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Organic Pay Price & Support Control

By Ed Maltby, NODPA Executive Director

ADDED JULY 1, 2009. The facts are simple if very unpalatable:

  • We have a surplus of organic milk of between 10-12% as management had planned supply for at least a 10-15% growth over 2008
  • Sale of fluid, packaged organic milk is projected to increase by no more than 5% over 2008 sales (probably mostly in store brand sales), down from previous year’s 20% + annual growth
  • Sales of organic, manufactured product is down, and inventories of organic powder, butter and cheese are at all time highs with no surplus storage available
  • While the core consumer is still buying organic fluid milk, the economy has not rebounded enough to increase sales of organic dairy manufactured products and retail prices have not dropped giving no incentive for consumers to increase purchases.
  • Do not plan for the situation to end within 6 months

The milk companies have responded in different ways to this situation. Many of their responses raise more questions than solutions and lack the necessary and traditional transparency of a sustainable organic dairy industry.

HP Hood/Kemps/Stonyfield brand

HP Hood (Hood) lowered their price by $1 in February and asked for a voluntary 10-15% cut in production. They have been canceling contracts and sending 180 day notice letters of contract termination because of quality concerns, uneconomic routes and “the softening economy” (this reason has been used when they have canceled contracts with outspoken producers). Producers who have been given prior notice of poor quality and received probationary notices have been given 5 days notice before dropping them. Hood is asking their producers to sign a new commitment letter with Dairy Marketing Services (DMS) and Hood without any defined pay price. The pay price will be decided on a monthly basis by Hood with no stated criteria for how they will reach those decisions. Producers have a deadline of July 1st to sign and some producers have been told their base will drop by at least $3/cwt depending on how their milk is utilized. The letter does tie Hood to accepting all the producer’s organic milk but prohibits the sale of organic milk to anybody else (no chance of any raw milk sales without prior consent of DMS) and says that DMS will not pay the producer until they receive money from Hood. The new commitment letter tightens the minimum quality standards and cancels the following: the annual cost-of-farming adjustment, the winter grain program, the market premium program, and the new entrant sign-up and transition program. The letter requires that a bulk tank unit must meet grade A standard, otherwise Hood will not make any payments until the unit is authorized, without any clear explanation of what that means. They have also introduced a confidentiality clause to all their contracts (the ones including DMS didn’t have one before). They are honoring existing transition contracts and payments. Hood and Stonyfield have refused to meet with producers and/or their lawyers to discuss solutions to the pay price situation.

Horizon Organic

Horizon dropped $1 from its MAP in May and sent out letters explaining their situation and asking for a voluntary 5% cut in production. Their contracts will continue to have confidentiality clauses; tightening up on quality; and they have stopped the “long program” but extended the “short program” as an incentive for producing winter milk. They have reduced production at their company owned farm in Idaho by approximately 50% and have started a range of natural dairy products to help balance their surplus. It is unlikely that any contracts will be longer than a year, especially if quality is questionable or the route is “uneconomic.” It is unlikely that Horizon will agree to any herd expansion. Other changes to contracts have been made to address animal welfare issues on the farm and to give the company the ability to terminate the contract when, after an investigation, a producer receives a notice of revocation of their organic certification rather than waiting for the certification to be revoked after an appeal. There have been no arbitrary cuts of producers; approximately 10 contracts have been ended across the whole country. As Horizon renews contracts they will obviously favor those producers who are well located near to processing plants, have consistently good quality milk tests and have good relationship with the company. Horizon is honoring their contracts with transitioning producers and continuing to pay the transitioning bonus.

Organic Valley/CROPP Cooperative

Organic Valley/CROPP Cooperative (OV) has dropped it’s pay price by $1 in February and another $1 from May to July reinstating the dollar for August milk. They have introduced a quota program to start July 1 2009 which is scheduled to end on January 31, 2010, unless extended by the Board of Directors. In the week before it is to be introduced, there are still many details about the program that are not clear. It is not clear what ”future market conditions” will determine whether the program will be extended.’ If it is extended OV will use the 2009 active base to determine future production levels. The permanency of the program will impact whether producers will need to appeal their active base to protect future production. There is also concern that if the active base is refigured each year based on a three year history, then the active base will slowly erode. As producers for OV are committed to market all of their product with OV, OV is requesting that producers not sell product through other markets, so no raw milk sales.There is a lack of clarity around how transparent the process of granting appeals will be and whether the reasoning for granting an appeal will be posted for other producer owners to see. The appeal form asks for information on the quality of the milk, recent reasons for expansion, the number of cows and acreage, and shifts in production.

Over-quota milk will have a $15 pay deduction from the producers’ mailbox price. The “mailbox price” is defined as the net price received by dairy farmers for milk, including all payments received for milk sold and deducting costs associated with marketing the milk. Historically, milk that OV could not sell organic has been redirected to the conventional market and the same holds true today. OV will be taking any surplus milk and “reblending” it; therefore being a cooperative, they have no FMMO restrictions on how much they pay producers. OV’s letter to producers clearly states that if too many producers appeal it will have an adverse effect on everyone.. Similarly to the other companies, OV continues to implement cost-savings measures throughout the business on an on-going basis. To quote an OV producer “we are solving problems as we move forward.”

What to do when confronted by these contractual decisions?

  • When the market rebounds remember how your milk company treated you!!
  • Re-read your contract and show any new contract or commitment letter to your lawyer before signing (your lawyer is bound by confidentiality so it doesn’t break any confidentiality agreement).
  • Your personal situation and fear for your future may cause you to sign an agreement that is not to your liking, many producers are. If you make the decision to sign a contract, you can privately record what process you followed with the company and the reasons why you don’t like the contract/agreement. You might want to get someone to notarize or witness it.
  • This information should be stored with the rest of your recordkeeping.
  • Why take the time to record this information? There might be future opportunities to address concerns about whether the negotiated contract was a result of negotiation between equals and conducted in good faith or imposed because of unequal power in the marketplace. It might also be useful as a reference in future dealing with the milk companies and/or the Federal government.

 

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