Organic milk seen flooding U.S. market
NEW YORK, May 13 (Reuters) - After years of being in short supply, organic milk is expected to flood the U.S. market as a regulation change and higher margins push more dairy farmers to produce it.
The dairy industry is expecting organic milk supply to surge by at least 40 percent this year from a previous annual growth rate of 20 percent, creating an excess of 25 million gallons, according to some estimates.
Meanwhile, consumer demand for organic milk will continue to grow at 25 percent annually, leading some industry experts to predict that a retail promotion war is imminent.
U.S. dairy processors and distributors like Dean Foods (DF.N), Stonyfield Farm and Organic Valley, a dairy farmers' cooperative that sells to retail grocery chain Whole Foods Market (WFMI.O) and others, are welcoming the news because it provides an opportunity to expand the market and offer more organic milk-based products.
"The oversupply situation is going to result in a pretty competitive marketplace," said Molly Keveney, a spokeswoman for Dean, which owns the best-selling Horizon Organic brand of milk. "Until last year we were in a supply constraint situation. We weren't innovating at all."
Greater quantities of organic powdered milk, yogurt, ice cream and cheeses are expected to hit store shelves as dairy processors divert their excess supply.
Consumer prices for organic milk, however, are unlikely to drop because the industry expects the glut to be short term.
"It would take a year before demand for fluid organic milk could catch up, assuming zero percent growth in supplies the following year," said JPMorgan Securities analyst Pablo Zuanic.
"But factoring in other potential uses for organic milk, we estimate the oversupply situation may last six months," Zuanic wrote in a research note.
NO SURPRISE
The dairy industry was expecting the glut, said Ed Maltby, executive director of the Northeast Organic Dairy Producers Alliance, representing 820 organic dairy farmers.
The change in regulation came last year after Arthur Harvey, a farmer in Maine, filed a lawsuit demanding stricter rules governing organic milk production.
The "Harvey rule," which goes into effect this June, requires farmers to feed their livestock 100 percent organic grain, compared with the earlier standard of 80 percent organic grain and 20 percent conventional grain.
Dairy farmers had a year-long grace period to switch to organic milk production. The new standard will increase costs to farmers because organic grain costs more.
As a result, organic milk production went up 30 percent in states like New York and Pennsylvania in the past year, Maltby said. Continued...
