Northeast Organic Dairy Producers Alliance

 

    
 

















 


Organic Milk Pay Price


Overview


Who or what sets the organic milk farmgate price?

The options out there for milk marketers are varied, and everyone out there is clamoring loudly that theirs is the best choice. Review all agreements carefully and make sure that the agreement matches your needs and that you feel confident in what you are being offered.

In the conventional market, the price that farmers get paid for their milk is strictly defined by the Federal Milk Marketing Order (FMMO), and roughly reflects the demand for wholesale milk in its many manufactured forms. Prices rise if there is a shortage but fall dramatically in times of domestic or worldwide surplus. Historically, organic milk prices have reflected the farmers’ need for a stable income and living wage. It has always been difficult to assess the true cost of providing a steady supply of high quality, organically certified milk. There are many different methods of production; different family demands; different needs for ensuring transition to the next generation; and different requirements to service debt or to obtain a long-term return on capital.

At this time, there are five companies who purchase raw organic milk in significant quantities. They are HP Hood LLC, Horizon Organic, Upstate Niagara Cooperative, Natural By Nature and Organic Valley. Lancaster Organic Farmers Cooperative (LOFCO), Dairy Marketing Services (DMS), Dairylea and Organic Dairy Farmers Cooperative (ODF) purchase milk on behalf of these processors and others. Some farmers sell directly to small manufacturing or processing companies, such as yogurt or cheese processors.

Farmers contract directly with companies that have brands in the market place such as Horizon, HP Hood and Organic Valley. Initial negotiations with transitioning farmers are between the individual farmer and either the end user of the milk (Horizon, Hood, and Organic Valley) or Dairy Marketing Services. Initial contracts are usually for 2 years. Farmers are paid through one of the existing cooperatives (DFA Inc., Dairy Lea, LOFCO, Mount Joy Farmers Coop, NFO, ODF Coop, St Albans Coop Creamery) or LLC’s (Agri-Mark, Agri-Services, LLC, Dairy Marketing Services).

The ownership of the purchasing companies varies from farmer-controlled cooperatives with a board of farmers (Organic Valley, LOFCO, Upstate Farms) to a New England based LLC (HP Hood) to a national company with shareholders (Horizon and Organic Cow owned by Dean Foods).

January 2008 overview

The latest contracts include a dazzling array of seasonal bonuses and benefits that will vary with each farm, weather conditions, and the price of purchased feed, requiring a post graduate degree in accounting and a crystal ball to evaluate all the permutations that will allow the producer to assess the impact on their net farm income. One of the main reasons many producers transitioned to organics was to get a higher and more stable pay price; however, we now have complicated contracts and coop agreements that change from month to month, may require specific forms of farm ownership structures, some with ill-defined animal welfare standards, and other market conditions that may be bound by enforced confidentiality clauses.

The organic dairy industry is built on strong partnerships between the processors and producers in the knowledge that an economically sustainable pool of producers will provide the security those processors need to expand their markets and product lines. In 2005, producers faced a similar situation where they were losing money and the processors responded with a staggered increase of up to $4 per cwt over a four month period. In January 2006, the base price plus the Market Adjustment Premiums (MAP) for New England and the Northeast was averaging $26/cwt for Horizon, HP Hood and Organic Valley.

January 2008 Pay Price

In January 2008, the New England base price plus MAP for Horizon is projected at $26.25, for HP Hood $26.90 and for Organic Valley $27, with seasonal bonuses that vary from $3 for 4 months to as little as $0.50 for two months. The effect on net income of the seasonal bonuses are difficult to assess on a region wide basis as the impact is subject to many variables, including unpredictable weather or crop conditions, and the price of purchased feed. Moving into the Midwest, farmgate prices for producers drop by as much as $4.50/cwt even though USDA studies show that operating costs are around the same as the Northeast. Producers in the Midwest and the west average a base price of around $22.50/cwt. The determination of pay price in other parts of the country follows the same pattern as in the Northeast, with little variance between processors. There are many “farmyard” deals that are made for higher base prices if producers are nearer to milk processing plants or on a route that is under-subscribed. Some of these deals are reported to be as high as $30 per hundred as a base price plus MAP and have confidentiality clauses to prevent producers exchanging information, which seems to happen anyway. Processors also “exchange” milk with each other from areas in surplus (the west for example) to satisfy markets in the east.

