In the early days of the organic label, there was the enthusiasm of creating a new type of farming, which some saw as an alternative to the mainstream corporate chemical agriculture, and there was an ability for these pioneers to make a reasonable living from organic dairy as the buyers they were working with understood the economics of organic dairy and were eager participants in its growth. Now the two national brands that effectively set the pay price view organic dairy through the lens of a corporation or a traditional cooperative where the interest of the company/cooperative precede those of the farmer, rather than working together. Organic dairy has matured and there is the need to think about how to attract the next generation of organic dairy farmers who may not want to work seven days a week; who see good health insurance as an entitlement; vacations and the ability to send their children to college a necessity; and to have enough profit to establish a retirement fund that is not based on selling their land and livestock.
The organic milk market has grown dramatically in the last fifteen years and now represents approximately five percent of total domestic dairy sales. From 2000 to 2005, the growth was within a community of processors and farmers where everyone knew each other and understood the challenges that each faced. There were tensions at different times, especially when Horizon tried to lower the pay price and farmers got together to stop them, which resulted in the formation of the Northeast Organic Dairy Producers Alliance (NODPA), but it was generally a question of pioneers working together to expand the market. With the growth of organic dairy and the introduction of a more corporate and confrontational relationship between processor and farmer and between the buyers, the reality of the multimillion dollar market has settled into a more traditional agriculture framework. Large scale organic dairying has the economies of scale to survive better when the pay price is lower; small to mid-size operations struggle to survive in that scenario.
US processors of organic milk have seen tremendous growth in the last ten years. CROPP with its Organic Valley brand is the largest organic dairy cooperative in the US and is currently at around a billion dollars gross income from milk, meat, vegetables and eggs with 1 employee for every 2 member owner farmers. WhiteWave Foods, owner of the country’s leading brand of organic milk, Horizon Organic, has increased its sales of Horizon Organic branded products by 8% over 2014 sales and has created a very diverse company, including plant based beverages (‘milks’), which is why its stock has rallied more than 100 percent since it was spun-off by Dean Foods some two and a half years ago. Stonyfield Farm (actually not a farm) is now owned by Danone and has record sales. Despite these successes, there is currently a shortage in organic milk supply, and competition for supply has been characterized as a “feeding frenzy for organic milk”. And, in 2013 and 2014, we had organic dairy farmers leaving organic milk production quicker than new operations were starting up; we had an increase in imports of organic beef and milk powder; and soaring competition for supply from grass based labels — that pay more for milk from farms that follow forage and grass based rations protocols than was being paid for organic alone.
Supply and Demand
Currently, the supply of organic milk is not keeping up with demand. To understand why this has happened one must look at a number of different areas that are common to many organic commodities. Pay price and lifestyle are two important components at play. No business can exist unless it is paid enough for its products to cover its costs of production, overhead costs, family living expenses and return on equity that allows debt service and money to be plowed back into improving the land and infrastructure of the farm, a central tenet of organic production. Lifestyle is a very important factor for farmers choosing to farm organically and certify under the USDA National Organic Program (NOP). They believe in improving the environment with their farming practices and creating a better farming life for their family and employees.
How is Pay Price Determined?
Pay price is primarily set by demand for organic milk at the farm, with an inevitable and historical delay in response to increases in demand before there is any change and an increase in pay price takes effect. The individual farmer has no control over the price they get for their milk, except to move it to another buyer. The amount that organic dairy farmers get paid for their milk is not set by the federal government as is non-organic milk, nor by negotiation between processors and representatives of organic farmers. There is no official posting of an average organic dairy pay price except on the NODPA website. Pay price is not related to the retail price paid by consumers, and the percentage of the retail price that organic farmers receive has been consistently less than the percentage that conventional dairy farmers get. Pay price is also not directly influenced by increases in the cost of inputs.
