The Organic Milk Market, January 2012

By Ed Maltby, NODPA Executive Director

ADDED January 19, 2012

What is good for the processor and the consumer, isn’t so good for the family farm

Organic dairy is in a surprisingly strong demand position, with retail sales increasing at a double digit pace over last year and supply tight across the country. With the average retail price for organic fluid milk lower than in the fall of 2008 and a low price gap between conventional and organic, the organic consumer is purchasing more organic fluid products than ever before. They are making the best of a favorable situation, which is only offset by a shortage in supply causing some stores to be shorted. Retailers continue to dictate to the organic processors on price and promotional specials and have a healthy margin averaging 30-40%. With a high conventional price to minimize the expense of balancing surplus milk, a minimal spring flush to sell on the conventional market and full utilization of milk in the organic market, the outlook for organic dairy processors is very healthy for 2012. For farmers there is an opposite outlook and a lack of confidence in the future of the supply side of organic dairy. More organic dairy farm families are leaving organic; returning to conventional production or retiring earlier than planned. The rising cost and availability of inputs, dramatically for corn, fuel and quality forage, has many farmers feeling the strain of cash flow with few reserves. They are anticipating and planning for a net loss, cutting the feed costs to a minimum and hoping to survive. For those that have changed their production in response to processors’ request for more winter milk, the costs of inputs for this winter will make winter milk production unprofitable.

What is the future for organic dairy farmers?

• Does the organic dairy industry need a mass market where at least 2/3rds of the farmers are struggling to survive or a market that ensures at least 2/3rds of farmers are thriving and reinvesting in their land and community?
• Do we want organic dairy family farms all over the country or concentrated in a few areas to obtain the lower costs structure through the economies of scale and transport that can be profitable at a low pay price, mirroring the conventional dairy industry and large scale dairies like Aurora Dairy?

In a depressed economy, retail sales of organic dairy are growing at 8-10% annually; thus the consumer wants the product and is willing to pay from $2.50 for store brand organic milk to over $4.50 a ½ gallon for branded product. Demand for organic dairy ingredients is also increasing.

The processors are still aggressively fighting for market share, especially in the Northeast, and private label/store brand share of the market is slowly increasing. Retailers and processors are obviously making money because they continue to invest in their marketing and shelf space, and with Organic Valley, their infrastructure and administrative staff.

Therefore the question is:

• How long can organic dairies live with a loss in equity and a lack of profitability and what type of operations will be producing organic milk in 2015?

Former NODPA Board president and Organic Valley producer Steve Morrison posed this timely question in the November issue of NODPA News “If processors work with the interests of their farmers at heart, this necessary adjustment [increase in pay price] can be accomplished quickly and safely.” Steve was suggesting an increase in base pay price of $4/cwt. over the next 12 months.

The Board of Organic Valley/CROPP decided on their pay price and premium structure in December 2011, and their pay price will increase by approximately $2/cwt plus an increase in components in March 2012. For most farmers that will not make a dent in their payables and lines of credit accumulated over the 2011-2012 winter.

WhiteWave/Horizon Organic have retained their $1.50 MAP for their eastern farmers and $1 for other farmers nationwide until the end of March 2012.

These actions by the processors will not be enough to re-establish producer confidence in the economic future of organic dairy, especially those that are carrying any significant debt load.
It is time for all stakeholders to work together to look at the future of organic dairy. The national umbrella group for farmers, Federation of Organic Dairy Farmers (FOOD Farmers), has some suggestions for the upcoming farm bill that could address the question of a safety net and a marketing order that would reflect the needs of organic farmers. If the marketplace can not support a pay price that responds to increases in input costs, we need to address the issue through insurance and supply management through an organic marketing order.

