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Dean Foods terminating milk contracts effective May 31

Progressive Dairyman Editor Dave Natzke Published on 05 March 2018

Editor’s note: This article has been updated with information from Pennsylvania.

Another round of letters notifying dairy farmers they are losing a milk market arrived in mailboxes, this time in Indiana, Kentucky and surrounding states. In a letter dated Feb. 26, Brent Bunce, director of Dairy Direct Operations, said Dean Foods would cease buying milk from affected dairy farmers, effective May 31.

The total number of farms whose milk marketing contracts have been terminated is unknown. Dean Foods had not yet responded to questions from Progressive Dairyman.

According to some sources, it involves farmers in Indiana, Kentucky, North Carolina, Ohio, Pennsylvania, South Carolina and Tennessee. Progressive Dairyman will provide updates as they become available.

In Kentucky, an estimated 22 to 25 producers are affected. About 30 dairy farmers are impacted in Indiana, including Joe Kelsay and Ken Hoeing, members of the Indiana Dairy Producers Association.

Kelsay farms in partnership with his brother, Russ, near Whiteland, south of Indianapolis, Indiana. The farm has been in the family since 1835, with dairy the primary enterprise over the last four decades.

At one time milking 500 cows, the Kelsays cut back to 400 cows about a year ago due to shrinking milk income margins. They milk 3X per day in a double-16 herringbone parlor.

“We’re trying to weather the storm, but the storm just got a little rougher,” Joe Kelsay said.

The Kelsays have shipped to Dean Foods since the early 1990s, with their milk going to a fluid plant in Louisville, Kentucky. Its customers include the Jefferson County [Kentucky] school system, the largest in the state.

“It’s been a great relationship through the highs and lows and goods and bads,” he said. “They’ve been a good company to work with, and I don’t have any complaints. As frustrating as this is, they have to run their business, and I can’t throw them under the bus.”

Kelsay serves on the National Dairy Promotion and Research Board. He’s worked closely with the American Dairy Association of Indiana, and said Dean has been a valuable partner on regional dairy promotion efforts.

“It doesn’t take away from the fact this is a jolt to our business plan and finding a market will not be easy in the coming weeks,” Kelsay said.

Due to the long-standing milk marketing relationship, Kelsay has not actively investigated alternative markets in the past. That’s now changed.

“It’s still early in the process and will take some discovery on our part,” he said. “We’re trying to get information and make phone calls.”

While not entirely surprising, Kelsay said the letter from Dean was “impactful” not only to dairy farmers in the region, but also to the entire dairy industry. “The producers got the letters, but the cooperatives and other markets will also be impacted,” he said.

Three large cooperatives cover the area: Foremost Farms, Prairie Farms and Dairy Farmers of America. Fort Wayne, the location of a new Walmart milk processing plant set to open this summer, is about two hours northeast of the Kelsay farm.

Kelsay, Hoeing optimistic

Kelsay remains cautiously optimistic he and other dairy farmers will be able to find alternative markets. Smaller herds with fewer marketing options may not.

“It’s never a good time to lose a market, but current conditions create an unfavorable climate for dairy producers given the supply and demand situation, and negative margins,” Kelsay said. “With margins where they are, the numbers are hard to work with now. If we have higher hauling bills or other costs, with lower pay prices, every deal will not work. Hopefully, we’ll come up with an opportunity that makes the numbers work.”

Hoeing, who operates a 400-cow dairy with four brothers near Rushville, in east-central Indiana, also received a market termination letter on March 2. The dairy has been in the family since 1947, marketing milk with Dean for about 20 years. Like Kelsay, he said the business relationship has been a good one.

After letting the dust settle over the weekend, Hoeing has made phone contact with several potential markets and has meetings set up with potential milk buyers for next week. He also talked with Wisconsin farmers who lost their milk markets last year. “It helps to talk with somebody who’s been through it,” he said.

Read: Milk with no home: Producers, processor face challenging times

As of March 5, Hoeing said things looked more promising than last Friday when the letter arrived.

“It might look kind of dark at first, but things should work out,” Hoeing said. “It might not be Plan A, but it could be Plan B. We’ll deal with it and make the best of it. We don’t plan on quitting.”

“There’s a lot of us in the same boat together,” Kelsay said. “We’re prayerful that everyone will have an opportunity to find a path that works for their farm. We’ll see the other side of this. I’m still long-term bullish for dairy. There’s a lot of hunger for the products we can produce. We’re at a bump in the road in the moment, but will come out the other side better for it.”

42 farms affected in Pennsylvania

In Pennsylvania, 42 dairy farms received market termination notices, according to Jayne Sebright, executive director of Pennsylvania’s Center for Dairy Excellence (CDE). The farms – 16 farms in western Pennsylvania and 26 in the eastern part of the state – represent about one-half of Dean’s independent milk volume at the three Pennsylvania plants: Swiss Premium, at Lebanon; Meadow Brook, at Erie; and the company’s largest plant at Sharpsville.

The Pennsylvania Department of Agriculture and CDE are reaching out to see if there are any alternative milk markets for affected farms, although there is little if any plant processing capacity currently available.

“We are very concerned both about the future of the farms and the well-being of the families, so we want to make sure we do whatever we can to help them as quickly as possible,” Sebright said. She recommended producers utilize the Dairy Decisions Consultant program to evaluate their options, both in and outside of dairy.

‘Two indisputable dynamics’

In the letter, Bunce cited “two indisputable dynamics” leading to the Dean decision: 1) the new Class I (Walmart) fluid processing plant coming online in the region, significantly decreasing Dean’s need for milk at its own facilities; and 2) the steady increase of milk production at the same time fluid milk consumption is on the decline.

In March 2016, Walmart – which previously purchased milk through Dean – announced plans for a $165 million milk processing facility. With milk sourced from dairy farms in Indiana, Ohio and Michigan, the plant will produce Walmart’s Great Value and Member’s Mark white and chocolate milk, serving 500 Walmart and Sam’s Club stores in Indiana, Illinois, Ohio and northern Kentucky.

According to Progressive Dairyman sources, when it begins operations this summer, the Walmart plant will receive mik from 26 producers, all within 200 miles of the plant. Two suppliers have direct contracts, with the remaining milk sourced through co-ops. Each producer will provide a tanker load of milk per day, the production equivalent of about 400 cows. 

The Dean letter to farmers coincided with the company’s quarterly call with investors. In the Feb. 26 call, officials said the company would consolidate its manufacturing capacity in 2018 to match declining supply chain volumes.

CEO Ralph Scozzafava said total volume across all Dean products for the fourth quarter of 2017 declined 6 percent compared to the fourth quarter of 2016. When adjusted for two less selling days in the fourth quarter, total volume across all products declined 3.5 percent versus the prior year.  end mark

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