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May 2009 Archive for Dairy Talk

RSS By: Jim Dickrell, Dairy Today

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

Dairy Crisis Demands Radical New Thinking

May 26, 2009

By Jim Dickrell

"You don’t ever want a crisis to go to waste; it’s an opportunity to do important things that you would otherwise avoid.” –Rahm Emanuel, Obama White House Chief of Staff.

Emanuel’s words on the U.S. financial crisis apply equally as well to the crisis in the dairy industry.

Everyone in this industry knows what a mess we’re in. But from where I sit, it seems that producers who are struggling—and failing—to meet cash flow are the only ones with a real sense of urgency. It took months to organize the 7th  round of the Cooperatives Working Together herd buyout. It’ll be June before significant numbers of those cows start heading to market.

And it was only two weeks ago when the National Milk Producers Federation announced the formation of a Task Force to address the national dairy crisis. The Task Force won’t even be organized until the NMPF Board meeting June 10 and won’t have its first meeting until after that. That will be a full six months after the 2009 Dairy Forum in Florida, where speaker after speaker laid out the crisis the industry is now facing. 

In the absence of action, numerous grass roots efforts have bubbled up. First, there’s the Specter/Casey bill , which dairy lobbyists dismiss as too radical and too cumbersome—and perhaps, a little too goofy—to have much traction. It would require USDA to collect cost-of-production data from the across the country, and then set minimum manufacturing prices at $17 or $18/cwt. 

It would collapse all Class II, III and IV milk into a single manufacturing class, and require California to become part of the Federal Order system. It also advocates supply control, though it’s hard to envision how the proposed control mechanism would prevent the build up of mountains for surplus powder and cheese.

Another proposal, the Dairy Price Stabilization Program, advocated by Holstein USA and California’s Milk Producer Council, would assign production bases to every dairy farm in the country.  Those wishing to expand would be required to pay a “market access fee” of $2 to $3/cwt on all milk marketed for the next four quarters following expansion. New dairy producers will also have the market access fee assessed for their first year of operation.

This plan would certainly put the breaks on expansion, but is hugely bureaucratic and doesn’t begin to address a whole host of other problems facing the industry.

And then there are those who simply want to dump milk to immediately reduce surpluses. These efforts are born out of pure frustration; they have the “feel good” aspect of at least doing something immediate. But long term...

The problems we’re facing in the current crisis were set up by years of benign neglect by both producers and processors. There’s lots of blame to go around. Yet, in the meantime, we’re eating our own and failing to address fundamental problems:

  • Wild price volatility and a safety net gap of $5 or $6 or more between average cost of production and the dairy price support of $9.90.
  • A Federal Order system that is so complex and cumbersome that it is  impossible to reform in any meaningful way.
  • Standards of dairy product identify that are so restraining that we give up any hope of innovation and increased market share outside of traditional product categories.
  • A take-it-while-we-can-get-it attitude toward exports, and a failure to recognize the immense potential that lies in overseas markets if we’re only willing to seriously pay the price to realize those opportunities. 

Last week, USDA announced the June Class I price for 3.5% milk at $10.08/cwt.  Friends, that’s the Class I price! 

Rahm Emanuel is right: Never let a crisis go to waste. What are we waiting for?

—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.

 

How Many Cows Will CWT Kill?

May 11, 2009

By Jim Dickrell

Now, it’s a waiting game. Cooperatives Working Together (CWT) officials are meeting today to start their analysis of the 7th round of CWT bids.

It may take another 10 to 14 days before CWT officials publicly announce the tentative number of herds accepted, says Chris Galen, National Milk Producers Federation spokesperson. On-farm audits of accepted bids could begin next week, but it will be another month before all those who submitted bids will be notified of acceptance or rejection.

Guessing how many cows CWT could kill in this seventh round is pure speculation, of course. 

And as they say in all stock offerings, past performance is not an indication of future performance. But here are a few numbers to think about:

With roughly two-thirds of U.S. milk production signed to participate in the CWT this year and next, roughly $250 million will flow into CWT coffers over that period. The average bid over the previous six rounds was $5.60/cwt, or roughly $1,100 per cow (assuming a 20,000 lb/cow average).

If this round of bids comes in at the six-year average and if CWT blows its entire wad on buying cows in this round, that suggests that, at most, 225,000 cows could be getting CWT eartags within the next month.

If  CWT wanted to tag 300,000 cows, that suggests the average bid could be no more than about $800 per cow, or $4.15/cwt.

Both of those scenarios are unlikely. First, it’s unlikely CWT officials will shoot their entire bank roll at one time. Politically, they’ll want to keep some of their powder dry to come back with another round later if needed. That’s especially true if USDA doesn’t restart the Dairy Export Incentive Program. NMPF will undoubtedly want to have at least some funds in reserve to subsidize product sales over the next 18 months.

At the same time, I doubt many producers will bid much less than $4/cwt—unless forced to by skittish lenders.  (The lowest average CWT was $4.02 in 2003.) At $4, that means a CWT payment of $800 per cow plus maybe $500 for the beef price (remember, a third of these cows will be light weight, first-calf heifers)—or $1,300/head. A $3 CWT bid will barely net $1,100/head.

There’s also concern that CWT will take out too few cows. The most cows CWT killed were 64,000 head in 2005. Less than that number now, given CWT’s cash commitment from members, will be viewed as too timid. In fact, you could see markets drop (yes, they can drop further). 

In any event, cows are going to die this summer whether it is through CWT, voluntary culling or lender-led culling. CWT probably offers the best option for those producers  who want or need to get out quickly. 

Just don’t pin your hopes on a market recovery from 300,000 CWT eartags coming to market in the next 60 days.  That number—or more—will come to market. It’s just going to take more time.          
 

—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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