Organic Pay & Retail Price, February 2013

Update

By Ed Maltby, NODPA Executive Director

ADDED February 18, 2013. The current reality with organic pay price is that processors are offering increases in pay price though seasonal Market Adjustment Premiums (MAP’s) but costs are rising as rapidly as the premiums are extended. Producers are reporting record high farm-gate pay prices this winter, between $35-$40/cwt with quality and component payments added, but are still having difficulty paying bills. In the Northeast, both Horizon and Organic Valley are paying the same pay price before quality premiums are added, $30-31/cwt when seasonal MAP’s are averaged over the whole year, which is only $3 higher than 2008. There seems to be no break in the price for feed with 16% crude protein organic feed nearly double what it was in 2010, even with imports of soybeans and substitution of other grains and alfalfa in pelleted mixes. Factor in high fuel prices, increased costs of other inputs necessary for winter feed conservation, and increases in overhead costs - especially in health insurance, land rent and taxes - and it is clear that costs of production are only continuing to increase.

Across the country organic dairy farm families report that they have more debt and more unpaid bills over 30 days than they had two years ago.

The Milk Income Loss Contract (MILC) program was reinstituted in the Farm Bill extension passed by Congress and signed by the President at the beginning of January 2013. MILC has been extended through August 31, 2013 at a payment rate of 45%, covering 2.985 million total pounds of milk per year with a feed adjuster factor of $7.35. In September 2013, the payment rate falls to 34%, the milk production covered drops to 2.4 million total pounds, and the feed adjuster factor goes up to $9.50. The payment rate for September 2012 was approximately $0.59/cwt.; for October 2012 approximately $0.02/cwt; with zero payments for November and December 2012 and a preliminary estimate of $0.11 for January 2013. These small payments will do nothing to mitigate the fact that the organic pay price does not keep up with the continuing increase in input costs.

The silver lining is that the cull cow and beef prices still remain high so those that do not have enough feed on hand can lower their cow numbers to match their feed inventory. In the Northeast there are now two buyers for organic cull cows, Organic Prairie and Delft Blue , and there are rumors that a meat packer in southern Vermont is interested in buying more organic livestock when they open their packing facility in May 2013.

Horizon Organic increased their MAP by $2 in February 2012 and Organic Valley increased their base by $1 and MAP by $1 in March 2012, to add to the $1-1.50 increase they both gave in September 2011. Horizon Organic announced at the end of April 2012 that their MAP will be maintained at $3 or $3.50 /cwt (depending on geographic location) until the end of September 2012 and then announced the open ended continuation of that MAP in October. Horizon has added their 4 month seasonal payment of $3 to the MAP to make a total MAP of $6.50. Organic Valley has taken $1 from their MAP and added it to their base for January 2013, recognizing that all input costs have risen, and paid a $2 seasonal payment for November 2012 milk with their usual seasonal payments kicking in December 2012. They will continue to have a seasonal deduct of $1 in May, June and July. Horizon is paying their seasonal payment on top of their increased MAP and will continue this seasonal payment into June 2013. Horizon does not have as much flexibility in changing their base price as Organic Valley because the base price is set by contract rather than cooperative agreement. Horizon sees the MAP as a flexible tool that can react quickly to changes in production costs

The average pay price nationally is estimated at $30/cwt although that will vary by region. Producers across the country are still requesting another $5/ cwt on the base price to reach a breakeven point for 2013 based on sound economic analysis from independent sources using data from farmers in all areas of the US. Organic Valley and Horizon have the same pay price before quality premiums but some of the regional processors are currently paying more based on differing criteria from a percentage of the retail price to increases in costs of production. Examples of these processors include MOO Milk in Maine, Trickling Springs in Pennsylvania and Natural by Nature also in Pennsylvania.

Organic Dairy Farm Profitability
For the 8th year, UVM Extension and NOFA Vermont collected economic data from 40 Vermont organic dairy farms. In 2011, the average farm of 57.4 cows earned a profit of $40,879 (median of $31,941) before any charges for family withdrawal which was calculated at $35,000, leaving, on average, a return of $5,879 (median -$3060) of profits for reinvestment and paying real estate loan principles. The average farm shipped 13,515 lb. of milk per cow (median 13,091) and received an average price of $30.64 per cwt. (median $30.89). The return on assets was 1.34% (median 0.74%). For 2011, there were 19 farms with net incomes above zero and 21 farms with net incomes below zero. Note that the family cost of living has remained constant for the past few years at $35,000 (half the median income for a family of four) for comparison between years. If a higher cost of living was used, average profits would be lower. In addition, the study uses a conservative estimate for the value of land, cattle, and equipment to assess return on assets. These results indicate a continued period of low profits that does not return even a low amount of $35,000 for unpaid family labor for more than half of the farms in the study. In contrast, in 2006 the average farm in the study earned $58,443 before family living and the return on assets was 4.2%. Farm gate milk price was highest in 2008 at $30.90 per cwt and hasn’t increased from 2008 to 2011. With expected increased expenses, the profits from organic dairy farms will likely decline further without some increase in income. So farmers may not have much choice except to increase milk production per cow or add more cows. For the first time in the 8 years that this study has taken place, it was more profitable to be a conventional dairy farmer than an organic dairy farmer.

