As producers struggle, cooperatives fumble: How is ‘excess milk’ determined to be a problem in deficit areas?

By Sherry Bunting, updated from Farmshine, June 1, 2018

KENTUCKY — As the calendar turns to June, the saga of lost markets has meant a transition for some, exits for others, and in Kentucky, 14 producers who still faced May 31, 2018 contract terminations with Dean Foods were given a 30-day reprieve.

“It’s down to the wire and we’re working on a hail-Mary,” says Maury Cox, executive director of the Kentucky Dairy Development Council (KDDC). “We started with 19 affected producers, and we’re down to 14. Some have exited the business and we may lose a couple more.”

According to Cox, the KDDC and other state officials are still working, leaving no stone unturned, for these 14 producers, confirming on May 28 that Dean Foods did extend their contracts to July 1.

Five of the original 19 affected producers in Kentucky have sold their cows and a few others, like Curtis and Carilynn Coombs, are in the process of incrementally downsizing their herds as the termination approaches.

In southern Indiana where seven producers were unable to find a market, Doug Leman, executive director of Indiana Dairy Producers, indicates that some are drying off cows, others are selling, and one is getting into on-farm milk processing. There are a select few that have been offered 30-day Dean contract extensions, mainly because their contract renewal dates were different, and Dean could utilize the milk.

In Kentucky, there is the added and unusual situation of an 800-cow dairy not being able to move into their new 8-robot dairy barn because the processor receiving their milk classified the second location, two miles from the main barn, as a start up instead of an existing patron’s modernization project that in total represented a modest expansion.

As the new robot barn sits empty, and many contacts made with no takers, Kentucky dairy leaders scratch their heads at the gate-keeping that is going on — wondering how is it possible that these things are happening? That in a milk deficit region, just two loads of milk from 14 former Dean Dairy Direct farms — that now have until July 1 — can’t find a home? That in a milk-deficit region, this separate situation happens to  a progressive dairy having to let their new completed barn sit empty and keep milking exclusively in the old facility, in order to keep their existing milk contract with another bottler?

All of this happening in a state that is part of the Southeast region that University of Wisconsin dairy economist Mark Stephenson says has a 41-billion-pound milk deficit in terms of production and consumers. And all of this happening in a state spanning two Federal Milk Marketing Orders (5 and 7) that regularly utilize transportation credits and diversions to move milk — bringing milk in from up to 500 miles away to meet the actual processing needs.

It doesn’t make sense. The movie playing-out in Kentucky could come to other theaters in the eastern U.S., and the previews are already being shown.

Repeated emails to Dean Foods went unanswered over the past two weeks as the company’s corporate communications director indicated by automatic reply that she is on “paid time off” until June 4.

Phone calls and emails to the communications department for the Kroger Company have also not been returned as Kroger bottles 100% of its store-brand milk at its own plants, including the Kroger Winchester Farms Dairy plant in Winchester, Kentucky, which is supplied by Select Milk Producers, Inc. and Dairy Farmers of America (DFA).

IMG-0010x(Incidentally, a billboard popped up recently on I-65 North outside of Louisville, Kentucky –picturing Holstein dairy cows grazing and proclaiming Kroger as “proud to support Kentucky farmers”. What could this mean? As noted in this report, requests to Kroger’s communications department — to understand what these billboards mean and what percentage of milk in Kentucky Kroger stores actually comes from Kentucky farms — have gone unanswered.)

Prairie Farms recently announced it is closing a plant in Fulton, Kentucky and will operate a distribution point there. Prairie Farms and DFA own or supply other milk processing assets in the state and region.

Numerous sources outside the directly affected region indicate that Prairie Farms is working with Walmart to source milk and bottling for Walmart while the Fort Wayne plant start up is delayed . Prairie Farms, Great Lakes Milk Producers and Foremost Farms are the three cooperatives, along with Walmart’s independent milk contracts, meeting the single-source loads requirement for Walmart’s new plant in Fort Wayne, Indiana.

