Got milk?You got it cheap. Jim Tillison, the Chief Operating Officer of Cooperatives Working Together, thinks there is way too much of the stuff on the market and it’s driving a stake through the heart of the dairy business.Last Friday, CWT announced its second herd retirement of 2009 and the eighth since the programs inception six years ago.
Underlining the urgency they feel, CWT is shortening the time frame for producers to submit bids.If a dairy wants to participate, their bids have to be postmarked next Friday, July 24th.The two ‘retirements’ of 2009 constitute a massive cull designed to take thousands of cows and millions of pounds of milk out of the system as soon as possible.
Jim Tillison cited the financial pressures on all dairy farmers as the driver behind the eight herd retirement since the program began. NMPF President Jerry Kozak called it “A double-barreled attack on milk production in a very short period of time, resulting (he hopes) in a farm level price recovery several months sooner than would otherwise occur.”
The dairy business is desperately in need of that recovery.Milk futures at the Chicago Mercantile Exchange have tumbled more than 50 percent since peaking two years ago, and active August has declined 33.6 percent since late March.
Contributing to that disastrous crash in prices was a ramping up of milk production a few years ago to take advantage of thirsty worldwide markets. It worked well for a while, too.Last year, U.S. dairy exports increased 25% over 2007, reaching a healthy $3.8 billion.
The recession hit fast and hard, though, shrinking exports in the first half of this year by approximately 53% compared to the same period in 2008.An industry that over-expanded during the good times found itself in serious trouble quicker than an AIG exec at a senate hearing.
The problem was that the those cows kept producing. And without a brisk demand to soak up all that liquid output, supplies continued to build and prices plummeted.There were no safe harbors, either. The cost of doing business – feed, fuel, taxes, etc. – kept rising at an alarming rate.
So far this year, 103,000 dairy cows across the country have been sold to beef processors.388 farms participated in the first buy-out with 80% from the southwest and western U.S.California is quickly losing its status as a dairy state, too, as the cost of doing business there is skyrocketing.
This second round of CWT buy-outs could mean somewhere south of a quarter million cows might be taken out of production by year end.With numbers that large, spending a few minutes with Jim Tillison to discuss a suddenly hot topic makes sense,
Q. Jim, let’s start by talking about Cooperatives Working Together and why it was developed. What is its relationship with NMPF and what is its long term goal?
A. CWT was formed in 2003 when dairy farmer milk prices were extremely low, not unlike the situation today. CWT is a cooperative formed under and as part of the National Milk Producer Federation which manages the program.
The goal of CWT is to strengthen and stabilize producer milk prices. It does this currently with two programs – the Herd Retirement program and the Export Assistance program which helps CWT member cooperatives compete in the international market place.
Q. CWT has just finished the farm audits of its seventh herd retirement round since the program was started in 2003. This time, the organization removed just over 100,00 cows and almost two billion pounds of milk. Let’s talk about hard, in-the-hip-pocket numbers. What did it cost to achieve those numbers? And what will it put into the average dairy farm’s bank account?
A. Preliminary numbers – not all producers have been paid as yet – show that approximately $112 million will have been spent on the first herd retirement of 2009. Since the herd retirement has just been completed, a final analysis of the positive impact it had in 2009 won’t be completed until the end of the year.
Remember, too, the first herd retirement of 2009 was a good first step, however, it is the combined impact of it and the just announced eighth herd retirement that will be the most telling.
Q. The herd retirement program helps dairy farmers leave the industry. Can we call it a personal retirement program, too? Doesn’t losing production create some long term concerns about the future of the dairy industry?
A. Yes, CWT does help producers leave the dairy business, but it isn’t a personal retirement program. Dairy farmers don’t produce milk, cows do and what CWT does it make sure that when a farmer leaves the dairy business, his cows do, too.
CWT has been in operation since 2003 and during that time (not including the just completed retirement) it has removed 5.1 billion pounds of milk production capability (276,000 cows) and cow numbers and milk production are both higher than they were the year before CWT started. CWT is a program that tries to bring supply in line with demand when supply is greater than demand. When the market is in balance, CWT doesn’t take action.
Q. This was the seventh retirement program accomplished by CWT in a relatively short time and an eighth is underway. What factors are making it necessary to do it so often?
A. The situation necessitating CWT taking the actions it took in 2008 and in 2009 (executing four herd retirements in a little over 12 months) was caused by the domestic and world economic situation. In January 2008, there were 9.3 million cows producing milk and every pound of milk produced went into the commercial market with 11% of the milk solids produced going into the export market.
Unlike in the past when farmers increased milk production faster than the growth in demand, in the last quarter of 2008 and continuing into 2009, the demand dropped off dramatically both domestically and overseas. Combine the loss of sales and resulting crash in milk prices with significantly higher cost of production and quick and significant action by CWT became critical. That is why an eighth herd retirement – the fourth in just over 12 months – has been announced right on the heels of the completion of the biggest herd retirement program ever.
Q. The retirement program puts a lot of culled animals in the marketplace in a short time. What effect does it have on cattle market prices?
A. In the past five to six weeks, CWT sent over 100,000 cows to meat processing and beef prices are reportedly very strong. With three million cattle going to beef every month, CWT’s actions shouldn’t have a significant impact.
Q. In the past CWT mounted an aggressive export assistance program. You’ve chosen to end that effort for 2009. What was the reasoning behind that decision?
A. The export assistance program was suspended for 2009, when our economic analysis indicated that using CWT funds to retire cows would be a much more effective use of dairy farmers’ investment in CWT. Export Assistance funds have been budgeted for 2010.