Table 1: Overview of pay-price in New England

 
Horizon Organic
Organic Valley*
HP Hood
 
2006
2008
2006
2008
2006
2008
 Base price
24.00
25.00
26.00
27.00
26.00
24.90
 MAP
2.00
1.25
 
 
-
2.00
 Short (2 to 4 months)
1.50
3.00
**
2.00
2.00
 Long (8 months)
0.75
1.50
 
 
 
 
 Trucking charge/yr
-
-
$900
$900
-
-
Average year round price***
 Long program
26.50
27.25
 
 
 
 
 Short program
26.50
27.25
26.00
27.00
26.50
27.40

*Organic Valley requires producers to purchase preferred stock equivalent to 5.5% of their annual base gross income; historically this investment has a 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.
**$1.00/cwt for milk produced in Oct, Nov, Dec, provided the average is greater than the average for May, June, July.
*** Seasonal bonus paid is multiplied by the number of months and divided by a complete calendar year.

Components and quality pricing varies with each company. With components, pricing varies from using the Federal Milk Marketing Order (FMMO) to a fixed price within the contract. Depending on farm operating practices and the breed of cows, components and seasonal and quality payments can increase gross income by as much as $3/cwt.

Table 2: Component payments by company measured by $/lb

 

Organic Valley
Horizon Organic*
HP Hood
FMMO- Nov 07
 
2008
2008
2008
2006
>2007
 Butterfat
2.0
1.82
FMMO
1.39
1.41
 Protein
1.86
1.56
FMMO
2.24
4.31
 Other solids
1.65
0.25
FMMO
0.23
0.25

*Horizon offers a choice of 3 programs, one just for butterfat ($0.13 BFD/.1 point+/-3.5%BF), one as above and one using the FMMO.
Table 3: Quality premiums offered by company measured by $/cwt

Volume Premium
  HP Hood 
Horizon
Organic Valley*
>750 cwt/ month
$0.15
$0.15
None
>1,500 cwt/month
$0.30
$0.30
None
>3,000 cwt/month
$0.50
$0.50
None
Low Standard Plate Counts
 
 
 
>9 and <16,000
$0.05
$0.05
11-20,000@$0.10
>5 and <8,000
$0.15
$0.15
0-10,000@$0.25
<6,000
$0.28
 
4,000 or less
$0.25
$0.37
 
Low P. I Counts
 
 
 
>17 and <32,000
$0.20
$0.28
$0.25
>9 and <16,000
$0.35
$0.56
0-15,000@$0.50
<12,000
 
$0.84
 
<8,000
$0.75
$1.25
 
Low Somatic Cell Counts
 
 
 
>251,000 and <300,000
$0.25
<300@$0.38
 
>201,000 and <250,000
$0.50
<225@$0.75
$0.48
>151,000 and <200,000
 
<175@$1.13
 
<150,000
$1.00
$1.50
$0.96

*OV has a Lab Pasteurization Count (LPC) payment of 0-51 @ $0.50/cwt; 15-100 @ $0.25/cwt. LPC is a laboratory test involving heat treatment of bulk milk samples at 145°F for 30 minutes.

Each company has its own transition incentives and programs that provide other than cash benefits. Space limits a full description of these programs but they include Horizon Organic’s HOPE program and Organic Valley’s centralized grain purchasing and veterinary helpline, plus support staff from all companies.
 
How is the farmgate price set?

  • Not by Government - Organic milk is neither directly subsidized nor supported and its farm gate price is not set by the federal government, despite the fact that all processors, with the exception of Aurora Organic Dairy, pay into the federal pool. 
  • Not by the retail price - The farmgate price bears no relationship to the retail price, which is set by supermarkets based on competitive wholesale pricing between processors, in-store promotions and an average margin of 31% for their operating expense and profit. The same ½ gallon of milk can vary by as much as $2, retail price, within a 5 mile radius.
  • Not as a percentage of retail price - In most years, organic dairy farmers receive a smaller percentage of the consumer dollar than the conventional farmer, 34% for organic compared to 41% for conventional (based on a farmgate price of $15 and a retail gallon price of $3).
  • Not by Parity Pricing - Parity price for November 2007 was $41.20 (up $.50/cwt from Oct. '07) for Midwestern milk; with regional premiums added to that, bringing it up to about $45/cwt in the Northeast. 
  • Not by comparison to conventional dairy - Conventional farmgate prices rose by as much as $10 per cwt in 2007 without any increase in the organic farmgate price.
  • Not by supply and demand - Consumer demand for organic dairy is still growing by at least 20% a year while family farm organic dairies are losing money and returning to conventional production.
  • Not by national negotiation - Most contracts are with individual farms except those that are contracting with Dairy Marketing Services, and a majority of producers have confidentiality clauses.
  • Not by costs of production - The pay price offered for 2008 is evidence enough.