For those farmers who sell to cooperatives, the price is set by cooperative agreement determined by the Board of the cooperative, based on recommendations of management. Cooperatives can and do change the pay price at their discretion as they are not bound by any contracts. CROPP cooperative has regional and national committees of farmer-owners that make recommendations to management and the farmer Board on their pay price requirements. For those farmers that sell organic milk to corporations, the individual farmer negotiates usually a two year contract with the corporation for a pay price which is loosely tied to the pay price of other organic milk buyers. Over the last ten years, NODPA has found that the price paid by the two national organic milk brands are always within a dollar of each other, with the regional buyers paying more when milk is short and less when there is an oversupply. While the price paid for organic milk is more stable than the conventional price with fewer fluctuations, it does not take into account the increasing cost of inputs, the increase in cost of living, and any return on investment. In New England we are fortunate that we have Bob Parsons, Agricultural Economist from the University of Vermont, who has been conducting a study of profitability among organic dairy farms in Vermont and Maine since 2005. His study shows that after peaking in 2008, the average net income that organic farm families have after deduction for family living ($37,000 per year) has dropped from $24,200 in 2008 to $7,000 in 2013. Bob summarizes his article in the January 2015 edition of the NODPA News by saying, “What does the future hold? This is a big question since nearly 33% of the farms cannot pay the owner a reasonable wage for unpaid labor and management. These farms are not economically sustainable.”
Historically, farmers’ pay price increases when there is competition for supply. In 2005, HP Hood (a large conventional New England dairy) entered into an agreement with Stonyfield Farm to market fluid organic milk under the Stonyfield Farm brand. To supply that brand, HP Hood aggressively sought suppliers in the northeast, which drove the pay price up as farms defected from the two national brands and new farms transitioned to organic production. By 2009 HP Hood was dropping farms in Maine, as they hadn’t budgeted for the trucking and balancing requirements of organic milk, and eventually the brand was taken over by CROPP cooperative. This happened at a time when the economy was slow and the growth in retail sales of organic dairy went from an annual increase of 14% down to just about level growth. At that time, CROPP introduced a quota system and lowered its pay price, as did Horizon Organic, and some regional buyers went out of business; and organic dairy had its first and only over-supply. Fast forward to 2011 when retail sales started to grow at an annual rate averaging eight percent, pay price stabilized but the cost of inputs — especially feed — increased dramatically; farmers started to feed less grain to lower their costs and this caused less milk to be produced. The milk buyers did not respond to the increase in sales, lower supply and the increase in on-farm inputs. In 2014, there was a shortage in supply and the milk buyers started to respond belatedly and raised the pay price in 2014 to take effect in 2015.
How Grass-Fed Milk is Changing the Pay Price Dynamic
In 2015, there are more variables that may affect the pay price for organic milk. What makes the situation different in 2014-15 is the increase in demand for grass-fed or “grassmilk” and the strength of regional demand for organic milk in the northeast and the west. There are both organic and non-organic grass-fed milk brands that require dairies to feed no grain and only certain energy supplements. To qualify for the ‘grassmilk’ programs farmers need to satisfy the individual buyers’ requirements which change from buyer to buyer, are not part of the national organic program and are subject to change by the buyer. Organic and non-organic dairies that were already not feeding grain because of their choice of production methods immediately qualified for these programs. Those organic dairies that cut out feeding grain because of financial necessity also met the criteria to qualify for the organic grass-fed label and pay price premium.
In looking to boost the supply of organic milk, whether it qualifies for the grass-fed milk program or not, processors have increased the pay price by 10% and revived their financial incentive programs for those thinking of transitioning to organic, plus offered signing bonuses. There are reports of farms transitioning to organic production again, especially in Vermont where there is active support and good business planning from NOFA Vermont for those making the switch. The organic grass-fed pay price premiums that buyers are adding are averaging 15% on a farm-gate pay price (the gross income that farmers are paid including all premiums minus any trucking costs). For most organic dairies this is not enough. For all milk being sold to meet grass-fed standards, the pay price needs to be in the middle $40’s as a starting point in order for it to “pencil out” in the long term for most operations.
