Dairy Farmers of America has sent letters to the independent, nonorganic dairy farmers in its Dairy Marketing Services system asking them to either join DFA or seek new marketing options.
“We can’t go forward with you under your current arrangement with us, as it is unfair to other participants in the DMS system,” the March 24 letter said.
The letter was signed by Brad Keating, senior vice president and chief operating officer for DFA’s Northeast Area. It tells the independent farmers that they will be receiving a 30-day notice of termination with an additional six-month grace period.
Farmers unable to find a different market within those seven months will be offered DFA memberships.
For the first year, they would not have to pay a capital retainer and would be able to terminate their DFA memberships with a 30-day notice if they are able to locate a new market. After 18 months, they would become full DFA members.
Dairy Marketing Services is a cooperative marketing association serving DFA and St. Albans Cooperative Creamery Inc.
Each day, DMS markets more than 700 loads of milk from 4,700 cooperative members and other producers in the Northeast and Mid-Atlantic.
Several smaller cooperatives contract with DMS to market their milk along with about 900 independent producers.
The 100-plus independent organic dairy farmers who use the service are not affected by the decision because their milk is handled under organic milk marketing contracts.
“We tried to go with partial depooling, which would have allowed the independents to continue and give a fair and equitable price. But without it, we have to go to full depooling,” Keating said in an interview on Monday.
“Our review of the numbers shows it would be bad for the independents (to fully depool). And we did not want to give a price that was damaging to the independents.”
Jerrel Heatwole, chairman of the DFA Northeast Council, said, “This was obviously the end of the decision chain” after the cooperative struggled for more than a year to find a solution.
Heatwole, himself a dairyman in Greenwood, Delaware, said economics drove the final decision.
As the operator of a 60-cow dairy on the Delmarva Peninsula, Heatwole said he understands the challenges small farmers face.
On top of that, he has ridden with field representatives for the past couple of months so he could talk to both independent dairy farmers and cooperative members about the current situation.
At the end of the day, this decision is “a fairness issue,” he said. “We wanted to be fair both ways.”
Milk production has overwhelmed the Northeast milkshed’s processing capacity. “All of our dairy contacts are flooded with milk,” said Ron Mong, a senior manager for dairy consulting at Herbein + Company Inc.
“Skim dumping has begun,” Mong said. “I don’t know of any proprietary plants looking for new dairy producers. I can’t imagine how much excess milk will be available over the Memorial Day weekend and into June when school milk demand goes way down.”
Cooperative members have been receiving market adjustment fees on their milk checks to help manage the milk oversupply, but federal rules do not allow the cooperatives to assess the independents the same fees.
In January, the board asked the administrator of Federal Order 1 to approve a partial depooling of independent producers to close the financial gap between cooperative members and independent producers.
DFA withdrew the proposal and went back to the drawing board after other cooperatives objected to the idea.
Pool plants must pay the blend price set by the Federal Milk Marketing Order, as must all fluid milk plants within the order’s market area. Manufacturing plants can choose whether to participate as pool plants.
By contrast, the price paid for milk by plants outside the Federal Order, or nonpool plants, is set by the marketplace.
Independence is a value some farmers hold in high esteem, but Heatwole said DFA could not find a viable option for them to continue that way once partial depooling was not allowed.
Keating said field staff as well as the cooperative’s Syracuse office will be assisting independent producers during the transition.
Heatwole said the decision is designed to help preserve dairy farms in the region. As an example, he told of a dairy farm that had shipped to an independent processor for more than 50 years before receiving a termination notice.
“After 50 years, it was gone,” he said.
Heatwole said stories like that, which popped up after several processing plants closed suddenly and left farmers without a market, were what got DMS started in handling independents.
In other cases, there were plants that decided they did not want to handle farmer contracts and asked DMS to take over.
Many of these plants — Rosenberger’s Dairies, Elmhurst Dairy, Farmland and others — are no longer around.
The timing of the announcement might seem odd considering that the cooperative announced record profits at its annual meeting last month in Kansas City, Missouri, on a net income of $131.8 million.
The increase was attributed to higher sales volumes, overall operating efficiencies and lower commodity input costs, according to a DFA press release.
The record earnings were also buoyed by the acquisition of the remaining 50 percent equity in DairiConcepts, a manufacturer of cheese, dairy ingredients and dairy flavor systems.
When it comes to milk marketing, the price paid to farmers is based on local marketing conditions. “The returns from the market in the Northeast are going down,” Keating said.
The cooperative can’t shift all of its profits to manage the financial shortfall of the region. “Local milk marketing returns come back to local farmers,” he said.
Chuck Nicholson, clinical associate professor of supply chain and information systems at Penn State’s Smeal College of Business, said the move is “a significant development but probably not surprising given the magnitude of the regional imbalance between production and processing capacity.”
This is another step to address the imbalance in the region, Nicholson said, although it is “a difficult situation for the affected producers.”
Mong pointed out that each Federal Marketing Order has its challenges. California is considering organizing a Federal Milk Marketing Order.
Meanwhile, the Upper Midwest Order is worrying about Canadian market access and the Southwest is worried about losing export sales to Mexico through trade restrictions.
The Northeast’s problem is a surplus of milk now that Michigan-produced milk is pushing east and less Federal Order 1 milk is heading to neighboring regions.
Mong said he believes more than 50 million pounds of milk could be dumped during May in Federal Order 1 with the volume increasing in June.
A decline in fluid milk sales is contributing to the situation. “Taking the pooled milk as one indicator, this is up about 11 percent since 2010,” Nicholson said, “whereas Class 1 milk is down by 15 percent.”
In a related move, the Pennsylvania Milk Marketing Board issued a ruling on March 21 allowing cooperatives that market milk for independent producers to deduct a market adjustment charge from the board’s minimum price.
According to the ruling, the charge could not be greater than the lowest charge assessed from the cooperative’s own members.
Keating said DFA appreciated the board “trying to work through the problem with us,” but its ruling does not address Pennsylvania-produced milk regulated through Federal Order 1.