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Pay Price & Organic Market in January 2010

By Ed Maltby

ADDED JANUARY 11, 2010. The full effect of the downturn in demand for organic dairy is being felt by all producers, with no one under the illusion that the situation will improve quickly. Consumer demand is still slightly negative, although there are regional and seasonal fluctuations in sales of fluid milk on a monthly basis; there are only two national buyers for wholesale organic milk; many producers are on short contracts; pay price has dropped; smaller independent handlers and cooperatives are making difficult decisions about their future; and the 270 + producers who shipped to HP Hood/Kemp/DMS to supply the milk for the Stonyfield fluid milk brand are in an uncertain position. Many well established organic dairies that have a good history of working with their processor will have a reasonable year financially but there will be many that have to make difficult personal and professional choices with limited options in 2010. The principal challenges for organic dairy 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. Organic milk is now a commodity in search of a secure market, with all the problems of a commodity that we know so well from the non-organic milk market.

Retail sales

The appointment of Eric Graf as the Organic Specialist for USDA-AMS Dairy Reporting has increased the availability of independent data and analysis on organic dairy, even if it is still limited. His latest report shows increased retail food store advertising of non-fluid organic dairy products indicating an increased investment in that sector, which reflects the opportunities of the current surplus to produce a greater variety of organic dairy products and a better future balancing of organic dairy. Sales of fluid organic dairy have dropped over the last year. The volume of sales of fluid whole milk has decreased by approximately 3% for the first ten months of 2009, compared with the first ten months of 2008, and organic fat reduced fluid by 4% over the same period. Sales of fluid milk bottomed out seasonally and are still lower than sales by the month for 2008.

The average retail price for organic fluid has also dropped to its lowest level in two years, averaging $3.70 /half gallon (a drop of 15¢ since January 2009), and the gap between the organic and non-organic retail price for half gallons that peaked in September is now starting to decrease. Both of these indicators are encouraging for future sales.

The chart below shows USDA statistics on the average gap in retail prices between organic and non-organic. The values are slightly distorted as there are no statistics available for half-gallons of non-organic milk, so the gallon price was halved to create these charts and graphs below.

Pay Price

Beginning January 2010, HP Hood will no longer be procuring organic milk for the Stonyfield Farm fluid milk brand. OV/CROPP has assumed that responsibility and they are working directly with those producers who had contracts with HP Hood/Kemps and Dairy Marketing Services to market their milk within the Stonyfield Supply Group. This will continue to be a difficult and uncertain time for those Hood producers who are in the middle of this transition as they work with CROPP to determine their future relationship or look for other opportunities. This will be a challenging time for OV/CROPP to maintain the contracts for these producers as organic shippers in a competitive retail market, although the increase in the non-organic pay price may lessen the impact of the utilization clause in contracts. Producers are reporting that the base price for some former Hood producers in the Northeast is as low as $20/cwt, while some report a $25/cwt base, so contracts vary depending on circumstances. 

In general, all producers accept the restrictions that the excess supply has placed on pay price and seasonal/market/regional payments.  Producers who transition in the last few years are at the most risk as they are still developing the potential of the land and livestock under organic management, while carrying debt from transition expense. Some producers report that there is still a lack of clarity over what, if any, milk can be sold/used by producers rather than sold to their milk company and are looking for more clarity.

There are now only two national organic procurement companies, some regional groups of up to 50 producers such as LOFCO and Upstate Niagara, smaller cooperatives/companies such as Organic Dairy Farmers Cooperative and Maine’s Own Organic Milk Company (MOOMilk Co), as well as individual processors such as Butterworks Farm, Strafford Organic Creamery and Empire Organics and a few established dairies that are expanding into organics such as Foster Farms and Cloverland Dairy.

HP Hood/Stonyfield Farm
On Monday, November 9, Organic Valley/CROPP Cooperative (OV) announced that it had entered into a perpetual licensing agreement with Stonyfield Farms and a co-processing agreement with HP Hood to effectively take over the Stonyfield milk brand. This will take effect on January 1, 2010. Organic Valley will also be managing HP Hoods private label contracts using milk from the pool of HP Hood producers. This announcement ended weeks of speculation about HP Hood’s future in the organic milk industry. 

Over the last nine months, HP Hood has been slimming down its producer base by ending contracts or giving 180 days notice. While their pool of producers is smaller now than before, there are still 270 farms in the northeast and midwest that supply organic milk to HP Hood. As part of Hood’s commitment to honor its existing contracts with their producers, the agreement between Hood and OV transfers financial responsibility for those contracts to OV and in turn, OV will honor the terms of all contracts. All Hood producers who have current contracts that expire after the first of the year will be offered membership in OV’s special category of membership called Stonyfield Supply Group (SSG). Producers will not have to change their milk handlers as OV has relationships with all eight of the milk handlers currently used by Hood producers.  By keeping the two pools of milk separate, current OV producers will not be adversely affected by this partnership

According to an OV spokesperson, their goal “ is to preserve the organic market for as many farmers as possible while still maintaining a sustainable pay price.”

 The producers under contract with HP Hood will have the following options:

  • Join OV’ SSG group membership. Hood producers who join OV will be part of the special reserve pool which will supply the Stonyfield brand and will not be required to pay any equity.  Producers will remain a member of OV’s SSG group until their contract with Hood would have expired. OV will notify the producer and give at least 60 days’ notice if OV is terminating the producers OV membership at the end of the previous contract with Hood. If OV does not terminate the producers SSG membership, OV and the producer have the right to end the membership with a rolling sixty day termination notice.
  • Keeping their current contract. OV will honor the producer’s existing contract until the end of term, and the producer will be paid on the same utilization basis as those in the SSG.
  • Seeking another market for their milk.

