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Organic Milk Pay Price Update

ADDED JUNE 1, 2009.

The last few months have seen the pay price drop by all milk companies, from some smaller cooperative and individual producers to the “Big Three.”  We are now in the time of year when all the seasonal bonuses end and everything reverts back to the base price. There is no anticipation of any increases in the next few months and no commitments for any fall seasonal payments. Table 1 below shows the New England pay price since 2006.

Organic Valley has mandated a supply reduction program for its producers by introducing a quota system on July 1, 2009. In summary the base will be calculated on a monthly production over the last three years and OV will be paying the full organic price on 93% of that production and $15/cwt on anything over that amount on a monthly basis. See attached letter from Organic Valley.

Horizon Organic have asked for a voluntary reduction of 7% in production but there is no evidence yet of any changes to contracts. HP Hood has been giving notice to some of their producers, approximately 10 in ME and nearly 60 in the midwest, plus others that we have no information about. This is not the time to transition to organic even with low conventional prices.

Overview of pay-price in New England

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).

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.

The graph below recently published by the USDA shows both the growth of organic fluid milk and the predictability of the seasonal fluctuations in volume of sales. It is interesting to note that the retail price of organic fluid milk has not changed significantly in the last two years. The graph does not account for any milk sold into manufacturing (Classes 2 through 4)