Milk Contract Forms the Basis for Dairys Business
Published: Friday, March 16, 2018
The following is reprinted with the permission of Lancaster Farming.
A dairy farm's ability to sell milk rests on a single document that many farmers know little about.
The magnitude of the milk contract hit home for Todd J. Janzen last April when he learned that 75 Wisconsin dairies were being dropped by their buyer with only 30 days' notice.
"This is almost a death sentence in today's market because the price of milk is so bad, and it's very hard to find a buyer for your milk," said Janzen, the president of an Indianapolis ag law firm and general counsel for Indiana Dairy Producers.
Janzen has gotten a lot of questions about milk contracts over the past year or two as Indiana farmers consider leaving their cooperatives to sell directly to big companies.
Walmart, which like Dannon and Kroger, is seeking to buy straight from farmers, recently built a milk processing plant in Fort Wayne to supply 600 of its Midwestern stores.
Janzen couldn't find much information on dairy contracts in legal reference sources, so he decided to take a look at the documents himself.
Janzen discussed his findings in a Jan. 16 webinar presented by the Agricultural and Food Law Consortium.
The first thing Janzen discovered is that dairy contracts can be hard to find.
Many of the farmers he asked for contracts didn't know where their documents were or what was in them.
Some had to ask their co-ops for a copy, which prompted questions about why the farmers wanted to look at their contracts.
Some buyers even said consulting a lawyer about the contract wasn't appropriate and could be a violation of the contract's confidentiality provision.
"Personally, I think that's pretty ridiculous, and it amazed me that anybody had the guts to say that to a farmer," Janzen said.
It's always acceptable to share a contract with one's attorney, he said.
In the end, Janzen obtained about 10 contracts representing both co-op and direct-purchasing agreements.
Most companies and co-ops claim the exclusive right to buy the farm's milk, but they differ in the degree to which they will accept more milk as the farm expands over time.
The direct-purchase agreements in particular could also shift a lot of liability onto the farmer.
Under some contracts, farmers might be liable for contamination that's not even detected until the product is in the grocery store.
If multiple farms contribute milk to a contaminated load and it's not clear which farm was the problem, they could all face liability.
"What (buyers) want to do is keep the producer on the hook as long as they can," Janzen said.
When he's representing a farmer, Janzen would prefer that all liability shift to the buyer the second the milk is accepted at the plant.
All of the direct-buy contracts have animal care standards, which could go beyond what's required by law.
"I think in the big picture this is the change of bringing the consumer onto the farm and letting the consumer make some farming decisions," Janzen said.
For serious enough animal welfare offenses, the buyer can drop the farm.
In many cases, though, animal abuse is better resolved by firing the culpable employee and educating the others, Janzen said.
Some contracts do delve into employee management, requiring, for example, a prospective farmworker to go through a drug test or criminal background check before hiring.
"If you're Dannon or Walmart or Kroger, you're very worried about your reputation," Janzen said.
Because those companies are so large, attorneys don't have much power to negotiate the terms of a milk contract with them.
"I have had some luck, even with some of these big players, in getting them to change a little bit here or there," Janzen said.
That usually happens when he can point out that the contract differs from how things are traditionally done in the industry, or that the contract violates state law.
One buyer wanted the power to terminate a contract if a single load of the farm's milk got downgraded.
Janzen convinced the company that in the context of the farm's total output, one downgraded load wasn't a good basis for termination.
A milk inspector can downgrade a load for something minor and instantly correctable, he said.
Direct-purchase contracts also list the state where any legal issues with the buyer will be litigated.
It probably won't be the farm's home state.
"In my experience, you'll never get the buyer to negotiate on this point," Janzen said.
Ideally, mediation or arbitration should be options before trial, he said.
In general, direct-purchase contracts can reduce the farm's exposure to milk market volatility and may increase profitability, though farmers lose the member-owner status they would have in a co-op.
A dairy farmer's ability to sell directly to a retailer depends largely on location and size.
Retailer-owned processors, like the Walmart plant in Fort Wayne, are found only in certain places around the country.
And large farms seem to have the best opportunity for selling to retailer-processors.
"If you're a big buyer of milk, it's much easier to sign up 10 2,000-cow dairy farms than it is to sign up 100 200-cow dairy farms," Janzen said.
That might not bode well for Pennsylvania, where dairy herds are relatively small.
Janzen worries that retailers buying directly from farmers are increasing the vertical integration of the dairy industry and could hasten the death of the small dairy farm.
"They're going to want to control as many aspects of that production as they can," he said.
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