Canceled contracts put dairies in a bind

After Massachusetts-based HP Hood LLC bought Crystal Cream & Butter Co. last year, 22 California dairy producers, including Tony Toledo, are looking for new homes for their milk because Hood will terminate their contracts at the end of June.

Twenty-two California dairy producers are scrambling to find new homes for their milk after learning in December that their processor will end their contracts later this year.

But finding creameries that will take their milk will be tough at a time when the state is faced with limited plant capacity coupled with increased milk production, said Michael Marsh, chief executive officer of Western United Dairymen.

The producers, most of them from the Sacramento County area, currently supply milk to HP Hood LLC, a Massachusetts-based dairy operator that bought Sacramento's longtime family-owned Crystal Cream & Butter Co. last May. The company then sold the Crystal brand to Foster Farms Dairy of Modesto in October.

HP Hood spokeswoman Lynne Bohan said the company notified 22 of its producers via letters in December that their existing contracts will terminate by June 30. Five producers will stay on.

"The company had to scale back some of its production, given the sale of the Crystal brand and that business," said Bohan. "That significantly reduced the amount of milk needed when we sold that brand."

Bohan noted that HP Hood still owns the Sacramento processing plant and continues to produce some of the company's branded products there, including Lactaid and Stonyfield Farm organic milk. The plant also makes some Crystal-branded ultra-high temperature milk for Foster Farms, Bohan said, but production of other Crystal brands has been shifted to Foster Farms, which also owns an egg and poultry business.

"So Foster Farms is going to be making Crystal Cream & Butter-branded dairy products at some of their plants," she said. "That volume has been moved to Foster Farms plants."

Tony Toledo, a dairy farmer in Galt who has been shipping milk to Crystal Cream & Butter since 1970, said he was blindsided by HP Hood's decision. He noted that the company held a meet-and-greet with producers last year during the Crystal-Hood transition and gave no warnings that it would be downsizing.

"There was really no indication that this was going to come around," said Toledo, who milks 450 to 500 cows. "When HP Hood bought the plant, everyone thought that they were going to keep all their producers, all the dairies that were shipping to them. That's what everyone was hoping."

When HP Hood announced its sale of the Crystal label, Toledo said many producers began to worry "that maybe things were going to turn for the worst." There was talk that Foster Farms could possibly take over the contracts of the now displaced dairy producers. In a press release last year announcing Foster Farms' acquisition of Crystal's conventional dairy business, the company said it "will maintain Crystal's existing producer relationships."

But Foster Farms Dairy President Jeff Foster said that statement was in reference to the current contract Foster Farms has with HP Hood for some raw milk supply. Although he would not disclose the specifics of the agreement, he said Foster Farms is contracting for that milk while HP Hood completes retrofitting the Sacramento plant to make extended shelf-life and ultra-high temperature pasteurization milk products.

"Those shippers are under contract with HP Hood, and having that milk come to us specifically helps both the growers and also HP Hood through this transition period," Foster said.

Foster Farms buys its milk from more than 40 independent dairy farmers in the San Joaquin Valley. The company's farms also produce milk from its 6,500-head herd.

Foster said while there's a potential that Foster Farms could make room in the future for some of the displaced producers from HP Hood, "it would be hard to say that there's extra capacity for their milk at Foster Farms" at this time.

"There is so much extra milk in California at this point in time," he said. "We have to look at it from an economic situation and find the best procurement for our milk."

He encouraged producers to put their names on Foster Farms' waiting list to become potential suppliers.

Marsh said all 22 producers have already put their names on waiting lists for other creameries to pick them up, but he acknowledged that it would be "a real challenge to find a home for those producers" given the tight plant capacity in the state.

"Right now the state of California has more milk supply than we have plant capacity to provide and can process the milk," he said.

He estimates there are more than 100 dairy processors in the state, ranging in size from large companies such as Hilmar Cheese, Leprino Foods and Kraft to small farmstead cheese operations.

Raymond Coupe, whose family dairy in Galt milks 165 cows and has been shipping milk to Crystal Cream for more than 60 years, said he's not sure what he's going to do after June 30 when his contract with HP Hood ends. At 44, he said he's not ready to retire but acknowledged that there are very few viable options for dairy producers in his position.

"In six months, a lot of things can change," he said. "The companies that are still in business aside from Crystal might have an opening by then. Some of the farmers can retire. I've got six months to figure it out."

Toledo, a second-generation dairyman who has been working in the business since he was 10 years old, said he doesn't want to think about what will happen if another creamery doesn't pick him up. He said he doesn't want to sell his farm because he has two sons, ages 23 and 14, who are interested in coming into the dairy business.

He's hoping that the two new dairy processing facilities that opened last fall in Visalia—Provisions Food Co. and California Dairies Inc.—will prompt dairies that are closer to those plants to move their supplies there, freeing capacity in plants closer to him, such as ones in Turlock or Tracy.

"It might give producers a little more room to get in with a plant," he said. "Right now the answer we get is they're all full and running at capacity."

(Ching Lee is a reporter for Ag Alert. She may be contacted at clee@cfbf.com.)