I’ve been wanting to say something more about the Organic Valley decision to throw raw milk sellers out of the co-op, but the Wisconsin/Vernon Hershberger civil disobedience thing interrupted my musings. Then, when I read through some of the recent comments by Michael Schmidt, Amanda Rose, Concerned Person, miguel, WI Raw Milk Consumer, Pete, Bob Hayles, and others, about raw milk safety and rights, I suddenly realized the Organic Valley and Wisconsin situations may all be more connected than I initially realized.

My initial reaction to the Organic Valley decision was that the milk co-op may actually be doing raw milk producers a favor by forcing them to make a long overdue business decision: stay with the highly regulated commodity business model that governs the majority of food production in this country, or go the niche route, which Joel Salatin has labeled the artisenal approach.

All of which harkens back to some fundamental principles of business startups, something I’ve researched and written much about (articles and books) before becoming obsessed with raw milk and food rights. Two big red flags associated with starting any business:

— Highly regulated markets. You lose too much freedom of movement, and enforcement can be capricious. Government regulators tend to favor the big guys and go after the little guys because the little guys don’t have expensive lawyers and thus don’t fight back as hard. Sound familiar?

— Commodity markets. No matter what the industry, it’s very difficult, unless you possess some technological advantage, to gain the economies of scale possessed by the big boys. More often than not, entrepreneurs add value via improved quality, convenience, and so forth, but not via lowering the cost and increasing output of production. That’s why entrepreneurs are best at developing high-margin niche, or specialized, markets, rather than competing with commodity products. And even if smaller producers are successful at taking market share from the commodity producers, they invariably react badly, often retaliating by lowering prices below production costs to drive out the little guys.

So here you’ve got raw dairies, which are small enterprises, cast into this sea of regulation and commodity markets. If I was a small business consultant who knew nothing about raw milk, my first reaction to learning about their situation would be, “Oy.” And once I learned more, it would be “Double Oy.”  Would that they weren’t there, but that’s where they are.

So the fallback question becomes: how do we make lemonade out of all these lemons?

Well, the big thing the raw dairies have going for them is that so-called “primary demand” for unprocessed foods is growing. Increasing numbers of people are learning about the dangers of processed foods and foods produced with antibiotics and pesticides. They want real milk, meat, and eggs produced locally by pastured cows and chickens, without the antibiotics, hormones and pesticides of the commodity segment. Similarly, they want organic fruits and veggies.

Also pushing primary demand is that more consumers are coming to understand that the commodity producers and their supporters rig the system. Big Dairy uses its pull to get the governor of a major dairy state (WI) to veto small-potatoes legislation that would open a tiny window of business opportunity for the little guys. The public health officials of a large urban state (MA) push for a crackdown on raw milk delivery services even though there’s not been a public health case in over a decade. A Big Dairy commodity producer thought to be friendly to farmers and consumers (Organic Valley) tries to squash raw milk producers that are grabbing more market share.

The result? Ever more interest and sympathy for the small producers. Stronger primary demand for raw milk and other such unprocessed products.

In the context of running a small business, safety is a business risk. The legal system is pretty clear. If your product makes someone sick, you could very well be held financially liable for damages. The smart business decision: reduce that risk via close attention to safety, and insurance. But even here, the commodity producers and their regulator backers and lawyers are at work, pressuring the insurance companies to help stamp out raw milk producers by denying coverage. They’re pushing major retailers (Whole Foods) to refuse to sell product. These are serious, but not insurmountable problems. When insurance becomes very expensive or unobtainable, companies sometimes self-insure by setting aside money to cover possible claims, or they get together with competitors and develop private insurance arrangements. And if some retailers won’t carry your product, you go out and find others that will, or you develop alternative distribution methods.

As a raw milk producer, though, your trump card is that you’ve got more and more consumers who like your product, and like you as well. But what the hell do you do with all these forces arrayed against you? You use whatever assets you can muster to fight back, and serve the market. In a place like Wisconsin, where the regulators and commodity producers are so totally hostile, there aren’t many assets.

In such situations, business challenges sometimes morph into political problems. A good example is slavery. This was originally a business problem. While free labor helped keep plantation owners’ production costs down, slaves cared ever less for being treated as property. So intense was resistance by slave owners to adjusting the business system that it took the ultimate political crisis– a civil war — to get rid of slavery. The union movement of the early 1900s — an effort by workers to organize themselves for better pay and benefits — similarly spilled over into the political realm via violent strikes and other clashes.

The unfolding civil disobedience in Wisconsin, then, might be seen as a business problem morphing into a political one. Small Wisconsin producers of raw milk are coming to the view that one of the few options they have is to organize themselves and resist. Their best chance of success lies in getting the politicians to order the regulators and commodity producers to lay off, since now votes are at stake in piling on these “good guys.” It worked for the labor union movement in the 1930s and for the Civil Rights movement in the 1960s and the migrant workers in California in the 1970s and 1980s.

Yes, there may well be some “injuries” along the way. Fines and arrests of dairy producers, as the regulators do the commodity producers’ bidding and try to deter mass rebellion. However, if the pain on the regulators and the commodity markets becomes great enough, they’ll have no choice but to relent. The big unknown: how much pain must be inflicted? Was the Acheson/FDA blog post I discussed in my previous post an indication the pain level is rising? Possibly.

I’ve long felt that the Organic Pastures outsourcing that Amanda Rose keeps coming back to and gets so upset about is a business problem. While I personally don’t approve of it, that is really unimportant. All that matters is the extent to which the marketplace cares, assuming there’s no violation of regulations and no one is becoming ill. If California raw milk consumers were to continue buying OPDC milk knowing some components of certain products were outsourced, well, that’s all that really counts in the U.S.of A. Maybe if there were more competitors to Organic Pastures in California, consumers would switch allegiance, but there aren’t.

Does anyone care that cereal makers target little kids with advertisements for sugary cereals? Or that pharmaceutical companies advertise on national television powerful drugs with side effects that can injure or kill patients? Or that people get sick and even die from contaminated spinach, ground beef, and peanut butter? Sure, people care about these things, but mostly, the marketplace solves the problem — consumers avoid certain products, or switch brands, or trust in producer assurances the problems aren’t really so serious or have been resolved.

For reasons that have been discussed at great length on this blog, safety problems with raw milk get magnified way beyond those of any other food. Once again from a business perspective, it’s incumbent that raw dairies pay very close attention to safety, not so much because the marketplace becomes frightened (quite the opposite), but because the business and political forces arrayed against raw milk use such problems as an excuse to try to limit or eliminate production.

But markets being what they are, I foresee the day when, once the regulatory silliness is dispensed with, raw dairies will compete with each other, as Tim Wightman suggests, on the basis of the quality of their milk, much as cheese producers compete. They may well compete on the basis of safety and according to how much outsourcing occurs, and criteria we can’t yet imagine.

I think having this business perspective is most immediately important for two groups: those Organic Valley members who sell raw milk now trying to decide whether to leave or stay with the cooperative, and those Wisconsin dairy farmers trying to decide whether to follow Vernon Hershberger on the civil disobedience path. I don’t mean to suggest these are easy decisions. They aren’t. In some cases, they require serious financial pain and “bet-the-ranch” business strategies. Which brings me to one final principle of entrepreneurship: passion, commitment, and persistence are key determinants of business success.