by Madeline Schultz, content specialist, AgMRC, Iowa State University, schultz@iastate.edu.

Profile revised May 2008 by Diane Huntrods, AgMRC, Iowa State University.

Overview
Dairy has been one of the fastest growing segments of the organic foods industry. According to the Organic Trade Association, sales of organic milk in 2007 were over $1.3 billion but only accounted for 2.7 percent of the nation's total milk sales, up from 1.7 percent the previous year. Organic milk can cost considerably more than standard milk; the national price premium for organic milk averages $1.99. However, consumer demand continues to grow at an annual rate approaching 20 percent. Organic milk is now available in nearly all retail food stores.

Production
In 1992 nearly 2,300 dairy cows were certified organic. At that point, New York, Wisconsin and Minnesota were the top three producers. The number of certified organic dairy cows proceeded to increase 469 percent between 1992 to 1997 and 421 percent between 1997 to 2002. Organic milk first appeared in supermarkets in 1993.

The United States produced 186 billion pounds of milk in 2007. Just 57.6 billion pounds of the milk was processed into fluid milk and cream products. Organic milk sales accounted for 2.7 percent of total milk sales in 2007, up from 1.7 percent in 2006.

As of 2005, 87,082 dairy cows were certified organic, up from 38,000 in 2000. At that point, organic dairy cows accounted for about 1 percent of the dairy nows found nationwide. The top five states with organically certified dairy cows were Wisconsin, California, Oregon, Texas and Pennsylvania. The number of certified organic dairy cows increased by 30 percent from 2002 to 2005.

The cost of production for organic dairies is greater than the cost for standard dairies. Organic feed costs more than standard feed, and organic production uses more labor and capital. On the other hand, organic milk brings premium prices, so profits are higher for organic dairies. Herd size matters to organic costs. Estimated total costs drop sharply as herd sizes increase. 

By 2005, several large organic dairy farms owned herds of several thousand cows. Like most other large dairies, these large organic dairies purchased most of their feed and provided little or no pasture to their cows, thus not meeting current organic standards. In response, critics lobbied for tighter organic pasture standards, calling for cows to graze at least 120 days on pasture with at least 30 percent of the cow's nutritional needs coming from fresh grass. In 2007 the USDA responded by decertifying one large organic dairy farm that had not met the pasture requirements. Expanded organic pasture requirements will likely benefit small organic dairy farms but may also lead to increased organic production costs and prices.    

USDA standards for organic food were implemented in 2002. Organic dairy is raised in a production system that promotes and enhances biodiversity and biological cycles and uses only organic feedstuffs and health protocol. It is based on minimal use of off-farm inputs. Dairy cattle producing organic milk are not given antibiotics and growth hormone stimulants. In general, organic foods are minimally processed with artificial ingredients or preservatives.

The USDA defines 'certified organic' as "agricultural products that have been grown and processed according to specific standards of various state and private certification organizations." Certifying agents review farm applications and qualified inspectors conduct annual on-site inspections. Farm records track all management practices and materials used in organic production.

USDA-accredited certifying agents must certify farm and processing operations that grow and process organic foods. A certified operation must have a written Organic Farm Plan made available to the public upon request. An exception to the certification rule is made for operations with gross agricultural incomes of $5,000 or less. Processing facilities for organic foods must also be certified by USDA-accredited agents. USDA maintains a list of accredited certifying agents on the National Organic Program Web site (http://www.ams.usda.gov/nop/indexIE.htm). It is currently compiling a list of certified organic processors.

Organic Sales

Organic food sales have grown 20 percent or more annually since the 1990s. In 2006 organic food sales reached $16.7 billion. Of that amount, organic dairy products accounted for $2.7 billion in sales, according to the Organic Trade Association’s (OTA) 2007 Manufacturer Survey. The OTA believes organic dairy sales reached $3.2 billion in 2007.

Milk prices vary by region. In 2004 the lowest average price for organic milk was in the South ($2.80) and the highest was in the East ($4.52). The national average price totaled $4.01.

Like most organic products, organic milk receives a price premium over standard products. The national average price premium that organic milk commands over standard milk is $1.99, or 98 percent of the standard price.

Organic dairy products are being marketed through mainstream supermarkets and natural food stores. According to Mintel, supermarkets and mass merchandisers represented 53 percent of U.S. organic sales in 2006. Sales from natural food stores accounted for 47 percent of organic sales. From 2004 to 2006, the share of organic dairy products sold at supermarkets increased while the share sold at natural food stores decreased. 
  

According to USDA’s Economic Research Service, increased sales of organic and natural food products are being driven by health-conscious consumers. Natural food stores and other specialized retailers are benefiting from this trend. Food products offered by natural food stores tend to be less processed and frequently are free of preservatives, hormones and artificial ingredients.

