Walmart Stores Inc.’s recent move to begin producing its own milk has prompted Texas-based Dean Foods to cancel contracts with more than 100 farmers in eight states.
The cancellation notices went out last month to farmers in Indiana, Ohio, Pennsylvania, New York, Kentucky, Tennessee, North Carolina and South Carolina, the New York Post reported.
Two years ago, Wal-Mart said it would build a dairy processing plant in Indiana to supply private-label milk to about 600 stores, curtailing business with some suppliers in the retailer’s sole foray into food processing in the United States, Reuters reported.
In a March 2016 securities filing, Dean Foods said the change by Wal-Mart could lead to the loss of 100 million gallons of “very low-margin private-label fluid milk volume” from late 2017.
Wal-Mart confirmed that Dean Foods would continue to supply milk for its Great Value and Member’s Mark private label white and chocolate milk to other Walmart supermarkets and Sam’s Club membership-based wholesale stores. The retailing giant is the largest grocer in the U.S. with more than 5,000 locations.
The plant will supply milk to stores in Indiana, Illinois, Michigan, Ohio and northern Kentucky, the company said.
Meanwhile, farmers and industry analysts say part of the problem facing American dairy farmers is the move to nut- and soy-based drinks.
“Americans drink about three gallons less milk per person per year just since 2010, and per capita consumption is down about 11 gallons since 1975,” Dean Foods spokeswoman Reace Smith told the Post. “The U.S. dairy industry is currently producing 350 million more gallons of milk each year than the year before.”
Smith confirmed to the Post that Walmart’s decision to open a milk bottling plant in Fort Wayne, Ind., played a part in the decision to fire the dairy farmers. “The introduction of new plants at a time when there is an industry-wide surplus of fluid milk processing capacity forced us into this position,” she told the Post.
Eliminating intermediary suppliers would likely give Wal-Mart greater control over input costs and more closely align it with other grocery chains like Kroger and Texas-based H-E-B that have already set up their own milk processing plants.
The shift also dovetails with Wal-Mart’s strategy of boosting its private brand offerings as a way to better compete on price, although the company said it did not have any plans for additional milk or food processing plants.
Meanwhile, Dean Foods’ decision to end contracts with at least 42 Pennsylvania farms has set off a two-month scramble for small, family-owned farms to find another buyer at a time that the market is flooded with milk and prices have hit rock bottom, the Pittsburgh Post-Gazette reported.
“A cancellation notice like this is almost a termination of the business notice,” Dave Swartz, assistant director of programs at Pennsylvania State University Extension with a focus on the dairy industry, told the Pittsburgh Post-Gazette.
“Those farms will have to find a new buyer and right now it’s very questionable whether they can do that,” Swartz told the Pittsburgh Post-Gazette. “There’s more milk than what we need in the nation.”
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