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Pay and Feed Price: September/October 2020

By Ed Maltby, NODPA Executive Director

As the USDA AMS data is catching up, the first 5 months of retail sales, reported by USDA AMS, reflects the anecdotal reports and the New England FMMO data that shows a COVID surge, which has not been sustained despite a continuing increase in total sale year-over-year:

  • January: Estimated sales of organic milk for January increased by 1.2% over 2019 sales (Whole Milk increase 7.2%; Reduced Fat 1.2%).
  • February: Estimated sales of organic milk for February increased by 6.9% over 2019 sales (Whole Milk increase 10.5%; Reduced Fat 4.1%).
  • March: Estimated sales of organic milk for March increased by 21.1% over 2019 sales (Whole Milk increase 19.7%; Reduced Fat 22.2%).
  • April: Estimated sales of organic milk for April increased by 23.7% over 2019 sales (Whole Milk increase 25.7.4%; Reduced Fat 22.2%).
  • May: Estimated sales of organic milk for May increased by 14% over 2019 sales (Whole Milk increase 23.4%; Reduced Fat 7.4%). Year to date for May 13.1% increase over 2019 year to date.

The Northeast Federal Milk Marketing Order 1 (FMMO) which publishes utilization of organic milk in that area has the largest utilization of Class 1 milk in the US, nearly double the second highest Marketing Order, so is a good indication of organic retail sales, nationally. In July 2020, utilization was higher than June 2020, but organic milk utilization was down 9% over July 2019, with Reduced Fat Milk (RFM) dropping by 14% and Whole Milk by 3%. In February, WM was up 7% and RFM was down 13%. Year-to-date utilization, January to July 2020, of organic milk in the Northeast is down 10%. The reasons behind these figures can only be conjecture as we have no access to the detailed reporting that conventional dairy has or to the expensive reports generated by sales data by such companies as Nielsen.

The Organic and Non-GMO Report has interviews with some leaders of the organic market who report that organic will emerge stronger from the pandemic. The report quotes Michael Potter, CEO of Eden Foods, “We got hit with a tidal wave of orders.” Eden Foods sells 400 organic food products from beans, grains, and flours to soymilk, condiments, pasta, and other products. The tidal wave of orders has gone down some but not to pre-COVID levels by any means, according Potter. Online sales are now 256% above pre-COVID while sales to distributors are now about 135% more than before the pandemic. Potter says people are prioritizing healthier food to build immunity, and they see organic as a healthier option. “Whenever things get nasty, people reevaluate what’s important, and food is at the top of the list.”

The questions that producers are asking are whether the increased ‘COVID sales’ of organic will carry forward into an unsettled economy and what are the longer term implications for supply and pay price. Private label and store brand sales continue to dominate the organic dairy retail market which doesn’t project a good future for branded product at a higher retail price. Historically, pay price has only increased with competition and short supply. With large dairies able to find loopholes in organic regulations and certifiers that serve their needs, supply can be expanded to meet demand without increasing pay price as economies of scale reduce costs significantly for organic dairy, allowing them to be profitable at lower pay price.

USDA Economic Research Service (ERS) published a report on consolidation in Dairy in July 2020, “Consolidation in U.S. Dairy Farming’ by James M. MacDonald, Jonathan Law, and Roberto Mosheim. When applied to conventional dairy the reporting is nothing new. Some extracts from the summary:

  • The number of licensed U.S. dairy herds fell by more than half between 2002 and 2019, with an accelerating rate of decline in 2018 and 2019, even as milk production continued to grow. As a result, production has been shifting to much larger but fewer farms. Larger operations realize lower costs of production, on average, and those advantages persist.
  • In 1987, half of all milk cows in the United States were in herds of 80 or more, and half were in herds of 80 or fewer.
  • There are powerful cost incentives behind farm consolidation. Larger dairy farms have substantially lower costs of production, on average, than smaller farms. This cost advantage appears to extend across a wide range of larger sizes, with farms with 2,000 cows realizing lower costs than farms with 1,000 cows, which in turn realize lower costs than farms with 500 cows.

The reporting also revealed a similar trend in organic where, based on 2015 data, larger organic herds are more profitable:

  • While the smallest organic producers—those with 10 to 49 cows—displayed substantial losses (-$11.77/cwt), organic producers with 50 to 99 cows earned net returns of -$2.52, compared with -$9.24 for conventional producers in that herd size class. Producers with 100 to 199 cows earned positive net returns of $2.45/cwt, compared with -$5.29 among comparable conventional producers—and those with more than 199 cows also earned positive net returns. These findings agree with earlier findings for field crops: certi­fied organic corn and soybean producers showed higher costs of production than matched conven­tional producers, but they were also able to generate higher net returns (McBride, et al. 2015).

Milk costs and returns for organic producers by herd size class, 2016

10-49 cows

50-99 cows

100-199 cows

over 199 cows

Dollars per cwt

Gross Returns

37.10

37.93

38.27

37.45

Milk returns

34.37

35.17

36.07

34.87

Other returns

2.73

2.76

2.2

2.58

Operating costs

Total feed costs

17.09

16.37

17

14.05

Purchased feed

6.87

6.65

8.23

8.79

Homegrown feed

9.26

8.94

8.02

4.23

Grazed

0.96

0.78

0.76

1.03

Other operating costs

5.12

5.53

4.85

4.7

Total Operating costs

22.21

21.9

21.86

18.75

Gross minus operating

14.89

16.03

16.41

18.7

Allocated overhead

Hired labor

0.66

1.91

2.71

4.4

Unpaid labor

18.22

9.47

5.09

1.66

Capital recovery

5.23

4.7

4.49

3.84

Other overhead costs

2.55

2.47

1.68

2.25

Total allocated costs

26.66

18.56

13.96

12.14

Total costs

48.87

40.45

35.82

30.89

Net returns

-11.77

-2.52

2.45

6.56

If you take this data and forward it to 2020 it might explain the continued low pay price despite the upward trend in demand. In 2016, the average pay price was $36 per cwt. in the Northeast, now it is around $31 per cwt. Which size dairies survive and are able to grow with a pay price of $31 per cwt? It might explain why one national brand is reported as using its broker to drop smaller herds for low quality tests to solve trucking and supply coordination problems. It might also explain why Aurora Dairy is investing in large dairies.

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