- ED MALTBY
Danone Puts Local Last: The Fight to save Organic Dairy Farms in the Northeast
By ED MALTBY
In August 2021, Danone North America, which owns the organic dairy brand Horizon Organic, notified 89 organic dairy farm families in Maine, New Hampshire, Vermont, and New York that the company was terminating their dairy contracts in 12 months’ time and stopping all sourcing of milk in New England. The reason they gave is that, in the future, they would source their milk from larger operations “that better fit our (Danone) manufacturing footprint.” Danone’s swift regional exit marked the largest simultaneous contract termination organic dairy has ever seen. The organic dairy supply market is relatively small, with only a few buyers left after years of mergers and acquisitions, so when a major buyer like Horizon leaves, there are few options for farmers. This is especially critical in New England where the only alternative buyer is now Midwest-based CROPP Cooperative/Organic Valley. The news was devastating to those farm families, many of whom had provided organic milk to Horizon Organic for decades and were instrumental in building Horizon’s successful brand.
Since 2017, organic dairies across the country have been receiving payment for their raw milk that is under the cost of production. They have not been able to build any financial reserves and have survived on subsidies and sweat equity. In 2022, massive inflation, especially in organic feed, is causing a higher than normal ‘attrition rate’ (the milk buyers’ term for family farms going out of business) and many farmers do not have enough income coming in to fund their operations.
After Danone/Horizon’s announcement in August 2021, some of the dumped farms immediately sold their cows, retired, or went out of business - selling their farms, or reverting to conventional production. The situation was further complicated when Maple Hill Creamery, which markets Grass-Fed milk, threatened to cancel the contracts of 46 of their farms, mostly in New York. NOFA-VT, NOFA-NY, Maine Organic Farmers and Gardeners Association (MOFGA), NOFA-NH, Northeast Organic Dairy Producers Alliance (NODPA), Organic Farmers Association (OFA) and the National Organic Coalition (NOC), (aka ‘northeast organic producer groups’) joined in a loud, public protest about Danone’s action arousing the subsequent media interest. The media and industry exposure attracted widespread interest from the organic and conventional dairy industry who were willing to talk about investing in northeast organic dairies. The northeast organic producer groups used their tremendous support from consumers, advocacy organizations, and farmers to bring pressure to bear on Danone to honor their responsibilities to their organic dairy farmers and the northeast community. The USDA Secretary of Agriculture, under pressure from the northeast congressional delegation, set up a Northeast Dairy Task Force which had strong participation from all sides and yielded many good ideas. The USDA response to the Task Force recommendations led to an investment of $80 million in four Dairy Business Innovation Centers (DBIC) across the country, including $20 million for the one in Vermont.
NOC, OFA, and NODPA brought a national perspective and practical leadership as did NOFA-VT, NOFA-NY, NOFA-NH, and MOFGA, working directly with farmers while also advocating for different solutions. The Real Organic Project dedicated many hours to educating the community about the sometimes difficult-to-understand organic dairy world with their Milk and Honey Symposium, and by advocating for more transparency in sourcing milk. Gary Hirschberg, Stonyfield Co-Founder, launched the Northeast Organic Family Farm Partnership in January 2022. Its intent was to create more demand and market security to support and safeguard the region’s organic family farmers. With funding from CROPP Cooperative, Lactalis/Stonyfield, and the northeast DBIC, it has been very successful in its education and advocacy for more sales of organic milk.
In March 2022, nearly all the farms that had lost their contract with either Danone or Maple Hill but wanted to stay in organic dairying were offered a Letter of Intent from CROPP Cooperative/Organic Valley which, if signed in 30 days by both buyer and farmer, gave the option to be signed onto CROPP’s Reserve Pool. Farmers had to satisfy all the requirements of selling milk to CROPP, including milk quality, sufficient volume, and accessibility of the milk storage tank plus, “CROPP’s membership qualifications (Page 4-5, Policy 1.2).”
The challenge for many of the small to mid-size operations was their ability to store milk to meet the requirements of CROPP’s milk pick-up schedule, to store milk at the correct temperature, and to upgrade their chart recorders. This was especially challenging for the Amish community who typically have fewer cows and smaller bulk tanks. The added stress for these family farms is that the CROPP pay prices are similar to what they were being paid by Horizon/Danone, though less restrictive in qualifying for quality and component payments. These pay prices have not changed since 2017; farms receive 21 cents a half gallon, about $5 per hundred pounds of raw milk below the 2021 costs of production in 2021. (Milk is sold by the hundredweight, cwt.).
In 2017, Danone, a B-Corp company, purchased WhiteWave, then owners of Horizon Organic. To gain the B-Corp designation, corporations must commit to making a progressive social impact and to environmental stewardship. Danone was part of negotiations with the Department of Justice to prevent a monopsony (a supply-side monopoly) in the organic supply market in the northeast. Four years later they created one. Danone owes these farmers and the northeast organic dairy community a future because these farms produced healthy, organic milk that helped make Horizon Organic the largest-selling organic retail brand in the USA.
