PRICE STABILITY AND ECONOMIC

SUSTAINABILITY–ACHIEVABLE GOALS?A CASE STUDY OF ORGANIC VALLEY®

YE SU AND MICHAEL L. COOK

Organic Valley is the largest organic cooperative in North America, one of two national buyers oforganic milk, and one of two national organic dairy manufacturers. The cooperative’s official nameis Cooperative of Regional Organic Producers, and it is organized as a new generation coopera-tive, owned and controlled by patron-members who also transact with the business. Organic Valleyhas a unique policy of sustainable and stable producer pay-pricing for organic milk in the emerg-ing organic dairy industry. This case presents challenges faced by the leadership of Organic Valleycooperative to maintain a stable and economically sustainable pay price for its farmer members.This case also introduces students to a new organizational form of cooperative, including its gov-ernance, the industry, and the market structure in which the cooperative operates. The objectiveof this case study is to improve student understanding of economic concepts such as theories ofthe imperfect market, demand and supply, and organizational design. The case also aims to helpstudents improve their critical thinking and analytical skills by exploring the possibility of main-taining a unique sustainable and stable pricing method through the data provided. Additionally,the story introduces the economic role that organic dairy operation might play for small andmedium-size dairy farmers as they attempt to maintain an economically sustainable family farmlifestyle.

Key words: Demand and supply, economic sustainability, industry organization, stable price.

JEL Codes: A22, A23, Q01, Q11, Q13.

Originating from a bold idea, Organic Valleycurrently reigns as the largest organic coop-erative in North America. In 1988, fromthe non-glaciated, hilly part of southwest-ern Wisconsin, seven progressive ruralentrepreneurs started a courageous andvisionary journey. The founders’ originalobjectives were to create an organizationthat would provide farmers with stable payprices and an economically sustainable family

Ye Su is a PhD candidate, and Michael L. Cook is theRobert D. Partridge Professor, both at the University of Mis-souri. The authors would like to thank the Robert D. PartridgeEndowment, the Graduate Institute of Cooperative Leadership,and the University of Missouri Agricultural Experiment Stationfor providing funds to support this case study. Copyright 2014by Ye Su and Michael L. Cook. All rights reserved. Readersmay make verbatim copies of this document for noncommer-cial purposes by any means, provided that this copyright noticeappears on all such copies. Correspondence may be sent to:CookML@missouri.edu.

This Teaching Case Study was presented at the Agricul-tural and Applied Economics Association Annual Meeting,Minneapolis MN, July 27–29, 2014, and was not subject to theJournal’s peer-review process.

farm lifestyle. For much of its 26-year history,Organic Valley has achieved this mission.However, in the past few years a more hostileeconomic environment has emerged to testthe resolve of Chief Executive Officer (CEO)George Siemon and the Organic Valley lead-ership team. This case shares the evolution ofa determined, idealistic group of mostly smallrural producers as they lead a farmer-ownedfirm from nothing but a dream to a complexmulti-pool international cooperative. Thecurrent quandary: can the original mission ofOrganic Valley—to simultaneously delivera stable producer pay price and an econom-ically sustainable family farm life style tomember suppliers—be maintained?

In the agricultural sector, producers areusually price takers and have minimal influ-ence in determining the price they receive fortheir output. Since 1995, conventional milkprice has fluctuated year to year, and oftenon a monthly basis. Price volatility increasesthe uncertainty and risk in farming. These

Amer. J. Agr. Econ. 97(2): 635–651; doi: 10.1093/ajae/aau114Published online January 27, 2015

© The Author (2015). Published by Oxford University Press on behalf of the Agricultural and Applied EconomicsAssociation. All rights reserved. For permissions, please e-mail: journals.permissions@oup.com

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create difficult and complex decision makingenvironments, especially for small farmersbecause they have relatively lower marginsand risk-bearing ability than large farmers.Cook and Marion (1981) argue that the morestable a price is for a given commodity, thelarger the proportion of small farmers thatwill remain in the industry. Unstable pricesdrive larger farmers to invest and force thesmall farmers out of business (Cook andMarion 1981). Organic Valley had a sta-ble pay price policy throughout its history.Through chosen representatives, memberscontribute to the pricing decision. Whenassured of a stable pay price, it is assumedthat farmers will concentrate on managingtheir production costs. However, when thecosts of production increase to such a degreethat their margins are zero or negative, farm-ing is not economically sustainable underthe stable price regime. This policy helps usunderstand the relations between stable payprice and economic sustainability.

The objective of this case study is toimprove our understanding of economicconcepts such as theories of the imperfectmarket, especially oligopsony models andtheir application to real world problems,and demand and supply theory. Further, weexplore how factors that shift supply anddemand affect prices, how conditions thatcontrol supply can affect and stabilize prices,and how innovative organizational formsenhance the probability of economic success.The case is also intended to help studentsimprove their critical thinking and analyticalskills by exploring the possibility of maintain-ing a unique sustainable and stable pricingmethod through the data provided. Addition-ally, the story introduces the economic rolethat an organic dairy operation might playfor small and medium-size dairy farmers asthey attempt to maintain an economicallysustainable family farm lifestyle.

