cows in field

Why Organic Milk Supply Management?

By Ed Maltby, NODPA Executive Director

Based on the report from the FOOD Farmers Supply
Management Committee and an article by Cindy Daley

Added September 6, 2010. All regions of the country were hit hard by the impacts of oversupply of raw milk, caused by the dramatic drop in the growth of demand for organic dairy products in 2009. This was compounded by a prolonged cyclical trough of low pay price, experienced by non-organic dairy, which caused hardship and long-term stress on assets and cash reserves for farms of all sizes and production methods. The effects of the surplus were felt at different times in different regions and were exacerbated by a sluggish economy, the exit of a national company from the organic market and the collapse of some mid-sized organic producer cooperatives. To further complicate the situation, oversupply was managed differently by the various organic handlers and processors, creating confusion and some in-fighting among producers.

In response to the circumstances in organic dairy, the Federation Of Organic Dairy Farmers (FOOD Farmers) instituted an Organic Milk Supply Management Committee (SMC) which held an initial meeting in early May. Producers representing the Northeast Organic Dairy Producers Alliance (NODPA), Midwestern Organic Dairy Producers Alliance (MODPA) and the Western Organic Dairy Producers Alliance (WODPA), met with a goal of defining the full scope of supply challenges, and to begin the process of developing a system to better manage the organic milk supply in a way that will benefit the entire industry, including producers, processors, retailers and consumers. Producers need to be at the table and drive the process to ensure that they are not price takers without due recourse.

What is the goal of supply management (SM)? The SMC concluded that the primary goal of an effective supply management program is to balance supply with demand in a way that is equitable for producers and processors. This will create a more sustainable/stable price, so farmers can do long term planning for their operations. The program would have to be flexible so that it can be “tweaked” as necessary, with full accountability and transparency. In addition, there must be open and clear communication between all sectors of the program. Finally, the program must be enforceable with 100% compliance among all sectors and not discriminatory toward new/young startup operations.

What are the industry’s specific strengths that could help it usher in a new supply management program? Some of the important strengths we possess as an industry include a growing producer alliance that facilitates communication among producers regardless of brand and processor. We have a great story that resonants with our consumers, who are both loyal and passionate about our product. Producers are also in the unique position of truly controlling supply at the source, i.e., there will only be as much milk on the market as we allow. The only piece that is missing from this “control at the source” mentality is our unified vision and the ability to work together for our collective benefit.

Unique features or opportunities that may facilitate the development of a Supply Management Program (SMP): The SMC felt that the timing is right to bring everyone together for a common vision. The current crisis is still fresh on everyone’s mind, creating a sense of urgency and a readiness for change. Another unique feature is the size of the organic dairy industry, because it is so small- roughly 3% of the total milk market- the industry can be more adaptive to change than our conventional counterparts. In addition, organic dairy producers have other assets, such as a unique perspective. They are by nature “out of the box thinkers”, so creating an innovative solution to these issues should be feasible. Finally, the ODPA’s have created a venue for farmer discussions and networking that wouldn’t have been possible even 5 years ago, uniting under the FOOD Farmer organization, and will give the subject national representation, and will be less impacted by brand or region.

Challenges that will make it difficult to develop a SMP: The committee felt that consensus might be difficult to gain on a national program due to our regional differences and the fact that producers are independent by nature, making it difficult to agree on program specifics and implementation strategies. Even if a program was to be developed, getting 100% compliance would be challenging unless it was tied to Federal programs or national enforcement. The last year and half has been fraught with difficult times, a sluggish economy, oversupply, and blended milk pricing in some areas have left contracts vulnerable to price undercutting, creating a domino effect that will end badly for all segments of the industry. Lenders are showing a lack of confidence in both organic and non-organic dairy production, resulting in stress for producers who have debt service or rely on credit for cash flow. While this should serve as an impetus toward unification on the issue of supply management, the experience has caused finger pointing and behavior that led to divisiveness among producers, blocking efforts towards unification. Processors, organic dairy brands and handlers will need to be central to the planning and development stages of any program designed to control supply.

Bringing these companies together for discussions will require careful planning because of the federal laws that are in place, designed to prevent collusion and price fixing between different companies competing against each other. Interestingly, farmer owned cooperatives, farmer organizations and individual farmers can meet to discuss supply management and milk pricing under the Caper-Volstead Act.

The principal challenges for organic dairies are to manage supply based on modest and reasonable growth, and to balance production by growing a diverse number of organic dairy products rather than relying on the non-organic market to balance any surplus. The current programs being discussed on the non-organic market will adversely affect the growth of organic and value-added dairy initiatives, so any organic dairy proposals will need to address these issues. There are regional differences and seasonal fluctuations in milk supply and milk utilization. There are substantial regional differences in production and operating costs, not only in feed inputs but also fixed and overhead costs that affect net family income and return on equity. We need an understandable method for determining pay price that has some basis in the costs of production and return on equity.

Overview of the basic principles of a
draft Supply Management Plan:

  1. Develop a system that sends a clear signal to organic milk producers when there is too much organic milk.
  2. Must be mandatory across the country: if you produce organic milk you are in the program.
  3. USDA will provide meaningful utilization and production data through mandatory electronic reporting, similar to the non-organic market. This data is available within the current system.
  4. Automatic trigger levels for under utilization will be pre-determined through a process that includes processors and producers. Trigger levels could be different for differ
    ent times of the year.
  5. AMS/USDA or independent entity charged with monitoring the system will assess demand based on utilization and will set the program in motion if triggers are reached.
  6. When the program is “triggered”, all producers will be encouraged to reduce milk volume. Recent production (prior to trigger) will be used as baseline for each operation. Farms will receive $0 for milk produced above (Baseline X Utilization) whereas those who cut the volume of raw milk they ship to match utilization will be paid the full price.
  7. Processors pay for all milk regardless of quota – cannot blend the price.
  8. Over quota milk income goes to pay for the SMP and marketing of organic dairy products – cost of data collection, accounting and administration.

In Conclusion:

In this low-cost paradigm, the organic industry will go the way of the conventional world, with the lowest price gaining ground on limited contracts, driving down farm-gate prices for all organic farmers. Ultimately, this will lead to the demise of the smaller or midsized herds with higher operating costs, or our young farmers who are less well capitalized. These discussions are key to the future of our industry and we need input from all producers, processors and consumers as we move forward. Please join the discussions at the NODPA Field Days and support innovative and sustainable solutions to the future of our industry.

The SMC outlines some general principles that we felt were critical to the process. There are a number of details that have yet to be fully elucidated and will require producer input. The committee welcomes input. A full workshop session and open discussion will take place at the NODPA Field Days in Unity Maine on October 7 and 8 and a seminar and discussion at the WODPA Conference in October 19 and 20 in Modesto, CA.