Milk processor cancels farm contracts as Walmart makes own milk

(Chambersburg) — As if low milk prices aren’t nerve-wracking enough, dairy farmers are worrying about getting a steady monthly milk check.

Milk processors face dramatic changes in the marketplace. They buy the farmers’ milk, or at least most still do.

“The fluid milk market has always been competitive, but we’re in unprecedented times,” said Reace Smith, a spokeswoman for Dallas-based Dean Foods.

Dean Foods, branded as Swiss Premium, is ending contracts this spring with more than 100 farmers in eight states, including Pennsylvania. The company’s reasons: Consumers are drinking less milk, and other companies are entering or expanding their presence in milk processing.

Industry observers say a recently constructed Walmart milk plant in Fort Wayne, Indiana, played a major role in Dean Foods’ decision. The new plant will bottle 100 million gallons of milk annually for 600 Walmart stores.

“By operating our own plant and working directly with the dairy supply chain in the Midwest, we’ll further reduce operating costs and pass those savings on to our customers so that they can save money,” said Tony Airoso, senior vice president of sourcing strategy for Walmart U.S.

Americans are drinking 28 percent less milk than they drank in 2000, 42 percent less than in 1970. Cheese and yogurt consumption has increased, but not enough to mend the hole in a farmer’s pocket.

U.S. farmers meanwhile have more cows, each increasingly producing more milk, according to the U.S. Department of Agriculture. The industry is producing about 350 million more gallons of milk each year than the year before, Smith said.

Local milk processors are taking other actions.

The Maryland & Virginia Milk Producers Cooperative Association reduced advance payments on milk checks. The move affected most cooperative members. About a third of 440 dairy farms in Franklin County are co-op members.

“At a time when farmers are struggling to make ends meet, we realize this change in the advance pay price put an unexpected burden on our members,” said cooperative CEO Jay Bryant. “We are working on a solution that will prevent this from happening in the future, and we will be sharing more about that with our members at our upcoming annual meeting.”

Lancaster Farming reported that Land O’ Lakes is offering a voluntary dairy buyout to members. 

“It’s not a good situation for dairymen anywhere,” said Jack Martin, a Waynesboro area dairyman. “We feel fortunate to be with Land O’ Lakes.”

Land O’ Lakes has a system that encourages farmers to limit their milk production, Martin said. The cooperative penalizes farmers financially for producing more milk at a time when there’s a surplus at the milk plant.

The milk industry or the federal government has sponsored dairy-herd buyouts to limit milk production, from time to time, but currently there is no industry-wide program.

Franklin County is Pennsylvania’s No. 2 dairy county and No. 33 in the U.S.

The milk produced in Franklin County is worth $178 million a year, according to the USDA. The milk production accounts for 40 percent of the value of all agriculture in the county.

Martin recently returned from his cousin’s cow sale. The third-generation dairyman was only in his 40s when he decided to exit the dairy business.

“He didn’t have the family support he thought he was going to have,” Martin said. “He didn’t see a future to keep going on. It’s not the best time to sell out. Prices aren’t as good as they could have been.”

Martin tells of dairy farms in West Virginia getting out. A farm family in Somerset County refused to expand and quit dairying.

“People you don’t think would consider (it), are selling,” Martin said. “It’s just surprising. I’m not sure I want to stay in either with these depressed prices. Everybody can handle low milk prices, but the length keeps wearing them down.”

“The dairy industry is in as challenging a time as we’ve seen it since 2009,” said Amber Sheridan, communications director for the Maryland & Virginia milk cooperative. “Globally, milk production is strong and inventories are high, making for a very competitive marketplace. In response, milk prices have fallen, and dairy farmer profit margins are razor thin, if not in the negative. This prolonged period of tight margins has farmers weary and concerned about the future of their own farms. We need to see a response in the milk supply before there’s any price recovery or relief for dairy farmers.”‘

Shannon Powers, deputy communications director for the Pennsylvania Department of Agriculture said, “Our agency is working with other state agencies, the Center for Dairy Excellence and numerous other partners on both long-term solutions to the crisis dairy farmers are facing. We’re also reaching out to stakeholders who may be able to provide emergency help in the short term.”

Unlike factories that downsize or close up shop, milk processors are not required to issue a notice when they cancel contracts, according to Powers.

The year is shaping up to be “very difficult” for dairy farmers, according to the latest Dairy Outlook from the Penn State Extension. Milk prices are expected to be higher than those in the dismal 2009, but many farm expenses have grown faster. Premium programs once offered to dairy producers are no longer available.

Dean Foods canceled contracts with 42 farmers, Powers said.

“Our decision was an incredibly difficult one and a step that we worked very hard to avoid,” Smith said. “We will provide farmers with resources to help them connect with counselors if needed.”

Retailers are expected to put continued pressure on existing, aging milk processing plants. Kroger Co. and Publix Super Markets, prior to Walmart’s action, began supplying milk to their stores from their own processing plants.

Dean Foods said only “the introduction of new plants at a time when there is an industry-wide surplus of fluid milk processing capacity forced us into this position. Competition for milk volume has increased, and Dean Foods lost volume at higher levels than anticipated.”

The 100 or so Dean Foods’ contracts will end on May 31. Affected farms were notified the week of Feb. 26. The company will continue to buy milk from about 12,000 farms across the U.S., including Pennsylvania.

The Maryland & Virginia cooperative is managing “a tight cash position,” according to a press release from the cooperative. “The decision to reduce the announced advance price was driven strictly by cash availability. We are pursuing a new credit facility that is better suited to meet the needs of our evolving business model.”

“Unforeseen mechanical issues at two key plant operations” made the cooperative’s financial position even tighter. The mechanical issues have been resolved, Sheridan said.

Cooperative members who did not get their full advance will see a larger-than-usual final check, she said.

The number of Pennsylvania dairy farms has declined since 2000, but each cow is producing more and total production is up, according to the U.S.D.A.

This article is part of a content-sharing partnership between Chambersburg Public Opinion and WITF.