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ADDED OCTOBER 1, 2009.
The organic pay price has been dramatically and severely affected by the recent downturn in the organic milk market which is now commodity based, having followed the conventional example of growing volume while sacrificing value in order to lower price to gain market share. It’s too soon to assess the long term effects of the changes on procurement on long term supply management, with initial reactions being very varied. Sales of fluid organic milk bottomed out in May 2009 still ½ million pounds higher than April 2007. The following three months have shown increased sales with July sales in the northeast nearly 1 million pounds higher than in July 2008 and nationally approximately 4 million pounds or an increase of 3% year over year. The principal challenge for organic dairy is to find a way to balance production within their own market rather than relying on the non-organic market. When supply is again short, producers will remember how their milk company treated them during this surplus.
HP Hood/Stonyfield milk brand (Hood)
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). Many of these notices are now starting to take effect with contracts ending and many producers having no market for their milk. Producers who have been given prior notice of poor quality and received probationary notices have been given 5 days notice before dropping them.
Hood has asked their producers, which includes Kemp 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 dependant on the organic utilization of the milk, with no stated criteria for how they will reach those decisions. Producers had a deadline of July 1st to sign the amendment and some of them have been told their base will drop by at least $3/cwt depending on how their milk is utilized. Hood producers in the NE received $25 -$25.50 per cwt for July milk which is a cut for most but not as dramatic as some expected. There are reports that Hood is now targeting those producers who did not immediately sign the contract amendment that changed their pay price dramatically and giving them 180 day notices to end their contracts. Expecting farm families to make decisions that affect their profitability and future family life without any negotiation and time to consult a lawyer is unfair and would be illegal if applied to other contractual situations.
Hood is mandated to accept the entire producer’s organic milk but prohibits the sale of organic milk to anybody else (no chance of any raw milk sales on the side) 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/representatives to discuss solutions to the pay price situation.
Nobody seems to know how Hood is planning for any future procurement or dedicated supply and many are wondering if they will complete the move to purchasing all organic milk from a Dairy Marketing Services organic pool and not have any direct contracts with producers.
Horizon dropped $1 from its MAP in May 2009 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, as contracts are renewed, they will stop the “long program” but extend 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 and maximize their return from organic milk to maintain pay price and reduce losses.
Some producers are still waiting for contracts, wondering what the final wording will be. There is a wide variation in the terms and conditions that Horizon is offering producers depending on their past history and anticipated future with Horizon. As with the other companies, Horizon is favoring producers who are “good partners” and do not voice criticism of Horizon publically. It is unlikely that Horizon will agree to any herd expansion and producers should always ensure that they have a market for their milk before expanding. They are also ending contracts with some larger operations, like Watts Dairy in Washington State. 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. Horizon is honoring their contracts with transitioning producers and continuing to pay the transitioning bonus. Horizon has also launched a new “natural” product to diversify their product line and absorb some surplus organic milk.
Organic Valley (OV)
Organic Valley/CROPP Cooperative (OV) dropped its pay price by $1 in February 2009 and another $1 in May. They introduced a quota program in July 2009 which is scheduled to end on January 31, 2010, unless extended by the Board of Directors. 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. 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.
Some OV producers are very content with the quota system while others have seen up to $400 taken out of the milk check based on monthly sales of only 25,000 lbs. Over one third of Organic Valley producers appealed their new base and we don’t know at this time how many were granted a variance and on what criteria. 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. Hopefully the criteria for granting appeals and the names of producers given a variance on their quota will be made public to ensure a transparent and fair process is followed. The quota system is hitting the newly transitioned producers the hardest, especially those younger farm families who took on debt to cover transition costs.
OV is holding its producers to their cooperative agreements not to sell or use their milk through other markets or on the farm. There is discontent among many producers about OV’s enforcement of this restriction on producers selling small amounts of raw milk or using it on the farm rather than getting the equivalent of $10 per cwt. Reports from the media and producers allege that OV is working with some state agencies to help enforce their restriction and dropping producers who inform them of their intent to use some of their milk on their own farm.
Over-quota milk will have a $15 pay deduction from the producers’ organic 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; as 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. To quote an OV producer “we are solving problems as we move forward.”
We hear only good things about Upstate who are reportedly allowing some of their producers to expand their production. We haven’t heard of any farms being dropped or pay price being reduced for their roughly 25 organic farms.
Non-organic mailbox prices
Table 1: Overview of pay-price in New England up to July 2009
1 Organic Valley requires producers to purchase preferred stock equivalent to 5.5% of their annual base gross income; historically this investment has an 8% return on required amount in Class B Stock. Profit sharing is activated if Organic Valley’s 2.2% profit goals are met or exceeded.
2 In 2009, Horizon’s MAP decreased in May by $1 (this shows as $0.50 as it was for approximately ½ a year), Hood in March by $1, and OV regional payments in February by $1.
3 $1.00/cwt for milk produced in Oct, Nov, Dec, provided the average is greater than the average for May, June, July.
4 Seasonal deductions for May, June, July.
5 Proposed $2 increase for December 2009, January 2010, and February 2010.
6 Seasonal bonus paid is multiplied by the number of months and divided by a complete calendar year. The trucking charges are not included in the OV calculations as the cost/cwt will vary with the size of the herd. (60 cows at annual production of 14,000 would be about $0.25/cwt)
Profitability Of Organic Dairy
The profitability of organic milk production in the US has suffered along with the conventional dairies. Organic dairies still face high feed prices plus increases in energy and other overhead costs. The March 2009 ERS Monthly Milk Costs of Production estimates for conventional dairies in Wisconsin, Vermont, and New York were, on average, $21.54/cwt, $24.94/cwt, and $26.55/cwt, respectively. Organic dairies, on average, have higher production costs by about $5 to $7 more per cwt. Thus, implied production costs for organic dairies in the three States can be approximated at $27-29/cwt (Wisconsin), $30-32/cwt (Vermont), and $32-34/cwt (New York).
Pay prices for organic milk will average about $27.43/cwt. At current estimates of production costs, organic dairy farmers in Vermont and New York are losing about $4/cwt and $5/cwt, respectively. The average milk price paid to dairy farmers by the two largest organic processors in Wisconsin (Organic Valley and Horizon Farms) is currently $24.63/cwt. At that price, the average loss for Wisconsin organic dairy farmers is $3/cwt. Costs vary greatly across farms and production methods. Farms that rely more on purchased feed inputs can expect to see greater losses than farms that rely more on pasture-based feeds. Organic dairy farmers use fewer feed concentrates and more forage than conventional producers; however, the purchased feed they do use has a higher per unit cost since it must be certified organic feed. For example, prices published by USDA’s Agricultural Marketing Service at the beginning of May 2009 show Upper Midwest organic feed grade corn at about $7.48/bushel, yet conventional no. 2 yellow feed corn was about half the price, averaging $3.90/bushel in Chicago.
The table below compares losses of conventional dairies with organic.
The graphs below are constructed from USDA data and show both the growth of organic fluid milk and the predictability of the seasonal fluctuations in volume of sales. It is interesting to note that the retail price of organic fluid milk has not changed significantly in the last two years and the volume of milk sold in July 2009 is higher than July 2008. The graph does not account for any milk sold into manufacturing (Classes 2 through 4).