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Don't Ignore Dairy Farmers' Pricing Problem

Even if your business has nothing to do with farming, the troubles facing dairies offer survival lessons for those selling commodity products

By David E. Gumpert

Article from Business Week

Running a small dairy farm with your family might seem like a beautiful lifestyle business. You milk your cows twice daily, and two or three times a week, a tanker truck from a processor or milk cooperative rolls up and hauls the milk you've collected away to a plant for pasteurization and homogenization. The processor determines such details as butterfat and bacteria levels, perhaps applies formulas established by milk boards about how much to pay for various milk components, and sends you a check.

The only problem is that the price you receive for your milk is beyond your control, set in distant commodity markets by large food processors. More often than you'd like, what you're paid is just barely enough to cover your costs. And occasionally, like right now, the rates many farmers are receiving are actually below what they pay for feed, not to mention labor, fuel, insurance, etc. In other words, it's a tough life for the estimated 72,000 small dairy farms (those with fewer than 500 cows) in the U.S.

Consider the case of John Moons, the 42-year-old owner of midsize Moonlight Dairy in California's Central Valley. He's been in the dairy business all his life, and while he's seen ups and downs, the current situation "is incredibly bad." He remembers 1995, when it cost $1.50 more to produce each hundredweight (a standard measure of milk, equal to about 11.6 gallons) than he received in income. Now, he loses $5 a hundredweight. The losses are so high this time around because the price of grain, which, as a commodity, would be expected to decline along with milk, has remained high.

Less Demand for Organic

Then there's the matter of surplus organic milk pushing prices of both organic and conventional milk down. Lots of small dairies piled into organic milk over the past 15 years, in response to the fast-growing demand for organic products. But now, because demand for organic milk has fallen off sharply with the recession, not only are prices down from a fourth to a third from a year and a half ago but contracts are being reduced or canceled, exacerbating official declines as organic farmers are forced to sell their milk at conventional-milk prices.

Alexandre Family EcoDairy of Crescent City in northern California is a midsize organic operation. At about $21 a hundredweight, the dairy is receiving about twice what conventional dairies receive, notes Stephanie Alexandre, an owner.

But because of the recession, the $21 is down from about $26 the dairy received 18 months ago. And the local processor will only pay the premium price for 80% of the dairy's milk; if it wants to sell the remaining 20%, it receives only the much lower conventional milk price.

While the organic milk oversupply situation is a new phenomenon, the problem of milk price gyrations isn't. Because it's fairly easy to add cows, whenever prices rise, farmers tend to increase their herds quickly to take advantage of the situation. The inevitable sharp corrections force dairies to thin their herds, as California dairyman John Moons is currently contemplating. When that doesn't work, small and midsize dairies are pushed out of business, which has led to ever-growing consolidation. The U.S. Agriculture Dept. reports that the number of farms with dairy cows fell by an astounding 88% between 1970 and 2006. And more than half of milk production now comes from dairies with more than 500 cows, according to the USDA.

Diversification Necessary

To survive in such a tightly regulated industry driven in significant measure by increasing economies of scale, smaller producers must be willing to diversify and even move outside existing distribution channels. Some dairies that took up the organic mantle over the past 10 years are now moving into higher-value dairy products like yogurt, kefir, and specialized cheeses, reports Cornucopia Institute, a nonprofit organization that ranks organic dairies according to how well they adhere to organic standards.

In some cases, the dairies are seeking to sell more of such products at farmers markets rather than through conventional retail chains. And in states where it's allowed, such as Pennsylvania, New York, and Massachusetts, increasing numbers of small dairies are selling unpasteurized milk—typically at prices five times or more the wholesale price—directly to the growing numbers of consumers willing to travel to the farms to make purchases. Since shifting from the sale of organic milk via conventional distribution channels to selling raw milk products directly to consumers in 2000, Mark McAfee, the owner of the largest raw dairy in the country, Organic Pastures Dairy, in Fresno, Calif., says annual sales have grown to about $5 million with more than 40,000 customers in California.

"The techniques and technologies of the last 30 years will not work over the next 30 years" for dairy farmers, argues Joel Salatin, a Virginia farmer. The author of several books on how small farms can market their products effectively, he advocates they sell directly to consumers. He reports some dairy farms are similarly diversifying by selling meat and vegetables. The alternative is to become one of the thousands of dairy farms that goes on the auction block.

David Gumpert is a journalist who blogs regularly about the business of health and has written a number of books about small business and entrepreneurship, including "Burn Your Business Plan!" His new book, "The Raw Milk Revolution," is due out in November.


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