Producing grass-fed milk has not been a panacea. Some producers have had to drop out of programs because they have had trouble balancing rations and weren’t able to manage the financial ramifications of producing a lower volume of milk. For those producers who have experience with a grass-fed only approach, the increase in demand for their product is based on a rapidly expanding market in fluid milk and some processed product but it is difficult to predict where this demand will go or when it will level out.
In 2015, we do see organic dairies making a better income than in the years 2011-2014, but most economists project that there needs to be a 20% increase on the current pay price to bring organic dairy farmers’ net income back to what it was in 2008. The recent increase was less than 10%. Over the last few years, organic demand has been between seven to nine percent, and consumers do not appear to stop buying if the retail price increases a little. Currently, producers across the country are looking to move away from the national brands and change their buyers, mostly to more regionally based processors and cooperatives. As the national brands let some private label contracts drop through lack of supply, the regional buyers bid very aggressively for on-farm supply to satisfy some of those contracts. The competition for organic milk has driven the pay price up with some regional buyers paying a 20% increase on the pay price that the national brands were paying in 2014.
As an indication of the strength of consumer demand, there are more imports of organic cheese and milk powder coming into the US market. In announcing an increase in pay price and change in regional pay price structure in January 2015, CROPP CEO George Siemon announced, “In the development of this plan, we considered the following factors: an increase in costs on the farm from feed inputs and land rents, a slow-down in transitioning of farmland and farms to organic, customer input, competitive factors, and a surge in market demand as the mass market embraces organic food.” Gregg Engles, the chairman and CEO of WhiteWave, echoed this sentiment, stating that farms are slowly converting to organic, but it takes time. “So, it just takes time, and the reason we are short is demand is just so strong. As long as this trend is a real trend, we’re going to be short because the demand is outrunning our ability to produce supply,” Engles said. Perhaps these two leaders in organic dairy have missed a salient point as the growth in organic dairy has been easy to predict: supply comes from farmers that are milking cows; if they were paid enough there would be enough milk.
Further complicating the supply issue and dividing the organic dairy industry is a proposed organic check-off program. The Organic Trade Association has submitted a proposal to the USDA to turn organic into a commodity and have a check-off program to increase sales of organically certified product. Currently 60% of organic feed is imported. Increasing the organic market without increasing domestic supply will undermine any growth in domestic acres under organic production. Traditionally, this has been what check-off programs have done.
Organic Certification: Integrity of the National Organic Program
Organic is the only third party certified program that is based on federal law and regulation. This makes it unique in a market place that is inundated with natural and other undocumented and non-verified claims. The requirements of the program are seen as a burden by some. Small to mid-size organic dairies do not usually have a Quality Assurance employee to monitor their NOP compliance. That job falls to the farmer. Some of the requirements are standard and represent just time filling out forms that detail your farm work over the previous year and your plans for the future. You record herd health and the different measures you have taken to remedy any health problems. If you used some herbal remedies or vaccines you would have first checked with the certifier that what you were using was approved by them as there is no central list of what can and can’t be used in organic production and certifiers vary in what they allow. Your written grazing plan will be documenting what is plain common sense and making sure that all your livestock will be grazing grass during the growing season. You will take your inspector on a tour of the farm so he can see if you are doing what you have put in writing. The inspector cannot advise or point to solutions, only ask for explanations for failure. Then you, the farmer, pay the cost of the certification in order to ensure that the consumer will trust your product.
For many dairy farmers organic certification saved their farms. Bob Parsons noted in his January article of the NODPA News that “There is little doubt that organic has provided a saving lifeline to Vermont’s small scale dairy farms. In discussing challenges with organic dairy farmers, more than 75% believe they would not be in business today if they had not had the option to go organic.” Going organic involves changing many aspects of production practices, herd health care and record keeping. It also means that certified farmers have to protect the integrity of the organic seal to preserve its place in the marketplace which is so essential, especially to those who can only market the product wholesale. Organic dairies can never match the subsidized prices of the mass market as their farm input costs are higher, production is usually lower and they have to allow for the time spent meeting the requirement of organic certification.
