Natural Foods Merchandiser

Conventional Milk Prices Rival Organic

Nationwide, conventional dairy prices are surging. A gallon of whole milk that retailed at an average price of $2.69 in January 2003 brought $2.88 just a year later, according to the U.S. Bureau of Labor Statistics.

?The milk prices we?re seeing have never been this high. We don?t know where the top is,? said Robert Cropp, a dairy marketing economist at the University of Wisconsin?Madison.

While conventional retailers have to face unhappy consumers and rethink using milk as a loss leader, naturals retailers are seeing only opportunity. The factors driving up the price for conventional milk don?t, for the most part, come into play for organic milk producers, thus narrowing the gap between the price of conventional and organic dairy at retail.

"It?s gonna be an interesting challenge if [the price of] regular milk shoots over organic," said George Siemon, CEO of Organic Valley Family of Farms, a major producer of organic milk. ?We?ve seen prices go up before and not seen a real surge in [organic] sales. If it gets to be the same price we might see that.? If so, retailers may find that children—who typically constitute a large segment of the milk-drinking public—spur parents to make the leap from conventional to organic milk. And as research shows, once parents begin buying organic products for their children, they begin to buy them for themselves as well.

Today?s high milk prices are due, in part, to conventional dairy farmers? reaction to all-time lows just a few years ago. ?The price of milk that farmers receive, starting in the last quarter of 2001 ? through about July of 2003, were very depressed—prices we haven?t seen since the late 1970s,? Cropp said.

To address the problem many conventional dairy farmers formed groups such as Cooperatives Working Together. Participating farmers paid a fee to CWT, based on their level of production. The group then used the $60 million it raised to pay farmers who agreed to retire their herds or limit production. A shorter supply meant a higher price in the market, the farmers reasoned. And it worked.

But other factors conspired to limit production even further. Poor hay quality in the Northeast meant insufficient and high-priced feed for dairy cows, so many of them were culled. Mad cow disease, too, reduced the number of Canadian dairy cows being imported. Then in March, the availability of bovine somatotropin, a hormone used to boost milk production, was halved when Monsanto encountered a quality-control problem at one of its plants. So now, the pendulum has swung to the other side, as conventional dairy producers face a shortage of production.

Organic dairy farmers are somewhat exempt from such wide price and availability fluctuations. ?The makers of organic product simply have done relatively flat pricing,? by creating long-term contracts with dairy farmers and charging a premium from the beginning, which consumers have proved willing to pay, said Cropp. ?It?s our goal to not react or be affected by prices,? Siemon confirmed. And since organic dairy farmers don?t use growth hormones, Monsanto?s move didn?t affect them.

Also, organic producers are able to contract with only as many farmers as they need to meet demand. ?It?s a fine line between too much and too little,? said Cropp. But, just as supply went down, demand started to creep back up, particularly for milk that is used in cheese production. ?Part of it is the Atkins diet,? he said.

Cropp said he doesn?t foresee any short-term increase in production. ?We don?t see prices returning any time soon, this year or even next.? That?s good news for organic milk producers, as long as retailers don?t raise the price on that as well. ?We?re not planning on changing our pricing unless there?s some dramatic shift in the marketplace,? Siemon said. ?We believe in our sustainsable thinking ... [and are] trying to build stability into the price.?

?You?ll find their products will be very competitive with conventional,? said Cropp.

Natural Foods Merchandiser volume XXV/number 5/p. 1, 12

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