The Evolution of Organic Valley

The 1980s was an economically difficultdecade for U.S. farmers. The globalizationof commodity markets, excess produc-tion, double-digit inflation, interest ratesapproaching 20%, and consolidation in thefood processing and input supply industriesconverged to lower gross and net margins atthe farm production level. During the latter

part of the decade many producers sold farmassets, combined operations with other fam-ilies, restructured their operating and mort-gage loans, suffered through foreclosures, ordeclared bankruptcy. In some instances, how-ever, groups of farmers attempted to controltheir destinies by creating new organizationalforms. This was the case of seven farmersnear LaFarge, Wisconsin.

In late 1987, this group of farmers metto explore alternatives that might offer theopportunity to continue a way of life theydid not want to forego. After four informalmeetings, the Coulee Region Organic Pro-ducer Pool (CROPP) was founded in March1988. This group’s goal was to combine familyfarmers into a unified group to collectivelymarket their organic output. They defined afamily farm as “a farm owned and operatedby families with a focus on protecting theland and supporting the community and ruraleconomy for future generations,” (OrganicValley 2013b). CROPP was organized withdistinct marketing pools. Shortly after coop-erative incorporation, they established anorganic dairy pool.

The newly-formed group was quick toaction. By 1990, the Organic Valley® brandwas established and cheese was being mar-keted under the brand. Shortly thereafter,Organic Valley was marketing fluid milk. Asthe decade progressed, more organic prod-ucts were added as the market opportunitiesappeared. By 2002, Organic Valley beganmarketing private label products, and withineight years private label output accounted for25% of total revenue. Marketing branded,private label, and bulk products becamethe cooperative’s three-pronged strategy(Organic Valley 2011). By 2014, the coop-erative approached one billion dollars inrevenue, and offered more than 500 productsin the organic food market.

Organic Valley: Organizational Structure andOperations

Organic Valley is structured as an inter-national, multiple pool, centralized, andquasi-virtual closed membership agricul-tural marketing cooperative. The cooperativeadds new members only when there is anincreased demand for milk that cannot bemet by current members. Organic Valley’smarketing agreement requires members to

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Figure 1. Organic Valley producer map

Source: http://www.farmers.coop/producer-pools/cropp-producer-map/.

deliver 100% of their milk to the coopera-tive, and has strict, enforceable terminationclauses. Each member holds one share ofClass A membership stock. This stock entitlesmembers to a one-member, one-vote votingright.

In 1994, Organic Valley expanded its mem-bership from Wisconsin into Minnesota andIowa as it began the process of accessing rawmaterial supplies regionally and then nation-ally. Consequently, the cooperative changedits name to the Cooperative Regions ofOrganic Producer Pools (CROPP) in 2001 toreflect a national organization with regionalpools. Organic Valley now has membersin 35 states, Australia, and three provincesof Canada (figure 1); the majority of theirmembers are dairy farmers. In 2014, thecooperative was sourcing its organic milkfrom eight regional dairy pools1 in 31 states

1 A definition of pooling taken from the textbook of Cobia(1989): “Pooling is a method of handling products whereby lots ofthe same product from different producers are combined by grade

(New York, Northeast, Midwest, Northwest,Rocky Mountain, California, Southwest,and Southeast; Organic Valley 2013a). Suchdiverse membership enables the cooperativeto build markets more efficiently, reduce thecosts of production, and ensure a stable rawmaterial supply. Currently, the cooperative isdiscussing possible further expansion of itsglobal footprint (Preusser 2013).

“Self-funding has been a key to OrganicValley’s success,” (Organic Valley 2013c).This acceptance of membership responsibil-ity permeates the Organic Valley culture asevidenced by the adaptation of self-fundingequity capital acquisition policies and prac-tices. From the beginning, Organic Valleyissued preferred stock with a $50 face valueand a maximum 8% interest rate or premium

and contributors receive average net payments. Typically, eachgrower’s products lose their identity and are treated collectivelyas one lot by grades. All producers receive the same averageprice for the specific grade. Multiple pools determine proceedson the basis of two or more grades, varieties or periods.”

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Table 1. Organic Food Sales in the United States (2002–2012)

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Total sales* 8.6 10.4 12 14.2 17.2 20.4 23.6 24.3 26.7 29.2 31.3Growth rate 17.3% 20.9% 15.4% 18.3% 21.1% 18.6% 15.7% 3.0% 9.9% 9.4% 7.1%

Source: Nutrition Business Journal 2012. Asterisk indicates that the numbers are presented in billions of dollars.

in 1988 and 1989. They borrowed workingcapital from banks by pledging farmer mem-bers’ assets as collateral in the early yearsof the cooperative. Beginning in 1993, thecooperative initiated a base capital plan andrequired each member to invest 5.5% ofthe member’s annual sales in the coopera-tive. This retained capital becomes Class Bstock and earns 8% interest annually. Thecooperative also issued Class C and ClassE nonvoting preferred stock with varyingrates of dividends to members and outsideinvestors in 2004, 2009, and 2013. All stock istransferrable, except Class A voting shares,with approval of the board of directors.

From the beginning, Organic Valley’sstrategy for rapid growth was to outsourceprocessing through strategic alliances. Thecooperative owns two processing plants. Itcontracts with regional processing plantsto process fluid milk in specific productionpool regions. These partnerships are derivedfrom the cooperative’s general strategy “[T]obuild the business and then the buildings -build Organic Valley by identifying co-packplants to work with us,” according to GeorgeSiemon, CEO and founding member ofOrganic Valley. This co-packing strategy savesOrganic Valley from investing large amountsof capital in fixed assets.

