Saturday, May 13, 2006

Wary of being crushed   Here’s a recurring story: A manufacturer of a small specialty item gets picked by a Wal-Mart or a Home Depot to produce a product (say a bicycle lock) that will see sold in thousands of stores. From dealing with a few hardware distributors or a few small chains, the little company is catapulted into the big time and the money starts flowing in and the company invests in employees and infrastructure to supply the new demand. But after a while, the demands keep ratcheting up: for lower prices, for faster delivery, for new products. The little company is soon overmastered. A few manage to grow (and move operations overseas), but most eventually can’t keep up and lose the business. Workershave to be laid off, new equipment is not paid off, and the company can’t go back to being the niche player it once was. That’s the dilemma now faces my organic dairies, as detailed in a Wall Street Journal article (“Co-ops, Big Firms Vie For Organic Milk Supplies”, 5/9/06).  As we have seen, organic is becoming the biggets food trend, and Wal-Mart has climbed on board. Until a few years ago, organic dairies sold only to small farmer-owned co-operatives, like Organic Valley and Lancaster Organic Farmers Cooperative. Now big players like Dean Foods (through its Horizon brand) and H.P. hood are moving in to meet demand. So there is a bidding war between these big national companies and the smaller local distributors, even as the demand for organic milk is rapidly outstripping the supply.   You would think the big companies would have all the advantages. They can offer better prices than the small firms, signup bonuses, and equipment leases. But, as the article explains, “smaller players have capitalized on the lure of greater price stability and a connection with other small farmers, keeping them in the game.”    The idea the small suppliers are selling is that the short-term gain from signing up with the big firms will be outweighed in the long run by the market forces that will have the big suppliers running off to buy next year at wherever the price per gallon is lower, either in the US or anywhere else in the world. And in the end, they are likely to industrialize the organic milk industry, patronizing only the largest, most efficient farms.   Dairy farmers have been burned before by the enormous price fluctuations in the regular milk market. Many farmers feel more comfortable with “a farmer-owned cooperative that seemed committed to stable pay-prices”. As a co-op exec reportedly “encourages members to resist raising prices simply to meet market levels at the moment, because ‘if you go up, you just go down later.’” The article tracks the unexpected resistance to the tempting offers form the big guys.   In the end, Horizon and other such companies will dominate the market. But the organic milk suppliers, for the moment, have an advantage because supplies are still short. But they are aware that, like the bicycle lock maker above, that signing to supply a global buyer is a very dangerous move. The closer they are tied in with a major retailing power, the more will be demanded of them. Then they too will enter the grow-or-die rat race, getting out of which was probably the very reason they got into organic production. They understand that all the risk in the organic dairy business will be shifted off to them, the little guys.   11:46:41 AM

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