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AgDairy Market Update

RSS By: Robin Schmahl, Dairy Today

Robin Schmahl is a commodity broker and owner of AgDairy LLC, a full-service commodity brokerage firm located in Elkhart Lake, Wis. He provides dairy market insight.

CWT Finally Moves in the Right Direction

Nov 01, 2010

CWT’s focus on export assistance is long overdue. Under the herd retirement program, millions of dollars were spent on helping farmers get out of business. Now, money will be spent on what it should have been spent on in the beginning.

 
After a little over seven years and 10 herd retirement programs, Cooperatives Working Together (CWT) announced the discontinuation of the herd retirement program. Jerry Kozak, president and CEO of the National Milk Producers Federation, said the retirement program “has reached a point of diminishing returns, where there were a declining number of member farms that were expecting to use CWT as a means to liquidate their herds.”
 
The focus now will solely be the export market by the use of the export assistance program that has already been a part of CWT. As a result, the assessment to farmers will be reduced to 2?/cwt. rather than the current 10?. In the coming weeks, there will be an effort made by CWT to obtain the commitment of 75% of the nation’s milk from cooperatives and independent producers in order to move forward with this change.
 
I applaud CWT for finally realizing that export assistance is the way to potentially open new markets for our dairy products and thereby improve milk prices. If the nation’s dairy farmers are going to fund a project to improve price, this is the way to do it. This will take some of our excellent-quality dairy products and put them into the hands of other countries, potentially increasing export demand for those products.
 
This has been long overdue. Previously, the killing of cows through the herd retirement program was the preferred method of raising milk price with the export assistance as only a minor part of the CWT program. Export assistance was even discontinued for a period of time but thankfully resurrected in March of this year. Since then, 51.9 million pounds of cheese and 33 million pounds of butter and anhydrous milkfat have received export assistance.
 
For years, the focus was on killing cows as the only way to decrease milk production and increase milk prices at the farm level. However, statistics show this really did not work. Since the inception of the CWT herd retirement program, 2009 was the only year during which milk production decreased, even though slightly over a half million cows had been eliminated under the program.
 
The main reason for the decrease in 2009 was because of low milk prices and a higher milk/feed ratio, which resulted in heavier culling across the country. The economic crisis had far-reaching effects on the dairy industry and is still having an impact. Exports have improved and consumers have settled more into purchasing food for needs and nutrition rather than frivolous purchases. This has allowed milk prices to improve to the level last seen in October 2008. This is not because of cows being eliminated under the program.
 
Cow numbers during the period from late 2003 to early 2009 nearly steadily increased as dairy producers experienced greater profitability from better milk prices and lower feed prices. Cow numbers dropped dramatically in 2009 and have been increasing again this year. In essence, the CWT herd retirement program provided producer money to those who wanted to exit the industry. Farmers paid for farmers to get out of business. Now that millions of dollars were spent on helping farmers get out, money will be spent on what it should have been spent on in the beginning.
 
Scott Brown from the University of Missouri has shown that during the period from 2004-2009, the CWT program increased milk prices by an average of $0.84/cwt. Of that, $0.76/cwt. was added through the retirement program while $0.08/cwt. came from export assistance. However, this is very difficult to assess as the dairy industry is not a controlled environment. There were and are many market factors that attribute to both high and low milk prices. So the real impact remains very vague.
 
The important thing is that CWT is finally moving in the right direction. We do not need farmers to pay other farmers to kill cows nor do we need a quota system as is being tossed around. Focusing on improving exports and gaining market share is long overdue and more effort in this area is certainly welcomed and will have a greater impact.  
 
Upcoming reports:
 
-          September Dairy Products report on November 2
-          Fonterra auction on November 2
-          October Federal Order class prices on November 5
-          The World Agricultural Supply and Demand report on November 9
-          California Class I price on November 10
-          Fluid milk sales on November 12
-          Fonterra auction on November 16
 
Robin Schmahl is a commodity broker and owner of AgDairy LLC, a full-service commodity brokerage firm located in Elkhart Lake, Wisconsin. He can be reached at 877-256-3253 or through their website at www.agdairy.com.
 
The thoughts expressed and the data from which they are drawn are believed to be reliable but cannot be guaranteed. Any opinions expressed are subject to change without notice. There is risk of loss in trading and my not be suitable for everyone. Those acting on this information are responsible for their own actions.
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