A board of seven directors, elected at largefrom the cooperative’s membership, gov-erns the cooperative. Board members meetonce per month to discuss the cooperative’sbusiness. Executive committees, one foreach commodity pool, report to the board ofdirectors. Each commodity pool is dividedinto regional pools based on geographiclocations. Representatives to executivecommittees are elected regionally. Execu-tive committees are important to OrganicValley’s governance in that they serve as atwo-way conduit, communicating members’concerns and recommendations to and fromthe board. The dairy executive committeehas monthly conference calls to discuss payprice, feed costs, or other members’ con-cerns. A professional management team is

responsible for day-to-day operations of thecooperative.

Background: Organic Industry

Sales of organic food in the United Statesincreased from $1 billion in 1990 to $31billion in 2012 (table 1). The U.S. organicfood sector is largely driven by consumerdemand (Greene et al. 2009; Dimitri andOberholtzer 2009). About three-quarters ofU.S. consumers purchase some organic foodeach year, and one-quarter of consumerspurchase organic food monthly. In order toassure national standards, the U.S. Congresspassed the Organic Food Production Actin 1990. This law established the NationalOrganic Program (NOP), which created uni-form national organic food standards thatwere implemented in October 2002 (NationalOrganic Program 2014).2

Due to higher production costs for organicfood and to increasing consumer demand,organic food has commanded a significantpremium over comparable conventionalfood products since 2000. For example, ahalf-gallon of organic fluid milk generateda 60–109% premium over conventionalbranded milk in 2006 (Smith, Huang, and Lin2009). In the 1990s, most organic food wassold in natural and specialty stores. By 2011,only 38% of organic food was sold in thiscategory of store, and 55% of organic foodwas sold through traditional food retailers(Organic Trade Association 2012).

Organic dairy is the second largest seg-ment of organic food after organic produce.Sales of organic dairy represented 16% oftotal organic food sales in 2012 (OrganicTrade Association 2013). Organic dairy salesincreased from less than $500 million in1997 to about $3.9 billion in 2012. Sale of

2 U.S. organic standards and certification information isprovided in supplement 5.

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Su and Cook Price Stability and Economic Sustainability 639

organic milk decreased in recession-riddled2008–2009, but increased again startingin 2010.

Organic Milk Processors

The United States has two national organicmilk buyers and processors: Horizon Organic,a subsidiary of WhiteWave Foods, andOrganic Valley, a cooperative. These tworivals compete in organic milk procure-ment and organic dairy wholesale and retailmarkets. Both Organic Valley and HorizonOrganic invest heavily in brand building,customer loyalty, quality, new product andnew package development, and marketanalysis. In 2004, the organic fluid milk mar-ket share was 42% for Horizon Organicand 36% for Organic Valley; in 2007, thesefigures were 33% and 19%, respectively(Dimitri and Venezia 2007). Their initial suc-cess encouraged the entrance of numerouslocal and regional enterprises, leading to thedeclines.

Horizon Organic, founded in 1990, was thefirst company to market fluid organic milknationally. It was acquired in 2004 by DeanFoods and operated under the WhiteWaveFoods Division until 2012, when Dean Foodsspun off WhiteWave Foods as an independentcompany. WhiteWave Foods is a natural andpremium food processing company owningwell-known brands such as Silk, Interna-tional Delight, Earthbound Farm Organic,Horizon Organic, and the European brandAlpro. Net sales of WhiteWave Foods in 2013were $2.5 billon (WhiteWave Foods 2014).In 2013, Horizon Organic was the numberone brand in organic dairy products, with43% of the U.S. market share in organic fluidmilk.

Organic Valley is the second largestorganic milk processor (details are embeddedin other part of this case). The third-largestorganic milk processor is Aurora OrganicDairy, a private company located in Boulder,Colorado; it is vertically integrated, com-prising large dairy farms and a processingfacility. The main products of the companyare privately labeled organic milk and butter(Aurora Organic Dairy 2014). Stonyfield isa premium organic yogurt processor locatedin New Hampshire, which sources milk fromOrganic Valley and independent producers.Other processors with brand recognition

include MOO Milk in Maine, TricklingSprings, and Natural by Nature in Pennsyl-vania. Besides these prominent organic milkcompanies, about 50 smaller organic milkbuyers or processors operate in the UnitedStates. Some of them are family-owned-and-operated facilities, and others are local orregional factories or cooperatives that handleboth organic and conventional milk.

Organic Milk Supply

The National Organic Program, passed inthe early 1990s but implemented in 2002,requires a three-year period for land, and oneyear for dairy cows to make the transitionfrom conventional to organic production.Only 400 dairy cows, were certified as organicin 2004 due to the newly-enforced regula-tion (National Agricultural Statistics Service2012). Since then, the number of certifiedorganic dairy cows has grown gradually. By2014, the total number of certified organicdairy cows in the United States had increasedto over 235,000 (table 2). In 2013, OrganicValley’s membership included 50% of allcertified organic dairy cows and HorizonOrganic had contracted with or owned 24%of U.S. certified organic dairy cows.

