Foremost Farms incurs ire of members with 90-cent deduction on milk

Jan Shepel
Wisconsin State Farmer
Farmers say latest milk check deduction from Foremost Farms couldn't come at a worse time, citing record high input costs and market uncertainty. Rumors of other processors following suit has farmers across Wisconsin worried and angry.

Foremost Farms cooperative members got a letter dated September 22 that did not warm their hearts – it set off a firestorm. Co-op officials said that starting with farmers’ September milk checks some “market adjustments” will be deducted from their milk checks and will add up to $0.90 per hundredweight for at least the remainder of the year.

The communiqué from their cooperative, signed by President and CEO Greg Schlafer and Darin Hanson, senior vice president of supply chain and risk management, said the decision to implement “market adjustments” is based on several inflationary cost factors. Those factors include record high labor costs, brought on by labor shortages, at their manufacturing facilities; higher costs of raw materials that are needed to produce finished products – energy, packaging equipment; and a significant difference between Class III (cheese) milk costs and the revenue generated by the sale of cheese and whey products.

“Extreme inflationary pressure makes it necessary for Foremost Farms to adjust milk pricing through a market adjustment to ensure the continued viability of the business,” the letter stated to farmer-members.

For many farmers the letter came as a shock. Rachel McManama Schroeder, who farms with her father James McManama in the Watertown area, said that during member meetings held earlier this year, cooperative officials said the business was doing well financially. “This letter came out of the blue,” she said.

“I was shocked, angry and frustrated when we got the letter on Saturday because it was so out of the blue.” She posted her feelings on social media once the news became public. “I have always talked so highly of my cooperative, Foremost Farms, but this was probably the most devastating blow we could have received,” she posted.

In a phone interview with Wisconsin State Farmer, she said that for the co-op to take nearly a dollar per hundredweight starting in September, will be a blow financially. “Our costs of production are higher than they have ever been,” she said.

Rachel McManama Schroeder, who farms with her father James McManama in the Watertown area take a break from making hay this summer. The daughter-father duo were far from happy after receiving a letter from their milk processor Foremost Farms informing them that the company would be deducting .90/cwt. from their milk checks starting this month.

Another frustration for her was that the letter didn’t really get at the reasons for the producer deduction. “They talked about the block and barrel price spread but that’s not my problem – I mean it is, since as a farmer-member I own the cooperative – but that seems like something that management has to do a better job dealing with,” she said.

Some of those she has talked to in the co-op have said that once new contracts with customers are re-negotiated at the end of the year that this deduction may go away, but Schroeder is not holding her breath. “Hopefully things will improve but I’m frustrated as a farmer who takes pride in producing a high-quality product and being told at our member meetings that our customers appreciate the high quality of the product. We work hard to get low somatic cell counts and high components.”

Farmers are ATMs

Schroeder, who went through Foremost’s Young Producers program, said it’s not that she believes Foremost is trying to “make itself rich and make farmers poor” but added that they “really need to realize how big a deal this is to their farmers. They are using their farmers as an ATM.

“I honestly like Foremost; and the Young Producer program was a great experience but that letter made me feel betrayed. The letter isn’t giving us the why that led to this decision. I’m not trying to talk negatively about my co-op but I want consumers to know that the skyrocketing prices they are seeing in the store are not coming back to farmers,” Schroeder said.

Rachel’s farm belonged to her grandparents; her dad took over in 1980. Rachel joined him as co-owner in 2010 after earning a Bachelor’s Degree in Animal Science and working off the farm for a few years. Since James took over the farm, it has grown from 80 to 500 acres of cropland and from 25 to 100 milking Holsteins.

MORE: Farmers already on the short end of the stick

Another farmer who talked to Wisconsin State Farmer is happy now that he left Foremost Farms a few years back. That’s when the co-op instituted a 69-cent “market adjustment.” In the first four months his 65-cow farm lost $4,000. “It was snowballing,” said Bruce Gumz who farms near Dorchester.

“Foremost was also one of the first to implement a fuel surcharge on us for hauling,” said Gumz who can see Foremost Farm's Milan plant from his farm. “It seemed like there was always a way to skim a little more from us. Being out of there has been a blessing. It was an environment that didn’t feel friendly at all, and certainly not to smaller farmers."

60 workers at Foremost Farms plant in Milan were notified on Sept. 23 that they will be out of work at the end of the year due to the plant closing. Company officials cited the age of the plant, cost of upgrades.

