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Dairy’s self-help program self-delusional
Three years ago come July 1, 70 percent or so of American dairy farmers began taxing themselves to fund a program the industry dubbed Cooperatives Working Together, or CWT. The tax was puny, a nickel per hundredweight, or 5-cents for each 11.6 gallons, of milk farmers sold through their cooperatives.

CWT (a take-off on the abbreviation for hundredweight, cwt., the unit by which American milk is sold) was the brainchild of the National Milk Producers Federation, the Washington, D.C. lobby of the nation’s dairy cooperatives.

National Milk made CWT’s goal simple: the money would fund a multi-pronged, voluntary, self-help program to boost farm milk prices.

To do so, CWT would create pools in which dairy farmers could “bid” their cattle into the slaughterhouse. If CWT accepted the dairymen bids, entire herds would be slaughtered to cut future milk production and farmers would keep slaughter receipts and get an additional check from CWT.

CWT’s would also operate an export assistance program. The export subsidy would cover the gap between higher domestic prices and cheaper world prices to underwrite more American exports.

Given the size of the U.S. dairy industry, this outside-the-government plan was as ambitious as it was audacious. To impact prices, CWT would have to kill tons of cows and move tons of exports in the-then 170 billion lbs.-of-milk per year U.S. dairy industry.

But producers - or at least their cooperative bosses - believed. From July 1, 2003 to May 31, 2006, CWT spent $180 million of volunteered funds to slaughter 147,252 dairy cows that, CWT calculates, removed 2.84 billion lbs. of potential milk from the market.

Additionally, dozens of export buy-downs moved thousands of tons of cheese, butter, powdered milk and other products overseas.

Good, right?

CWT thought so. In a January 20, 2004 press release it reported that its first six-month’ effort lifted domestic producer prices by 60-cents per cwt. and resulted “in $1.014 billion in additional dairy farm income.”

That impact, however, is surely overstated because it’s virtually impossible to isolate the effect of removing 1.2 billion lbs., or 0.7 percent, of milk out of the 170.3 billion lbs. produced in 2003.

Additionally, 2004 was gearing up to be the best milk price year ever. Led by a 4 percent surge in demand and only a 1 percent increase in production, milk prices averaged a record $16 per cwt.

Yet, the perceived 2003 success led CWT to continue to fund whole herd buyouts and export price buy-downs throughout 2004 and 2005 even as record to near-record milk prices drove up both programs’ costs. (Farmers need bigger bucks to kill their mini-milk factories when the factories are spurting pure gold.)

The programs, blinded by the perceived success, moved on until, on May 31 this year, they posted a $19.4 million deficit. In simple terms, CWT burned through its cash wad, then turned to its credit card.

As such, on July 1 CWT will double the voluntary contribution to a dime per cwt. to cover the debt and raise another $180 million to continue the programs for another 18 months.

CWT anticipates some producers begging out but “most will move to the dime.”

Should they?

Probably not.

While the programs have killed cows and moved product overseas, their impact on market prices is extremely doubtful.

When CWT began in 2003, the USDA estimated the U.S. had 9.08 million dairy cows producing 170.3 billion lbs. of milk. For 2006, USDA estimates the U.S. dairy herd at 9.1 million head and milk production at 181.3 billion lbs.

In short, despite CWT efforts, the U.S. now has 20,000 more cows making 11 billion pounds more milk. CWT is not just swimming against the current, it’s drowning in it.

Looked at from another angle, the herd buyout and export buy-down are similar to raking leaves in a hardwood forest in October. Are you raking leaves? Certainly. Will you be able to see that you’ve raked leaves tomorrow? Certainly not.

Dairy farmers should tell their cooperatives that CWT isn’t self-help; it’s self-delusion. And at $360 million, it ain’t cheap.

This farm news was published in the June 28, 2006 issue of Farm World, serving Indiana, Ohio, Illinois, Kentucky, Michigan and Tennessee.