There were approximately 2,000 organicdairy farms in the United States in 2008(National Agricultural Statistics Service2012). Wisconsin has the largest number oforganic dairy farms, but California providesthe largest volume of organic milk. Of the381 organic dairy farms in Wisconsin in 2011(National Agricultural Statistics Service2012), 292 are members of Organic Valley(figure 1). The average herd size is 90 cowsfor Horizon Organic producers (HorizonOrganic 2014), and 77 cows for OrganicValley (Organic Valley 2014d). At the begin-ning of 2011, Organic Valley’s membershipincluded 1,144 dairy farmers. Horizon had531 contracted farmers and two company-owned farms (table 2). In December 2013,Horizon Organic sold its 4,000-cow farm, butcontracted with the buyer to purchase themilk (Cornucopia Institute 2014). By 2013,1,5303 dairy farmer members were affiliatedwith Organic Valley and Horizon Organiccontracted with 600 dairy farms.

3 This is the latest number from the Organic Valley 2013 AnnualReport, which is greater than the number in figure 1.

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Tabl

e2.

Cer

tifie

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rgan

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airy

Cow

sSu

pply

ing

U.S

.Org

anic

Val

ley

and

Hor

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Org

anic

(200

7–20

13)

2007

2008

2009

2010

2011

2012

2013

Tota

lcer

tifie

dco

ws

inU

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166,

178

249,

766

n/a

254,

579

254,

771

n/a

235,

620*

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rms

400

500

n/a

533

n/a

n/a

600

HO

cow

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49,0

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a51

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n/a

n/a

57,4

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tage

ofto

tal

24%

20%

n/a

20%

n/a

n/a

24%

OV

dair

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N/A

1037

1098

1144

1366

1507

1530

OV

cow

s69

,300

79,8

4984

,546

88,0

8810

5,18

211

6,03

911

7,81

0O

Vpe

rcen

tage

ofto

tal

42%

32%

n/a

35%

41%

n/a

50%

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row

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OV

farm

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Not

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Organic Milk Pricing

U.S. conventional milk prices are primarilymarket-driven, but regulated by the Fed-eral Milk Market Order (FMMO) System.FMMO announces a blended minimal milkprice each month for non-organic milk.Organic milk prices are largely determinedby market conditions. The two major organicmilk processors, Organic Valley and HorizonOrganic, forward contract with their milkproducers. Horizon Organic and OrganicValley’s pricing protocols include four basicelements: a base price, seasonal premium,seasonal deduction (Organic Valley only),and market-adjusted premium.

Horizon Organic contracts with farmersfor one to three years by setting prices withindividual farmers confidentially (HorizonOrganic 2007). Horizon Organic changed itsmarket-adjusted premium (MAP) to reflectmarket conditions and production costs.Further, it has the sole right to reduce thepay price, based on market conditions with30 days’ written notice to its producers ifthe proposed price change is less than 25%(Northeast Organic Dairy Producer Alliance2011).

Organic Valley’s farmer members col-lectively determine their pay price for theupcoming year based on current costs ofproduction and a fair return (Organic Valley2014c). This pay price is announced early inthe calendar year and is fixed for one year.Members within the same region receivethe same price regardless of herd size. Ifmarket conditions or cooperative perfor-mance change within a given year, the boardof directors has the right and responsibilityto adjust the pay price. The historical baseprices for Organic Valley have been con-sistently set higher than the base prices forHorizon Organic. Nevertheless, with addedpremiums, the two rivals’ final annual payprices generally converge. Final averagedifferences range between 25� to $1.16/cwt(cwt = hundred lbs.) over the last sevenyears, as evidenced in table 3.

The observed base farm price for organicmilk is more stable within a given year andalso more stable in the long run than theconventional milk price. For the past 25 years,farm prices for organic milk increased eachyear, except 2008 and 2009. Even thoughthe overall trend for conventional milk payprices has been increasing, prices fluctuateyear to year (figure 2). The largest difference

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Tabl

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Org

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Milk

Pay

Pri

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alle

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007–

2013

)

Org

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Val

ley

($/c

wt)

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/cw

t)*

Yea

r20

0720

0820

0920

1020

1120

1220

1320

0720

0820

0920

1020

1120

1220

13

Bas

epr

ice

2628

.75

27.3

27.3

27.3

28.8

28.8

2425

2525

2525

25M

AP

11

12

2.5

21

2.5

3.5

3.5

Seas

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MA

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33

1.5

34

33

33

Sum

mer

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n−1

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−1−1

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28.2

527

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27.5

28.8

30.5

530

.55

26.5

28.5

28.3

327

28.5

29.5

31.5

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between organic and conventional milkprices was $10.90 in 2009. This differencedecreased to $6.50 in 2013. The fluctua-tion in differences is primarily caused byvariation in conventional milk prices. Com-paring coefficients of variation (CV) fora five-year moving average between farmprices for organic and conventional milk, weobserve that the CV values of conventionalmilk are much larger than the CV valuesfor organic milk. The ranges are 16% forconventional and 10% for organic, and themeans of these two CVs are significantlydifferent at the 1% level (figure 3). The CV isexplained in figure 3 (lower CV values meanless variation).

Organic Valley’s base price is fixed at thebeginning of the calendar year, but the coop-erative pre-announces a one-dollar summerdeduction in May, June, and July to balancethe burden of the spring flush. Moreover,Organic Valley provides incentive paymentsin addition to its base price in January, Febru-ary, and December (e.g., $2.00 in 2009 and2010, and $3.00 per cwt from 2011 to 2013).Therefore, the actual monthly pay prices mayvary from month to month (figure 4), but theproducers are aware of these adjustments inadvance. The price range paid to producersfor organic milk between 2008 and 2013 was$5.98, compared to $10.80 for conventionalmilk during the same period.