In the past 18 months, the northeast organic producer groups representing the affected farmers have asked that before leaving the region, Danone provide support to the farmers they dropped. First, in September 2021, the group asked Danone to reinstate those farmer contracts. When Danone refused, the group asked for the following:
1) Give farmers another 6 months on their contracts
2) Make a significant investment in organic dairy processing infrastructure in the region
3) Provide farmers they dropped with severance pay
In December 2021, Danone agreed to:
Extend contracts with farmers until February 28, 2023, with no change in terms of the contract.
Provide a transition payment to farmers when the contract ends of $2/cwt. on the milk volume produced in the last 6 months of the contract with Danone/Horizon. Note: this is less than 7% of the current pay price these farmers receive.
Provide financial consultants to work with the farmers at no charge.
Co-invest in activities in the Northeast by working with regional stakeholders on systemic infrastructure challenges.
The northeast organic producer groups also arranged to have a question asked at the Danone annual shareholder meeting in France: did Danone intend to honor their commitments made in December 2022, especially the investment in northeast dairy infrastructure and in payment to producers? The reply to the shareholders was the same points that Danone made to producers and stakeholders.
Movement Pressure Had Limited Effect
By August 2022, Danone offered contract extensions to all the farms they had canceled, but very few farmers say they have received their severance payments. Danone still has not made any financial investment in the region’s dairy industry or set up any process to do so. On August 17, 2022, the producer groups reminded Danone North America of its promise to invest in the northeast organic dairy industry. Danone had asked for different projects they could invest in, and the producer groups developed proposals for how a Danone North America investment can make the greatest impact where it’s needed most. Producer groups sent a long and detailed list of investments to Danone, many of which were also part of the recommendations from the USDA Dairy Task Force.
In October 2022, at the urging of producer groups, House Representatives Pingree (ME), Welch (VT), Kuster (NH), and Golden (ME) sent a letter to Antoine Bernard de Saint-Affrique, Chief Executive Officer, Danone, and Shane Grant, Chief Executive Officer, Danone North America, asking them to honor their promise to organic dairy farmers and northeast communities to invest in dairy infrastructure in the region. Representative Welch’s office did meet with a representative from Danone North America, Chris Adamo (Vice President Public Affairs & Regenerative Agriculture Policy), about the letter. Adamo was very clear that Danone will not be investing, stating:
They have “stopped exploring” co-investment opportunities.
They did not get any good suggestions from USDA or other government agencies for what they should invest in.
They no longer want to communicate with advocacy groups.
They will not be matching the USDA’s $20 million investment.
They would consider some investment if they saw a way for it to benefit their remaining producers in the region, but they gave no commitment that they would do that.
Obviously, that is their final word. In contrast, in March 2022, USDA made a $20 million investment in the region to support farmers during this crisis.
Match Taxpayer Investments
Danone simply has not done enough. U.S. taxpayers should not be picking up the tab to clean up the economic mess Danone left behind. Danone must, at a minimum, match the $20 million taxpayer investment for northeast organic dairy. Danone’s 2021 year-end sales were $25.11 Billion US dollars. Danone CEO Antoine de Saint-Affrique stated, “we ended the year on a strong note…We delivered on our commitment to return to profitable growth…with a recurring operating margin at 13.7% in 2021. This was enabled by a strong focus on execution and a step-up in productivity, a proactive approach to pricing and the disciplined implementation of Local First.” But to Northeast organic dairy producers, Danone achieved these profits by putting Local Last.
The Future of Organic Dairy in the Northeast
The northeast organic dairy community has had the perfect storm in 2022: unpredictable weather, loss of a major buyer of raw milk, continuing low pay prices, lack of competition, no COVID or Dairy Margin Coverage (DMC) program subsidy, and inflation caused by a world in tumult. The cost of feed and other inputs has reached ridiculous highs. Northeast organic dairies have been hard hit by abuses of loopholes in the organic regulations and the failure of the NOP to enforce the regulations consistently across the country.. Because of the low organic pay price, producers have not been profitable and now, with the increase in the cost of inputs, they are unable to cash-flow their operations, having fully leveraged their equity. (Cash flow represents the cash inflows and outflows from the business. When cash outflows are subtracted from cash inflows the result is net cash flow. Profitability represents the income and expenses of the business. When expenses are subtracted from income the result is profit or loss.)
This has resulted in farm auctions, heavier-than-usual culling and reduced milk production. Small- and medium-sized farms have left organic dairy with many of the larger ones returning to conventional production. The writing is on the wall for the smaller operations that might only have 5 to 25 cows because buyers no longer want the logistical and quality challenges associated with picking up their milk. From 2016 to 2021, Nicole Dehne, the certification director of Vermont Organic Farmers, said, “the organic dairy industry has seen a 22% decrease in farms. “At the end of 2021, we had 158 dairies,” she added. “We anticipate having fewer than 150 dairies (in Vermont) by the end of 2022.”
