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By Ed Maltby, NODPA Executive Director
ADDED March 8, 2012
As the costs of organic dairy production start to reach a new base level, the big question on producers’ minds about pay price as they plan this crop season is ‘Will the increases currently in place end in June?, Will there be seasonal cuts in the Market Adjustment Premium (MAP)?, How will the increase in retail price affect sales and what will the fall pay price be?’ The fear of consumers switching to store brand milk or reducing purchases of organic with higher retail prices is a negotiating tactic used by processors to keep pay price down. Based on experience in 2011 this is not the case.
From December 2010 to December 2011, the average retail price of organic milk increased by 14 cents per ½ gallon while sales increased by 14.3% over 2010. But producers received only an average of $1.25/cwt (6cents per ½ gal) of the total retail increase of $3.26/cwt (14 cents per ½ gal) for ¼ of the year. In January the average retail price jumped by 7 cent/ ½ gallon before any increase went to producers in the middle of February or March.
Processors will have lower expenses in 2011 in dealing with the ‘spring flush’ of milk. With the current milk supply approximately 5-8% lower than demand, the annual spring flush of milk will not be the normal financial drain on processors as they utilize all of organic production for organic products rather than selling into the conventional market or making organic powder. With corn double the 2010 price and soy meal now over $1,000 a ton, the cost of winter milk will assume new highs, even with home produced forage and season extending small grains and brassicas. Factor in high fuel prices, increased costs in 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. The request by NODPA, WODPA and MODPA producers for at least a $4 increase in pay price by the end of the summer is even more urgent and necessary.
Pay price increase
Horizon Organic increased their MAP by $2 in February and Organic Valley increased their base by $1 and MAP by $1 in March, to add to the $1-1.50 increase they both gave in September 2011. Unconfirmed reports from producer meetings is that Horizon will keep its $2 increase in MAP through the summer, and Organic Valley will not take the $1 deduct that they typically do in May, June and July.
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.
USDA AMS reports that retail prices of organic half gallons have increased by an average of 7 cents per ½ gallon from December 2011 to January 2012, and by 21 cents per ½ gallon since December 2010. This data doesn’t take into account that at least 30% of milk volume is sold as private label, which has a different, more competitive, retail pricing structure and is used by retailers as a loss leader to attract customers to other organic and natural products. With the increase in retail price, the volume of sales has continued to rise, both month to month and year to year. Despite the 21 cent per ½ gallon increase in retail price since December 2010, December 2011 sales were at an all-time high with total organic fluid milk product sales of 182 million pounds, up 8.1% from December 2010, and annual sales are up 14.3% January through December 2011 compared with the same period in 2010. This contrasts with an annual 3.9% December 2011 decline in sales for all fluid milk sold, implying that non-organic milk sales have declined while organic milk sales have increased in the double digits.
Comparing the December 2011 and January 2012 average price for retail half gallon organic reduced fat (2%) milk, surveyed from stores in thirty cities as reported by USDA AMS, it was found that those 17 cities had higher average prices during January, 3 lower average prices, and 10 unchanged average prices.
The overall average price for all thirty cities increased 7 cents from December to January, from $3.80 to $3.87. This is a higher month to month increase than at any time since this monthly data was first collected by USDA AMS beginning in April, 2008. Wichita, at $4.24 for January, is the city up the most, 41 cents. Hartford, at $4.54, is the city with the highest January average price. Dallas, Houston and Denver, each with an average of $3.24, are tied for the lowest January average price.
Feed grade corn is averaging a slightly lower price, with the bulk of the sales throughout the country ranging from $410-450/ton, while corn in the Northeast traded $470-$600/ton. Argentinian imports of soybeans are still reportedly in use throughout the Eastern United States due to high US prices, although the quality varies. Soybeans are averaging $733/ton and soybean meal has jumped by over $200 per ton in the last month to average over $1,000 /ton.