Organic milk is pouring it on

The Baltimore Sun

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 such as Miller with more-stable prices, and often more profits, than conventional dairy operations see.

But over the past year, the milk business has been turned on its head, with many organic farmers getting squeezed as 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. 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.

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.

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

Partly, it was philosophical: They had become wary of pesticides and herbicides. Partly, it was economic: The organic market held the promise of not only 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.

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 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.

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 different story in organic milk. In conventional supermarkets, the price of organic milk products 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. Because of 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. Those costs "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 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. Also, 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.

Mike Hughlett writes for the Chicago Tribune.

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