Pay Price & Organic Market in May 2010
By Ed Maltby
ADDED May 17, 2010. The full effect of the downturn in demand for organic dairy has been felt by all producers, but we are now entering a period where demand is increasing and at least one processor is looking for more milk in the Northeast and Midwest. With excess supply in the West and pay price as low as $13/cwt for some independent producers, processors are increasing their inventory of powder (which can be shipped economically across the country) in anticipation of a tightening of supply this fall.
A quick overview of the situation is:
With only two national processors, they need to recognize their responsibility and work with producers and their organizations to rebuild confidence in the organic dairy industry. Producers need to work together to protect the long-term future of their community. We need an understandable method for determining pay price that has some basis in the costs of production and return on equity. We need to plan responsibly for reasonable growth, not unsustainable volatility with many peaks and troughs.
When Kevin and Lisa Englebert became the first certified organic dairy in 1984 there was no defined future but we all knew what was meant by Access to Pasture. A quarter of a century later, we have defined Access to Pasture but still don’t know what the future holds. 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.
With the rebound of the non-organic market the price gap between organic and non organic retail pricing has decreased, down from a high of $2.32 in August to $2.09 in December 2009 and it is now $2.13 in May 2010. The narrower the gap the more attractive organic milk will be for price conscious consumers.
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.
Beginning January 2010, HP Hood no longer procured organic milk for the Stonyfield Farm fluid milk brand. OV/CROPP 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 (SSG). Former Hood producers are being paid a base pay price with a deduction based on the 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 has imposed 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 drop, 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. By keeping the two pools of milk separate, current OV producers will not be adversely affected by this partnership.
This continues to be a difficult and uncertain time for those former 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 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 $23/cwt, while some report a $25/cwt base, so payments vary depending on circumstances. OV is building their supply and purchasing some milk on the spot market at very competitive prices.
Processors and handlers have chosen to manage a surplus in many different ways. HP Hood dropped many contracts, and then introduced utilization clauses before passing its remaining contracts over to Organic Valley. The remaining companies have introduced formal and informal quotas; lowered the farmgate price; introduced utilization clauses; cut off producers with low quality or who are in isolated locations; and used their contractual power to the fullest. While we saw a 3% drop in national sales of organic fluid milk from 2008 to 2009 (USDA-AMS data), many believe we are coming into balance again, except for some large dairies in the west. The free market system may well be solving the problem but we will lose the most vulnerable farm families; mostly the younger families that transitioned with the promise of a stable pay price in an expanding market. If this happens, we need to recognize what message we will be sending to the next generation of organic dairy farmers.
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.
Horizon has finished their producer meetings and was able to inform attendees at the last of the meetings that they could increase production. 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 dropped its $1 MAP for the summer but maintained its pay price; a base of $25 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 power to alter their agreements as market conditions change.
Organic Valley/CROPP Cooperative (CROPP) has maintained its pay price for its full members since it introduced its quota program in July 2009. The projected 2010 base component price is $27.07 with a $3/cwt seasonal incentive for milk produced in December, January and February, 2010 and have $1 as a Market Adjustment deducted in May, June, and July. 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. 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 January, 2011 or until the Board determines there is no need for it. OV has several producer committees that are working on fine tuning the quota system, especially how the active base is determined. They encourage member-owners to appeal their initial allocation of their active base so the system can be more equitable in the future. 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. OV is discussing new policies on off-farm diversion, farm conditions, cooperative conduct and maximum herd size. OV is also being pro-active with their own animal care program in anticipation of the work of the NOSB and concerns of customers.
Table 1: Overview of pay-price in New England up to July 2009
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.
Maine and Vermont Organic Dairy Study Results for the 2008 Production Year
Over the past 5 years a joint project between NOFA and UVM Extension has examined the economics of organic dairy production in Vermont and Maine, with the study looking only at Vermont for the last 2 years. What they found is an agricultural sector that experienced a surge in profitability and prices in 2006 only to see those profits erode by 2009. The study involved developing balance sheets and accrual income statements from participating farms that were paid for their assistance.
For 2008, the 35 farms in the study averaged 67 cows, producing 13,438 lbs of milk per cow at an average price of $30.90 per cwt. There is quite a contrast of farms in the study, ranging from 257 cows to a low of 20 cows. However several of the smaller herds were the most profitable. There is also a contrast in milk per cow, ranging from 7789 lbs to 19,132 lbs of milk per cow showing a range of management practices and amount of grain being fed. Two herds in the study did not feed any grain, and these farms were not the lowest producing herds in the study.
The chart below gives an indication of the difference in profitability between organic and non-organic dairies in Vermont and Maine. More information can be found at: add site