Dairy Marketing Services LLC (DMS), the marketing arm of Dairy Farmers of America (DFA), has provided about 700 independent Northeast dairy producers with a timeline to find another milk market or join the cooperative.
DMS sent a letter to those producers, March 24, outlining the transition process. The letter culminates months of efforts to address costs related to the growing imbalance in milk supply and demand in Federal Milk Marketing Order 1.
FMMO 1 encompasses Connecticut, Delaware, Massachusetts, Maryland, New Hampshire, New Jersey, Rhode Island and Vermont as well as portions of New York, Pennsylvania and Virginia. Through its marketing arm, Dairy Marketing Services, DFA markets milk for about 5,000 producers in the Northeast order. Of those, about 4,100 are members of DFA or DMS-affiliated co-ops, and 900 are independent producers. Of the 900 independent producers, about 200 are under separate organic milk marketing contracts.
At issue is how FMMO milk pooling revenues, as well as costs to dispose of surplus milk, are shared among cooperative members and independent producers. Under federal order payment rules, the balancing costs to move or dispose of pooled excess milk can only be spread across co-op members.
Earlier this year, DFA proposed a partial “depooling” scenario in the Northeast FMMO 1. However, that proposal was withdrawn after several other cooperatives expressed opposition. For background, read Back in the pool: DFA seeks flexibility in Northeast federal milk marketing order and DFA withdraws Northeast depooling proposal
“That left us with a full depooling option,” said Brad Keating, president and chief executive officer for DMS. ”However, when we looked at full depooling, that was going to be way too painful for (the independent producers), so we decided not to depool. But, we can’t go forward in a world where independent producers get the blend price and farmers in the co-op world take something less.”
In the letter, DMS gave the independent producers a 30-day termination notice, but provided an additional six-month “grace period”– ending Nov. 1, 2017 – to find an alternative milk market.
“If they can’t find a market by that date, they may join DFA is offering membership into the cooperative,” Keating said. That membership has two conditions.
“During the first year, they don’t have to pay any capital retains or equity,” Keating explained. “And, they can leave at anytime with 30 days prior notice.”
“We’ve tried to create a safe harbor for these folks, and it’s essentially 19 months of safe harbor,” Keating said. “Hopefully that’s enough time to get the market straightened out.”
Unlike a situation in the Midwest, where Grassland Dairy has informed a number of dairy farmers the company can no longer accept their milk after May 1 due to a loss of a Canadian export market (Read Milk with no home: Producers, processor face challenging times), Keating the situation in the Northeast is being driven by a reduction in processing capacity and increasing milk production. The border battle with Canada over ultrafiltered (UF) milk exports has little impact today on the Northeast FMMO, but could make the situation worse, he said.
Class I utilization in FMMO 1 has declined from 41 percent in 2011 to 33 percent in 2016, diverting more milk into cheese, butter and yogurt. During the same period, milk pooled on the order has increased from 24.4 billion pounds in 2011 to about 27 billion pounds in 2016.
“In the Northeast, it’s due primarily a surge in milk production combined with simultaneous reductions in processing capacity,” Keating said. “We’re in an unbalanced situation.”
In a January letter to FMMO 1 market administrator Erik Rasmussen, Elvin Hollon, DFA vice president of fluid marketing/economic analysis, described that imbalance.
Comparing the third quarter of 2016 to the same period in 2015, Hollon said milk production in the 11 states comprising FMMO 1 rose 140.2 million pounds, an increase of 25 tanker loads per day. While reduced processing capacity due to plant closures was somewhat offset by the expansion or construction of another plant, Hollon estimated the marketing area has lost about 165 million pounds of monthly processing capacity since 2013.
Those dynamics have created large supplies of excess milk, with substantial cost to move or dispose of it. Keating said the 19-month window gives independent producers time to make marketing decisions, while protecting DFA members from the additional economic burden of milk disposal.
“The Northeast will come back into balance, but right now we have more milk than we have markets for,” he said. “We did this because when you look at the revenue coming back from the milk, adjusted for the cost of dealing with all the additional milk, we were quickly running into a situation of the ‘haves’ and the ‘have nots.’ That’s unfair and unequitable.”
“We don’t want people to be thrown out of business,” he continued. “But we can’t have a scenario where we have one group protected with the blend price, and the other take whatever price the market delivers.”
The Northeast FMMO continues to deal with surplus milk by permitting milk to be disposed of in plants or on farms, while allowing it to be pooled within the order to return a partial value to producers.
Read: Temporary Northeast milk dumping request granted. 
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Dave Natzke
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