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Dairy seeks consistency in contract with Dannon

PD Editor Walt Cooley Published on 09 February 2012
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A Kansas dairy recently began a new milk marketing contract to exclusively sell all of its milk to Dannon.

During the first quarter of this year, McCarty Dairy, a fourth-generation, family-run operation in Kansas, will begin supplying all of its raw milk for Dannon’s Texas-based yogurt plant. The company operates two other U.S. yogurt processing plants in Utah and Ohio.

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“We were looking for a like-minded customer that would promote growth and milk quality on our farm.

We think we’ve found that with Dannon,” says Clay McCarty, one of three brothers operating the 7,100-cow dairy.

The McCartys have been expanding their dairy since relocating to northwestern Kansas from Pennsylvania in 1999.

The family sold its 200-cow dairy and purchased an 800-cow farm in Rexford, Kansas. Later they purchased another dairy in nearby Bird City, Kansas, expanding their herd to 3,500 cows.

They are currently leasing a third facility in Scott City, Kansas, and milking 7,100 cows in total. They also raise all their own replacements.

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“We’ve wanted to separate ourselves as dairymen, maybe not necessarily with a rolling herd average that’s higher than our neighbor’s or with more pounds of milk per day,” McCarty says. “We’ve tried to do it in some other innovative ways.”

McCarty’s direct-supplier contract with Dannon is certainly innovative. The dairy’s milk will be priced on a cost-plus model throughout the multi-year contract.

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McCarty says the contract is “sustainable.” Prior to signing on with McCarty, Dannon purchased milk for the Texas plant from a national co-op.

Dannon sought a more direct relationship with its supplier to mitigate volatility in milk prices and to advance its environmental stewardship and sustainability goals. Both sides say they believe the agreement will help them reach these mutual goals.

“When we purchase milk through a co-op, which we continue to do and happily so, we are dealing with an intermediary,” says Michael Neuwirth, a spokesman for Dannon.

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“Based on the structure of that relationship, we do not have a direct connection with an individual farmer. That limits how much you can work with a partner when you do not have a direct connection.”

Neuwirth says the direct supplier model is a new venture for Dannon and says the two businesses were “lucky” to have met each other. The dairy’s feed and nutrition supplier, Cargill, “helped put the two of us in the same room,” McCarty says.

“We share some of the same ideas and interests,” he explains. “Price stability, carbon footprint reduction and environmental stewardship.”

During discussions with Dannon, McCarty says he recalled the advice his banker once gave him:

“You’re young and motivated. But you’ve got to figure out how to become a price-maker, not a price taker.”

“I don’t know if we’ve become price-makers, but we’re now no longer just taking a price,” McCarty says.

The dairy has always used risk management strategies for feed and milk pricing, but due to marketplace volatility over the last two years, McCarty says they’ve done less forward contracting than usual.

“We’ve always been involved in forward contracting both feed and milk,” McCarty says. “We can live with the highs. We can’t live with the lows. We’ve always tried to land somewhere in the middle and continue to grow.”

McCarty sees the new contract as just such middle ground.

“If we can grow our business and help them grow their business, this will be a win-win,” he says.

Expectations are high on both sides.

“We are interested in learning from this experience,” Neuwirth says. “We are open to hearing from other dairies like the McCartys who share a commitment to progressive dairy management.”

Neuwirth says the McCarty family fit Dannon’s predetermined philosophical and management profile as well as size and milk volume criteria.

“We bring to bear a strong business in the U.S., in a category that is growing, and global expertise that we are ready, willing and able to share with partners like the McCarty family,” Neuwirth says. “The financial stability that we can provide is probably of interest to many dairymen.”

Neuwirth says he’s not sure if Dannon’s direct-supplier model with McCarty Dairy will be duplicated in the future, although the promise held in the McCarty agreement may leave the door open.

“We think this is a wise and soon-to-be fruitful venture,” Neuwirth says. PD

PHOTOS:
Courtesy photos by McCarty Dairy.

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