Wall Street Journal
By SARAH NASSAUER

Last month, Peter Miller stood in a small agricultural extension office, pleading his case for more organic dairy farming to a few dozen farmers from New York’s Orange County. “We could use a lot more milk right now and we are looking for farmers in northeastern New York,” said the 46-year-old Eastern procurement director for the Organic Valley — Cropp Cooperative.

Across the room sat tough competition for America’s supply of organic milk: Peter Slaunwhite, a production-relations manager for the Horizon Organic brand, which is owned by WhiteWave Foods, a subsidiary of Dean Foods Co. — the country’s largest producer of all things dairy. “This is really a growing industry,” Mr. Slaunwhite assured the same audience during his PowerPoint presentation filled with statistics on skyrocketing consumer demand.

Pricing Power

While cooperatives and small companies that process, package, and distribute organic diary products are thrilled with rising sales, raw organic milk supply in the U.S. can’t meet demand, leaving them in a struggle with larger firms like Dean Foods, with sales last year of $10.5 billion, or HP Hood LLC, the sixth-largest nationwide, to win over new farmers. But although big companies often have the clout to offer better prices, smaller players have capitalized on the lure of greater price stability and a connection with other small farmers,
keeping them in the game.

The large companies, with deeper pockets, are able to lift prices they pay for milk quickly, absorb overhead costs like adding additional trucks to pick up milk at isolated farms, and offer extras. Horizon, for instance, pays any farmer who recruits a neighbor to sign up with the company $1,000. And, it can negotiate an individual “pay-price” for raw milk, including a possible signing bonus, at a farmer’s kitchen table.

‘The Bottom Line’

“They’re a co-op. We’re a milk company,” says Mr. Slaunwhite, a producer-relations manager for Horizon Organic, explaining how farmers choose between his company and Organic Valley. Mr. Slaunwhite says his personal relationship with farmers is important, but ultimately they are looking “for the bottom line,” when selling to Horizon Organic.

An organic dairy co-op like Organic Valley, the largest in the U.S. with revenue of $242 million last year, finds it difficult to be as flexible because it pays each member farmer the same price and each one has input on pricing decisions. Signing bonuses and recruiting
awards are out of the question.

Yet small companies and farmer-owned cooperatives like Organic Valley are competing successfully for the nation’s organic milk supply. Organic Valley says 87 new farms began supplying them with milk last year, while only 20 farmers left for the competition. Horizon says it added 57 new farm suppliers in 2005, but declined to say how many farmers it lost to the competition.

Smaller operations win points by appealing to a farmer’s desire for stable pricing and cultivating their image of supporting small family farms.

Last summer, dairy processors fought for New York farmer Tom Pinney’s organic milk supply, with one offering $22.50 dollars per hundred pounds, another $24, and yet another, $26. Mr. Pinney, who had just finished his certification process for organic farming, signed with Organic Valley, the smallest operation, offering the lowest price. He says he felt more comfortable with a farmer-owned cooperative that seemed committed to stable pay-prices. “We just got burned all those years,” by the large pay-price fluctuations typical of the big conventional dairy business,” he says.

Organic Valley’s chief executive, George Siemon, says he encourages members to resist raising prices simply to meet market levels at the moment, because “if you go up, you just go down later.”

David Martin, father of 14 children, started farming organically in 1994. In 2003, he founded the Pennsylvania-based Lancaster Organic Farmers Cooperative with three other farms and now counts a 40-farm — primarily Amish — membership. He says some of his farmers have recently turned down more money from larger companies because, “there’s a lot of concern about how similar Horizon would be” to a conventional milk company as the industry grows.

Small by Choice

Mr. Martin has lost some farms to larger operations, but he says he is confident the co-op’s focus on small farms and stable pricing will continue to appeal to farmers because they “identify us as a different entity,” than a large company.

Horizon is aware that farmers and consumers are sometimes wary of their parent company’s size. “Part of the challenge is that people think we are just a huge company. Some people don’t know we have family farms,” says Joe Scalzo, chief executive of WhiteWave Foods, and, after a recent management shake-up, Horizon is letting everyone know that 80% of its milk comes from family-owned and operated farms.

Mr. Miller, standing in the parking lot of the Orange County extension office after seeking new suppliers for Organic Valley, says it all comes down to sticking to what you’re are good at and hoping it appeals to the farmer’s personal beliefs.

“Everyone has their little pitch,” he explains. “Lofco is, ‘We’re Amish.’ Horizon is, ‘We’re going to be world leader.’ Ours is, ‘We are farmer-owned and independent.’ ”

Write to Sarah Nassauer at [email protected]

URL for this article: http://online.wsj.com/article/SB114712654919147076.html

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