Organic dairy farmers benefit from annual contracts


Issue Date: September 9, 2009
Ching Lee

When Sonoma County dairy farmer Doug Beretta decided to go organic more than three years ago, he was trying to save the family farm from a volatile market. These days, upon witnessing the financial distress of fellow dairy farmers around the state, Beretta said he knows he made the right decision.

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Sales of Class 1 Organic Milk—California (PDF, 58KB)

"If I was still conventional, I think I'd be out of business right now," he said.

He acknowledged that while the organic dairy business hasn't been all rainbows and sunshine, it still is a relative bright spot against one of the darkest periods that have befallen his conventional dairy brethren, who saw their milk checks cut in half almost overnight when the economic crisis hit.

Organic dairy farmers, for the most part, are faring better, said Leslie "Bees" Butler, a dairy economist at the University of California, Davis. Unlike conventional dairy farmers, whose milk prices are based on national markets for butter and cheese and can fluctuate widely each month, organic dairy farmers tend to have more stability in what processors pay them.

"The big savior for the organic guys has been these one-year contracts—the fact that the price doesn't change all the time," he said.

What has changed is supply and demand. After years of double-digit growth, organic milk sales started to take a tumble early this year, losing market share at the same time as more dairy producers have converted to organic, adding to the national supply of organic milk. That has created a surplus, Butler said, prompting processors to lower the price paid to farmers and even impose production quotas when negotiating new contracts.

Beretta said Napa County-based Wallaby Yogurt, which buys his organic milk, has adjusted his price two times since January, with pay reductions totaling $3 per hundredweight. That puts his current price at about $20 cwt., which he says is still $4 to $5 cwt. above his total production cost. In comparison, the September Class 1 milk price paid to conventional dairy farmers is $13.21 in Northern California and $13.48 in Southern California.

Another saving grace for organic dairy farmers is that the price of organic feed has leveled off, especially for hay. Record-high feed prices over the last two years have been a major thorn for dairy producers, both organic and conventional. And until recently, feed availability had been a big concern for organic producers, due to a surge in demand as organic dairy production grew.

But that also has changed, with the overall organic feed supply now in favor of the dairy producer, said John Orange, a dairy management consultant for Cargill Animal Nutrition in Mount Vernon, Wash. Not only is there more organic acreage coming on, but demand for organic feed has receded now as farmers pull back on production, he added.

"There is excellent supply of organic feed available," Orange said. "Organic hay is well under $200 a ton in a lot of areas now, and grain prices are also pretty much down, compared to where they were the last two years."

Beretta said when hay availability was shorter last year, his supply had to come from Grants Pass, Ore., an 800-mile haul one way, so the tremendous freight cost drove the price up even more. This year he has more options because of the plentiful supply.

"I'm probably getting one to two letters a week from growers saying there's hay available—in Nevada, as far south as Hanford, in Tracy and in Macdoel up by Klamath Falls. So it's coming from all over," he said

Weakening feed prices may be short-lived and could tick back up when producers start to stock up on hay for the winter, said Tony Azevedo, a Merced County organic dairy farmer and president of Western Organic Dairy Producers Alliance.

He said the real advantage that organic dairy producers have is that their animals are, for the most part, pasture based, allowing producers to spend less on expensive organic feed, which is typically double the price of conventional feed.

"If you have a large amount of pasture, you're going to survive this thing," Azevedo said.

Not all organic dairy farmers are in the same boat, however.

Butler said those who were still transitioning to organic when conventional milk prices crashed last year are probably in worse financial shape than many conventional producers. That's because it takes one year to transition, during which producers are still getting paid conventional milk prices while paying much higher organic feed costs.

"They've really got to be hurting, if not out of business, or gone back to conventional," Butler said. "Probably some of them even gave up transitioning, or they'll transition later on when things stabilize a little bit."

Lured by the higher organic milk price, Orange said some of his clients spent $200,000 to $300,000 to become organic, "borrowing a lot of money, selling a lot of animals and doing whatever they can to pay for that." And now, just as they've gotten their foot through the door, the market has changed and processors are reducing both their price to farmers and the volume of milk they will take.

Transitioning or newly transitioned organic dairy farmers are not the only ones hurting. In Northern California, dairy farmers who belonged to the now-defunct dairy cooperative Humboldt Creamery are struggling for additional reasons, after the creamery declared bankruptcy in April.

Although Humboldt Creamery now has a new owner, Foster Farms Dairy in Modesto, farmers say they suffered huge losses in the bankruptcy and are not encouraged by the price they're now earning for their organic milk.

John Vevoda, who produces organic and conventional milk for the creamery, said producers had yearly contracts with the cooperative, but those contracts are no longer valid. Not only has the organic dairy market softened due to the ailing economy, but Humboldt Creamery also lost contracts in part because of the bankruptcy, he said.

With these losses, there's now a cap on production. Farmers earn the full price for a portion of their organic milk, selling the rest at prices paid for conventional milk. Vevoda said that works out to be about $16 cwt., not nearly enough to cover his production costs.

"We are not getting a very good price at all," he said. "We're eating equity like nobody's business. If we didn't have the pasture, I don't know what we'd be doing right now. Even my conventional cows are going out on pasture. It's the only way we can feed them right now."

But he noted that his pasture is now past its prime as the season progresses and he's trying to secure feed for the winter. He said he can't get a loan, so he's being forced to sell an easement on a ranch that he bought when he was 19.

Ray Shinn, another Humboldt Creamery producer, said despite recent tough times, "the organic dairy business has been pretty good." After losing hundreds of thousands of dollars in the creamery's bankruptcy, he's now struggling to make payments on his property but is hoping Foster Farms will find new markets for all the milk and help producers back on their feet.

"I just hope things turn around here," Shinn said.

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

Permission for use is granted, however, credit must be made to the California Farm Bureau Federation when reprinting this item.