Organic Valley’s Balancing Act: Farmer PayPrice Stability

“Supply management is a critical part ofmaintaining our sustainable approach. Theproducts our farmers produce must be uti-lized organically to ensure the premiums weall want for our labors. We want to maintainour stable price structure, and a key piece ofthis is providing the business with a stableand predictable level of production,” (Peters2009).

From the founding of Organic Valley in1988 until 2004, the growth of supply anddemand for organic milk was mostly bal-anced. However, from 2004 (following theimplementation of the organic standardsregulations; fewer cows were certified afterthe new regulation) through 2008, demandfor organic milk exceeded supply. This netmargin opportunity became attractive torivals. As a result, Dean Foods acquired

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10.00

12.00

14.00

16.00

18.00

20.00

22.00

24.00

26.00

28.00

1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013

$/cwt

Conventional

Organic

Figure 2. Annual farm price for organic and conventional milk (1989–2013)

Sources: Organic milk price is Organic Valley’s base price; conventional milk price is the milk price from the USDA Economic Research Service.

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

14.00%

16.00%

18.00%

20.00%

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

CV Conventional price

CV Organic price

Figure 3. Coefficient of variation (CV) for 5-year moving average of price

Note: The coefficient of variation is defined as the ratio of the standard deviation to the mean and informs the comparison of variations betweendifferent samples.

Horizon Organic, and HP Hood licensedthe Stonyfield brand for fluid organic milk.These transactions resulted in increasedcompetition in the organic milk market,especially in milk procurement. Because ofrapid growth in demand and lagged responsein supply, Organic Valley was not able tosupply all of its customers. Due to this tightsupply-demand situation, Organic Valleydecided to stop supplying 15 customers—including Wal-Mart, its third-largest customerat the time—to ensure supply for its corenatural food store customers (Pattison2007).

The economic recession of 2008–2009brought an end to excess demand for organicmilk. During 2008–2009, real per capitadisposable income in the United Statesdecreased by 1.3% and real consumptionof food and beverages decreased by 1.5%(table 4).4 In addition, the price of conven-tional milk decreased to about one-third the

4 Previous studies suggest that organic fluid milk is more priceand income elastic than conventional milk, and income has apositive effect on organic fluid milk consumption (Dimitri andVenezia 2007; Alviola and Capps 2010). Alviola and Capps (2010)report that income elasticity is 0.2672 for organic fluid milk, and−0.0135 for conventional milk, with price elasticity of −2.0046 for

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10

12

14

16

18

20

22

24

26

28

30

$/cwt

Conventional ($/cwt)

Organic

Figure 4. Monthly organic and conventional milk farm prices (2008–2013)

Sources: Organic milk price is from Organic Valley; conventional milk price is from the USDA Economic Research Service.

Table 4. Real Consumption Expenditure on Food and Beverage, Real per Capita IncomeChange, and Organic Fluid Milk Sales Change

2007 2008 2009 2010 2011 2012 2013

Real consumption changefrom previous year (%)

1.34 −1.19 −1.52 2.15 1.57 1.32 1.34

Real per capita incomechange from previous year(%)

1.15 0.59 −1.34 0.29 1.65 1.28 0.03

Annual sales of organic fluidmilk (millions lbs)

1413 1676 1605 1810 2074 2156 2267

Annual sales change oforganic fluid milk fromprevious year (%)

33.05 18.61 −4.24 12.77 14.59 3.95 5.15

Sources: Real Personal Consumption Expenditures by Major Type of Product, Quantity Indexes, Bureau of Economic Analysis, and the USDA Eco-nomic Research Service.

price of organic milk (Siemon 2010). Theper capita income difference and the pricegap between organic and conventional milkcaused total sales of organic fluid milk todrop by 4% in 2009.

Due to the economic recession sweepingthe nation in 2008–2009, Organic Valley’s20% annual sales growth came to a screech-ing halt and its national average annual payprice decreased from $28.05 to $27.25/cwt

organic milk and −0.8729 for conventional milk. When incomedecreases, consumers substitute more inexpensive milk for moreexpensive milk (Dong and Stewart 2013). Sales of Organic Valleybranded products decreased during the recession, but private labelsales increased. These trends are consistent with the previouslymentioned studies.

from 2008 to 2009, the first decrease since2000 (Organic Valley 2010). Organic Valley’stotal sales revenue in 2009 decreased by 1.5%(figure 5). However, the organic milk supplyheaded in the opposite direction. In early2009, the supply of organic milk continuedincreasing for the first eight months (higherthan projected), thus increasing invento-ries and related costs. A potential crisis atOrganic Valley loomed. The cooperative’svalues, polices, and practices would be tested.

