Dairy Coops

Published on Tue, 11/02/2010 - 11:17am

This is—possibly—the 200th anniversary of the birth of American dairy cooperatives. The first coop is thought to have been a creamery built at Goshen, Connecticut in 1810. Coops spread throughout the early 1800s; the first federation of cooperatively owned cheese factories was recorded in 1913 in Wisconsin, and the first interstate association in 1921. In between, Congress passed the 1914 Clayton Act, which expressly exempted non-profit farm cooperatives from antitrust laws. By the 1930s, there were over 2,200 dairy cooperatives.
 
University of Wisconsin dairy economist Bob Cropp assembled those facts in an article called The History and Role of Dairy Cooperatives. Today, there are 155 dairy coops, and Cropp says several factors have driven the consolidation. “One is simply, with modern technology, transportation and packaging, geographical markets are bigger than they were before,” he says. “But consolidation in the customer base of coops, like the Walmart influence, has been faster than coops and what has forced the consolidation; a lot of it has enabled them to serve larger customers.”
 
A few of the remaining coops are huge; the biggest of them, Dairy Farmers of America [DFA], was formed in 1998 by the merger of four smaller coops and represents between 20-25% of all milk marketed in the United States. In the ‘30s, the 2,200-plus coops combined only had 45% of the U.S. milk market. But Cropp says smaller cooperatives are popping up that serve niche markets. “Whether they’re grazers, making a product saying that milking the cows on grass makes better cheese, or organic; that may be serving a more local market,” he says.
 
Not all the small coops are specialists, though. The Damascus, Ark. based Arkansas Dairy Cooperative Association [ADCA] claims 92 members, not all of them in Arkansas. Manager Floyd Wiedower says, “We have producers in Oklahoma, Missouri and Kansas. We’re losing some in Arkansas, and getting some in the other states.”
 
Formed in 1991, ADCA has survived by working with other coops, large and small. It’s an associate member of Windthorst, Tex.-based Lone Star Milk Producers; it also belongs to Southern Marketing Agency, which finds markets to which ADCA can deliver milk. They’re not all in Arkansas; Wiedower says, “There are some oddball places that it’s hard to get milk to; our truck fleet’s pretty good, and we can deliver.”
 
Among Southern Marketing Agency’s other members are the Maryland & Virginia Milk Producers Cooperative, Missouri’s DMCI…and DFA. Says Wiedower, “The agency allows us to compete because we share in the markets; we share in whatever the costs are to the coops. And then I guess some people are just attracted to a smaller, more friendly coop; then they don’t have to deal with the big guys but they get the same benefits, and that’s what we have with the agency.”
 
Cropp notes dairy farmers are not as loyal to their coops as they used to be. “To the new generation of farmers, the coop’s always been there,” he says. “They say, ‘Well, I ship my milk to a coop, the milk price is no higher than a non-coop, so why should I belong to a coop?’” Because most coops have very loose membership arrangements, a producer could approach one coop with an offer to sell milk, and the next month go to another—or to a private processor; Cropp says, “At least up here in the Midwest, there are some good, private cheese companies that have very competitive pay prices, and they’ve been able to attract some members away from coops.” Larger producers are particularly likely to jump from one processor to another, he says, because coops have to treat all of their members as equitably as they can and are limited in the incentives they can offer bigger dairies.
 
But DFA attracts more members than it loses; that according to Randy McGinnis, who’s chief operating officer for the coop’s Central Area “As one way of measuring how we’re doing, we track how many dairy farms are choosing to market through DFA compared to how many of our current members choose to market somewhere else,” says McGinnis. Although some farmers have left the coop over the last six years, more have joined, and those who have left constitute “a very, very small percentage,” he says.
 
What does DFA do to keep and attract its members? “First and foremost,” says McGinnis, the coop works to get farmers the best price and most efficient marketing possible. In addition, DFA offers services that can help the producer become more economically efficient and viable; among them are forward contracting and forward pricing, health insurance plans, member financing programs, and input and farm supply options. McGinnis says, “We do a lot of work with them on helping them with farm management, helping them with quality and different things that will help them do better on the farm.”
 
As Cropp noted, consolidation in the processing and retail sectors has made it increasingly important for producers to band together to market their milk; the coop can put together volumes that individual producers cannot. “I don’t know that there will be a lot more consolidation” of coops, says McGinnis, “but there will at least be more and continued working relationships with other coops. We do expend a lot of effort working with other cooperatives for the mutual benefit of dairy farmers, and we believe to some degree that can accomplish nearly the same thing as consolidating into one cooperative.”
Another thing the coop can do that the individual farmer cannot is lobby Washington. For decades, producer interests, lawmakers and USDA have sought the right combination of market supports and pricing that would bring stability to an industry that is still trying to evade the boom-and-bust cycles that repeatedly put thousands of farmers out of business. “Dairy is a highly regulated industry, from two aspects,” McGinnis points out. “It’s one of the most highly regulated and protected food products from a health standpoint of any out there; those regulations are important, so we want to be involved in that process. On the pricing side and farm policy side, there are a lot of decisions made in Washington that have impact on dairy farmers’ economic viability, and we are very actively involved in those efforts.”
The most recent crash coupled historically low prices caused by the recession with rising feed prices. “Dairy farmers struggled through that,” says McGinnis. “They burned through a lot of equity, and they’ve got a lot of extra debt that they’re still going to be recovering from for quite some time. We are very supportive of changes in federal policy that will help dairy farmers better deal with price volatility, or even eliminate some of that price and margin volatility.” DFA is backing a plan the National Milk Producers Federation is calling “Foundation for the Future”; McGinnis says it’s multi-faceted. “There’s some protection in there from extreme low prices, almost like a margin insurance program; there are aspects that are intended to send better market signals to the industry, to help with the supply/demand balance, including some aspects of a supply-management program,” he says.
 
ADCA also did what it could to help its members through the downturn. “The last year we have provided some additional money in the form of loans without any interest,” says Wiedower. “We advanced some money to try to keep people operating at these times when it’s been very difficult, for a couple of months last spring.” Twice, the coop made extra 75 cent/cwt payments that they’ll recollect over a ten-month period.
 
How solid is the anti-trust exemption? Cropp says there are some threats to it. Earlier this year, the U.S. Department of Justice sued to reverse private sector dairy giant Dean Foods’ acquisition of two Wisconsin plants owned by the coop Foremost Farms; DOJ said the acquisition violates the Clayton Act because it eliminates competition in the sale of milk to schools and retailers in a three-state area. At the joint DOJ/USDA dairy competition hearing in Madison, Wis. this past June, DOJ antitrust division head Christine Varney said, “We are keeping a watchful eye on this industry, mindful of the various comments that we have heard. We know that dairy farmers are concerned about a lack of choices for buyers, about the way that their milk is priced, and about a year of dispiriting returns for their labors.”
 
But DOJ, says Cropp, “may be barking up the wrong tree there. Coops are still relatively small in size compared with customers, so they form a marketing agency in common where they band together for the purpose of setting the price of milk, and then have full supply arrangements. The issue is if it cuts off competition from others serving that fluid market; that gets more into federal order pooling regulations.” Dean, he says, is struggling as a result of the dictates of Walmart and other mega retailers; that, in turn, is “really putting the screws to the margins of the people serving them. And of course, the coops serve Dean Foods.”-+++

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