Gumz said the That 69-cent assessment was the straw that broke the camel’s back.

"We said this is enough,” said Gumz who after talking to other dairies made the decision to ship his milk to Nasonville Dairy run by the Heiman family. “They have been way friendlier.”

Now that Foremost is taking an even larger assessment from its members, he is glad to be shipping elsewhere.

Ben Maier, who milks 110 cows near Cross Plains in southern Wisconsin, said he got his first check of the month and it was down to a pay price of $17.80 per hundredweight. “With that ninety cents (that’s now being deducted) it would be almost $19. This seems pretty stupid. It’s pathetic. We do all the work – milking the cows, hauling the manure, growing the feed and all the rest – and then they take this money out just to make up for the market,” he said in a phone interview.

He hasn’t been able to speak to his field rep, because the rep since moved on to a different job and the position remains unfilled.

And to make matters worse, when Maier goes to the local store at the end of the day to buy milk the store is out of chocolate milk and whole milk and there is very little 2-percent milk available, he said. “That tells me there must be demand.”

“We’re thankful they take our milk because we have to have a market, but this is BS that they have to take money away from us. Last week we got notice that they are closing two plants. What about all the money they are going to save not operating those plants?” he added.

Maier, whose farm has been in his family since 1871 said he’s grateful to be able to do a job he loves and produce a wholesome, healthy product, but dislikes being asked to make this kind of sacrifice. He farms with his father who lives on the original 80-acre farm where Ben’s grandparents and uncle also live.

Milk pricing factors

In the letter to members, the Foremost officials said that one of the reasons the co-op had to resort to the milk check deducts is that several factors keep them from making enough money on their dairy products. “Federal Order milk pricing formulas, which include make allowances, have not been adjusted since 2009. The make allowance is a cost factor built into the milk price to account for all the costs required to convert milk to the final product. These costs have increased significantly over the past year,” the company stated.

The implication was that with the make allowance at 2009 levels, money to keep the co-op profitable had to come from somewhere else. The letter also said that the inverse market pricing of barrels over blocks has made the cooperative unable to generate better net revenue. All of this adds to their market adjustment deduction decision.

“The Federal Order pricing also incorporates two Chicago Mercantile Exchange (CME) cheese market survey prices into the calculation of the Class III protein price: (500-lb.) barrel and (40-lb.) block cheese markets. Due to competitive market conditions, Foremost Farms sells all cheese products based on the CME block index to generate revenue,” the letter to farmers goes on.

“Over the past several months, the barrel cheese market has been a premium to the block market, driving up milk costs that cannot be recovered through the revenue generated from our cheese products Part of the market adjustment is to account for this impact,” farmers were told.

Company officials stated in closing, “Decisions to adjust pay price are difficult and only implemented to ensure the long-term viability of the cooperative.”

Things have got to change

When contacted, Communications Director Lisa Yanke said Foremost Farms would not be releasing any additional information beyond what was contained in the letter sent out to member farms, saying they are respecting the confidentiality of members.

Laurie Fischer of the American Dairy Coalition heard about the Foremost milk check deduction from her association’s members. “Farmers are at the bottom, they are telling me, and they have no where to go to recoup the losses from something like this,” she said.

Laurie Fischer

She confirmed that it was an across-the-board deduction decision for all farmers in the co-op. She had talked to larger herd owners and they confirmed to her that they also got the letter. “Like the other farmers who got the letter, they said they had gotten no heads-up ahead of time,” she added.

Fischer is in the process of looking into the question of the make allowance and how it does or doesn’t affect value-added cheese production and thus the producers who supply the milk to cheese plants. “Farmers are afraid of retribution. They are telling me they feel they need to do this if they want to have a home for their milk,” she said. “But things have got to change in milk pricing. There has got to be more transparency.”

Farmers caught in crosshairs

Fischer said her American Dairy Coalition’s bottom line is this: “We are navigating uncharted waters with a system that is antiquated, not nimble; and a convoluted milk pricing scheme in which the actual dairy farmers need to have a clear and conclusive voice,” she said.

“We understand that processors are facing inflation in their input costs,” she added. “Farmers are experiencing intense inflationary pressure on their operations too. The difference is, the farmer’s cost of production is not considered in the milk pricing formulas – at all.”

