Organic Pay & Retail Price, December 2012

Update

By Ed Maltby, NODPA Executive Director

ADDED December 9, 2012.

With gridlock in Washington DC, dairy farmers may be the only group that could benefit from Congress dropping over the financial cliff. Without a Farm Bill, there is a default provision within permanent Farm Law that requires the Secretary of Agriculture to set the dairy price support between 75 and 90% of parity. Taking the November 2012 parity price of $52.70 as a guide that suggests the Secretary would have to set the dairy support price at a minimum of $40 on January 1, 2013 if no new farm legislation is passed. Having organic and non-organic raw milk selling wholesale at the same price would throw a lot of confusion into the retail market!!

The current reality with organic pay price is that processors are only offering a small increase in pay price and costs are rising. In the Northeast, both Horizon and Organic Valley are paying the same pay price before quality premiums are added, $29-30 per hundred pounds which is only $2 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.

With no MILC subsidies to rely on, processors need to take responsibility for supporting their producers with a higher base pay price and they need to pay the seasonal Market Adjustment Premiums (MAPs) all year while input prices are so high.

• Now would be the time for Organic Valley producers to press their case to their representatives before their Board makes any decisions in December/January. The OV Board faces conflicting tensions between the needs of their farmer-owners for a fair pay price and the need to complete capital projects with a new produce warehouse, an expansion of their warehouse in Cashton WI along with plans for a new office building, the expansion of their not-so-old headquarters building in La Farge, and the purchase of a majority holding in an organic slaughterhouse.

• Similarly, with Dean cashing out some of their investment in WhiteWave, Horizon producers should continue to question where the company’s priority lies and how Horizon, under their new leadership in procurement, member relations and Chairman, is going to ensure that their farmer partners stay in business.

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.

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 is reported as proposing taking $1 from their MAP and adding it to their base for January 2013, recognizing that all input costs have risen, and pay a $2 seasonal payment for November 2012 milk with their usual seasonal payments kicking in December 2012. Horizon is paying their seasonal payment on top of their increased MAP and will consider continuing 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 per cwt to reach a breakeven point for 2012 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.

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 $5879 (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%. Milk price was highest in 2008 at $30.90 per cwt. 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 Income Return on Assets
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, with dramatic decrease in the gap between conventional and organic retail price.

On November 2012 USDA AMS reported that the national weighted average advertised price of organic half gallons of milk is $3.52, with a price range of $2.99 to $4.69; the highest price, $4.69, is for a store brand and the lowest, $2.99, is for both store brands and national brands. These prices are 40 and 30 cents lower than at the begging of the month. The weighted average advertised price for national brands is $3.64 and for store brands $3.36.

The advertised price spread between organic and conventional half-gallon milk is currently $.67. The average price spread this year has been $1.31. The smaller the gap the more attractive it is for consumers to purchase organic milk.

Sales of fluid product in August 2012 increased, up 10% from August 2011 and dropped slightly in September 2012. Year to date increase over last year is 5%, with a surprising increase in sales of Whole milk over Fat-Reduced milk, but cumulative organic fat-reduced, January through September 2012, are up by 26 million pounds. Organic milk continues to be a loss leader to attract customers to other organic products.

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.

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.

Posted: to Organic Pay, Feed & Grain Prices on Sun, Dec 9, 2012
Updated: Wed, Oct 17, 2018