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David E. Gumpert

David E. Gumpert

Posted: June 9, 2010 03:24 PM

Making the Business Case for Dairy Farmer Civil Disobedience

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The dairy industry has been in a funk the last couple of years because of over supply and low prices. Ever more milk producers have responded by hitching their wagons to one of the few dairy growth areas: raw milk. Many believe it is a more nutritious product, but let's not overlook simple economics -- a dairy that sells its milk to a milk cooperative or processor receives on the order of $1 to $1.50 a gallon, and loses money in the process. A dairy that sells unpasteurized milk to the rapidly growing numbers of consumers clamoring for unprocessed foods receives anywhere from $5 to $10 or more a gallon.

The tensions over this dichotomy have now exploded into full view, with Wisconsin dairy owners ever more boldly challenging the agriculture regulators in America's traditional dairy state (now second to California), who have been trying for more than a year to put a lid on the raw dairy market. Last December, farm owners Kay and Wayne Craig, with support from the Farm-to-Consumer Legal Defense Fund, sued Wisconsin's Department of Agriculture, Trade, and Consumer Protection (DATCP), claiming harassment and inconsistent enforcement of the state's laws that allow "incidental" sales of raw milk; their case comes up for an initial hearing this month. Also in December, Max Kane, owner of a raw milk delivery service, was found guilty of contempt of court for refusing DATCP requests for the names of his customers and farmer suppliers; the case is currently under appeal. Last week, dairy farmer Vernon Hershberger cut the DATCP seals agents placed on his refrigerators and freezer in a raid just the day before. At least two other dairies, which don't want to be named, have taken the intriguing step of categorizing their customers as employees, since employees of Wisconsin dairies are allowed to buy unlimited amounts of raw milk.

Two events in the last month have emboldened the resistance. First came the veto by Gov. Jim Doyle of legislation that would have permitted sales of raw milk from dairy farms. Then came the decision two weeks ago by Organic Valley, a huge cooperative producer of organic dairy products, to throw out of its organization of about 1,500 dairy farmers some unknown hundreds who insist on selling raw milk on the side, while also selling milk to the cooperative for pasteurization.

How has all this come about? Are resistance, and even civil disobedience, the most appropriate responses? Or are the Wisconsin dairies doomed by the huge forces working against them?

Probably the best way for me to answer these questions is to approach the current situation as a business strategy challenge. For any number of reasons, smaller dairies are facing big problems, in Wisconsin and many other areas. This isn't a new situation -- America has lost 88% of its dairies since 1970 to the forces of consolidation. But the current situation is about much more than consolidation. Here are some of the business forces at work, and a few ideas about how to turn these forces from negatives to positives.

To begin with, there are two big red flags associated with starting any business:

  • Highly regulated markets. You lose too much freedom of movement, and enforcement can be capricious. Government regulators tend to favor the big guys and go after the little guys because the little guys don't have expensive lawyers and thus don't fight back as hard.
  • Commodity markets. No matter what the industry, it's very difficult, unless you possess some technological advantage, to gain the economies of scale possessed by the big boys. More often than not, entrepreneurs add value via improved quality, convenience, and so forth, but not via lowering the cost and increasing output of production. That's why entrepreneurs are best at developing high-margin niche, or specialized, markets, rather than competing with commodity products. And even if smaller producers are successful at taking market share from the commodity producers, they invariably react badly, often retaliating by lowering prices below production costs to drive out the little guys.

So here you've got raw dairies, which are small enterprises, cast into this sea of regulation and commodity markets. If I was a small business consultant who knew nothing about raw milk, my first reaction to learning about their situation would be, "Oy." And once I learned more, it would be "Double Oy." Would that they weren't there, but that's where they are.

So the fallback question becomes: how do we make lemonade out of all these lemons?

Well, the big thing the raw dairies have going for them is that so-called "primary demand" for unprocessed foods is growing. Increasing numbers of people are learning about the dangers of processed foods and foods produced with antibiotics and pesticides. They want real milk, meat, and eggs produced locally by pastured cows and chickens, without the antibiotics, hormones and pesticides of the commodity segment. Similarly, they want organic fruits and veggies.