It should be enough that producers clearly state their case, providing evidence of increasing costs of farm inputs, for processors to respond to their member-owners and farm partners and negotiate an increase in the base pay price that will keep farm families in business. Individual producers have tried and failed with this approach as have formal and ad hoc groups of producers across the country, and FOOD Farmers has presented a national voice of concern which has so far been ignored.

Why is a 20% increase needed in January 2008?
NODPA and FOOD Farmers have been proactive in asking for a 20% increase in base price incorporating the MAP and the retention of quality and component programs. This increase would return producers to the same level of profitability they had in 2006. Producers have also volunteered to work with consumers in explaining any increase in retail price that might be necessary to save family farms from bankruptcy.

In order to highlight the effect of low pay prices on farm profitability, we have used the research by USDA Economic Research Service (ERS) completed in 2007 using 2005 data, and the ongoing multi-agency study led by the Universities of Vermont and Maine to supplement the anecdotal information supplied by producers. Both these studies reported similar data for northeast organic dairy farms.

Table 2 uses data from the ongoing study in Vermont and Maine and makes projections for 2006-2008 based on existing market knowledge. “Farmgate milk sales” assumes up to $3 for a combination of components, quality and seasonal payments, and is representative of actual farmgate prices. The table reflects the large increase in purchased feed and energy costs documented by many agencies. We use the actual percentage increase between 2004 and 2005 as the basis for increases in other line items. It is evident that in 2006 there was profitability before taking depreciation or equipment/facility replacement into account. In 2007, the increase in income from bonus programs has mitigated losses for those farmers with high component herds who are being paid for components based on FMMO. The final column shows a 20% increase in the base pay price plus assumes an extra $3/cwt from bonus programs which brings producers back to the level of profitability they had in 2006. 

Table 4: Organic Dairy income and expense per cwt based on a 50 cow herd

  
Actual
Projected on actual
pay price
20% increase in base
  
2004
2005
2006
2007
2008
2008
Farmgate milk sales
22.97
24.94
28.00
30.00
31.50
35.00
Cattle
1.08
1.29
1.55
1.86
2.23
2.23
Crop sales
0.11
0.19
0.29
0.43
0.64
0.64
Other
1.67
1.78
1.87
1.96
2.06
2.06
Total Income
25.83
28.20
31.70
34.25
36.43
39.93
Expenses
 
 
 
 
 
 
Auto + truck exp
0.40
0.37
0.39
0.41
0.43
0.43
Bedding
0.43
0.51
0.56
0.62
0.68
0.68
Custom hire
0.37
0.58
0.70
0.84
1.00
1.00
Total feed cost
9.10
9.25
10.18
13.23
17.20
17.20
Fuel, oil, utilities
1.58
1.99
2.29
2.63
3.03
3.03
Interest
1.04
1.10
1.16
1.21
1.27
1.27
Labor
2.10
2.44
2.68
2.95
3.25
3.25
Marketing
0.44
0.42
0.44
0.46
0.49
0.49
Real Estate Tax and Insurance
1.18
1.17
1.21
1.24
1.28
1.28
Rent
0.10
0.43
0.45
0.47
0.50
0.50
Repairs
1.31
1.90
2.09
2.30
2.53
2.53
Vet, medicine, breeding, DHIA
0.79
0.83
0.87
0.92
0.96
0.96
Other: misc
0.21
0.56
0.59
0.62
0.65
0.65
Total Expenses
19.05
21.55
23.60
27.89
33.25
33.25
Depreciation
2.81
2.81
2.81
2.81
2.81
2.81
Net farm income
3.97
3.84
5.30
3.54
0.37
3.87
$40,000 owner draw
6.29
6.64
6.68
6.68
6.68
6.68
Net Farm Income 
-2.32
-2.80
-1.38
-3.14
-6.31
-2.81

The Agricultural Adjustment Act of 1938 states that the parity price formula is "average prices received by farmers for agricultural commodities during the last ten years and is designed to gradually adjust relative parity prices of specific commodities".


 



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