To address this excess supply situation,Organic Valley’s leadership considered threeoptions: 1) recalculate the pay price basedon actual monthly organic milk utilization;2) terminate the membership of recently-accepted members; 3) collectively reduce

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Figure 5. Organic Valley members and sales (1988–2013)

Source: Organic Valley website http://www.organicvalley.coop/.

production. The board acted quickly anddecisively. After discussion and communi-cation with members, the board of directorsadopted the third option and recommendeda quota system. The quota program requiredthat each farmer reduce deliveries by 7%based on the average of the farmer’s previousthree years of milk production. Farmers wereallowed to deliver more milk, but the over-quota milk was priced at $15, considerablyless than the annual pre-announced baseprice. The supply of organic milk decreasedin September, and was significantly lowerthan projected for the following threemonths, making projected and actual sup-ply growth converge. The pay price remainedunchanged. As a result of the quota pro-gram, organic utilization increased to 94%,inventory was reduced 25%, from 12.2 to 9.2million pounds, and the quality of the milkdelivered by farmers increased. Total milkdelivered in 2009 increased by 1% from 2008instead of a projected 3.7%, and customercomplaints decreased due to the higher qual-ity of the milk (Organic Valley 2010). Thequota was enforced from July 2009 to July2010 for most farmers, and until September2010 for new members from HP Hood, anduntil December 2010 for West Coast farmers(Organic Valley 2011). All farmers managedtheir way through the crisis and no one leftthe cooperative. “The farmer-owners steppedup by providing leadership and sacrificingincome to safeguard our long-term strategy,”(Organic Valley 2010). The direct effect of thecrisis on the organic milk processing industry

was dramatic. One of the large players, HPHood, decided to leave the industry, andOrganic Valley took over almost all membersof HP Hood.

Due to the pre-announced pay price,Organic Valley did not decrease its wholesaleprice in 2009 and 2010 as Horizon Organicand other processors did. In an attempt tomaintain market share, the cooperative spentan additional $3 million on product promo-tion. The market share for Organic Valley’shalf-gallon fluid milk decreased by 10%, butprivate label and bulk sales increased dueto the substitution effect (Organic Valley2011).

Overall, 2010 was a successful year forOrganic Valley. Sales increased by 19% over2009, and the number of members increased14% from 1,404 to 1,607. Although the quotawas enforced for the first half of the year,the cooperative met its expected profit goal,which enabled the cooperative to renew itsprofit sharing program (Organic Valley 2011).

However, not all news was positive. Duringthe recession, organic feed prices decreasedbetween August 2008 and July 2010. Inresponse, some organic grain farmers con-verted to conventional operations due tohigher margins for conventional grain andlower margins for organic grain (Silva et al.2012). Severe weather in 2011 and 2012 inorganic grain growing areas also diminishedgrain and feed yields. These factors reducedthe supply of organic grain and feed. As aresult, organic feed prices skyrocketed in2011 and 2012. Organic livestock farmers,

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especially those who do not produce feed,were greatly affected by the high feed prices.Consequently, in the summer of 2011, a com-bination of these high feed costs and drysummer weather reduced organic milk supplysignificantly (Link 2012).

Although the price of organic feedincreased, Organic Valley’s milk pay priceremained fixed. The margin for organicmilk was squeezed. Therefore, organic dairyfarmers fed their herds less grain, leadingto reduced milk production. As a result,the organic milk supply decreased in late2011 and 2012. Retailers and consumersclamored for organic milk. In response tohigh feed costs, Organic Valley raised itspre-announced base pay price by $2.00 forthe year 2012. However, this increase stilldid not cover the extraordinarily high feedcosts. Consequently, some farmers sold partof their herds, and some fed them less, orlower-quality, feed. Further, a small numberof farmers converted to conventional opera-tions (Tampa Tribune 2012). These decisionsfurther reduced organic milk supply. Bylate 2013, the average pay price for organicfarmers in the Northeast was approachingthe mid-$30 range, but the profitability ofmany farmers continued to be unsustainable(Parsons 2013).

In June 2013, Stonyfield announced that itwould begin sourcing a small portion of itsmilk from local organic dairy farmers ratherthan from Organic Valley (Lundgren 2013).Stonyfield is one of Organic Valley’s largestcustomers, and was purchasing approximately25% of Organic Valley’s total milk volume,representing 13.5% of Organic Valley’s totalsales in 2011 and 10.5% in 2012. Additionally,Organic Valley had licensed the Stonyfieldfluid milk brand since 2010. In 2011, OrganicValley’s sales of Stonyfield milk represented9.0% of the cooperative’s total sales and8.5% of its milk supply. In 2012, these fig-ures dropped to 8.0% and 7.4%, respectively(Organic Valley 2013b).

Stonyfield’s future actions regardingorganic milk supply will have a profoundeffect on Organic Valley’s milk procurementand utilization. As a preemptive move, inAugust 2013, Organic Valley farmers receivednotice from their cooperative that a secondsupply management quota would begin inOctober 2013. However, at the last moment,the quota was cancelled when the excess sup-ply forecast was not realized (Organic Valley2013c).

High feed costs, extreme weather, andrivals’ tactics and strategies are putting farm-ers under extreme financial stress and aremaking it more difficult for Organic Val-ley’s leaders to set a stable milk purchaseprice. Both undersupply and oversupply oforganic milk challenge the cooperative’s payprice and profit levels (Organic Valley 2012).Organic Valley and its farmers have experi-enced wide swings, particularly in the last tenyears. Organic milk supply was short in 2004,2011, and from August 2013 into early 2014.In contrast, the industry and Organic Val-ley were in an oversupply situation in 2009and 2010. This increasing volatility creates adilemma for Organic Valley’s leadership sincemuch of the cooperative’s original appeal wasbased on a platform of family farm economicsustainability and stable pay prices.