The Supply Market

The repercussions of the downturn in demand in 2009 saw the exit of one national processor (HP Hood/Kemp) and several regional processors (Humboldt Dairy, Organic Choice, Clover Stonetta) plus the restructuring of Lancaster Organic Farmers Cooperative (LOFCO) and merging of 53 of their farmers with Organic Valley, the expansion of Natural By Nature, the formation of MOO Milk, and the increase in the volume of organic milk controlled by Dairy Farmers of America (DFA). The remaining two major national companies, CROPP/Organic Valley and WhiteWave/Horizon Organic, are looking to sign up more farmers and both have lifted any restriction on production either through a quota or by contract. Both companies have absorbed farmers from companies that have left organic plus there is some ‘poaching’ of farmers from each other. Payments for winter production are the same, even as the prices of organic corn and soybean have increased and availability tightens up. During 2009-2010, many vendors who were facing their own economic challenges shortened their credit terms with farmers, as did many lenders, which has left farmers with less credit to meet rising fixed and overhead expenses. As an indication of profitability in 2009 and into 2010, the most recent survey results from the ongoing study by University of Maine and Vermont Extension, USDA ERS and NOFA VT shows that in 2009 government payments through the MILC program provided the difference between profit and loss for many farmers showing a declining trend in profitability since 2006.

The Milk Income Loss Contract (MILC) is projected to kick in early in 2012 but will be phased out in September 2012. With increased feed, energy costs and overhead expense (property tax, fuel, land rent, health insurance) farmers are reporting that they are barely covering their input costs and are asking for an increased pay price, especially for winter production. For most farmers an increase of $6-9 (depending on buyer and contract terms) will be needed before they can start to break even and re-invest in their farms.

The two national processors vary in how they respond to the needs of farmers who are seeing a shrinking bottom line. In the Northeast, this difference has shown itself in a pay price that varies by $1.50-$2 per hundred pounds of milk between Organic Valley and Horizon Organic. In August 2011, Organic Valley paid a dividend equal to $0.16 /cwt for all milk shipped in 2010 and increased its pay price by up to a dollar per hundred pounds with an increase of $0.05/lb on their butterfat premium; adding $0.30/cwt to their national premium, and a $.50/cwt Market Adjustment Premium (MAP). In August, Horizon Organic raised their MAP by $1-50 for 6 eastern states and $1 for farmers nationwide which was extended to March 2012. Organic Valley have set a pay price for March 2012 with an increase of $2/cwt and Horizon Organic hasn’t responded so far. In other parts of the country, Organic Valley and Horizon are closer to each other on an average pay price.

The new Access to Pasture rule has had little effect on both volume of milk produced or production practices as farmers had already cut back production and cows in 2009-2010 in response to a surplus of milk. There have been two major complaints from farmers about the new pasture rule; the increase in paperwork and the variation between different certifiers and inspectors on how much detail they want within the organic system plan and in subsequent reporting. Miles McEvoy, head of the USDA National Organic Program (NOP) addressed this issue at the Fall 2011 meeting of the National Organic Standards Board and promised to make it a priority to bring uniformity to the interpretation of regulations with a minimum of paperwork.

Retail sales

The positive picture for organic dairy retail sales and the unexpected increase in demand could not have been foreseen in early 2010 while the economy was still in recession. In retrospect, this rapid turnaround can be attributed to the increased confidence from the core organic consumers who were less affected by the recession and who place a greater priority on the quality of their food. Available data shows more households are increasing their purchases of organic dairy product rather than new customers buying organic dairy in preference to other beverages.

Sales of organic fluid milk are the highest in 2 years; more value added organic dairy products are being marketed; and processors are increasing the use of packaging that reduces waste, lessens line lost and ensures longer shelf life. There is aggressive competition in the marketplace with the Horizon Organic brand as the market leader. The phasing out of the Organic Cow brand to consolidate and improve the marketing of the Horizon Organic brand in the Northeast hasn’t been as successful as WhiteWave expected, losing some market share to the more familiar Stonyfield Farm milk brand. Organic Valley has expanded their range of products with flavored milk and ½ and ½ , Hazelnut creamer, organic flavored soy drink and have strong sales of their Stonyfield milk brand, plus increased sales of non-fluid milk to Stonyfield Farm for their products. Organic Valley has an agreement to provide HTST milk for NY Fresh from NY farmers’ milk by partnering with Elmhurst Dairy in Roxbury, NY.

