Excess milk, lower prices trouble organic dairies

After years of enjoying a stable market for their milk, California organic dairy farmers are experiencing some growing pains, as an oversupply of milk in recent years has lowered prices paid to farmers, forcing some to leave the business.

Just three years ago, a nationwide shortage of organic milk had processors and buyers scrambling to secure more supply. Attracted by the premiums being offered, a number of dairy farmers transitioned to organic, particularly as the gap between organic and conventional farm-milk prices continued to widen.

The market is now awash in organic milk, with processors reducing prices to farmers, imposing production quotas and diverting some of that milk to conventional channels, said Richard Mathews, executive director of Western Organic Dairy Producers Alliance. He noted as early as spring 2016, there were signs that rapid conversions of U.S. dairy herds to organic were creating a glut of milk in the market.

At the same time, U.S. organic milk sales have cooled, falling 1.9 percent in 2017, according to the Organic Trade Association. This is in spite of continued growth in total U.S. organic food sales, which rose 6.4 percent last year.

"I don't think we're going to see the kind of growth we're used to," Mathews said of the organic dairy business. "Earlier, we were catching up with demand. Now, the demand isn't growing as fast as it was."

Earlier this year, Danone North America, which owns Horizon Organic and Wallaby brands, informed select farmers in California, Oregon and Washington that it will not be renewing their contracts. The company said it has been experiencing an oversupply of organic milk for more than two years and that the oversupply is "regional in focus and will be addressed on a regional basis."

Danone announced that it will close the Wallaby yogurt plant in American Canyon early next year and move production to its facility in West Jordan, Utah. The company said its decision to drop contracts with certain farmers was weighed on two main factors: the farms' proximity to its production plants and the cost of hauling their milk. Danone also said the two brands are "expanding their farmer network in other parts of the U.S. that align with their manufacturing footprint."

With minimum wage and other production costs so much higher in California, Sonoma County dairy farmer Jennifer Beretta said she can see why Danone doesn't want to operate in the state anymore. Her family ships milk to Wallaby and is one of eight producers in Sonoma and Marin counties being dropped by Danone; about 15 others from Humboldt County, Oregon and Washington also are being cut, she said.

Beretta said her family—whose contract with Danone expires at the end of the year—has "kicked around the idea of going back to conventional" and has considered doing their own value-added products, but with their contract ending in a few months, "there's not a lot of time and not much money for investment." They've applied to other creameries, but with the entire organic dairy sector already facing an oversupply, she said those processors are not going to take on more milk if they don't have to.

"They don't want to hurt their own producers and I get that," she added.

To be profitable, Humboldt County producer Kyle Miranda, who ships milk to Humboldt Creamery, said he needs prices to be in the mid-$30 range per hundredweight. According to the U.S. Department of Agriculture, a national organic dairy cooperative's August pay price was $29.14 per cwt. Miranda said some California farmers are being paid closer to $26 per cwt., and they are "hurting bad."

"We've taken big pay cuts—record pay cuts," he said.

During the last several years, Miranda said organic dairies appear to be going through the kind of price swings that have long plagued conventional dairies, though it wasn't always this way. He noted when supply and demand became imbalanced in 2008-09, processors managed their supplies better.

"It used to be a smaller community, so maybe it was a little easier to control then," he said. "There's a lot of different labels out there now that weren't there 10 years ago, and they have to compete with each other. None of us want to see a race to the bottom, but that's what's happened."

Describing the last two years in the organic dairy business as "horrible," Merced County dairy farmer Ward Burroughs said he has seen at least two organic producers in the state call it quits within the last six months. To stay in business, Burroughs said he has diversified his farm by also producing pasture chickens, organic almonds, olive oil and marketing some of his own milk. With organic milk prices becoming more unstable, he said he plans to milk fewer cows and convert more pasture to almonds.

Burroughs, who ships to Organic West Milk, a distributor based in Ripon, said he doesn't blame companies such as Danone, which also makes plant-based beverages that compete with milk, for diversifying.

"They've got to do what the marketplace tells them to do," he said. "They're making a lot more money on the plant-based products than the milk."

As someone who ships milk to Petaluma-based Straus Family Creamery, Sonoma County producer Richard Hughes considers himself "very fortunate" because founder and CEO Albert Straus is also a farmer and understands what farmers need to be profitable.

"We're in it together," he said. "He wants us to be successful in order to supply him with what he needs. You don't see that very often."

Hughes said Straus has always had an effective supply-management strategy, setting a base for his producers and paying them based on their components. He currently earns $37 to $38 per cwt.

Although the creamery didn't drop producer prices last year, Straus said he had to trim them by about 10 percent this year "because our margins are being squeezed." Other processors have had to reduce prices by as much as 20 to 60 percent, he noted. As a dairy farmer himself, he said he knows producers tend to milk more to maintain their income when prices drop, "which is self-defeating."

"We're able to stabilize their milk price because we keep our supply in line with our sales," he said.

Though that may seem obvious, Straus said he thinks his company has been able to do this because of the close working relationship it maintains with the eight producers who ship milk to the creamery.

"Trying to sell at a lower price is not a winning strategy," he said. "That's what I've been trying to tell all of our competition as well as the farmers. If you're in a declining market, you're going to keep having problems unless you communicate effectively and timely with your producers and work together."

(Ching Lee is an assistant editor of Ag Alert. She may be contacted at clee@cfbf.com.)