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Protecting Your Paycheck in Good Times

September 2004 - by Brooke Core

This past spring, a small group of Jersey producers affirmed the meaning of a quotation made famous by Helen Keller, “Alone we can do so little; together we can do so much.”

When members of the Central Equity Milk Cooperative (CEMC) lost their protein premium, they called on National All Jersey (NAJ) for help. With a little bit of luck, a lot of foresight and the support of countless Jersey breeders through their contributions to Equity, a new market was found.

The fruits of everyone’s labor came to fruition in March 2004, when Central Equity signed a four-year deal to supply milk to the Milnot Company. Milnot agreed to buy milk based on component class prices of the Central Federal Milk Marketing Order (Federal Order 32).

“The biggest lesson we learned from this deal is the importance of team work and cooperation among different interests to meet a shared goal,” said Mike Brown, former National All Jersey General Manager. “The new milk market for Central Equity and the new milk supply for Milnot would not have happened without the good work of all the people involved.”

How the Deal Came About

For members of Central Equity, the pivotal issue has always been multiple component pricing. Producers are located in southwest Missouri, which is part of the Southeast Federal Milk Marketing Order (Order 7), one of just four federal orders that currently does not have Multiple Component Pricing (MCP). The cooperative was established in 1987 by a handful of Jersey producers to market their high-protein milk for a premium.

“Central Equity members wanted processors to recognize the value of the components in Jersey milk and to pay accordingly,” said David Brandau, who is NAJ’s Equity Program Specialist and has been involved with the cooperative from the beginning. “They expect more money from their milk because there is more value in their product and processors get a higher return from Jersey milk.”

“The market in this part of the country has long been dominated by a single cooperative that has focused on the fluid milk market,” Brown explained. “It has not been interested in providing a component-based milk market to producers in the region.”

Despite this, CEMC has found markets that included a protein premium from a number of organizations over the years. This came to a halt in December 2003.

“We were notified that all protein premiums would end,” noted Mike Rauch, CEMC President and Jersey breeder from Billings, Mo. “As well, we were told that our check-off dollars could no longer go to Southwest Dairy Museum, a dairy promotion agency which uses mobile classrooms as one of the their promotion tools.”

“We notified NAJ right away about the policy changes,” added Rauch, who also operates Sancrest Farms with wife and CEMC secretary, Bobbi Rauch. “They have provided guidance from the beginning. They helped us create the cooperative and find our first market.”

At about the same time, the Milnot Company, which is the largest private label canned milk manufacturer in the country, was told they could not be guaranteed a milk supply after June 2005.

“The supplier is building a new cheese plant and plans to direct milk there,” said Milnot Company’s Director of Operations, Gordon Woosley, Seneca, Mo. “We tried to negotiate a deal but were getting nowhere. So, we hired Joe Hylton as a consultant to pool milk and find a reliable milk supply. He was able to get about five million pounds a month, but that still was not enough.”

Woosley elaborated, “We heard that the Jersey co-op had lost their protein premium and was looking for a market for their milk. Joe thought this might have possibilities since he had helped the Jersey breeders set up their co-op and was familiar with the group.”

NAJ arranged a meeting among the CEMC Board of Directors, Milnot’s Woosley and Hylton and NAJ’s Brown and Brandau. Preliminary guidelines were established and an open meeting for milk producers with an interest in supplying milk to Milnot was scheduled for February.

“Support at the meeting was overwhelming,” remarked Rauch. “A big part of the milk Milnot needed was signed that night. CEMC took on the responsibility of marketing milk to Milnot and Joe Hylton was hired as general manager.”

In order for Central Equity’s milk to qualify for a Federal Milk Marketing Order (FMMO), it was necessary to find a fluid (Class I) market in a federal order that would take a portion of the co-op’s milk.

“Wells Dairy, in La Mars, Iowa, turned out to be the best fit for CEMC to qualify their milk for a FMMO,” explained Metzger, current General Manager for National All Jersey. “Wells Dairy provided CEMC members with additional benefit of qualifying for multiple components from Order 32. This is because the FMMO from which a producer obtains prices is based on the location its final fluid product is marketed to consumers.”

Because everyone worked together so well, approval of the new milk cooperative by the United States Department of Agriculture was obtained in less than a month.

“With the Central Equity-Milnot agreement, goals of the CEMC founders were finally realized through the activation of the co-op and payment of milk on a component basis,” remarked Brown.

Creating the Window for Opportunity

While this was a case of one person who knew another person, who knew another person, the deal was accomplished quickly because CEMC recognized the need for an organized milk-marketing approach early on.

“The charter for CEMC was in place and the co-op was active,” explained Brandau. “If the paperwork had not been in place, we would not be where we are today. All we needed to do was smooth a few edges and iron out some details.”

Brown echoed his sentiments, “Without the foresight of Central Equity’s board of directors to maintain CEMC’s registration with the state of Missouri over the past 16 years, the opportunity to use the cooperative this past winter may have been lost.”

From a processor perspective, Woosley remarked, “The whole deal would have cost us a lot more without the co-op. It gave us some flexibility. It’s just not as easy as it would seem to pool that much milk. You cannot do it overnight.”

Rauch gives credit to NAJ and Hylton for pulling ideas and details together. Said Rauch, “Joe worked closely with NAJ to find producers and milk haulers and develop the internal structure that got CEMC and Milnot together.”