(Author’s note: While Walmart touts the milk for its new bottling plant, once fully operational, will come from within 180 miles of the Fort Wayne plant, the plant’s reach in Great Value bottled milk distribution will be much farther — up to 300 miles away where milk that is more ‘local’ to those Walmart stores in Kentucky and southern Indiana is displaced. So far, none of the cooperatives working with Walmart have taken on this southern milk.)

With Prairie Farms, Dairy Farmers of America (DFA), and Select Milk Producers all supplying milk processing operations in Kentucky, not one has agreed to take on the Dean-dropped dairy producers as members.

New members are a problem for Prairie Farms when their own members are on a quota system, and yet, the cooperative is working with other cooperatives and Walmart to source milk to supply a consumer need that was previously sourced from the dropped herds via the Dean plants.

As for other plants, even Bluegrass Dairy and Food, a dairy powders and ingredients company — with plants in Glasgow and Springfield, Kentucky balancing milk supplies in the region — is not exclusively owned by the local Williams family who founded it in 1995. The majority of the company was purchased in 2010 by a private investment firm. Sources indicate Bluegrass cannot accept the displaced milk from independent producers because they are completely co-op supplied and balance co-op milk at the two Kentucky plants as well as a third plant in Dawson, Minnesota.

When asked if DFA is taking new members, John Wilson, senior vice president and chief fluid marketing officer wrote in an email: “Our Area Councils monitor local milk marketing and manage membership decisions as well as other local issues. Membership decisions by this group of local dairy farmers are evaluated based on a number of factors, including an available market for milk, which continues to be out-of-balance in some areas of the country.”

On the Kentucky situation, specifically, Wilson said that, “We are concerned for family farms. We recognize the dairy farmers in Kentucky and southern Indiana who have been displaced face a tough situation. While there is excess milk in the area and finding a home for this milk will be a challenge, we are working with others to determine if we can provide any assistance.”

DFA-FMMO.jpgFollow up questions about how “excess milk” is determined to be a problem in a milk-deficit area, have not been answered. (Since publication, DFA’s John Wilson replied in an email that the excess milk situation is really the region, not specifically Kentucky.” One can see why when comparing the DFA Area Council Map, above right, to the USDA Federal Order Area Map, above left…  Note how in the above DFA Area Council Map, the lines are drawn with the navy blue of DFA’s Mideast Area Council dipping straight into the maroon of the deficit Southeast Area Council right through central Kentucky, for example, and it becomes apparent that the decisions can be weighted toward surplus transport between Orders within Area Councils and between them.)

After all, milk moves in mysterious (and not so mysterious) ways.

MilkTruck#1Meanwhile, of the over 100 dairy farms in eight states affected by the Dean contract terminations, it has been the willingness of smaller regional bottlers and smaller regional cooperatives to mobilize compassion, leadership and local marketing efforts to pick up the slack.

In Pennsylvania, it was localized (PA Preferred / Choose PA Dairy) bottlers like Schneider’s Dairy and Harrisburg Dairies that picked up many of the eastern and western Pennsylvania farms, with much of the balance being picked up by New York-based Progressive Dairymen’s Cooperative, marketing with United, a bargaining co-op covering both New York and Pennsylvania. Six Pennsylvania farms sold their cows.

In addition, one New York producer shipping to the Erie, Pennsylvania plant slated for closure, made his last shipment of milk on May 31 and sold his 150-cow herd and equipment, although he is hoping to rent the freestall barn he built a year ago.

In Tennessee, at least one farm exited, and all but one remaining were picked up by the new Appalachian Dairy Farmers Cooperative that is marketing to a bottler featuring local milk.

In northern Indiana, the farms with lost markets were picked up by two regional cooperatives Michigan Milk Producers and the Ohio-based Great Lakes Milk Producers.

In addition, with the new Class I Walmart plant in Fort Wayne, and the destabilization of fluid milk sales as U.S. population growth is not making up for declining per-capita fluid milk consumption, Dean plant closings are on the horizon. Sources indicate that Dean plans to close as many as seven plants by September but that no new producer-termination letters are expected in the near-term.