Marketing channels for organic products depend on the size of market. Some dairy operations bottle and sell the milk and/or other dairy products locally. For national distribution, products tend to move from the farm to a cooperative processor/bottler and then to a private distributor before reaching retail outlets.

According to “A Study of Marketing Issues with Organic Milk,” a Kansas State University research study, the half-gallon container is the typical size for organic milk. The study also concluded that organic consumers tend to have smaller-sized families, purchase fewer soft drinks and be more concerned about the caloric and fat content of milk.

In 2005, the Agricultural Marketing Service announced rules to exempt certain organic producers and marketers from paying assessments under the research and promotion programs. The change will exempt producers and marketers operating under a National Organic Program approved organic system plan from paying assessments, provided they produce and market only commodities eligible for a "100 percent organic" label. The new Final Rule to Exempt Organic Producers from Assessment by Research and Promotion Programs is available at  http://www.ams.usda.gov/2002farmbill/organicexempt/.
 

Processing

The organic dairy market has been significantly affected by large-scale investment from food processors. The first two companies to produce and distribute organic milk on a large scale were Organic Valley and Horizon Organic. As of May 2007, Organic Valley, a cooperative established in 1988, and Horizon Organic, owned by Dean Foods and producing organic milk since 1992, provided around 75 percent of the nation's supply of organic milk.   
 

USDA-accredited certifying agents must certify processors of organic foods. A certified operation must have a Written Organic Plan made available to the public upon request. Processors with organic sales totaling $5,000 or less are exempt from the certification rule. Non-certified processors, producers and handlers are allowed to use the term “organic” in compliance with labeling requirements.

Exports

The United States exported more than 2 billion pounds of dairy products valued at over $3 billion during 2007. Mexico was the largest export market for dairy products, and Canada was the second largest export market. Japan, China and the Philippines are also expanding markets for U.S. dairy products. In addition to the export of high-quality cheese, which increased by over 50 percent in the last year, whey, lactose protein, ice cream, infant formula, fluid milk and cream, and milk powders were exported.

The United States imported 4.6 billion pounds of dairy products during 2007. New Zealand was the primary source of imported dairy products. Canada and Italy were also significant sources of dairy products. Imported dairy products included European-style cheese; casein, a milk protein used as a food ingredient; milk protein concentrates; butterfat; dairy blends; whey and chocolate preparations.

Competition

Unlabeled milk products control the majority of the market. Based on a University of Wisconsin study, demand for rBST-free milk (milk produced without the growth hormone recombinant bovine somatotropin) peaked in 1998 and is decreasing.

In general, fluid milk competes with other beverages for sales. While skim milk consumption has increased over time and whole milk consumption has decreased, overall milk intake by Americans has dropped in the last 20 years. Bottled water is now the second most consumed commercial beverage. Consumption of fruit and sports drinks has also increased over time. Nondairy milk products made with soy and rice are competing for space in the dairy case and are advertising as having comparable dairy attributes like calcium.

Other factors related to milk competition include the fact that milk is viewed as a commodity. Few branded milk products are sold; most milk is private label. Therefore, milk competes against worldwide beverage makers with well-known brands.

Milk distribution is another factor. Milk is primarily sold at the supermarket. Compared to other competing beverages, its promotion is limited due to product perishability. Milk’s use of single-serve plastic containers and of new flavors are likely to become keys to innovation for branding, image improvement and increased marketing channels, according to a Beverage Marketing Corporation report.

Outlook
Growth in demand for organic milk is expected to surpass increases in supply, causing prices to continue their upward trend. However, shortages of organic feed may restrict the growth of this market.    


 

Sources
Beverage Marketing Corp.

Blayney, Don, The Changing Landscape of U.S. Milk Production, Economic Research Service, USDA, 2002.

Blayney, Don and Manchester, Alden, Milk Pricing in the United States, Economic Research Service, USDA,  2001.

Dairy, Briefing Room, Economic Research Service, USDA.

Dairy Management Inc.

Dhar, Tirtha and Foltz, Jeremy, The Market for rBST-free and Organic Milk, University of Wisconsin-Madison, 2003.

Dimitri, Carolyn and Greene, Catherine, Recent Growth Patterns in the U.S. Organic Foods, Market, ERS, 2002.

Executive Summary, 2007 Manufacturer Survey, Organic Trade Association.

Exports and Imports, U.S. Trade Statistics, FAS, USDA, 2007.
  

Hammarlund, Ray, A Study of Marketing Issues with Organic Milk, Kansas State University, 2002.

McDonald’s Corporation
 

National Milk Producers Federation

Organic Exemption, Ag Marketing Service, USDA, 2005.

Organic Production, Briefing Room, Economic Research Service, USDA.

Report to Congress on the National Dairy Promotion and Research Program, and the National Fluid Milk Processor Promotion Program, 2006.

Profile written May 2005 and revised May 2008.