cows in field

Organic pay price declines

Processors panic over spring flush of milk and declining growth in sales

By Ed Maltby, NODPA Executive Director

Added March 6, 2009. It happens every year, as one season leads to another. A flush of milk as cows go out to grass coincides with a decline in fluid milk sales as the schools let out and consumers drink less milk during the summer months. Why has this year caught some processors by surprise?

Organic milk sales grew by as much as 24% in 2008 and fluid milk sales are projected to grow by 5-8% in 2009, while processed organic dairy products will stay level or decline. Average retail prices for organic whole milk have increased by 9¢ over retail prices in February 2008 .

Most economists predicted that sales would decrease in 2009 and some thought the drop would be more drastic. Apparently organic butter, cheese and powder inventories are high with little spare storage capacity available. This is a result of excess supply during the winter months. Why weren’t the companies working with producers to reduce supply in the fall of 2008 with programs that can be applied equitably and fairly? Why didn’t processors start negotiating with producers to develop programs to match supply with projected demand? Why are farms still being transitioned?

What has happened is that Organic Valley and HP Hood have lowered their pay price and Horizon is still honoring their contracts including the seasonal premiums that they raised by $.75 for January, February and March 2009, although there are rumors that they are planning a drop in pay price. Horizon’s seasonal premium ends in April.

On Friday February13, Organic Valley told its farmer owners that their Board, in consultation with their producer committees, individual producers and management retroactively lowered the February 2009 pay price by $1, followed by a further $1 cut for the months of May, June and July to deal with the spring flush followed by a projected $2 increase for the months of December 2009, January and February 2010. It is uncertain whether they will offer their $1 seasonal bonus for September, October and November. There will also be an increase in the stop charge from $75 to $180 per month beginning in February. They will also stall transitioning producers by 60 days, during which they will continue to receive the $2 transition payment but will then receive $2 less than their budgeted regional pay once shipping organic. Organic Valley management and producer committees are looking at a voluntary incentive program to deal with the spring flush, as any balancing of surplus milk on the conventional market will be at record low prices.

How does the cut in pay price affect Organic Valley producers? For a producer with 60 cows averaging 14,000 lbs of milk annually, this action will cause a loss of income of approximately $10,409 and a cut in their family living expenses to deal with the loss.

On February 24th , H.P.Hood sent out a letter to its producers saying that, “due to recent actions by our competition,” there will be a $1 reduction in the MAP effective with March 2009 milk with the reasoning this it will allow them to stay competitive in the marketplace. They are also asking all producers to reduce production by 10-15% voluntarily--otherwise they, “will be forced to take other measures to reduce our milk supply.” They give no indication of how this will be achieved in an equitable way or who will hold producers accountable.

HP Hood has also sent letters to at least 8 producers in Maine informing them they will not renew their contracts. They have also informed some producers in Michigan, Wisconsin and Iowa that their contracts will not be renewed.

There are also reports that many producers have been receiving warnings about the quality of milk that had previously not concerned processors. Some of the warnings have threatened that they would not pick up their milk if the problems were not resolved. NODPA suggests that any producer who receives a bad quality report has their own testing done either by the state or by any of the local testing labs. Click here for a list of labs that do the required testing.

What happens next?

Processors have been sending many mixed messages over the years as they have existed in a market that was expanding at an annual rate of 25%. When HP Hood entered the market, processors engaged in aggressive competition and signed up producers with small herds who were located in areas with difficult routes. They also signed up producers who might have questionable quality reports.

This supply of milk was used to produce more organically certified manufactured dairy products (ice cream, butter, cheese) and fed the growth of store brand organic fluid milk. Store brand milk has increased consumption beyond the core organic consumer and into a consumer category that is influenced by price as well as the benefits of an organically certified product. While store brands have been a vehicle for growth of consumer demand, it has had a mixed effect on the long term profitability for organic producers and processors. This has become evident in the following ways:

  • Decreased profitability for processors. The competition for supplying and packaging store brands has been based on undercutting price in what some have described as a “race to the bottom” between the major companies. If a processor has a contract for the store brand, they are more likely to be able to negotiate significant shelf space for their branded product. The competition between the major processors and independent companies such as Aurora Dairy, based on price alone has affected processors profitability. With store brand organic milk being the single highest growth area, the large processors are shifting their emphasis away from promoting their branded product to building the store brand customers. For some processors, store brands are now up to 30% of their total milk sales. The decreased profitability for processors has provided them with an excellent and convenient excuse for not increasing the pay price to producers, even though the pay price is only 30% of the retail price. Decision to undercut the wholesale price to retail buyers is purely to gain market share and increase the long term profitability of the processors.
  • The growth of store brand milk and the demand for lower priced wholesale organic milk has encouraged the growth of large dairies that have exploited the inability of the USDA National Organic Program (NOP) to enforce universally applied standards for grazing. Despite the fact that organic production has always been pastured based, the lack of a legal definition has allowed the growth of dairies with restricted land base and lower costs of production to become certified. These dairies have lower production costs and can therefore sell large volumes of organic milk to processors at lower prices than processors pay their farmer-owners and partners and subsequently enable the price cutting in the retail market. Retail buyers have thrived in this situation as increasing price competition has allowed them to increase their margins and buy at the lowest price with short term contracts for their store brand product.

Ultimately, the long term future of the organic milk market is based on providing an authentic, third-party certified product that can be easily differentiated by the consumer, and holds the qualities that consumer’s value. All consumer research points to their willingness to pay extra for dairy products that are produced without the use of herbicides, pesticides, growth hormones or antibiotics from cows that are pasture based. Organic production has always met all those qualities with the exception of a consistent and universal interpretation of how much pasture is required. Ongoing rulemaking will provide the legal language for certifiers to enforce a pasture based system and give USDA’s NOP the ability to sanction those dairies that are out of compliance. While consistent application of the rules will provide a level playing field for producers and guarantee consumers a product that meets their expectations, it does nothing to ensure a farmgate price that will provide economic sustainability for all sizes and types of organic dairies. The conventional milk market has shown the importance of producers having leverage with processors and the consumers to maintain an equitable return for their time, labor and capital investment. Processors and producers need to negotiate about controlling supply to match demand and maintaining a sustainable pay price that will ensure the profitability of all levels of organic dairy.