This level of Dean consolidation was mentioned in quarterly earning reports. However, Dean Foods has not publicly announced specific plant closings and repeated emails and calls to the Dallas-based company were not answered.

Three plant closings later this year have been confirmed by town authorities quoted in press reports.

One is the Garelick plant in Lynn, Mass.

Another is Dean’s Meadow Brook plant in Erie, Pennsylvania. The Erie Regional Chamber reported to Erie News Now that Dean intends to sell the Erie plant and transfer its bottling to the plant in Sharpsville, Pennsylvania while purchasing a smaller property in Erie for a distribution center.

The third reported Dean plant closure of an estimated seven to be announced is the Louisville, Kentucky plant where many of the Kentucky and Indiana farms that received contract-termination letters ship their milk.

Meanwhile, as Walmart’s new milk sourcing with the “Midwest supply-chain” gets underway ahead of its new Fort Wayne plant becoming fully operational, the 90 to 100 million gallons of milk per year (roughly 800 mil. lbs) are already being moved away from regional bottling and distribution channels to consolidated sourcing and distribution — with the biggest effects at the farthest edges of the new Fort Wayne plant service area, like Kentucky, where dropped producers are unable to find milk buyers.

There just does not appear to be any market access at other plants in the region without being members of cooperatives like DFA or Select or Prairie Farms, and despite multiple attempts by state dairy leaders, none of these three cooperatives have stepped up to accept the displaced producers as members.

As noted in a May 15 Farmshine report,  the KDDC, Kentucky Department of Agriculture and the Governor’s Office of Ag Policy have all been involved in helping these farms find a solution.

It is not an issue of no processors for the milk. The issue is the gates to these processors are closed to these displaced independent producers because they are not already members of the cooperatives manning the gates.

In the most recent March/April edition of KDDC’s Milk Matters newsletter, president Richard Sparrow talked about the situation for these Kentucky dairy farms as “operating in a very limited, if not closed market, with few or maybe no options.”

In his Milk Matters president’s corner, Sparrow offers this commentary:

“It is a really sad commentary on the state of our dairy industry that all the major fluid milk processors in Kentucky have a large percentage of their day-to-day milk supply coming from farms hundreds of miles outside our state’s boundaries. Yet, at the same time, Kentucky dairy farm families can’t find a home for their milk,” writes Sparrow. “This situation did not happen overnight. It is not an oversupply problem or a quality problem. It is a marketing problem.”

KDDC executive director Maury Cox said in a phone interview that he did not want to be negative. However, when he looks at the whole picture of the market, the increased hauling and marketing fees, the quota programs and base-excess programs in this milk-deficit region, the amount of milk being sold $1.00 or more below mailbox price, and the effect of potentially losing these producers upon the infrastructure for remaining producers, he admits that it is difficult to see light at the end of the tunnel.

“They are putting us out,” he says. “I think we are looking at the complete demise of Kentucky’s dairy industry. I think that is what we are seeing.”

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Will ‘local’ focus stem tide of milk displacement?

PA-preferred (1).jpgHarrisburg Dairies, Schneider’s Dairy step up for milk from at least 9 of 42 dropped Pa. farms

 

(Author’s note: Farmers whose milk has been displaced in 8 states are in various stages of determining their futures. Some are exiting the dairy business, a few have been picked up by cooperatives, or as in the case of this story, by processors. Some are resorting to marketing milk with brokers at much lower prices. In addition to PA Preferred, Tennessee’s legislature is working on a state label for milk.)

By Sherry Bunting, Farmshine, March 30, 2018

BROWNSTOWN, Pa. — In the days following the “Save Pennsylvania Dairy Farms” town hall meeting in Lebanon March 19, some breakthroughs came for 9 of the 42 Pennsylvania farms notified by Dean Foods that their contracts will end May 31.

Harrisburg Dairies, based in Harrisburg, picked up 5 (possibly 9) of the 26 farms let go by Dean’s Swiss Premium plant in Lebanon.

Schneider’s Dairy, based in Pittsburgh, picked up 4 of the 16 farms let go by the Dean plant in Sharpsville.

