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Milk Quota’s – What should we look for?

By Ed Maltby, NODPA Director

Added June 1, 2009.
With the introduction of quotas by Organic Valley, below are some areas to look at when considering any proposed quota system from the milk companies:

  • Review the contract/cooperative agreement to see if it prohibits or limits the ability of the milk company to institute quotas. Producers should check their contracts for any language that spells out the milk company’s commitment to purchase all of their milk.
  • Producers may be interested in attempting to market the milk they produce that is over quota and that the milk company would not pay as organic by themselves. These producers may want to review their contracts/cooperative membership agreements and bylaws for any kind of exclusivity agreement or limitations on the right of producers to sell their organic milk to buyers other than the milk company. If a contract includes a provision in which the producer agreed to market exclusively to the milk company, the producer should consult an attorney before attempting to market any over-quota milk produced. The producer may be able to negotiate a change to the contract with the milk company that would allow the producer to market the milk in certain ways. Producers should be certain they comply with all applicable federal, state, and local laws, such as any restrictions on sale of raw milk.
  • Producers who feel their "active base" is too low can and should use any appeal process within the contract, cooperative agreement or State law. Presumably, the producer’s likelihood of success on appeal will depend upon the strength of their arguments and evidence for increasing their quota, based on past high production or low production that was for reasons such as natural disaster. It’s in the interest of each individual producer to have his or her active base and quota as high as possible, but it is in the interest of the milk company to have the quotas average out to meet to overall production and sales goal that they have set.
  • Producers who might want to sell less productive cows should review their agreements with their lenders--they may need to seek permission from the lender, if the lender has a lien or security interest in the cows, equipment, or milk. Producers who sell collateral owned by a lender without prior approval (some lenders may grant approval after the fact, but producers should never assume that approval will be granted later) may face serious consequences, including criminal charges for conversion.
  • Producers should ask for a dollar value of the quota as an asset that can be placed on their balance sheet to compensate for a lower gross income or sale of some less productive cows as some lenders insist on some basic asset to debt ratios to keep the loans as compliant.
  • Many producers have an assignment to their lender, so that checks from the creamery are made out to both the producer and lender. Sometimes these assignments are structured as a flat amount to the lender, sometimes as a percentage of the total check. Producers may want to revisit the assignment now, and request an adjustment in the assignment from the lender, if there will not be enough left for the producer to pay family living and farm operating expenses after the assignment is taken out of the milk check which has been reduced as a result of the implementation of any quota.
  • Many states have agricultural mediation programs. These might provide assistance to producers seeking to negotiate with their lenders. Also, Extension or Farm Business Management programs may provide assistance with assessing and adjusting farm business plans in light of the new quota.
  • Producers facing severe financial distress as a result of the new quota and the recession may want to explore options to restructure their loan with a private lender, or loan servicing if the Farm Service Agency is their lender. Other producers may want to meet with an attorney familiar with Chapter 12 bankruptcy, to see if this is an option that would help them to restructure their debts and continue farming.
  • Producers may want to contact state and federal officials, either as individuals reporting the challenges they are facing as organic dairy producers, or as a group to propose a policy to address the challenges and assist organic dairy producers facing these market challenges
  • Producers should maintain detailed financial records--including any income lost as a result of the quota, as well as other increased costs (such as for high feed prices). If the federal or state government were to provide relief for organic dairy producers in the future, they may require producers to provide evidence of the losses suffered.

For some general advice on assignment of payments and organic dairy contracts go to: http://nodpa.com/resources_biz.shtml