Foremost CEO visits with Watertown dairy, explains assessment

Jan Shepel
Wisconsin State Farmer
Rachel McManama Schroeder and her father James McManama operates the dairy Simply Crazy Farm near Watertown. The 90-cow operation produces milk for Foremost Farms which recently informed its members the cooperative would deduct 0.90/cwt retroactive to Sept. 1, 2022.

Last week the Wisconsin State Farmer reported that Foremost Farms management sent a letter informing farmer/members that the dairy co-op will deduct 90 cents per hundredweight from member milk retroactive to September 1. The missive did not specify on how long the deduction – called an assessment – from member milk would go on.

Farmers who talked to us were upset because they felt that the assessment came out of the blue. One of those was Watertown area farmer Rachel McManama Schroeder who said she felt the co-op was using its farmers as an ATM. She wasn’t happy about the letter’s lack of explanation on why management felt it had to take this money away from members.

She called the corporate offices in Baraboo and emailed CEO Greg Schlafer and Darin Hanson, senior vice president of supply chain and risk management, who had both signed the letter to members. She got a phone call back from Schlafer and told him that she’d like to have a better explanation of the reasons behind the assessment on farmers’ milk.

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

The letter had been written and sent to farmer/members just ahead of a delegate meeting and Schroeder is an alternate delegate. She told Schlafer that she had not been able to make the delegate meeting because of chores at the farm she operates with her father James McManama.

“Greg (Schlafer) emailed me back within a day or two and offered to come to the farm. I told him I would like to talk to him in person,” she said. “We run a 90-cow dairy farm and in the grand scheme of the cooperative we are not that big a deal. But I told him I would really like to hear from him in person.”

Schroeder felt that it showed a sense of leadership to have the co-op’s CEO come to their farm and discuss the move with her and her dad. “Dad was really surprised and grateful that he came to the farm to discuss this with us. We expected maybe an hour and he sat at the kitchen table in the farmhouse with us for two hours.”

Schroeder said Schlafer never made them feel it “was beneath him” to be there, adding that this is “completely different leadership than we have ever seen at Foremost Farms.” The letter that went out to members, however, was short on specifics and “was exactly the kind of letter we would have seen from the previous management,” she said.

Rachel McManama Schroeder, left, meets with Foremost Farms CEO Greg Schlafer and the cooperative's field representative Kayla Wilson.

The letter stated that the decision to implement “market adjustments” was 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 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. When Schlafer spoke with the family, she said the CEO mentioned inflation. “But everybody has to deal with that,” she said.

Her takeaway from their meeting was that the biggest problem for Foremost Farms was that the price disparity between blocks and barrels is costing the co-op money and is the driving force behind the assessment that has now been put on farmer/members. “Nine tenths of the time blocks prices are higher than barrel prices but those prices have been inverted for some time,” Schroeder said. “Greg told us the co-op was going to try to ride it out but they anticipate it’s going to get even worse and they decided to put in the assessment.”

Schlafer told her that Foremost Farms was trying to be as transparent with producers as they could, but couldn’t offer a more detailed explanation in the letter as it might have taken 10 pages.

Schlafer explained to Schroeder that this block/barrel price inversion is hitting all co-ops but others may be taking their margin losses from producers by lowering other premiums, like butterfat or protein or other solids. He told Schroeder that his management team is trying to be more transparent than that.

Dairy industry experts who spoke to the Wisconsin State Farmer previously suggested that a co-op like Foremost Farms may be getting leaned on by the bank for cooperatives, CoBank. When posed the question, Schlafer told the family that CoBank was not involved in pressuring Foremost to enact the assessment. Schroeder said that she talked to Foremost board members and they confirmed that CoBank was not behind the move to impose the assessment.

Blocks and Barrels

The prevailing prices for Cheddar blocks and barrels are a key factor in the price that farmers will see as the Class III price. The two are both called Cheddar, but are generally two distinctly different products. Blocks are usually made in a 40-pound size and are the orange color that American consumers expect from Cheddar, while barrels are typically 500 pounds and are generally white Cheddar.

The smaller blocks are generally cheese that is ready to be cut and wrapped or shredded or sliced for retail sale. The larger barrels are destined for further processing into other products.

Production of the larger barrels, which are almost always white, results in whey that is also white. That white whey can go into high-value products like baby formula. Natural annatto, a reddish-orange food coloring that comes from the seeds of achiote trees, is used in the coloring of the orange Cheddar blocks. When cheese is made with it, it moves into the whey. The orange whey can be bleached to make it white, but many end users specify in their contracts that they don’t want bleached whey, making it a lower value product than naturally white whey.

Most cheese factories make either blocks or barrels because each requires specialized equipment and those products are destined for certain markets, that the cheese factory has developed.

Even if a specific plant doesn’t produce those kinds of cheese, Schlafer told Schroeder and her dad, the contracts for other cheese types, like mozzarella, are based on the price structure created by the blocks and barrels.

