The Retail Food Dollar ... and How Organic Dairy Farmers Receive Their Share

By Ed Maltby, Executive Director, NODPA

June 7, 2008: Consumers are surrounded by marketing that encourages them to purchase organic milk to “save the family farm,” “to support our farm partners,” to “buy from our farmer owners” or that the farmer is our “hero.” So, what is the truth about how the family farmer benefits--or not--from producing USDA certified organic milk? What does an organic dairy farmer need to be profitable?

What does the organic farmer need to be profitable and provide for the next generation?

• As of June 2008, in the northeast and midwest, organic dairy farmers need a base price of $35 per hundred pounds of milk ($1.51 per ½ gallon) to be profitable enough to cover their production costs, provide for their family and present a viable future for the next generation. This is the equivalent of an additional 31 ¢ per ½ gallon over the current pay price to continue to provide high quality organically certified milk from family farms into the future.

How can this be paid in tough economic times?

• The retail price of organic milk varies by as much as $1.80 depending on where it retails and which brand it is sold under. There are many in-store promotions that can lower the price in order to gain market share.
• With that much variation in retail price and an average 20% growth in consumer demand, the future can be profitable for all levels of organic dairy. If the consumer paid an extra 20¢ per ½ gallon, and the processing company and the retailer gave a few percentage points on their margin, and those increases were passed through to the farmer, we would have profitable organic dairy family farms into the next twenty years.

Why is this level of increase needed when everyone is suffering economic hardship?

• Despite requests from individual farmers and farmer organizations like NODPA and FOOD Farmers, organic dairy farmers received no increase on their base price from January 2006 to December 2007, with the exception of one company that gave a small cost of living increase.
• From January 2008 to June 2008 organic dairy farmers have received an average increase in their farmgate price of 9% based on their December 2007 price. That is an average of 3.8% per calendar year, approximately 8¢ per gallon per year for the period January 2006 to June 2008.
• Farmers have seen rapid increases in production expenses such as:
  • Increases in the price of purchased feed (both grain and hay) by between 50-110%, (see update on Feed price page)
  • Increased costs of diesel fuel (essential for powering tractors to make hay and grow corn),
  • Increased costs of petroleum based products such as plastic for protecting hay from winter weather.
  • Increases in cost of liability and property insurance, land taxes, property and equipment maintenance, labor costs and health insurance.

How much do organic farmers in the Northeast get paid for a gallon of fluid milk?

• The answer is simple, the average “farmgate price” (what farmers receive) is $1.20 per ½ gallon. The three main companies that buy organic milk from farmers are WhiteWave Foods (Horizon Organic and Organic Cow brand), Organic Valley Family of Farms and HP Hood (Stonyfield Farm brand). Farmers have individual contracts with the company of their choice, and are paid a base price for their milk plus a dazzlingly array of incentives and bonuses including: regional bonuses, market premiums, seasonal bonuses, volume bonuses, butterfat and protein bonuses, profit sharing, signing bonuses and quality bonuses.
• Despite the fact that there are at least three independent companies buying milk from farmers, they are all offering approximately the same amount for each 100 pounds of milk (the unit for which farmers sell their milk) and they tend to raise their prices by the same level at the same time.

What is the farmer’s share of the retail dollar?

• The consumer pays anything from $2.89 to $4.69 for a ½ gallon in the store (see footnote).
• The average retail price for a ½ gallon in June 2008 is $4.02 (see footnote), which is an increase of 58¢ from May 2005. The increase that farmers have received during the same period is 29¢ per ½ gallon.
• The farmer receives 30% of the average retail price. The percentages that are allocated to the retailer, distributor, processor and brand owner varies depending on brand, store policy and store location.

How does store brand milk affect the pricing of organic milk
and the profitability of family farmers?

• Store brand milk is either packaged for the individual chain store (as in the case of Organic Valley packaging milk for Whole Foods 365 brand) or as branded product that is only promoted at the store. For example, Aurora Dairy in Colorado packages Nature’s Promise ½ gallons for Stop and Shop. The Woodstock brand, which is packaged by Schroeder Company in Minnesota, is also sold in Stop and Shop.
• The informal survey from western Massachusetts shows that store brand milk will average lower than the branded product. Stop & Shop’s Nature’s promise sold at $3.59/ ½ gallon and the Organic Cow and Stonyfield brand sold at $4.19 / ½ gallon, a difference of 60¢.
• Many of the major companies will package store generic brands for different retailers so the store brand is a significant sector of their business, as is the case with Organic Valley and Whole Foods. In Whole Foods the 365 brand retails for $3.29 / ½ gallon and Organic Valley retails at $4.19 / ½ gallon, the same milk, packaged in the same plant but with the store brand selling at 90¢ less than the Organic Valley brand milk. That’s similar to HP Hood, who packages the Full Circle generic brand sold in Big Y and the Stonyfield brand, with the generic brand retailing at $3.98/ ½ gallon and Stonyfield brand at $4.85/ ½ gallon, a difference of 87¢ for the same milk from the same plant but in a different package.
• In an economic recession, it is generally assumed that more consumers will purchase store generic brand products. Organic is no exception to this, so the influence of store brands will be felt more strongly by the national brands during the upcoming year.
• There is not enough data yet to know at what point higher prices will deter consumers from purchasing organic milk and there has not been any consumer resistance to purchasing ½ gallon of organic milk at $4.50.
• Dairy buyers for the major retailers are not as experienced in the marketing of organic milk and tend to follow the same criteria they use for non-organic milk, price cutting and in-store promotions. They are experienced in encouraging competition among suppliers of store brand milk and national brands for the shrinking space in the retail dairy case. In these highly competitive situations, the generic organic milk is able to lower its price because it has no marketing overhead which will force the national brands to lower their price to compete. While this is good for the consumer, it creates an unsustainable situation for dairy processors and ultimately family farmers who do not have the savings and extensive lines of credit to fund competition between large companies. If this situation continues we will see the demise of the smaller, organic dairy family farm and an increase in the large organic dairies that can produce organic milk cheaper because of economies of scale.

How do I tell where organic milk is comes from and is packaged?

• The major brands have their own contracted supply of milk which is transported and packaged separately so their product can be traced back to the individual farm.
• Aurora Dairy in Colorado has its own vertically integrated system where they produce milk from their own farms and only process their own milk. This can be traced back to them by the plant code on the packaging.
• Other store brands and generic milk are more difficult to trace back to the individual farms as the milk is pooled together with many farms, although the organic certification process can be used to track all milk back to the farm it came from.
• Each package of milk has to have a code on the package that shows the state and the plant where the milk is packaged. Some examples from products sold in western Massachusetts:

Posted: to Industry News on Sat, Jun 7, 2008
Updated: Sat, Jun 7, 2008