Organic Valley’s Balancing Act: Family FarmEconomic Sustainability

Organic Valley promotes social, environmen-tal, and economic sustainability. Economicsustainability is the root and mission ofOrganic Valley, and drives the operation ofthe cooperative.

Organic Valley’s Economic Sustainability

“The continued success of the cooperative’sbranded products is the foundation of a sus-tainable pay price to farmers,” said MikeBedessem, Chief Finance Officer (OrganicValley 2014a). The cooperative invests heav-ily in marketing branded products to increasethe reputation of Organic Valley and deepenbrand loyalty. Organic Valley differentiatesitself from investor-owned firms by emphasiz-ing its farmer-owner roots and by involvingmember farmers in sales, marketing, andconsumer awareness events. In addition,Organic Valley invests heavily in consumerresearch and marketing, and applies a three-pronged sales strategy to increase its organicutilization and improve revenue.

Organic Valley’s revenues increase duringmost years, but net income is more variable(figure 6). At the beginning of each fiscalyear, the board of directors sets a profittarget for the cooperative. Historically, theprofit level is set to return approximately 2%of sales. Once the profit target is met, thecooperative shares additional profits with

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Figure 6. Organic Valley net income and growth rate (2006–2013)

Source: Organic Valley Website http://www.organicvalley.coop/.

employees, members, and their communi-ties. In 2006 and 2010, Organic Valley metits profit target, so farmers received a 13th

payment, in addition to the cooperative’snormal monthly payment. However, profitsdropped substantially in 2013 to only 0.5%of sales, far below the expected 2.4% level.This variability and level of return concernsOrganic Valley’s leadership.

Another concern for Organic Valley’sboard and management is leadership succes-sion. Well-managed leadership succession,especially at the senior management level, isessential for the long-term sustainability ofOrganic Valley. Many of the cooperative’ssenior managers have worked at OrganicValley for more than 10 years and have col-lectively instilled the organization with aunique culture. CEO George Siemon is oneof Organic Valley’s founding members. DairyPool Director Jim Wedeberg is also a found-ing and active member. Chief OperationalOfficer Louise Hemstead started working atOrganic Valley in 1993 and is also an activemember. Finding qualified replacements forthese senior managers who are approach-ing retirement is critical to maintainingOrganic Valley’s long-term vision, as wellas long-term growth. Acknowledging thisconcern, the Organic Valley board increasedthe budget for staff training and startedan annual farmer leadership symposiumin 2011.

Interdependency of Price Stability andEconomic Sustainability

During the 1990s, family farmers were forcedto exit farming due to low margins gener-ated from production agriculture. Organicproduce prices offered a substantial pre-mium over conventional produce prices anda promising market opportunity. High priceand strict cost controls were the key factorsfor survivability in a depressed productionagricultural sector. For Organic Valley’smembers, economic sustainability means thatfarming can provide enough profit for farm-ers to make a living, so farmers can stay ontheir land and maintain farming as a profes-sion, a career, and a lifestyle. In addition, thenext generation of farmers could remain inproduction agriculture if they so choose.

The tool Organic Valley adopted to pro-vide economic sustainability is the stablefarm gate price policy, which states that thefarm pay price is determined by farm mem-bers and based on what the farmers actuallyneeded to generate a reasonable income(Organic Valley 2014b). Through this yearlyconsensus building process, Organic Valleysets the target pay price for organic milk,which is considered economically viable forthe sustainability of organic dairy farmers.This pricing method is considered unique andprogressive by incorporating farmers’ inputinto the price-setting process.

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Organic Valley farmers feel they are ina better position to control their costs ofproduction than to control product marketpricing. By setting the organic milk priceone year ahead, organic dairy farmers con-centrate on improving farm managementpractices and strategies to control theirproduction costs. The fundamental goal ofOrganic Valley, that is, to provide a stable andeconomically sustainable pay price, comple-ments their practice of paying farmers firstand operating on the remainder.5

Farmer Members’ Economic Sustainability: IsOrganic Dairy Economically Sustainable?

Due to increasing consumer demand, organicmilk sales and margins increased dramaticallybefore the 2009 U.S. economic recession.Indeed, organic dairy farmers had bettereconomic returns than their counterpartsoperating in the conventional milk indus-try (Krieg 2007; Kilman and Reddy 2012).During this period, numerous conventionalmilk producers converted to organic dairyoperations and experienced significantimprovement in financial returns (McCroryand Parsons 2013b; McCrory et al. 2013;McCrory and Parsons 2013a).

The economic recession decreased con-sumer demand for both organic andconventional dairy products. The organicdairy farmers’ revenue decreased by 10%on average, but conventional dairy farmers’revenue decreased by 40% in 2009 (Barham2010). A major reason that the organic dairyfarmers had higher returns was because ofOrganic Valley’s supply control program.Through the self-imposed quota system,Organic Valley was able to maintain a higherand stable pay price. Exhibit 12 provides anexample.

