeting the requirements of being organic requires more energy use, Mike says: “All you’re doing is spending more carbon per gallon of milk.” That’s not an appealing prospect for a man who says he has reduced the footprint of a gallon of his milk to the equivalent of about
10 pounds of carbon dioxide—some 43% below the average—and is still fighting his way toward zero.

The McCloskeys occupy an unusual position: They’re successful large-scale farmers who meet the highest environmental standards, but other farmers and eco-conscious foodies can always find things to criticize in their methods. Still, Mike has reached a point where he feels there’s nothing he can’t explain or justify. “My doors are open, and you see everything I’m doing,” he says. He’ll change his practices to meet what the market demands, but he adds, “Just make sure you want to pay for it. Make sure you understand that environmentally, it has a cost.”

A version of this article appears in the February 1, 2016 issue of Fortune.