In talking to dairy farmers this week, Fischer said she is hearing of other milk buyers –both cooperatives and proprietary plants – that are sending letters regarding deductions from their patrons' milk checks. “I haven’t seen the letters but I’m told one plants to deduct $5 per hundredweight and another plans a $2.50 deduction," she said. "It may be that they are planning to re-vamp a number of the programs, like somatic cell count and volume premiums and those combinations add up to these higher values."

The way she read the Foremost letter, it seems to her as if the 90-cent deduction was scheduled to run from September through the end of 2022, Fischer said.

Other dairy industry sources told Wisconsin State Farmer that if those larger deduction rumors are true, they would likely be a one-time thing. But overall, milk pricing is in turmoil and farmers have a hard time figuring out all the nuances of how they are getting paid.

“We are in a milk pricing meltdown,” says Pete Hardin, editor and publisher of The Milkweed, a national dairy publication headquartered in Wisconsin, “This is hurting everyone.”

Past management

Hardin said that the current management team at Foremost inherited a very difficult situation from previous managers and challenging conditions today have likely contributed to their difficulties.

“The pressure from lenders on businesses that have less-than-sterling equity positions may have played into this decision (taking the deduction from member milk), echoing what has happened with other dairy cooperatives in the past. And with interest rates rising, that probably added to the pressure,” he said.

Pete Hardin

Last November, Agri-Mark cooperative in New England and Eastern New York, placed a 35-cent per hundredweight deduct on its members’ milk, at the behest of its cooperative lenders, and Hardin believes it is still in place. “Lenders are pressuring cooperatives to boost their equities given the uncertainties and volatility in the dairy business right now,” he added. “Foremost blaming the barrel/block market becomes, in part, a convenient whipping boy. I think there are probably longer standing structural issues.”

Another problem that is likely hurting Foremost Farms is a large inventory of whey. In January and February, when whey prices were hitting record highs, dairy plants weren’t able to fully capture the profits, he explained. Since that time the whey market has collapsed when China dramatically reduced its purchases. His sources tell Hardin that the co-op is now sitting on a large inventory of whey. They have been trying to unload whey at very low prices, he has heard.

The fact that the Baraboo-based cooperative placed the ongoing 90-cent deduct on member milk is a phenomenon he has seen repeated when dairy co-ops get into equity trouble. In another case, Hardin said the financially troubled Swiss Valley Farms co-op (before it merged with a more financially viable group) raised hauling rates dramatically per hundredweight after the lender intervened. “Of course, the truckers didn’t ever end up seeing that money,” he added.

In November 2020, Hardin reported on Foremost Farms previous management miscues, when they were selling their cheese and allowing big customers like Nestle and General Mills to delay payments for six months. That led to interest costs for the year 2019 that stood at $15.86 million – a 391 percent hike in interest costs from the previous year. “That’s how bad their former management was,” he said.

Financial statements from Foremost at the time also showed $10 million worth of missing cheese inventory. According to its own financial reports, Foremost Farms lost $52.1 million in 2019 and also wrote down $57.7 million in member equities.

“I feel sorry for the farmers,” he said. “Boo hoo – operating costs are up at dairy plants. They’re up just as much on the farm. Can’t the co-op get their margins out of the marketplace?” Hardin said.

Plant closures too

In other Foremost Farms news, the co-op will discontinue operations at two of its plants at the end of the year – Milan and Plover, Wisconsin. The closures reportedly will impact more than 100 employees. In its statement announcing the move, Foremost states that the closures were not a “reflection on the performance of employees and leaders in these locations.”

“The Foremost Farms Board of Directors and leadership agreed it is in the best interest of the performance of the cooperative as a whole to discontinue operations in these locations,” their statement said.

The production limitations in both of the aging facilities and labor challenges have created financial inefficiencies and it would take significant investments to bring the plants up to date and add the kind of technology that would be necessary. Therefore the decision was made to divert milk and move operations to other plants that are newer or already have the necessary technology in place.

One unnamed source alleged that the Milan plant has been for sale (with no takers) and may have been targeted for closure because its workforce is part of a union.

Foremost Farms USA was created in 1995 from predecessor cooperative Wisconsin Dairies and Golden Guernsey Dairy Cooperative. There are an estimated 5,300 farmer-members in Wisconsin, Minnesota, Iowa and Illinois. The co-op has 25 locations with 1,300 employees, who process 3.6 billion pounds of milk each year with $775 million in sales.