Both Harrisburg Dairies and Schneider’s Dairy source their milk through direct relationships with local family farms, and they use the PA Preferred logo on their milk labels, signifying it was produced and processed in Pennsylvania, which also means the state-mandated over-order premium paid by consumers is passed back through the supply chain.

“It really made the decision for us, when it came to needing our milk supply to be independent producers that we can have a direct relationship, monitor and inspect ourselves,” Alex Dewey told abc27 News, Harrisburg about the PA Preferred label and their decision to add five of the displaced farms to their Pennsylvania-sourced milk. Dewey is the assistant general manager of Harrisburg Dairies.

Likewise, Schneider Dairy president William Schneider told Clarion news that, “We really didn’t need the milk, but… these people were going to lose their livelihood. I didn’t want people to be out on the street, so we did what we could.”

Both dairies appear to have chosen their 4 and 5 farms based on hauling routes and proximity to their respective plants.

Meanwhile, the situation is in limbo the remaining 12 farms in western Pennsylvania, along with the handful of Ohio and New York producers, affected by volume adjustments at Sharpsville and New Wilmington as well as 21 in eastern Pennsylvania affected by volume adjustments at Dean’s Swiss plant in Lebanon.

In addition, producers affected by these notices in Indiana, Kentucky, Tennessee and the Carolinas are also currently still seeking markets. A few in the Southeast have made plans to sell, but overall, there are still about 100 dairy farms displaced by Dean’s system-wide consolidation and Walmart’s new plant coming on line in May in Fort Wayne Indiana.

Some other marketing factors are emerging.

For example, the Dean Sharpsville plant continues to notoriously bring in loads of milk from Michigan. The company confirms that the 90-day notices sent Feb. 26 to over 100 dairy farms in 8 states, did not include Michigan.

The Sharpsville plant was referenced specifically in the December Pennsylvania Milk Marketing Board (PMMB) hearing where the Pennsylvania Association of Milk Dealers and Dean Foods requested a significant reduction in the producer over-order premium to its lowest level in 17 years. This change to a 75-cent mandated premium went into effect for wholesale and retail milk price minimums January 1.

At the time of the hearing, both John Pierce and Evan Kinser of Dean Foods testified that retailers are getting accustomed to bargain-priced milk elsewhere with documented retail milk prices offered to consumers in other states as low as 87 cents per gallon. Kinser testified that this new reality made Pennsylvania’s high state-minimum retail milk price an increasingly attractive destination for milk bottled elsewhere.

Kinser had further testified that the pressure from the increasing influx of out-of-state milk was making it difficult for milk produced in Pennsylvania to compete for retail (and apparently farm level) contracts.

Kinser also indicated that the mix of milk sourcing at the Sharpsville plant, in December, was already much different than the mix at the Swiss Premium plant in Lebanon. With Sharpsville close to the Ohio and New York borders, the plant has been sourcing milk from Ohio and New York for some time, but also increasingly from Michigan and Indiana.

In fact, at the December PMMB hearing, Kinser’s much-redacted testimony warned of Pennsylvania milk becoming displaced and that the new and lower 75-cent over-order premium level is “already a compromise that represented the highest level the current economic conditions can sustain.”

Kinser warned that if the premium were any higher than 75 cents, Dean Foods would be forced to renegotiate its contracts with suppliers to change the mix of milk used at ALL of its plants within the state in order to compete for contracts with packaged milk coming into the state from plants beyond Pennsylvania’s borders.

Even though the PMMB granted Dean’s request to lower the mandated premium to 75 cents, it appears the mix of milk is being renegotiated anyway as part of the company’s milk supply chain consolidation process as the volume adjustments at Pennsylvania plants have fallen primarily onto Pennsylvania farms.

Also emerging in the marketplace is the increased occurrence of brokered milk. This trend began in 2013 as producers across the Northeast and Mideast have dealt with contract losses in the fluid market at smaller levels than seen today.

Great Lakes Milk Producers is an example of a recently organized group of producers from Ohio, Michigan and Indiana, which is organized “like” a cooperative but markets milk as single-source loads through a broker.

