Mallorie’s Dairy: Changing regulations challenge producer-handler

July 2009 Posted in Community

By Dixon Bledsoe

Teri Mallorie Kilgus, herd health manager and co-owner of Mallorie’s Dairy of Silverton, is proud of how her father started the dairy and is determined to keep it going. Recent challenges to the business have been met, but more loom on the horizon.

Four years ago, national milk cooperative and processor organizations were successful in convincing the U.S. Department of Agriculture that farms that produce and process their own milk – producer-handlers – had an unfair pricing advantage. Mallorie’s is one of three dairies in Oregon operating as a producer-handler.

Charlie Flanagan, Mallorie’s business manager, said the company raises the cows, milks them, pasteurizes the milk and distributes to wholesalers, retailers and end-users. That means it sells milk to companies that make things like yogurt and cream soups, independent retailers like Roth’s Fresh Markets and distributors that serve a variety of end-users such as small stores, coffee shops and nursing homes.

At the time of the ruling, Mallorie’s had a herd of 1,200 Holsteins, 1,800 other animals including new calves and produced 12,300 gallons of milk daily.

The ruling, in effect, removed an exemption of nearly 75 years that had allowed producer-handlers to operate outside regulations that set farm milk prices. Producer-handlers like Mallorie’s had been exempted because they did not buy milk from other farmers.

The rule basically changed the playing field so producer-handlers producing more than 3 million pounds of milk monthly became regulated and subject to the pricing provisions set by USDA. At the time, Mallorie’s was producing about 4.5 million pounds per month.

The change was nearly devastating to the locally owned and managed dairy started by the late Robert “Bob” Mallorie, DVM, in 1954.

The result would have been that Mallorie’s would have had to “sell” their milk, at least on paper, and then “buy” it back at a higher price. Flanagan said the cost of compliance with the change would have been enormous.

What the company chose to do was sell off 800 cows, 800 replacement animals, cut 25 jobs and pay legal fees to combat the charge led by the big processors. They rediced production to the 3 million pound mark and kept the exemption.

“A lot of people don’t understand that milk processors don’t even have their own cows. They simply buy the milk elsewhere, often from many different dairy farms. They have economy of scale because these are huge processors,” Kilgus said. “We have a ‘closed’ herd, meaning that every animal on our farm was born here and raised by us. Mallorie’s Dairy has full control of the business of turning out quality milk.”

Under the watchful eyes of the Mallorie family, Flanagan and quality control expert Jorge Villafan, one of four licensed pasteurizers in Mallorie’s bottling plant; the dairy is a model of vertical integration, where a company handles all aspects of the milk business.

Kilgus learned the business working with her father, who earned a Doctor of Veterinarian Medicine degree from Ohio State University. She is focused, as he was, on herd health.

“Dad started out not as a dairyman who decided to become a veterinarian, but as a vet who always wanted to own and operate a dairy. He paid particular attention in making sure our cows were well-fed, healthy and comfortable.”

Kilgus set straight the issue of tethered veal calves. “We have never grown calves for veal,” she said. “We grow our own cows because we have great control over the whole process. We keep a few bull calves for breeding purposes, but sell the rest of them.”

The Mallorie’s Dairy main site on Hazelgreen Road outside of Bethany sits on about 400 acres, but there is also the Mt. Angel farm and a feedlot in Culver. The company grows a third of the herd’s feed supply. Cows are fed different formulas depending on their nutritional requirements. Kilgus said, “Our milk cows get high quality feed. … It is very important for consumers to know our milk is high quality. You can taste the difference and we do not use rBST (Recombinant Bovine Somatotropin), an artificial growth hormone injected into dairy cows to boost milk production.”

Mallorie’s Dairy was awarded five-star recognition for its products, practices and environmental stewardship by the Milk and Dairy Beef Quality Assurance Center in Stratford, Iowa.

The award is their highest rating and was presented after a review by a DQA Five-Star field staff and a certified professional consultant inspection of the operation.

Mallorie’s Dairy is aware that consumers are concerned about where their food comes from and that it is produced in a responsible manner. It has even spent thousands of dollars reducing odors periodically emanating from the dairy.

“No one is getting rich in the dairy farming business these days,” Flanagan said. “Gas is higher, corn is being taken out as feed and being used for bio-fuel causing prices to go up and milk prices are essentially fixed by the U.S.D.A. Right now, the price we get for our milk has been less than the cost of producing it since January, but in the dairy business you are either in or you’re out. You can’t just turn cows off and on depending on economic conditions.”

Kilgus and her family are firm believers in the values her father instilled in them. “We know what we’re doing. Our quality control is the best in the business because we take care of all aspects of the business. … My dad actually delivered milk to houses, getting up at 2 a.m. to start. He trained us to keep it going. When he passed away, it was scary for us kids, but we are doing it.”

He also instilled a sense of community service, and the dairy’s list of donations and causes is long, including recently donating a beef cow for Silverton Area Community Aid.

But more purposed regulatory changes are causing the Mallorie’s crew to ask “Why are they doing this to us?” The U.S. Department of Agriculture, at the behest of the same large national processors, is considering tightening the exemption requirements.

“The new rule, if implemented, will exempt only those small producer-handler dairies producing less than 450,000 pounds per month. If they get their way, it will have a terrible effect on small companies like ours,” Kilgus said. “To us, the impact will be terrible.”

A U.S.D.A. decision will be made in October. Producer-handlers are being singled out because they are independent entrepreneurs that have created a different business model. “This is a fight for survival and someone has to root for the little guy,” Kilgus said.

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