Examining Processor Relationships
Over the past few years, the importance of the relationship between dairy farms and their processor has become increasingly important. Let’s begin with the creation of base programs by the majority of the dairy manufacturing industry. These supply control programs have been in used by a portion of the industry for many years, but it now appears these are the norm. They began to get traction several years ago when as a way to manage oversupply. When excess milk cannot be processed it is dumped with incurred losses generally spread among the dairy farms selling to that processor. Base programs are determined by the farms actual production history over the previous two or three years, then updated annually. In some cases, modest growth may be an option, which allows for genetic and/or management improvements in the herd.
Milk production base is generally quantified in cwt (cental weight), and is specific for the dairy farm that created the production history. However, in some cases production base can be traded at a price established by the processor. Production base programs are meant to avoid accumulation of surplus dairy products and can also help manage processing capacity. The consequence of shipping milk in excess of a dairy farm’s base results in a financial discount applied to that excess milk, intended to discourage this added production.
Because base programs are now prevalent and processing is limited, some nuance has developed in the industry. In many regions, base programs have become a common pathway for growth through the purchase of an operating dairy farm. There are some built-in benefits when a dairy business can acquire a permitted dairy facility, a processor for the milk and the herd of cows simultaneously. In some cases, production base can be acquired with only the purchase of cows. In most cases, the approval of base sale requires processor approval. Keep in mind, some production base cannot be purchased or transferred.
The other development that has been occurring with increasing frequency is dairy farms receiving notification from their processor that their production is no longer needed. They often have a 30- to 60-day period to find a new processor for their milk. The risk of losing a farm’s milk market is now another area of concern for a dairy farm to consider.
This leads to the next question: How can you protect your business against this sort of major disruption? The obvious may be to become a preferred supplier to that processor, which in most cases would mean providing the highest quality milk possible with the best quality and component characteristics that can be achieved. Low-cost, high-volume producers provide some built-in efficiencies for processors. Also important is the communications. There is added value to an open dialogue with your processor. Milk is a perishable product that needs to be manufactured into a finished product, then marketed across the country. Understanding the process of what happens once milk leaves the farm can only help the relationship. Also looking into the terms and specifications of a farm’s procurement agreement with your processor is certainly a recommended practice.