Organic milk buyers have given small pay price increases in 2022 (75 cents to $1/hundred pounds), but say they are not able to provide either a Market Adjustment Premium or a temporary pay price increase to support farmer cash flow. Stonyfield/Lactalis says they are committed to supporting a local supply but have to work within the goals of their parent company Lactalis. They have pledged to increase their pay price by the end of the year to reflect a total annual increase to match the average national inflation. CROPP Cooperative reports that they are not in a financial position to increase their pay price, plus, they are in the middle of a planned change in leadership.
It is reported that there is no surplus of organic milk in the northeast. Retail milk prices are the highest they have ever been, and retail sales are steady, however, the farmer’s share of the retail dollar is only 27%. The conventional dairy farmers’ share of the retail dollar averages 60%. The organic dairy companies are reporting that they are using increased income from a higher retail price to maintain their operations rather than pay farmers extra. The marketplace has not responded by increasing the pay price in the northeast to increase supply. Any shortage of supply in the northeast is being provided by organic milk sourced from large organic CAFOs delivering Ultra-Pasteurized milk from Colorado and Texas. Unlike conventional dairy, organic dairy does not have any existing federal safety net. Organic dairies face unique challenges and the effect of doing nothing on the farming community, the rural communities they support and the environment will be vast. NODPA and regional and national organic producer groups are advocating for emergency funding. This is a time when USDA is investing heavily in supporting organic transition and there needs to be an investment in retaining organic land and recognizing the organic pioneers who have done so much.
While there are neither easy solutions nor one silver bullet, there are opportunities for organic family dairies to survive these crises and even to grow. Every Task Force on dairy and organic dairy has highlighted the lack of dairy infrastructure. With so many of the processing plants in the northeast controlled by Dairy Farmers of America, the largest dairy company in the US and the 6th in the world with 2021 sales of $19.3 billion, the processing is in short supply and expensive. USDA has invested heavily in meat processing facilities and needs to support size-appropriate dairy infrastructure.
We can see some long-term solutions that will create opportunity in the future with the passage of OOL and Strengthening Organic Enforcement (SOE) (assuming they have the right language in the final rules, and these rules are implemented immediately), plus enforcement might encourage more domestic production of organic soybeans and corn to satisfy the huge demand from the organic poultry industry and organic dairy operations both large and small. This still leaves the production of organic milk in the northeast more expensive than anywhere else in the country.
Competition has been the usual way to change pay price. When milk is in short supply, buyers compete for supply, and pay price goes up; when there is a surplus, the pay price goes down. The northeast is not in surplus, but ultra-pasteurized and even ultra-filtered milk can now be imported more cheaply from other parts of the country. Few consumers understand that these are overly processed forms of milk. Ultra-filtration is one of the newest trends in dairy processing. This technique pushes milk through a semipermeable membrane filter, allowing specific components of milk to pass through based on their molecular weight. Why do brands choose to do this? Because it allows a dairy brand to engineer the final product. This is how ultra-filtered dairy brands can achieve higher protein milk (milk proteins have heavier molecular weight) with less sugar (lactose has a lower molecular weight). Machine-selecting which components make the cut, the natural balance of the milk is lost.
Currently, there is no competition on the supply side for organic dairy in the northeast, except to a small degree within the grass-fed labels, although even there, the pay price for the premium label is still lower than the farmer’s costs of production.
A Farmer-Controlled Northeast Brand for Milk
The long-term answer is to invest in regional and size-specific organic milk that is produced, processed, and marketed in the northeast, taking full advantage of the large and discriminating consumer base. Local milk would guarantee an adequate return to northeast organic dairies while providing environmental and economic benefits to the region, rather than exporting them to Colorado. NODPA was awarded a grant by the northeast DBIC to work with NOFA-VT and a team of consultants to look at the viability and create a business plan for store brands that are supplied by northeast organic milk for a consumer-facing regional brand and entrance into the institutional market. This unique brand would be owned and controlled by producers. It would have short supply lines to both processing and distribution and guarantee consumers will pay for what they get.
NODPA is working with developers to build a new plant in the northeast that is independently owned and controlled. Consumers have proven with the buy local programs that they will pay extra for local products that support their community. The survival of organic dairy farms in the northeast is dependent on recognizing the increased cost of producing organic milk in the northeast, and then building a business that understands the regional economic, environmental, and social benefit to the whole region of a local supply based on consumers’ preferences and support for the region’s organic farmers.
Ed Maltby is a producer with over 45 years of experience managing conventional and organic dairy, beef, sheep and vegetable enterprises on a variety of farms in Europe and the United States. He has served as NODPA Executive Director since 2005 and serves on the Board of the National Organic Coalition and the Organic Farmers Association.