The period between 2009 to 2013 waseconomically difficult for conventional andorganic dairy farmers. This is especially thecase for small farmers because of their rel-ative cost disadvantage. Nationally, organicand conventional dairy farms of all sizessaw a negative net return during this period,except for farms with more than a thou-sand cows (table 5 and see supplement 4 for

5 This is related to cooperative principles. Please see theappendix for a full description about cooperative organiza-tion form and its principles. Please refer to supplement 1 andsupplement 2 for information about cooperative organizationalforms.

more information). In both the organic andconventional categories, large dairy farmshave higher returns than smaller ones due toeconomies of scale. However, in the group ofdairy farms with less than 100 cows, organicdairy farms outperformed conventional dairyfarms, especially in terms of return on oper-ating costs. Organic dairy farms have higheroverhead and unpaid labor costs than con-ventional dairy farms of similar size, but theopportunity cost for unpaid labor affectsdairy producers differently. Many small dairyfarmers are willing to accept a lower returnon their labor because they appreciate thefamily farming lifestyle. These farmers’ majorproduction decisions are based on operat-ing costs, especially short-term productiondecisions (McBride and Greene 2010). Thisis why many small dairy farmers convertedto organic production systems in the late1990s and early 2000s—to save their farmsfinancially. A well-governed and managedorganic cooperative provides small dairyfarmers with a greater opportunity to stay inthe business and gives their children a chanceto remain in farming (Campbell 2005). Arecent study found that organic dairy farmersin Minnesota had positive profits from 2006to 2013 and these profits were higher than theprofits earned by conventional dairy farmersof similar size (table 6). Another recent long-term study of organic dairy farmers from2004 to 2013 by Parsons and his colleaguesfound that profits are decreasing, larger farmsare outperforming smaller ones, and half oforganic dairy farmers cannot make a rea-sonable living wage if current margins arenot increased. However, Parsons’ study alsoshows that organic dairy farmers with bet-ter management skills have a probability ofgenerating higher returns.

Uncertainty and Challenges

Organic Valley’s founders aimed to createan organization with unique rules, rights,and responsibilities in order to help familyfarmers maintain an economic and sociallivelihood consistent with their values andbeliefs. However, due to the uncertainty ofdemand and supply, as well as rapid struc-tural changes within the industry, membersand management are starting to ponderwhether the original dream on which OrganicValley was founded is still achievable. At

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Table 5. Conventional and Organic Milk Production Costs and Returns per Hundredweight Sold, by Size Group, in the United States (2010)

Item <50 cows 50–99 100–199 200–499 500–999 >1, 000 All Sizes

Con* Org Con Org Con Org Con Org>200 Con Con Con Org

dollars per cwt soldMilk sold 16.61 25.83 16.61 26.69 16.63 25.22 16.64 27.72 16.30 15.05 15.95 26.59Total gross value 19.06 28.60 18.77 29.41 18.52 27.49 18.39 30.05 18.04 16.66 17.74 29.11Operating costs:Total feed costs 12.54 15.65 11.50 14.96 11.04 14.79 10.94 15.51 9.69 8.85 10.01 15.24Total operating cost 16.54 20.52 15.35 20.25 14.36 19.67 14.45 19.49 12.75 11.03 12.92 19.93Allocated overhead:Hired labor 0.52 0.84 0.80 1.72 1.21 2.24 1.79 4.49 1.84 1.43 1.41 2.60Opportunity cost of unpaid

labor13.22 15.52 6.79 8.99 3.42 4.59 1.40 1.01 0.49 0.16 2.09 6.65

Total overhead 22.55 27.46 14.88 20.56 9.88 15.43 7.55 10.99 5.33 3.85 7.40 17.60Total costs listed 39.09 47.98 30.23 40.81 24.24 35.10 22.00 30.48 18.08 14.88 20.32 37.53Value of production less total

costs−20.03 −19.38 −11.46 −11.40 −5.72 −7.61 −3.61 −0.43 −0.04 1.78 −2.58 −8.42

Value of production lessoperating costs

2.52 8.08 3.42 9.16 4.16 7.82 3.94 10.56 5.29 5.63 4.82 9.18

Supporting informationMilk cows (head) 33 34 68 68 135 130 313 460 701 2, 236 182 77Output per cow (lbs.) 15,885 12,223 17,530 12,599 19,232 13,721 20,040 16,663 22,673 23,297 20,961 13,884

Notes: Con = Conventional; Org = Organic. Source: USDA Economic Research Service.

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Su and Cook Price Stability and Economic Sustainability 649

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Figure 7. Dairy herd size for Organic Valley

the beginning of 2014, Organic Valley had1,530 dairy farmer members. About 84%,or 1,284 farms, had fewer than 100 cows(figure 7). Given the rapid change in eco-nomic conditions, production costs, andincreased degree of competition, how canthe cooperative be successful for another 25years, 50 years, or more? How can the coop-erative continue to stay true to its foundingmission as well as adapt to the changingenvironment? With these major issues loom-ing, supportive organizations and importantstakeholders are thinking about these specificquestions:

• Can Organic Valley continue to maintaineconomic sustainability for their familyfarm members while maintaining theircurrent stable pay price pricing policy?If so, will flexibility in the policy need tobecome more formalized?

• Can the cooperative organizational formmeet the needs of small family farms?What are the pros and cons of this closedmembership form of cooperative relativeto more traditional forms of collectiveaction and other organizational businessforms?

• Is Organic Valley the price leader in theraw organic milk supply market?6 Whatimplications might this have or not havefor Organic Valley farmer members?

• What assumptions should be made aboutfuture demand and supply, the struc-ture of supply, and the future viabilityof small and large organic dairy farm-ers compared with their counterpartproducers in conventional dairy?

6 Please see supplement 3 for popular oligopoly models.

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Supplementary Material

Supplementary material is available at http://oxfordjournals.org/our_journals/ajae/online.

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