When he's right on schedule, John Ferguson can predict when street lights will change, when dogs will run out on lawns and when regular...

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When he’s right on schedule, John Ferguson can predict when street lights will change, when dogs will run out on lawns and when regular morning walkers will round the corner.

Having delivered milk to Queen Anne and Ballard homes for 11 years in his black-and-white cowprint truck, Ferguson has become a neighborhood staple. He welcomes morning waves and cookies at Christmas.

Ferguson is a milkman for Smith Brothers Farms one of the increasingly rare family-owned dairies that bottle milk from their own cows.

But unlike Ferguson making his morning rounds, Smith Brothers Farms is not warmly regarded by the dairy industry. According to its larger, organized competition, Smith Brothers and other milking-barn-to-doorstep operations have outgrown the small farms that needed federal government protection during the Depression and should be regulated.

Two months ago, the U.S. Department of Agriculture proposed changing a 75-year-old marketing rule in the Northwest and Las Vegas regions — one that could result in overhauls for Smith Brothers and two other dairies in the Northwest. Supporters of the proposal are confident the secretary of agriculture will adopt the change within the next few months.

“We were very alarmed this could happen after this many years,” said Smith Brothers President Alexis Smith Koester. “We aren’t disrupting the market. We truly don’t feel like we have an advantage.”

Unwinding the exemption

August 2003: Regulated dairy industry succeeds in getting USDA involved in limiting the producer-handler exemption.

September 2003: USDA holds public hearing in Tempe, Ariz.

November 2003: Due to number of participants, USDA has additional hearing in Seattle.

January 2004: USDA holds final hearing in Virginia.

April 13, 2005: USDA issues a recommended decision in favor of changing the 75-year-old producer-handler exemption.

June 13, 2005: Official public comment filing period ends.

Rules of the business

Behind every glass of milk in the U.S., there is a strictly regulated dairy business. Federal marketing rules require dairy farms to sell their milk into a regional pool, and operations that process milk must buy from the pool at a set price. This helps ensure dairies small and large are paid the same for their milk.

But do-it-all operations like Smith Brothers, called “producer-handlers,” have been exempt from the regulations since the Depression. The thinking at the time was they were too small to influence prices and couldn’t survive without the exemption.

Seven decades later, the dairy industry says no more.

Big players like the Dairy Farmers of America, Northwest Dairy Association and the National Milk Producers Federation successfully argued before the USDA that the once-small producer-handlers now have an unfair advantage.

Elvin Hollon, of the Dairy Farmers of America, said the large producer-handlers are pumping out about 10 times as much milk as the average Northwest farm.

“If the average person in Washington was to realize this is not a little ma-and-pop business, that it’s among the largest … they would conclude it is not unreasonable they pay the same minimum price everyone else does,” he said.

In April, the USDA issued a proposal two years in the making. The rule would require Pacific Northwest and Arizona-Las Vegas producer-handler operations that produce more than 3 million pounds of milk per month — more than would fit in an Olympic-size swimming pool — to participate in the milk pool. In this region, the rule change would affect Smith Brothers, Edaleen Dairy in Lynden and Mallories Dairy in Silverton, Ore.

The USDA said “historical justifications for exempting [large producer-handlers] are no longer warranted” and that a producer-handler operation would always have a price advantage over the fully regulated distributors. WestFarms Foods, which sells under the Darigold brand, claimed it lost significant sales to large producer-handlers in contracting with local school districts because the producer-handler could offer their milk up to 40 cents cheaper per gallon.

Jack Rower, marketing specialist for the USDA’s Agricultural Marketing Service, said the milk pool is like having a jar of coins. Adding the producer-handlers into the pool would be like doubling the amount of nickels in the jar. The jar’s entire value would go up, and the split per producer would be worth more.

The USDA acknowledged in its final proposal that “this may cause an economic impact” on large producer-handlers, but said “the impact is offset by the benefit to small businesses” — about 65 percent of the 450 dairy farmers in the Northwest region.

“What the USDA is looking out for is that we are fair to all producers. We want to make sure the orders serve the purpose they are meant to serve … affording everyone to get the proper price for their milk,” said Becky Unkenholz, public affairs specialist for USDA. “I can’t speculate who will be put out of business.”

Delivering a decent living

Ferguson, a Snohomish resident, wakes up at 4 a.m. to load his truck with crates of fresh milk from a distributing plant in Shoreline.

During the 13-hour workday, he can cover more than 100 miles and run cartons to as many as 200 front porches.

It can be monotonous, and there are all those milkman jokes. But it’s a decent living that allows his wife to stay home with his young daughter, Ferguson said. He hopes his line of work can endure in the dairy industry’s changing times.

Ferguson and the 60 other Smith Brothers milkmen may lose their jobs as a result of the rule change. And the 40,000 homes, 12 school districts and smattering of small businesses they serve may have to go farther than their own doorsteps for milk.

Ballard resident Barbara Miller can’t carry heavy cartons from the store to her home. For the past 13 years, she has relied on Smith Brothers’ home delivery service.

“I’ll be very much disgruntled if they have to stop doing that business,” she said. “It will be an injustice, really.”

Miller isn’t alone in her sentiments. The USDA usually gets a small number of comments per decision, said Unkenholz, but is now wading through tens of thousands submitted regarding this rule change.

Smith Brothers, along with Edaleen and Mallories, launched a campaign to their customers, distributing handouts and putting information on Web sites. About 4,200 Smith Brothers customers filed comments to the USDA, said company President Smith Koester.

Smith Koester has run the dairy for nine years. She said balancing both the 3,000-cow farm, located in Royal City, and the distribution plant in Kent costs more than the big co-ops and associations realize.

“Anyone can be a producer-handler. But there aren’t new ones starting up,” she said. “It’s not easy.”

In the Northwest region, there were 73 producer-handler farms in 1997 compared with the nine today.

The 85-year-old Smith Brothers operation, which produces about 6 million pounds a month and does 70 percent of its business in home delivery, would have to reconsider its entire model if the USDA adopts the rule change.

If the dairy wants to continue its business as it runs today, it would have to sell its milk to the regional pool, and then buy it back at the pool price. This would cost about $100,000 to $150,000 extra per month, said Smith Koester, which she claims is more than the dairy’s monthly profits, although she would not release company numbers. If it wanted to maintain an exemption, the dairy would have to cut its operations in half and produce only 3 million gallons a month. This would mean laying off half its 100 employees.

A more feasible option would to become a distributor-only operation, selling its farm in Eastern Washington. Or it could become a producer-only operation, cutting its home-delivery service.

Smith Koester hasn’t made any decisions.

“None of these choices are good. We’ve just built our business plan by these rules,” she said.

A few years ago, Ferguson took a home-inspector class to prepare for the day he could no longer lift heavy crates of milk.

“Now it looks like I may have to put it into play. I hope not,” he said. “I hope we can survive this.”

Christina Siderius: 206-515-5066 or csiderius@seattletimes.com