Net Accrual Income and Return on Assets of Vermont Organic Dairy Farms for 2011
Net Accrual Return on Assets
Income

2006 $23,443 4.2%
2007 $18,522 3.0%
2008 $24, 231 3.5%
2009 $20,527 2.8%
2010 $5,790 0.8%
2011 $5,879 1.3%

* Calculations include a $35,000 charge for unpaid owner labor and includes depreciation.

What is the effect on sales if processors pass on these increases to their retail buyers?
A $2 increase per cwt for farmers will be 9 cents per ½ gallon wholesale increase and with a 30% retailer mark-up would be an 11 cent increase. The mark-up will vary between retailers. This assumes that the processor doesn’t increase their costs over what they are paying producers. With a 21 cent per ½ gallon increase in retail price, sales increased by 5.2 million gallons from January 2011-January 2012.

Retail Prices
The trend towards an increase in retail price for store brand organic milk and the shrinking gap between the store brand and branded product continues, and over the last few months there has been an increase in the gap between conventional and organic retail price to a more normal level. USDA AMS reported that the national weighted average advertised price of organic milk half gallons was $3.75 on February 8th, 2013. The price range was $2.59 to $4.99 with store brands at $2.59, and national brands at the higher price, $4.99. The weighted average advertised price for national brands is $3.89 and for store brands, $3.22. Competition is strong for retail market share in the northeast with everyday market promotions lowering the price of Horizon branded product.

The advertised price spread between organic and conventional half-gallon milk is currently $1.58. The average price spread for 2012 was $1.24. The smaller the gap the more attractive it is for consumers to purchase organic milk.

Sales of fluid product in November 2012 increased, up 5% from November 2011 and dropped slightly in September 2012, rebounding in October 2012. Year to date increase for November 2012 over 2011 was 9%, with a surprising increase in sales of Whole milk over Fat-Reduced milk, but cumulative sales of organic fluid, January through November 2012, are up by 91 million pounds. Total sales of organic fluid products for 2012 were 2,172 million pounds an increase on 2011 of 5% and organic fluid sales in 2012 were just 4% of total fluid sales. While organic fluid milk bottling for retail sales continues to be the largest category use of organic milk, USDA AMS reports that organic butter manufacturing is increasingly drawing from the organic milk supply. Currently organic cream is readily available to butter manufacturers as production in the Midwest is slightly long in response to seasonal pay price incentives. Organic butter demand is expanding beyond the expected retail demand, to demand for butter used for making organic candy, as well as an ingredient in other organic food.

Organic milk continues to be a loss leader to attract customers to other organic products. Organic dairy processors continue to compete to supply lower priced store brand milk, for example, selling milk at a lower wholesale price to stores that package the milk in their own branded cartons - same milk as branded product but at a lower wholesale price which make more money for the retailer and less for the farmer – such store brands are Wal-Mart, Cosco, Trader Joe, Wholefoods, Safeway O Organic. Aurora and Organic Valley are the top two suppliers of private label/store brand milk, while Horizon is the leader in branded product with store brand/private label a close second

Most dairy buyers and milk brokers will assume the elasticity of demand for organic milk and how closely an increase in price will decrease sales. The evidence for the total market does not confirm this premise as USDA AMS data shows total sales (which include store brand) increase despite higher prices and but may mean that consumers move to store brand product if brands raise their price. The chart below tracks sales of fluid organic milk and retail price. Volume of purchases appear to be affected more by seasonality and the conventional/organic price gap than an increase in price of $0.30-60 cents per ½ gallon.

A recent study by ERS highlights the disparity between organic and conventional producers share of the retail price. The first chart below shows the conventional dairy farmer share of the retail dollar and the second shows organic producers’ share of the retail dollar. The conventional share hovers around 50% since 2000 and the organic share is around 30%. All data is from USDA and organic data in 20012 includes store brand milk prices.