Pay price, feed and retail price update
for May 2015
Organic Milk Supply Feeding Frenzy
By Ed Maltby, NODPA Executive Director
Added May 25, 2015. If you are in a position to move your milk to another processor, especially if you qualify for any grass-fed programs, you will find plenty of folks out there willing to buy your milk and most will give a sign-on incentive. Producers across the country are looking to move away from the national brands and change their buyers, mostly to more regionally based processors and cooperatives. Processors are giving financial incentives for those thinking of transitioning to organic and there are reports of farms transitioning, especially in Vermont where there is active support and good business planning for those making the switch.
One processor in New York is offering an incentive of $3 per hundred pounds for the final 12 months of transition plus $2.50 per hundred incentives for the first 3 months of organic production. Another is offering a $38 base price on organic (not grass fed). As Organic Valley is dropping some of its store brand contracts because of a shortage in supply, they are being picked up by more regional processors who need the customers to balance their branded product. Experienced producers are stressing the need for a higher long term base price, and a base pay price of $37 per hundred with quality and volume premiums bringing it closer to a farmgate price of $40 per hundred with no trucking costs, are increasingly common.
The last time that we had such good demand for organic milk was when HP Hood entered the market. As a result, the pay price jumped by a few dollars, processors established unrealistic trucking routes and there was an increase in smaller independent processors. It was not sustainable and many producers suffered. While the cause for the increase in demand for organic milk this time is based more on shortage of supply caused by inadequate pay price, producers need to be cautious to ensure they are getting what they need to be profitable.
Don’t be misled by the processors calculating your farm gate price as every farm will have different conditions and always look for a high base price that is tied to a contract or cooperative agreement. All milk being sold to meet grass fed standards, the pay price needs to be in the middle $40’s as a starting point for most operations in order for it to “pencil out” in the long term. Some producers have had to drop out of programs because they have had trouble balancing rations and also weren’t able to manage the financial ramifications of producing a lower volume of milk. For those producers that have experience with a grass-fed only approach, the increase in demand for their product is based on a rapidly expanding market in fluid milk and some processed product but it is difficult to predict where this demand will go or when it will level out. Over the last few years, organic demand has been between seven to nine percent, and consumers do not appear to stop buying if the retail price increases a little. As an indication of the strength of consumer demand, there are more imports of organic cheese and milk powder coming into the US market. The spring flush of organic milk is beginning and there are good signs that the increase in volume may ease some of the processors’ supply challenges and increase the producers’ bottom lines as they move away from purchased feed.
Producers also need to pay close attention to their contracts, which are the fallback position when your processor wants to slow down your switch to another buyer or when supply is long and they want to cut the base price, or when the smaller operations sell to larger companies who can handle expansion better. The date of your contract renewal is important, even down to the day, as some producers have found out. If you have to give six month notice prior to your contract renewal, a phone call or quick email is not good enough. If your buyer is telling you that there are restrictions on what you can and can’t do as you move to another buyer, seek expert help from another producer or NODPA, as sometimes the buyers don’t have all the facts. NODPA has three publications, by Jill Krueger, available on NODPA’s website Resources page, to help producers in making decisions on their contracts: “Making the Most of Your Milk Check: What Dairy Farmers Need to Know About Assignments”, “When Your Processor Requires More than Organic Certification: Additional Requirements in Organic Milk Contracts”, and “Hushed Up: Confidentiality Clauses in Organic Milk Contracts”. They can be downloaded for free or we can send you copies if you do not have access to a computer.
Organic grain prices are steady and demand is light to moderate for organic grains now that many producers are focused on the current planting season. Discussions surround weather and planting conditions nationwide, potential market conditions in regard to prices and yields at fall harvest, and ongoing concerns with transportation issues and imports in regard to pricing competitiveness.