Also pushing primary demand is that more consumers are coming to understand that the commodity producers and their supporters rig the system. Big Dairy uses its pull to get the governor of a major dairy state (WI) to veto small-potatoes legislation that would open a tiny window of business opportunity for the little guys. The public health officials of a large urban state (MA) push for a crackdown on raw milk delivery services even though there's not been a public health case in over a decade. A Big Dairy commodity producer thought to be friendly to farmers and consumers (Organic Valley) tries to squash raw milk producers that are grabbing more market share.

The result? Ever more interest and sympathy for the small producers. Stronger primary demand for raw milk and other such unprocessed products.

In the context of running a small business, safety is a business risk. The legal system is pretty clear. If your product makes someone sick, you could very well be held financially liable for damages. The smart business decision: reduce that risk via close attention to safety, and insurance. But even here, the commodity producers and their regulator backers and lawyers are at work, pressuring the insurance companies to help stamp out raw milk producers by denying coverage. They're pushing major retailers (Whole Foods) to refuse to sell product. These are serious, but not insurmountable problems. When insurance becomes very expensive or unobtainable, companies sometimes self-insure by setting aside money to cover possible claims, or they get together with competitors and develop private insurance arrangements. And if some retailers won't carry your product, you go out and find others that will, or you develop alternative distribution methods.

As a raw milk producer, though, your trump card is that you've got more and more consumers who like your product, and like you as well. But what the hell do you do with all these forces arrayed against you? You use whatever assets you can muster to fight back, and serve the market. In a place like Wisconsin, where the regulators and commodity producers are so totally hostile, there aren't many assets.

In such situations, business challenges sometimes morph into political problems. A good example is slavery. This was originally a business problem. While free labor helped keep plantation owners' production costs down, slaves cared ever less for being treated as property. So intense was resistance by slave owners to adjusting the business system that it took the ultimate political crisis -- a civil war -- to get rid of slavery. The union movement of the early 1900s -- an effort by workers to organize themselves for better pay and benefits -- similarly spilled over into the political realm via violent strikes and other clashes.

The unfolding civil disobedience in Wisconsin, then, might be seen as a business problem morphing into a political one. Small Wisconsin producers of raw milk are coming to the view that one of the few options they have is to organize themselves and resist. Their best chance of success lies in getting the politicians to order the regulators and commodity producers to lay off, since now votes are at stake. It worked for the labor union movement in the 1930s and for the Civil Rights movement in the 1960s and the migrant workers in California in the 1970s.

Yes, there may well be some "injuries" along the way. Fines and arrests of dairy producers, as the regulators do the commodity producers' bidding and try to deter mass rebellion. But if the pain on the regulators and the commodity markets becomes great enough, they'll have no choice but to relent. The big unknown: how much pain must be inflicted? A recent blog post by a former high-ranking official of the U.S. Food and Drug Administration advocating conciliation on raw milk suggests the pain level is rising.
http://leavittpartners.com/news/raw-milk-%E2%80%93-food-safety-and-the-fda/

For now, you can be sure both DATCP and Wisconsin dairy farmers are watching the situation very carefully. DATCP officials have said they handed over to a district attorney evidence that Vernon Hershberger was illegally selling raw dairy products, so in a sense they have distanced themselves (though there have been reports of agents nosing around the farm area and store). If the district attorney refuses to take further action, expect to see lots of Wisconsin dairies move from selling raw milk secretly to selling it openly.

Also look for DATCP officials, in any event, to continue to harp on potential safety problems of raw milk. For any number of reasons, notably problems 100 and more years ago with frequent outbreaks from contaminated raw milk, safety problems with raw milk get magnified way beyond those of any other food. Once again from a business perspective, it's incumbent that raw dairies pay very close attention to safety, not so much because the marketplace becomes frightened (quite the opposite), but because the business and political forces arrayed against raw milk use such problems as an excuse to try to limit or eliminate production.

But markets being what they are, I foresee the day when, once the regulatory silliness is dispensed with, raw dairies will compete with each other, as some raw milk advocates have suggested, on the basis of the quality of their milk, much as cheese producers compete for prizes and ribbons.

In the meantime, many raw dairy owners have decisions to make. Those Organic Valley members who sell raw milk will soon need to decide whether to leave or stay with the cooperative. And many Wisconsin dairy farmers will have to decide whether to follow Vernon Hershberger on the civil disobedience path. I don't mean to suggest these are easy decisions. They aren't. In some cases, they require serious financial pain and "bet-the-ranch" business strategies. Which brings me to one final principle of entrepreneurship: passion, commitment, and persistence are key determinants of business success.

 
 
 

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