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RSS By: Jim Dickrell, Dairy Today

Jim Dickrell is the editor of Dairy Today and is based in Monticello, Minn.

CWT maximum bids too high?

Aug 05, 2009

By Jim Dickrell

Cooperatives Working Together officials and accountants are working their way through the latest deluge of bids for the eighth round of herd retirements.

We’ll know by the end of the week, at the latest August 10th, on how many herds and cows have been accepted into the program. What we already know is that the maximum accepted bid will be $5.25/cwt. This is the first time CWT officials have announced a maximum bid ahead of time.

Several producers I’ve talked to have wondered why it was set so high. At $5.25/cwt, a 1,500 lb. Holstein producing 20,000 lb. of milk would generate $1,050. Tack on the cull value of roughly $600, give or take, the total value of the cow comes to $1,650. While that still might fall short of the +$2,000 price such an animal might have commanded a year ago, it’s still not bad and probably far above the current loan value of the animal. 

Keep in mind, too, that successful CWT bidders get this value on all of their animals. Had they sold out through a cattle jockey or even via auction, 20% or 30% of the herd would be sold for cull value only.

So why does CWT set the maximum bid where it does? I called Jim Tillison, CWT CEO, and asked. “We’ve always established a maximum bid that we would accept. But this is the first time we made it public,” he says.

“One reason is with the shortened time frame for submitting bids in this round, we didn’t want producers to guess what our maximum bid would be.”

To establish the maximum bid, National Milk Producers Federation economists survey the country to determine what top selling replacements and springing heifers are selling for. They then subtract the cull value, and then divide the remainder by average production. The result: A maximum bid of $5.25 this time around. Fair enough.

A friend of mine from Colorado, however, still questioned why the bid was so high. His thinking: If you set the maximum bid at say $4/cwt, you could take out 30% more cows. 

Tom Wakefield, a Bedford, Pa. dairy producer and NMPF board member, testified before Congress two weeks ago that CWT has $160 million left in its kitty through the end of 2010. At a maximum bid of $5.25, that means it will be able to buy out about 152,000 cows at that maximum. But if the bids were capped at $4, CWT would be able to buy 200,000 cows. 

Yes, the winning bidders will only get $1,400 per animal (CWT price of $800 plus cull value of $600), but it’s still above loan value for I would think the vast majority of producers. 

The goals of CWT, as I understand them, is to both remove cows and allow bidding farms to exit with dignity. They are both laudable.

But as this dairy crisis drags on and on and on, it becomes increasingly clear that the only solution is to reduce cow numbers and milk production. In fact, Iowa’s Farm Bureau president Craig Lang testified to Congress last week that his organization believes cow numbers must still drop 3%. That’s another 275,000 cows, based on June numbers.

Tillison expects cows accepted into the 8th round will be completely removed by the end of September. It’s too bad more cows couldn’t be removed by then. Then again, CWT is your money and your program. You get to decide how it should be spent. Just don’t ignore the opportunity cost of not doing more for less.

—Jim Dickrell is editor of Dairy Today. You can reach him via e-mail at jdickrell@farmjournal.com.

This column is part of the Dairy Today eUpdate newsletter, which is delivered to subscribers biweekly and includes dairy industry analysis, dairy nutrition information as well as the latest dairy headline news. Click here to subscribe.

 

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