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Organic Milk Pay Price Update

ADDED AUGUST 1, 2009.

Pay Price update
The organic pay price has been dramatically and severely affected by the recent downturn in the organic milk market. The organic milk market is now commodity based, having followed the conventional example of growing volume while sacrificing value in order to lower price to gain market share.
Two of the milk company’s new programs are so vague about their final paycheck that there can be no accurate forecasting. Hood/Kemp/DMS and Horizon have changed their policies on implementing and policing their quality programs; are interpreting their confidentiality clauses more strictly; and are abandoning non-economic routes that they set up only a few years ago. The new Organic Valley quota program is not clearly defined, introducing a new “active” base when they already had a base they purchased when they joined the cooperative and with many areas that have not yet been standardized. The milk companies have responded in different ways to this situation. Many of their responses raise more questions than solutions and lack the necessary and traditional transparency of a sustainable organic dairy industry. None of the companies are looking to take on new producers. Many HP Hood/Stonyfield milk brand producers are choosing to not accept the new contract amendment they have been offered, preferring to let their contracts run out and then face the decision about whether to continue in organic dairying.

HP Hood/Kemps/Stonyfield brand
 HP Hood (Hood) lowered their price by $1 in February and asked for a voluntary 10-15% cut in production. They have been canceling contracts and sending 180 day notice letters of contract termination because of quality concerns, uneconomic routes and “the softening economy” (this reason has been used when they have canceled contracts with outspoken producers). Producers who have been given prior notice of poor quality and received probationary notices have been given 5 days notice before dropping them. Hood is asking their producers, which includes Kemp producers, to sign a new commitment letter with Dairy Marketing Services (DMS) and Hood without any defined pay price. The pay price will be decided on a monthly basis by Hood with no stated criteria for how they will reach those decisions. Producers had a deadline of July 1st to sign and some producers have been told their base will drop by at least $3/cwt depending on how their milk is utilized. The letter does tie Hood to accepting all the producer’s organic milk but  prohibits the sale of organic milk to anybody else (no chance of any raw milk sales on the side) and says that DMS will not pay the producer until they receive money from Hood. The new commitment letter tightens the minimum quality standards and cancels the following: the annual cost-of-farming adjustment, the winter grain program, the market premium program, and the new entrant sign-up and transition program. The letter requires that a bulk tank unit must meet grade A standard, otherwise Hood will not make any payments until the unit is authorized, without any clear explanation of what that means. They have also introduced a confidentiality clause to all their contracts (the ones including DMS didn’t have one before). They are honoring existing transition contracts and payments. Hood and Stonyfield have refused to meet with producers and/or their lawyers/representatives to discuss solutions to the pay price situation.

Horizon Organic
Horizon dropped $1 from its MAP in May and sent out letters explaining their situation and asking for a voluntary 5% cut in production. Their contracts will continue to have confidentiality clauses; tightening up on quality; and, as contracts are renewed, they will stop the “long program” but extend the “short program” as an incentive for producing winter milk. They have reduced production at their company owned farm in Idaho by approximately 50% and have started a range of natural dairy products to help balance their surplus and maximize their return from organic milk to maintain pay price and reduce losses. They are also ending contracts with some larger operations, like Watts Dairy in Washington State. It is unlikely that any contracts will be longer than a year, especially if quality is questionable or the route is “uneconomic.” It is unlikely that Horizon will agree to any herd expansion and producers should always ensure that they have a market for their milk before expanding. Other changes to contracts have been made to address animal welfare issues on the farm and to give the company the ability to terminate the contract when, after an investigation, a producer receives a notice of revocation of their organic certification rather than waiting for the certification to be revoked after an appeal. There have been no arbitrary cuts of producers; approximately 10 contracts have been ended across the whole country. 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 good relationship with the company. Horizon is honoring their contracts with transitioning producers and continuing to pay the transitioning bonus. Horizon have also launched a new “natural” product to diversify their product line and absorb some surplus organic milk.

Organic Valley/CROPP Cooperative
Organic Valley/CROPP Cooperative (OV) has dropped its pay price by $1 in February and another $1 in May. They introduced a quota program in July 2009 which is scheduled to end on January 31, 2010, unless extended by the Board of Directors. There are still many details about the program that are not clear. It is not clear what “future market conditions” will determine whether the program will be extended.’  If it is extended OV will use the 2009 active base to determine future production levels. There is also concern that if the active base is refigured each year based on a three year history, then the active base will slowly erode. As producers for OV are committed to market their entire product with OV, OV is requesting that producers not sell product through other markets, so no raw milk sales. There is a lack of clarity around how transparent the process of granting appeals will be and whether the reasoning for granting an appeal will be posted for other producer owners to see. The appeal form asks for information on the quality of the milk, recent reasons for expansion, the number of cows and acreage, and shifts in production.

Over-quota milk will have a $15 pay deduction from the producers’ mailbox price. The "mailbox price" is defined as the net price received by dairy farmers for milk, including all payments received for milk sold and deducting costs associated with marketing the milk. Historically, milk that OV could not sell organic has been redirected to the conventional market and the same holds true today. OV will be taking any surplus milk and “reblending” it; as a cooperative, they have no FMMO restrictions on how much they pay producers. OV’s letter to producers clearly states that if too many producers appeal it will have an adverse effect on everyone. To quote an OV producer “we are solving problems as we move forward.”


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

Overview of pay-price in New England

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Profitability Of Organic Dairy
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).
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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The graphs 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).

 

 

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