He added, “NAJ was instrumental in the legal aspects of the co-op since we did not have to do any financials or bookkeeping with any of our previous markets. The knowledge and support of NAJ staff helped us get going in a very short period of time.”

Richard Bloss, Sarcoxie, Mo., agreed with his fellow board member, “NAJ made a huge difference for us. They came down to mediate a lot and made inroads that weren’t available to us. NAJ has the staff, clout and contacts to make things work.”

Commented Metzger, “NAJ’s role in the Central Equity-Milnot deal was facilitator in helping a co-op obtain a market for their milk.”
Summing it up, Ray Schooley, Marshfield, Mo., founding CEMC Board Member and former AJCA President, said, “While CEMC members had ideas and dreams, it was the work with NAJ and Joe Hylton that brought the deal together.”

Win-Win for Everyone

The ultimate goal is that Jersey producers get paid a fair price for their product – a price that is good for producer and processor alike.

“The Central Equity-Milnot deal resulted in a higher price for the producer and a lower price for us,” remarked Woosley. “It is a win-win situation for everyone. In October, one of our busiest months, we shipped 100 percent of our orders on time and complete. In the past, we’d been shipping about 98-99 percent on time and complete.”

Dairy producers like the arrangement as well. Commented Bloss, “Milnot is willing to pay for a complete product, which is great because we aren’t just giving the extra value of the product away.”

The Central Equity-Milnot agreement has benefited not only Jersey producers, but those milking other breeds as well. Even though CEMC’s founding group was Jersey producers, the co-op today is comprised of about 190 dairy producers in Missouri, Oklahoma, Arkansas and Illinois, most of whom milk other breeds.

“High-component producers shipping to Milnot are making $1.00 to 2.00 more per hundredweight than those shipping to other milk companies in the Ozarks,” remarked Rauch. “Even producers with Milnot that do not have high component herds are making more than their contemporaries shipping to other companies.”

A representative from Dairy Support Inc., St. Louis, Mo., the company that handles marketing, pooling, payroll, assignments and federal order reporting support for CEMC, summed, “The deal is good for everyone because Jersey producers get component payments and Holstein producers get volume premiums.”

What Makes CEMC Unique?

Central Equity’s goal is to put as much money in the pockets of its members as is possible. It is a non-profit, low-cost organization. Board members are not compensated for their time, there is no investment in buildings or equipment, and no capital retain is withheld. Each member pays into the NAJ Equity program at the rate of two cents per hundredweight as a milk check assignment.

The approach is successful. “Since its inception in 1987, Central Equity has out-paid other milk procurement companies in the area every month but one,” boasted Rauch.

Like other successful businesses, much of Central Equity’s success comes from its people. “The members that started with CEMC are still with the co-op unless they’ve left the dairy business entirely,” said Rauch. “Members have a great deal of pride in CEMC and an even deeper love for the Jersey cow and the dairy industry.”

Brandau explained it another way, “Commitment from a core group of producers is critical. CEMC members wanted to do a better job of getting paid fairly for their milk. They came together to accomplish this goal.”

Where Do We Go From Here?

When you’re in the lead, there will always be someone else jockeying for your position. CEMC is not immune to this. The latest challenge is a proposed amendment in the pooling requirements of Order 32, the market in which CEMC qualifies their milk.

“While producers are now enjoying true component pricing, their market is threatened by those who would not want them to succeed,” remarked Metzger. “Ironically, the cooperative that told the Milnot Company they would no longer supply them milk is trying to change the regulations in a way that would prevent Central Equity from providing Milnot with a fairly-priced milk supply on a regular basis.”

Hylton elaborated, “Every day, larger co-ops try to stop us from doing business. The hearing in early December was scheduled because one of the large co-ops wants to tighten up the pooling provisions for their benefit.”

All this brings out the importance of persistence, a plan and the need for programs like Equity.

“Federal Order hearings, such as those that are occurring now, have a big impact on small co-ops,” said Rauch. “NAJ is our voice at these hearings. Dairy producers are a smaller and smaller minority in a bigger and bigger marketplace. And Jersey producers are an even smaller minority.”

Schooley reminded, “The large co-ops will continue to try and stop competition and new markets will have to be developed. NAJ has the necessary expertise to help producers meet these challenges, the greatest of which is, and always has been, finding a plant that is not controlled by the major co-ops.”

Brandau remarked, “We need to keep Equity to continue the work as a whole on national, state and local levels. This doesn’t come free. But, if you look at those who have invested in the past, you’ll see that the investment has paid off.”

“The two cents per hundredweight that goes to Equity is a drop in the bucket in return for what you get,” explained Bloss. “You are paid back every day or month you participate.”

While different producers gain different returns from their investment in Equity, for CEMC producers, the return is essentially the difference between the price received from a fat-skim market and a component-pricing market. That difference is about $1.40 per hundredweight more for component pricing.

“Since March, the return to Jersey producers from seven months of component premiums at $1.40 per hundredweight would pay for more than 40 years of monthly Equity investments,” explained Brown.

“The success of Central Equity is a significant benchmark in the story of National All Jersey,” Brown summarized. “NAJ was able to provide CEMC producers a component market because of the success it had in expanding regulated MCP into most federal order markets. It is a great example of regulatory changes, combined with private initiative, working together for the betterment of Jersey producers.”

“Just as important, the current attempt to change the Central Federal Milk Marketing Order rules in a way that would make it more difficult for CEMC to operate is a textbook example on why NAJ and the work they do is still needed and very important.”