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Volatility in dairy business will begin to affect organic milk prices
[April 26, 2008]

Volatility in dairy business will begin to affect organic milk prices

(Chicago Tribune (KRT) Via Acquire Media NewsEdge) COLUMBUS, Wis. _ Neighboring dairy farmers in Columbus, Wis., thought Jim Miller and his family had embarked on a path to bankruptcy when they decided to produce organic milk. How could you run a farm without chemicals and make milk for a market that barely existed?

That was over a decade ago, and the neighbors turned out to be wrong. Organic became the sweet spot of the milk business, providing farmers like Miller with more-stable prices, and often more profits, than conventional dairy operations.

But over the last year, the milk business has been turned on its head, with many organic farmers getting squeezed like never before and conventional dairy farmers enjoying the best of times. Meanwhile, consumers have seen prices for conventional milk post double-digit increases, but barely budge for the organic stuff.

That's beginning to change, though. Many of the same factors that sent conventional milk prices soaring _ climbing feed and fuel costs, for instance _ are also at work in the organic world. It just takes longer for rising costs to wend their way through the organic food market because of its relatively slow-moving pricing system.

"The whole world is a little topsy-turvy right now when it comes to commodity costs and fuel prices," said George Siemon, chief executive officer of Organic Valley, a cooperative of more than 1,200 organic farmers in 34 states and one Canadian province.

Milk is one of the biggest stars of the fast-growing organic food business, which is on display this week in Chicago at the Organic Trade Association's annual show at McCormick Place. Organic food of all sorts sells itself on healthfulness, and no product is perhaps seen as more wholesome than milk.

"You'll see moms buy organic milk for their kids, even if they think the stuff is too expensive for themselves," Siemon said.


Organic Valley, based in the southwestern Wisconsin town of LaFarge, is one of organic milk's biggest players, ranking second in production only to dairy giant Dean Foods. And Miller's farm, R&G Miller & Sons Inc., is one of Organic Valley's larger producers with 340 cows, a herd five times bigger than the co-op's average member.

Still, it's a family farm: Nine of the company's 14 employees are Millers of some sort. And the Miller family has deep roots in this area about 28 miles northeast of Madison, farming here since 1852. Milk has been the focus for decades, specifically organic milk since 1994.

The conversion to organic wasn't a matter of flipping a switch. The easy part was providing pasture. Organic milk must come from cows who are allowed to roam and eat a certain amount of grass, and the Miller farm has plenty of pasture, about 300 acres.

The hard part was weaning off antibiotics for the cows and chemicals for the crops that feed the herd; both are prohibited in the organic market. Or as Tom Miller, Jim Miller's cousin, put it, "What do you do when the cows get sick, and how are you going to control all those weeds?"

It's a steep, labor-intensive learning curve figuring out answers to those questions. The Millers' own agronomist told them going organic wouldn't work. "Neighbors said, 'You can't do that, you'll ruin the farm,' " said Jim Miller, who is now on Organic Valley's board.


The Millers' motivation was typical of many farmers who convert to organic.

Partly it was philosophical: They had become wary of pesticides and herbicides, particularly after Jim Miller's dad, who always sprayed the crops, died of colon cancer in 1994.

Partly it was economic: The organic market held the promise not only of higher prices for their milk, but also more stable prices than in the conventional market. Indeed, the Millers say they've consistently made decent money since they switched to organic, something they couldn't always claim as conventional dairy farmers.

And sales of their product have soared. The overall organic dairy market grew sevenfold between 1997 and 2006, according to the Organic Trade Association, and organic milk sales alone are over $1.3 billion annually.

Organic milk still constitutes only about 3 percent of the nation's fluid milk sales volume, according to the National Milk Producers Federation. But demand continues to grow at an annual rate of at least 20 percent, even though a gallon of organic milk can cost at least 60 percent more than a gallon of standard milk.

As the market grew, organic dairy farmers were generally happier with their economic lot than conventional farmers, according to a 2005 study by three professors in the University of Wisconsin's Agricultural and Applied Economics Department.

Of the Wisconsin organic dairy farmers they surveyed, 57 percent said they were satisfied or very satisfied with their farm income. That compared with only about 6 percent among conventional dairy farmers. But that equation has likely changed over the past year due to the upheaval in the industry, said Jeremy Foltz, one of the study's authors.

Prices paid to conventional milk producers soared about 60 percent between the end of 2006 and the end of last year, according to data from the U.S. Department of Agriculture.

Producer prices have fallen back some this year but are still relatively high. Meanwhile, retail milk prices climbed about 20 percent during 2007's second half, and have been rising at double-digit rates this year, according to data from the U.S. Bureau of Labor Statistics

It's been a very different story in organic milk. In conventional supermarkets, the price of organic milk products actually fell 0.6 percent last year and rose only 2 percent in natural-foods stores, according to SPINS Inc., a market researcher that tracks prices for organic food.

Many organic producers have found themselves in a vise. Due to a policy change by the USDA, a temporary glut of organic milk hit the market in 2007 and is only now washing itself out. Organic milk processors expected the supply surge, limiting price increases to milk producers through much of 2007.

But dairy farmers' costs, particularly for fuel and feed, soared last year. Indeed, organic feed today costs about 71 percent more than it did in most of 2006, said Organic Valley's Siemon. And those cost trends aren't expected to change any time soon.

Farmers who are self-sufficient in producing feed are cushioned. The Millers, for instance, grow all of the hay, soybeans, corn and oats they feed to their cows.

But for those who do not, rising feed costs _ like all cost hikes faced by organic farmers _ "are difficult if not impossible to pass on," said Lynn Clarkson, president of Clarkson Grain, an organic feed provider based in Cerro Gordo, Ill., near Decatur.

That's because the very mechanism that produces price stability for organic farmers hurts producers when costs suddenly jump. Organic farmers tend to work on contracts in which prices are set for a relatively long period, Clarkson said. Prices for conventional farmers, on the other hand, tend to be dictated by fast-moving spot or futures markets.

In the milk business, the USDA sets a new minimum producer price each month, using a complicated formula primarily based on spot market prices for cheese and butter. At Organic Valley, farmers and co-op executives typically set an annual price increase in the fall that goes into effect in January.

This year that increase was 4.3 percent. But it still wasn't enough to keep up with feed prices, so Organic Valley instituted a special 4 percent increase in March.

Those producer price increases are or will be making their way to consumers. Plus, the traditional supply-demand dynamic has returned to the market: Growth in demand for organic milk is expected to outstrip increases in supply, putting upward pressure on prices.


Clarkson, the organic grain producer, worries about long-term supply constraints if feed prices and conventional milk prices stay high. That's because to help keep up with consumer demand, the organic business needs a steady stream of conventional dairy farmers to go organic.

But under current market conditions, the incentive to do so is "squashed," Clarkson said. Conventional farmers can get decent prices for their milk and can pass along their own cost increases faster than organic farmers. So why undertake the challenge of converting to organic?

Eric Newman, Organic Valley's vice president of sales, acknowledges that recruiting farmers is a tougher sell these days. Plus, while the co-op is still growing its ranks of milk producers, the attrition rate of organic farmers who have quit or returned to conventional production has increased, he said.

For the Millers, it's too late to go back to conventional. Economics aside, they're committed to the philosophy of organic farming, Tom and Jim Miller say. "Even if the market went to hell, we'd still be farming organically," Jim Miller said.


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