• Organic dairy has shown a greater degree of stability and growth than non-organic dairy. Organic milk sales increased during three of the last four years, declining only during 2009 in contrast to fluid milk products sales of organic and non-organic milk combined, which declined during three of the last four years, using 2010 data through October. Organic fluid milk product sales as a percentage of total milk products sales have shown a steady increase: 2007, 2.36%; 2008, 2.8%; 2009, 2.72%; and 2010, 3.23%.

U.S. Sales of Fluid Milk Products Yearly Percentage
Change From Prior Year (USDA AMS)

• USDA Agricultural Marketing Services (AMS) reports sales of organic fluid product in October 2011 increased by 13% over October 2010 with 180 million pounds of milk sold and up 17.0% January through October 2011 compared with the same first ten months of 2010. Sales volume increase has been most significant in value-added and fortified product which is classified within the Reduced Fat category of fluid sales, whereas sales of whole organic milk have been level.

These figures are based on the consumption of fluid milk products in Federal milk order marketing areas and California, which represents approximately 92 percent of total fluid milk sales in the United States. An estimate of total U.S. fluid milk sales is derived by interpolating the remaining 8 percent of sales from the Federal milk order and California data.

• Sales of organic milk products continue to rebound during 2011, in contrast with sales of total milk products, which declined.

These figures are based on the consumption of fluid milk products in Federal milk order marketing areas and California, which represents approximately 92 percent of total fluid milk sales in the United States. An estimate of total U.S. fluid milk sales is derived by interpolating the remaining 8 percent of sales from the Federal milk order and California data.

• With the higher prices in the non-organic market, the current average retail price for organic milk in December 2011 is 6¢ lower than in 2008 and the price gap between conventional and organic is now at one of its lowest level since September 2008 at $1.98 per half gallon. The narrower the gap the more attractive organic milk will be for price conscious consumers.

As collected by Federal Milk Order Market administrators based on a survey conducted one day between the 1st and 10th of each month (excluding Fridays and weekends) in selected cities or metropolitan areas. One outlet of the largest and second largest food store chains are surveyed.

• The average price of organic half gallons dropped to an all-time low of $3.66 in January 2011 from a high of $3.86 in December 2008. In December 2011, the average ½ gallon price as reported by the FMMO is only $3.79 for whole milk and $3.80 for 2% milk. With 2011 ending, a comparison of the 2010 and 2011 annual average price for retail half gallon organic reduced fat (2%) milk prices in 30 cities, surveyed by FMMO market administration, shows 20 cities have higher prices for 2011 and 10 have lower prices. Indianapolis, at $4.19 for the 2011 annual average, is the city with 2010 to 2011 annual average prices up the most, 45 cents. Atlanta, at $3.44 for the 2011 annual average, is the city with annual average prices down the most, 36 cents. Denver has the lowest annual average price for 2010, $3.07, and 2011, $3.02. Minneapolis has the highest annual average price for 2010, $4.52, and 2011, $4.55. The overall 2011 average price for the 30 cities combined, $3.75, is 1 cent lower than the combined average for 2010.

• Looking at pricing from a different perspective, the Nationally Advertised Price Comparison (the national weighted average advertised price for organic milk) half gallons increased 51 cents to $3.62 in 2011.The reason for the average price increase was the increase on the low end of the range. The low end of the price range increased 69 cents to $3.19, while the upper end of the price range was unchanged at $4.59.

As collected by Federal milk order market administrators based on a survey conducted one day between the 1st and 10th of each month (excluding Fridays and weekends) in selected cities or metropolitan areas. One outlet of the largest and second largest food store chains are surveyed.

Posted: to Organic Pay, Feed & Grain Prices on Thu, Jan 19, 2012
Updated: Thu, Jan 19, 2012