Organic dairy farmers are well aware of what the consumers wants and will pay for. They didn’t want antibiotics to be used at all in organic dairy to preserve the integrity of their product. The Europeans allow some use of antibiotics in organic production and some are allowed in growing organic tree fruit in the USA. Organic dairy farmers learned new ways of health care and prevention. When it came to ensuring that all organic dairy animals were grazing pasture, it was the organic dairy farmers that imposed some very prescriptive regulations in the face of complacency from the NOP, the organic dairy processors and the larger organic dairies. Farmers reacted when a few dairies were ignoring the requirement that cows need to eat grass and were producing large volumes of organically certified milk that undermined the market and threatened to devalue the integrity of the organic seal. In what many see now as too prescriptive, farmers insisted on having enforceable benchmarks that ensured that cows’ diets consisted of at least 30% grass during the grazing season. These requirements are now enforced by all certifiers and have never been challenged in court.
We are at a significant point in the integrity and nature of organic certification, with many things threatening the integrity of the organic label, most specifically the watering down of the organic rules. Currently, the NOP says it is powerless to have a moratorium on the certification of soilless growing plant production and has set up another taskforce to re-examine this production practice that is approved by some certifiers but not by the majority of them. Soilless production is the antithesis of certified organic production. GMO contamination is affecting every level of organic production but there is still no responsibility assigned to the patent holder for the contamination, the responsibility is still focused on the producer spending money to prevent contamination. When you look at who controls organic, at how many organic regulations are geared to lower standards to encourage growth, at the allotment of risk and responsibility to the producer for certification failures, even those outside their control, and at the increasing trend of processors to buy raw materials based on the lowest cost rather than supporting increased US organic production, then one should not be surprised that there is little growth in the acres under organic production.
In 2014, organic dairy farmers were not surprised that there was a shortage of organic milk developing. The pay price had been held down for three years; purchased feed had soared in price, along with other inputs; the cull beef price was the highest it’s been for years, allowing farmers to sell cows that were not productive; farmers were feeding less grain resulting in lower milk yield; and there were few if any dairy farms transitioning. In the west, organic dairies tried for a couple of years to convince their national buyers to increase their pay price to cover increased costs. With no response they gave up and a few returned to conventional production or sold their herd and many farms are now selling their milk to more regional buyers at an increased pay price. CROPP cooperative suffered the greatest loss in supply losing many of its original farmers in California and other western states. In the northeast the same is happening, with farmers leaving the national buyers and moving their supply to regional cooperatives and local processors. The shortage of milk caused by a low pay price and a steadily increasing demand allowed farmers to leverage the only bargaining chip they have – move their milk to another buyer. The general effect of all this activity is that the pay price has increased by at least 10%, and in some cases as much as 30%, and we are starting to get farms transitioning to organic production again. With a higher pay price, sales haven’t dropped and retail prices haven’t had to increase dramatically. Unless we are going to reconstitute organic milk powder from Australasia to turn it into organic milk, we need a domestic supply of fresh milk. To attract new entrants to organic dairy we need regulations that are clear and make sense within the practices of organic husbandry and soil health, regulations that are prescriptive enough that they can be enforced and safeguard the capital investment that is required for organic dairying. Regulation should not pander to economic expansionism as organic integrity is essential to the growth of organic commodities that are mostly sold on the wholesale market.
Raise the pay price, safeguard the integrity of organic and exhibit actions that show the long term strength of organic dairy, livestock and crops as a production practice that will return profit commensurate with inputs and return on equity – problem solved and more acres and livestock under organically certified production, consumers have dairy products made domestically and we have a sustainable organic dairy community.
Ed Maltby is the Executive Director of the Northeast Organic Dairy Producers Alliance (NODPA)