Part of the reason for barrel production’s rise – and the resulting block/barrel price inversion – is the byproduct market. The rising value of whey has led to the increased production of barrel cheese, because it will also yield white whey and processors have realized that they can cash in on the whey.

Dairy pricing experts explain that the other part of the block/barrel price spread problem stems from the way Class III milk is priced. The Federal Milk Marketing Orders determine milk prices based on what it will be used for. Class III prices are for milk that is being sold to make cheese. Farmers who sell their milk for this Class III use are paid on a formula which factors in prices for cheese, whey and butter.

A nationwide survey of cheese factories used in determining this formula uses only block and barrel prices, rather than factoring in the nation’s most-produced cheese – mozzarella.

Some experts argue that if mozzarella was added to the survey – because it is now the dominant cheese in the marketplace – and if it was weighted to reflect its importance to the Class III price paid to farmers, the picture would be fairer.  Others caution that a large portion of what is called “mozzarella” in the marketplace is really “pizza cheese” which does not have a standard of identity and if it were included in the pricing system it would not make things fairer for milk producers.

One dairy pricing expert told Wisconsin State Farmer that the situation Foremost finds itself in reflects the volatility within the dairy product complex; there’s the block/barrel split and then there’s the butter/Cheddar split. Cheesemakers are also dealing with a make allowance that hasn’t been updated since 2009 (based on two-year-old data.) What Foremost is dealing with reflects the stresses on “virtually all cheese plants nationwide.” 

Hurts all cheese prices

Schroeder said her co-op makes a lot of different cheese types but contracts that are made with buyers of that cheese are all based on the inequitable system. “We were told that Foremost is trying to see if there is a different way to price them, but customers are getting a deal right now. (Schlafer) said they are trying to be proactive and they are working on it,” she said.

Schlafer told Schroeder and her dad that he didn’t know what the end date would be for the milk producer assessment. “He didn’t have answers for 2023.”

He did tell them that the 90 cent per hundredweight is only being assessed on milk that is produced in the Midwest. “Producers in Indiana and Michigan are in a different federal order and milk is priced differently there because of Class I utilization. In the Midwest, we make cheese, so the block/barrel price spread is what’s hurting us. It’s the milk going into Class III that is getting the deduction,” she said.

Schlafer did confirm to her that the 90-cent assessment was being leveled on all Midwest farms, regardless of size.

Schroeder also told Schlafer that she appreciated the tough job that he’s got – trying to balance all the market forces, the demands of its lender, and also look out for the farmers. “I told him that there’s more emotion, heart and passion in these farmers than there is going to be in any other industry.”

The CEO shared with the farmers that when he worked at General Mills before coming to Foremost, he had different levers he could pull but with the tight margins in the dairy business and the arcane pricing system that almost no one can understand makes it a bit more difficult, Schroeder related. She told Wisconsin State Farmer that she wanted to do a follow up to the story last week, because she was impressed with the leadership that Foremost’s CEO had shown in taking time with a farmer/member.

They also talked about the announced closure of two of Foremost’s cheese plants and whether that would save enough money to help out operations. Schroeder said he explained that those plants won’t be closed until the end of the year, so the closures aren’t doing anything to save money for the co-op right now. “He explained that it’s going to be better to move the milk to another, more efficient plant and close the two that are older and less efficient,” she said.

When producers got the letter about the assessment in late September, they “wanted to yell and talk to the media,” Schroeder said. “Dad and I felt the same way. We were asking questions and not getting answers. With this new management team, producers are willing to speak up and expect more transparency. I appreciate the CEO coming out to the farm and I’m going to have to trust that it will turn around.”

Nevertheless, the assessments are hurting producers and she wanted Schlafer to know that. “I wanted him to know what’s happening down here at the farm level. We told him that when they are making new contracts (with cheese buyers) at the end of the year, to think of us out here on the farms.

“Dad felt the same – that Greg had shown more leadership than we’ve ever seen. We could tell that he cares and that the management team is trying. In the here and now, there’s only so much they can do,” Schroeder said. “We are still not happy, because it still hurts, but at least we understand it better.”

Her family’s farm was founded in 1958 with her dad joining the operation in 1980. Schroeder earned a degree in Dairy Science from UW-Platteville and then worked as a herd manager for Crave Brothers and later took a job at Mid-State Equipment to learn more about business. After making improvements like adding a freestall barn in 2011, her dad invited her back to the farm in 2013 and the two have been farming together ever since.

“We really don’t argue. We have four part-time employees to help milk and do field work,” she said. Rachel’s older brother helps out with field work during crunch times and a younger sister helps with Rachel’s two young children, ages 6 and 2. “There’s no better way than being raised on the farm, learning the value of work and seeing them fall in love with the cows.” Rachel’s mom recently retired from her job as a radiology technician.