 Producers whose contract with Hood ends before 12/31/09 will not be part of the agreement.

Former Hood producers will be paid based on utilization of their organic milk. In determining the pay-price, the amount of supply produced by the SSG will be compared to the amount of sales under the Stonyfield milk brand (including the private labels); the resulting organic utilization will be the basis for their blended pay price.

OV will impose a cap on production and the “active base” within the SSG will be determined by the previous 12 months production. The OV Board of Directors will determine how long this production cap will remain in place and how long the special SSG group membership will last. If sales of the Stonyfield milk brand drops, OV may be forced to allow the former Hood producers to be terminated at the end of their contracts and/or lower the pay-price to reflect the losses from selling any surplus into the non-organic market.

Horizon Organic
Horizon is in the middle of their producer meetings, a time when producers need to talk directly with management to explain their challenges. The new CEO for WhiteWave, Blaine McPeak, has publicly committed to a long term future in the organic market. His knowledge from managing Horizon Organic is positive for Horizon’s continued support of its producers. Horizon reports that many producers responded to their request for a 5% drop in production; that they are not terminating contracts and they are honoring contracts given to transitioning producers. Producer reports indicate that Horizon has maintained its pay price; a base of $25, with a $1 MAP and a $3 premium in October, November, December and January, although there is some variation in contracted pay-price. The contracts that Horizon is presenting to its producers have changed between 2008 and 2009. Some changes to contracts have been made to: 1) authorize Horizon representatives complete access to organic files at the certifier’s office and elsewhere; 2) gives the company the ability to terminate or suspend the contract immediately if  the company believes the producer’s certifier “has questioned or is investigating” any part of the Organic Systems Plan for non-compliance; 3) allows Horizon to change the pay-price for an individual producer with 30 days notice and they only need written agreement from the producer if the amount is over 25% of the new base price; 4) allows the company to terminate the contract if the producer can only supply 80% of the agreed volume and needs company approval for any increase over 20% %; 5) Horizon retains the right to decrease the agreed base volume they will purchase by up to 20% with 90 days notice; 6) Horizon retains the right to charge for hauling , and 7) gives Horizon the ability to terminate for cause if the producer “engages in any activity which is not consistent with the principles underlying organic production” or if “that activity is subject to any publicity (including media or internet).” Horizon has retained the “Mutual Confidentiality” clause that allows the producer to consult only with professional advisors on contract conditions and restricts their right to share information with other producers. As Horizon renews contracts they will favor those producers who are well located near to processing plants, have consistently good quality milk tests and have a good relationship with the company.  Producers report that they have no bargaining power at this time and most are thankful they have a market with a relatively stable pay-price. Horizon says it needs the changes in contracts to be able to compete against other companies in the cost of buying raw milk. Many producers are concerned that the contracts are now more restrictive and give the company more powers to alter their agreements as market conditions change

Organic Valley
Organic Valley/CROPP Cooperative (CROPP) has maintained its pay price for its full members since it introduced its quota program in July 2009. Producers have been told that they will receive a $2/cwt seasonal incentive for milk produced in December 2009, January and February 2010 and have $1 as a Market Adjustment deducted in May, June, and July. In December 2010 the Fall Incentive will increase to $3 with the proposal to continue the $3 in January and February 2011. Members who had money deducted from their monthly checks for over production but remained under their total quota for the first six months (July-December 2009) will be receiving reimbursement checks by Feb 15. CROPP’s hauling fee was increased from $900/year to $2,160/year earlier in 2009 and remains at that level. Producers have been told that the quota system will extend through July with a goal of going back to the Active Base, or to stair step down from the proposed 7% quota over a period of months. Some producers report hardship as a result of the implementation of the quota system, others have cut back on paid help and health insurance to remain in business.

Table 1: Overview of pay-price in New England up to July 2009
 e

Profitability Of Organic Dairy

The profitability of organic milk production in the US has suffered along with the conventional dairies. Organic dairies still face high feed prices plus increases in energy and other overhead costs. The March 2009 ERS Monthly Milk Costs of Production estimates for conventional dairies in Wisconsin, Vermont, and New York were, on average, $21.54/cwt, $24.94/cwt, and $26.55/cwt, respectively. Organic dairies, on average, have higher production costs by about $5 to $7 more per cwt. Thus, implied production costs for organic dairies in the three States can be approximated at $27-29/cwt (Wisconsin), $30-32/cwt (Vermont), and $32-34/cwt (New York).

In 2009 pay prices for organic milk will average about $27.43/cwt. At current estimates of production costs, organic dairy farmers in Vermont and New York are losing about $4/cwt and $5/cwt, respectively. The average milk price paid to dairy farmers by the two largest organic processors in Wisconsin (Organic Valley and Horizon Farms) is currently $24.63/cwt. At that price, the average loss for Wisconsin organic dairy farmers is $3/cwt. Costs vary greatly across farms and production methods. Farms that rely more on purchased feed inputs can expect to see greater losses than farms that rely more on pasture-based feeds. Organic dairy farmers use fewer feed concentrates and more forage than conventional producers; however, the purchased feed they do use has a higher per unit cost since it must be certified organic feed. For example, prices published by USDA’s Agricultural Marketing Service at the beginning of May 2009 show Upper Midwest organic feed grade corn at about $7.48/bushel, yet conventional no. 2 yellow feed corn was about half the price, averaging $3.90/bushel in Chicago.

The table below compares losses of conventional dairies with organic.

 

 

 



 

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