Part of the drill is getting the milk qualified with farm audits and certifications as single-source loads that can be matched up to spot needs from cheese and yogurt plants to even, at times, the Dean plant in Sharpsville, Pennsylvania, the Southeast in the summer, and potentially even the new Class I Walmart plant in Fort Wayne.

Marketing through a broker can mean a long haul in a long market with changing conditions. This option makes milk quality a mandate without a premium.

As 27 farms in Indiana continue to seek a market, it is unclear whether brokering with Great Lakes Milk will become an option. The size of the displaced Indiana family dairy farms fits the single-source criteria, ranging 300 to 1500 cows and collectively represent an estimated 20 million pounds per month of displaced milk volume let go by a Dean plant in Indiana as well as Louisville, Kentucky.

“This is a huge issue for our state right now with an overwhelming impact,” said Indiana Dairy Producers executive director Doug Leman at a recent annual meeting in Indianapolis about the 27 farms with displaced milk scattered around the state. “Conversations are starting to happen, and we are planning a meeting for these farms. But just because Dean is not buying this milk, does not mean that the consumer demand has gone away. We have to let the dust settle and go through the milk shuffle.”

Among the recently affected Indiana farms is the sixth generation Kelsay Dairy Farm, operated by brothers Joe and Russ Kelsay and milking nearly 400 cows near Whiteland.  Joe Kelsay was the milkman for last year’s Indy500.

“We are exhausting all contacts and connections with cooperatives and plants,” said Kelsay in a phone interview. “Several told us they are not in a position to take any additional milk, some are doing some checking, and we do have a couple meetings scheduled. We are cautiously optimistic.”

When asked if the new Walmart plant will pick up any of the Dean dropped farms, Leman said the plant’s supply has been locked up with a percentage coming from undisclosed dairies doing contracts directly with Walmart and the balance being single-source loads via third parties.

“We can’t tell Walmart where to get the milk, but we are letting them know to check with these farms,” said Leman. “Some are within 50 miles of the plant.”

Kelsay doesn’t blame either Dean or Walmart for the market loss his family and others are experiencing. “This is a difficult time, but we can’t fault one company or another for doing their best to run their businesses,” he said.

Meanwhile, in Pennsylvania, town hall meetings were held (and reported in last week’s Farmshine) to raise public awareness. Ag Secretary Russ Redding wrote to Dean Foods asking for contract extensions.

But Dean has indicated its problem with excess volume will begin before these contracts end.

“We explored all our options before we made this decision,” noted Reace Smith, Dean Foods director of corporate communications. “At this time, we can’t extend the contracts further. As a fluid milk processing company, we are unable to store milk long-term.”

The timing is difficult with spring flush and spring decisions around the corner.

“We’re all in limbo right now,” said Agri-King nutritionist Bob Byers in a phone interview. He works with 25 farms, serving in the affected area of western Pennsylvania for 20 years. He notes that affected farm families have only so much time to make decisions like what crops to plant, what fuel and supplies to order. These decisions revolve around whether or not they will be milking cows after May 31.

“There is a timeline involved to unwind a multi-generational dairy farm with inventories of cows and feed and with a team of employees to think about,” says Kelsay. “If there is no one to purchase our milk, how can we continue? What happens here has a significant impact on our team of employees, and their families, as well as our hauler, nutritionist, equipment and feed suppliers – our whole web of contacts. We do a lot of business with a lot of people.”

Byers notes that this is the worst of times in the dairy business that he has seen in his 20 years and that it definitely affects local jobs and businesses.

Lebanon9495(Signs)

“Local people want local milk,” he said. “That is the only thing that will help these local farms at this point. Media attention will help get that message in front of consumers, and in front of companies like Walmart.”

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PA-preferred

Alisha Risser of Lebanon posted this photo of Harrisburg Dairies’ milk displaying the PA Preferred label signifying the milk was produced on Pennsylvania farms. The Rissers were part of a town hall meeting in Lebanon reported in last week’s Farmshine, and they are one of five farms whose contracts were dropped by the Dean Swiss Premium plant in Lebanon that will be picked up by Harrisburg Dairies.