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Do-it-yourself dairies may lose exemption

August 13, 2005
Associated Press

SILVERTON, Ore. (AP) - When Bob Mallorie started his dairy five decades ago on this land surrounded by corn fields, he milked the cows, bottled the milk, then jumped behind the wheel of his truck to deliver the fresh bottles.

Doing every step of the process was not unusual in the 1950s, when many dairy farms were self-sufficient entities.

As the dairy industry evolved, however, farms became increasingly specialized, and what was once done under one roof is now accomplished under several. In the entire country, there are now fewer than 80 dairies that also bottle their milk, down from a high of 421 in 1969, according to the U.S. Department of Agriculture.

That number is likely to drop even further if the USDA does away with a law that has protected small, do-it-yourself farmers by allowing them to sell their milk at the price they choose.

Proponents of the move say the dairy now run by Mallorie's daughter is a "factory farm" - so large that it no longer deserves the benefits of legislation meant to give mom-and-pop outfits a leg up.

"We're being called a 'factory farm' by some of the largest dairies in the nation, if not the world. It's really nonsense," said Teri Mallorie, her blue eyes wet with emotion. "You know, I'm really proud of what my dad did and I just want to keep it going."

Since the 1930s, the price of a glass of milk has been strictly regulated in the United States.

Under the federal milk marketing system, farmers are required to sell their milk into a regional pool, which pays them a set price. Processors buy milk for one of four set prices, depending on whether they are going to market the milk in bottled form, as a soft dairy product like ice cream, cheese or powdered milk.

Ever since the system was put in place, the so-called "grass-to-glass" dairies were exempted, on the argument these outfits were too small to impact the market.

Now under a plan drafted by the USDA - and pushed by some of the largest dairy operations in the nation - farmers in the Northwest and the Arizona regions who milk and bottle more than 3 million pounds of milk per month will have their exemption removed.

Only those regions would be at first affected, because those are the areas that were initially targeted by the dairy industry as places where competition is unfair.

Those areas have 10 do-it-yourselfers, of which only four are above the 3 million threshold.

The dairy industry wants to have the exemption removed across the country, and hearings in other regions have already been held.

That raises the possibility that all 80 or so do-it-all dairy farms could be forced to stay under the 3 million ceiling, or else be made to pool their milk and suffer the consequences.

The farm now run by Mallorie's daughter in the lush Willamette Valley produces 4.5 million pounds of milk per month, well above the proposed threshold. In June, if she had been forced to sell her milk into the regional pool, the blended price she would have received would have been $13.81 per hundred pounds of milk.

To continue her bottling operation, she would have to buy the milk back from the regional pool. Under the federal pricing system, Mallorie said, for the month of June she would have had to pay $15.52 per hundred pounds, a loss of $1.71 per hundred pounds.

That comes to nearly $1 million of red ink per year, said Charlie Flanagan, Mallorie's business manager.

"We have never had a net profit of even close to $1 million in the history of this business. In fact, that's almost double what our net profit would be in a good year," he said.

Dairy Farmer of America, which controls a third of the U.S. milk supply, is arguing for removing the exemption from the milk pricing system for farms like Mallorie's.

In hearings before the USDA, they pointed out that the average dairy milks just 700,000 pounds per month.

That means that Mallorie's farm is six times larger than average and Sarah Farms in Yuma, Ariz., is 17 times bigger than average, said Elvin Hollon, the co-op's director of fluid marketing and economic analysis.

"They make themselves look like they're a small guy, a David up against Goliath," said Hollon. "Why should we be giving a price break to someone that's 10 times bigger than average? Or six times bigger than average? That doesn't seem reasonable."

In Kent, Wash., the three granddaughters of Joe Koester are running the farm he started in 1920, producing around 6 million pounds of milk per month - twice what would be allowed.

"But we're small compared to Dean and Kroger," said Alexis Koester, one of the granddaughters, naming two of the companies pushing for a revamping of the federal milk system.

In their testimony before the USDA, Dean Foods Co., the nation's largest dairy processors, which has 110 plants and annual sales of $10.8 billion, argued that these farms have been given an unfair advantage. Kroger Co., the country's largest supermarket chain with sales of $56.4 billion, testified that the dairies were cutting into their profits by underselling them.

Professor Andrew Novakovic, who heads Cornell University's program on dairy markets and policy in Ithaca, N.Y., says the net effect of removing the exemption for the four affected dairies will result in "pennies" for the other farmers. They "would have a hard time seeing a difference in their milk check," he said.

But the difference in the milk check for Mallorie's and Smith Bros., not to mention Edaleen Dairy, in Lyndon, Wash., and especially Sarah Farms in Arizona would be anything but trivial, he added.

"We would have to cut our production in half," said Duane Brandsma, 39, who along with his sisters runs Edaleen Dairy in Lyndon, Wash.

Cutting production in half would mean losing half his herd and half his employees - as well as half his sales.

Over at Smith Bros., cutting production from 6 million to 3 million pounds is not an option.

"We have a brand new dairy farm that's only a few years old. It needs to run at capacity to be efficient," said Koester, granddaughter of the farm's founder.

In her testimony to the USDA, Teri Mallorie enumerated the different ways the proposed change would hurt her dairy - from cutting 40 percent of their employees and half their herd, to raising their prices, to going out of business altogether.

"God help us," she said.