Natural Foods Merchandiser
Dairy industry report

Dairy industry report

Industry experts expect milk prices to stay flat or improve slightly in 2010. Meanwhile, larger dairy companies are stepping up efforts to find strategies to draw and keep customers looking for the best deal.

The dairy industry was among the hardest hit by the economic downturn, and the outlook for 2010 is only slightly less grim. Milk prices in freefall from the recession coupled with oversupply continue to take their toll on dairy farmers—particularly small, family-run organic operations.

‘It’s very bleak,” says Ed Maltby, executive director of the Northeast Organic Dairy Producers Alliance, which represents about 750 farmers.

The good news: Industry experts expect milk prices to stay flat or improve slightly this year. Meanwhile, larger dairy companies are stepping up efforts to find strategies to draw and keep customers looking for the best deal.

Prices low for farmers

Both the conventional and organic milk markets collapsed last year. The price paid to conventional dairy farmers went from roughly $18 per 100 pounds of milk in 2008 to about $11 in 2009. Organic dairy farmers were paid anywhere from $20 to $26 per hundredweight in 2009 versus $25 to $27 in 2008, according to data from the U.S. Department of Agriculture, NODPA and LaFarge, Wis.-based Organic Valley, a co-op of about 1,400 family-owned organic dairy farms spanning 34 states.

At the grocery store, that translated into prices as low as $3 a gallon for conventional milk and about $5 a gallon for organic milk, according to the USDA. Some price-conscious consumers switched to conventional milk, and, consequently, organic milk sales growth dropped from an average of 20 percent per year to zero, resulting in about a 12 percent surplus of organic milk, Maltby estimates.

Prices have since leveled out, but not before some large distributors cut the contract prices they paid to their member dairy farmers. Dairy giant HP Hood, based in Lynnfield, Mass., let some contracts expire, and Organic Valley instituted a quota, says Eric Newman, vice president of sales. For any organic milk they produce over their quotas, farmers will be paid conventional prices.

But there is hope: Newman doesn’t anticipate any price changes this year and expects Organic Valley’s sales and volume to grow about 3 percent. Retail prices also are expected to rise slightly. “Sales are picking up. We’re finally seeing numbers going into the black,” he says. “We saw the bottom in August and September [2009].”

Maltby says organic farmers were helped by the fact that organic grain prices dropped last year and organic feed and forage prices reached about the same level as conventional prices.

Farmers on the brink

Maltby puts organic dairy farmers into a few groups: “The first are those who have been in the business for five to 10 years. They don’t carry much debt; they’re doing OK. They’ll survive. The second group has been in business four or five years. They still have some debt. They’re struggling. Finally, there’s the last wave that just came into the business. They still have to transition [to organic]. They have a lot of debt. They’ve reached the end of their lines of credit. They’re the ones we’re going to see disappear—or go conventional. And they’re the young farmers—the ones we need.”

When farmers ask Maltby whether they should go organic, he tells them, “No. Stay with conventional for now.” Adds Newman: “The farmers are ready to switch to organic. We just need more markets.”

Lawsuits, investigations target prices

Last year’s milk price meltdown led to a lawsuit filed against Kansas City, Mo.-based Dairy Farmers of America and its marketing affiliate Dairy Marketing Services, along with Dean Foods and HP Hood, charging they fixed prices and monopolized the fluid-milk distribution market.

The U.S. Justice Department also launched investigations into why dairy farmers were getting record low milk prices while consumers saw little relief, and whether giant milk processors, including Dean, were controlling the milk market.

There are no predictions on when the lawsuit might go to trial or when the investigations will be completed.

"Natural," "hormone-free" aimed at cost-conscious consumers

To appeal to consumers who were veering away from more expensive organic dairy products, Dean Foods’ WhiteWave division last year launched a lower-priced “natural dairy” line of products under its Broomfield, Colo.-based Horizon Organic brand.

The company is also conducting a small regional test with a new single-serve natural milk fortified with protein.

“Consumers are asking for high-quality, lower-cost options to feed their families,” says Dean spokeswoman Sara Loveday. And companies such as Wal-Mart continue to tout their growth hormone–free milk to appeal to consumers concerned about safety as well as price.

Both efforts have organic proponents crying foul.

“Dean Foods will not be able to [say] the products are produced without pesticides, herbicides, antibiotics and other drugs or genetically modified feed crops, or that the cows are required to graze in pastures rather than being confined to factory-farm feedlots,” said Mark Kastel, cofounder of the organic dairy watchdog group the Cornucopia Institute, at the time of Horizon’s announcement. “These are all factors that truly differentiate organic production from natural/conventional agricultural and livestock production.”

Newman and Maltby both argue that while natural products are cheaper than organic, the term natural is unregulated. “If people want to really know what goes into their milk, they still should buy organic,” Maltby says. Newman says Organic Valley has no intention of switching any products from organic. He points out that while there’s a surge of publicity from companies saying their products don’t contain growth hormones, “all conventional guys use fertility hormones. The natural movement is suspect.”

Access-to-pasture rule

A federal rule clarifying the access-to-pasture requirement for organic livestock that went into effect in January will “level the playing field,” Maltby says. “The rule clearly defines what is required for organic certification and provides exact definitions for farmers and certifiers to understand what is necessary to satisfy the requirement for access to pasture.” Organic activists pushed for the rule after investigations revealed that some cattle that produced organic milk had little or no access to pasture.

The new pasture rule states that farmers shall provide “year-round access for all animals to the outdoors, shade, shelter, exercise areas …” and that during the growing season, at least 30 percent of a cow’s feed must come from pasture. Growing season is defined as the time from the last killing frost in the spring to the first killing frost in the fall or early winter.

Maltby also praised President Barack Obama’s administration for increased enforcement of organic standards overall. “That’s good news for the future,” Maltby says.

Jane Hoback is a writer and editor in Denver. She has fond memories of that yummy cap of cream when opening a bottle of milk.

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