March 27, 2018

Relationships With Retail Brands Have Advantages, If You’re Ready

 |  By: Mike Opperman

Wouldn’t it be nice to negotiate a fair price for your milk that offers a consistent and predictable margin, regardless of the market? To get to that point, producers have to shrink the distance between the milk produced on the farm and the end product purchased by consumers. Some producers have been able to get there by establishing a supply agreement directly with a consumer-facing retailer. Those agreements are often hard to come by and difficult to secure. Cargill developed a Dairy Enterprise Group several years ago to help create connections between producers and retail brands. Rodrigo Carranza, national sales leader within Cargill’s Dairy Enterprise Group, says producers should be able to answer three basic questions when considering entering into retail supply agreements:

1. Do I have a strong understanding of my cost of production? “Most of the supply agreements are cost-plus arrangements or provide a certain margin over the cost of production,” Carranza says. “It’s really important that producers have a deep understanding of their cost of production so they can agree on a mutually beneficial contract that offers an acceptable margin and they know levers they can utilize to improve efficiencies.” Margins are key on both sides of the relationship, and one of the primary reasons for establishing a direct supply agreement is to reduce milk price volatility to establish a consistent margin. “For us, it’s about establishing a predictable price over the long term,” says Ryan Sirolli, senior agriculture director with Dannon, a company that has nearly 100 producers who ship directly to Dannon plants. “We try to establish win-win relationships that are of economic benefit to the producer as well as to us over the long term.”

2. Am I comfortable with transparency? “We’ve seen greater interest in retailers who are considering greater transparency and traceability due to consumer demands and preferences,” Carranza says. “You have to realize as a producer you are now an extension of the CPG’s brand.” Being transparent means being able to define and defend production practices when asked. Most retail supply agreements require third-party certification on management practices such as animal welfare, animal health, employees, environmental management and other areas of concern to consumers. “Everything we do is really about the customer,” Sirolli says. “People really care about where their food comes from, and there are so many things that they want to know more about. So if you want to establish trust with the people who are going to buy your products, you have to be transparent and with that comes expectation of being a good steward in your community and good steward of the environment.”

3. Do my values align with my potential retail partner? “We look to establish relationships with producers who share our same values in terms of social and environmental priorities,” Sirolli says. “Producers who ship directly to Dannon are an extension of our brand, so it’s important that we share the same values.” In some instances, sharing values means adapting management practices to fit certain requirements, such as feeding non-GMO feed or establishing employee management protocols. Sirolli says there needs to be a willingness from the producers Dannon works with to be flexible to adopt certain management practices that are part of their contract.