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USDA proposed changes are sour milk to Mallorie's Dairy

A regulation amendment targets producer-handlers in the Northwest and Arizona

BY OMIE DRAWHORN
Appeal Tribune
June 8, 2005

SILVERTON - The U.S. Department of Agriculture has proposed a rule change that could jeopardize the business model of Mallorie's Dairy and three other independent family owned dairies in the Pacific Northwest .

With its 1,900 cows and milk-processing plant near Silverton, Mallorie's is classified as a producer-handler because it does everything from milk the cows to bottle and sell the milk.

Under the new federal order amendment, producer-handlers in the Northwest and the Las Vegas-Arizona area would be taxed $1 million per year because they produce more than 3 million pounds of milk per month.

This could force the dairy and others like it to raise the price of milk, downsize operations to avoid taxation, or close up shop all together.

The federal order system was designed to guarantee farmers a fair price from processors. Do-it-all producer-handlers like Mallorie's have been exempt from USDA pooling and pricing for the last 70 years, but this could change if the USDA approves the new regulations.

Charlie Flanagan, Mallorie's business manager, said paying $1 million is not an option for the dairy.

"It would be devastating to our 51-year-old business," Flanagan said.

"If we reduced our size, we would have to let go (of) about 35 people, sell off 1,800 animals, consolidate farms, restructure facilities to fit animal sizes, lose customers, and then try to be efficient," said Mallorie's owner Teri Kilgus. "I don't understand how the government has the right to do this to our business . we don't like any of the choices, so we are asking for the public's support to change the minds of the USDA."

The USDA will look at the rule change again on June 13 after a 60-day comment period. In the meantime, Kilgus and Flanagan, along with the three other dairies in the Pacific Northwest affected by the change, are determined not to just sit back and watch as the business they have worked so hard to maintain crumbles; they are fighting back.

The farms have launched a Web site, www.keepmilkpriceslow.org and have been collecting signatures throughout their respective regions.

Mallorie's, a family owned dairy, has been producing and bottling milk since 1954. It currently employs 86 people and houses 1,900 cows.

Flanagan said if Mallorie's goes out of business, then the competition, which keeps prices down, will no longer be a factor and the price of milk will likely increase.

The law would also require the affected dairies to sell their milk into a pool and buy it back at a higher price, Flanagan said.

The difference would stay in the pool and be divided among competitors.

Gary Vis of Edaleen Dairy, another producer-handler dairy, in Lynden , Wash. , said this only would amount to around $300 a month per dairy.

The ruling would also affect Smith Brothers Farm in Kent , Wash. , and Sarah Farms in Yuma , Ariz.

Flanagan said Mallorie's produces 4.5 million pounds a month, well above the limit, so producing less than 3 million pounds would require some extreme downsizing.

The three independent farms are up against some big players. Dairy Farmers of America, Dean Foods and Kroger all testified in support of the producer-handler amendment at the USDA hearing.

"[We] support the regulatory change because it creates a sense of fairness," said Agnes Schafer, spokesperson for Dairy Farmers of America. "We believe producer-handler activities do affect the market."

Because producer-handlers are currently exempt from the pool, they can sell their milk at higher, Class One prices, while the other dairy farmers receive a lower, "blended" price for their milk from the government-regulated pool, said Elvin Hollin of Dairy Farmers of America. He added that producer-handlers make 14 to 30 cents more per gallon on selling milk, which is huge by dairy industry standards.

Hollin said producer-handlers have gotten extremely large.

"The average producer-handler is 10 times larger than the average size dairy farm," he said.

Flanagan maintains that producer-handler dairies like Mallorie's only control 4 percent of the marketplace collectively. The smaller dairies who feed into the larger cooperatives make up roughly 96 percent.

He added that the change to the federal order would be unfair.

"It's like working two hours of overtime and having to split it up with three other people who didn't work any overtime; when you work harder and do more, you shouldn't be treated the same," Flanagan said.

Unlike other dairies, which sell their raw milk through a co-op at a price fixed by the USDA, producer-handlers like Mallorie's do their own processing.

Vis said the USDA is likely supporting the rule change because of pressure from dairy co-ops, like Dairy Farmers of America, who control 34 percent of the nation's milk supply.

"It is a lot easier taking on three little family farms than three or four big co-ops," he said.

He said during the hearing, Kroger testified that producer-handlers "forced them to respond to competitive situations."

"In other words, they have competition so they can't charge as much," he said.

USDA spokesperson James Daugherty said he couldn't comment until the proceedings were over.

Mallorie's has met with representatives of U.S. Rep. Darlene Hooley's office and the Oregon Department of Agriculture and asked for help in overturning the proposed USDA regulations.

Hooley said the "one-size-fits-all" philosophy is a way of penalizing small farmers.

"We have four family farms that have a very small product; it really is a way of putting them out of business," she said, adding that the producer-handler has a very small impact on the market price.

"There are other proposals out there that make a lot more sense," Hooley said.

Flanagan said the number of producer-handlers across the country is already dwindling.

In the 1960s there were more than 450 producer-handlers and at last count there were 56 across the country.

"Almost 400 have gone out of business because they couldn't compete with the big guys or they were small and just couldn't maintain another market," Flanagan said. "The milk business is tough because most of the people you compete against are big, very big."

Flanagan said Mallorie's itself has collected 3,000 signatures and 6,000 letters of support from the Web site.

"The support has been overwhelming," he said. "People say 'how can this be? This doesn't make sense."