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1409 PD: 3 Open Minutes with Jim Tillison

Published on 21 September 2009

Progressive Dairyman Editor Walt Cooley recently asked Jim Tillison, Chief Operating Officer Cooperatives Working Together, about the effectiveness of recent CWT herd retirements and the future of the program.

Q. How do you measure CWT’s success?
TILLISON: In order to get an unbiased third-party opinion, we went out and asked Dr. Scott Brown of the Food and Agriculture Policy Research Institute to do an evaluation of the program on an annual basis. It’s posted on our website. Basically what it shows is that over the years the program has returned somewhere around $14 to producers for every $1 spent. So we believe the program has been very effective in terms of its objective, which is to strengthen and stabilize producer milk prices.

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Q .How would you answer someone who says CWT isn’t a form of supply management?
TILLISON: I think CWT is a form of supply management. It’s not a government program; it’s not a mandatory supply program, but it very definitely is a supply management program. You’ve got dairymen who produce almost 70 percent of the milk in this country investing in CWT.

For example, by the time we finish this herd retirement, the second in 2009, and if you roll in the herd retirement that we implemented at the end of 2008, which frankly most of the cows came out in January and February of 2009, CWT will have removed nearly 240,000 cows that would have produced 5 billion pounds of milk, so there is no question that CWT is a supply management program.

When milk prices turn around later this fall, in fact they are actually starting to turn around now, but later this fall we will see the full impact that CWT has had as a supply management program.

Q .Is there a supply management program that could have prevented the current dairy recession? Voluntary or involuntary?
TILLISON: I don’t think that anybody foresaw the dramatic drop that we saw in the demand for dairy products in late 2008 and carrying on into 2009. It happened very, very quickly. The way I put it is in January of 2008 we had 9.3 million cows in the national dairy herd and were selling every pound of milk produced.

In January of 2009, we had the same number of cows, actually maybe a slightly smaller number of cows, and we had about 5 billion pounds of milk looking for a home. In this case, the demand didn’t slowly drop – it plunged and very quickly. Frankly, I don’t believe that any program that’s being talked about would have done much to prevent what’s occurred this year.

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Q .How is your organization preparing for future milk price swings and volatility?
TILLISON: Our business model is looking at how the CWT program needs to change to address the volatility that does occur. When people say, “We’re going to be in the same place that we are now in two years,” I don’t agree with that. I think this is a very unusual situation.

However, CWT and NMPF are cognizant of the concerns producers have regarding price volatility. We’re looking at how programs can be adapted or new programs added that will provide more of an ongoing price stabilizing situation when the marketplace and producers are acting normally.

Q. What’s the status of these changes you’ve just mentioned?
TILLISON: National Milk Producers Federation (NMPF) has established a strategic planning task force, and a subgroup of that task force is dealing directly with the CWT program. They’ll look at the proposals that have come to us, plus the proposals our staff makes.

Then they’ll make recommendations to the CWT National Milk Strategic Planning task force. If that group feels they have validity, then a proposal will go to the CWT committee and ultimately to the National Milk Board of Directors. We’re trying to move as quickly as we can with the process, but we want to be diligent about it.

Hopefully a number of the proposals that we’re looking at will be vetted later this year when the CWT committee meets at the National Milk Annual Meeting in November.

Q. What, if anything, needs to be done to make the CWT program more effective?
TILLISON: We’re looking at the herd retirement program. We’re looking at the whole concept of managed supply. We’re looking at expanding, for a lack of a better word, beyond the “whole herd retirement.” We’re evaluating partial herd retirements. We’re evaluating the possibility of a milk production reduction program.

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We’re also looking at some other programs related to younger livestock. We’re also broadening our investigation on what can be done on the demand side too. We’ve had an export assistance program that has worked well. We’re asking how that program can be improved, how can it be expanded.

We’re listening to all suggestions and evaluating them to see how we can make this program work better in the future.

Q. What impact do you think sexed semen has had on the effectiveness of the CWT program?
TILLISON: I don’t think that sexed semen has really had an impact on the CWT program. I also don’t think that sexed semen at this point in time is resulting in a large number of new heifers being on the market. With dairy farmers I’ve talked to and the dairy farms that I’ve visited, producers say they’re aware of sexed semen, but they indicate that they can’t afford to use it in these current economic times.

Obviously down the line, sexed semen will become a technology that is widely put in use, as new technology has always been put to use in the dairy industry, and that is one of the reasons why CWT is looking at what else it can do besides whole- herd retirement programs to manage the supply of milk.

I think that sexed semen will not result necessarily in a huge expansion of the U.S. dairy herd. I think it’s going to result in more rapid turnover in herds, and with more rapid turnover, you’re going to get milk production increases per cow rather than increases in the number of cows being milked.

Q. Why do you think we’re still seeing increases in total U.S. milk production even after CWT herd retirements?
TILLISON: When looking at the cost of production and milk prices that dairy farmers have been facing, are producers going to put $4-5 corn into a cow that’s producing 15 pounds a day when they can put that feed into a cow that will give 80 pounds of milk a day?

If you look at the July milk production report, we’ve actually got 145,000 fewer cows right now than we had in July one year ago. And yet milk production is essentially the same as it was a year ago. Why? Because production per cow has increased.

Producers aren’t going to put expensive feed into an animal that’s not going to give them the most milk they can get for their money.

Q. Why the new penalty for CWT-bid accepted producers returning to milk production within one year? Why not longer?
TILLISON: Starting with the first herd retirement in 2009 the CWT committee indicated that they wanted to have a program that would encourage people not to go right back into business. The discussion did cover a lengthier time for staying out of business and a higher lever of holdback.

The committee ultimately decided that the primary focus of CWT was to remove as many cows as possible, as much milk as possible, and therefore the concern was that a longer holdback period or a higher amount of money being held back would result in less participation in the herd retirement program. One thing that people have to remember is CWT doesn’t exist for people who want to go out of business.

CWT exists to help dairy farmers who want to stay in the dairy business and make money doing it. What our economists tell us is that the most effective thing that CWT can do is remove as many cows as possible as quickly as possible to get the milk price situation turned around.

Q. Has the CWT program already helped most of the producers who don’t want to dairy long-term exit the business?
TILLISON: First of all, it’s not dairy farmers that make milk, it’s cows that make milk. One of the comments we have heard from the start is: “Well, that guy would have gone out of business anyway.”

Yes, that dairy farmer may have gone out of business, but all of the farmer’s cows probably wouldn’t have gone out of business. Let’s say I’m having a hard time, so I decide to go out of business. I sell a few of my cows to someone else who’s not having quite as hard of a time. He milks them and then after awhile he can’t do it anymore so he culls some more and sells the rest. What I like to say that CWT does is speed up what would happen naturally when times are bad.

In fact, our staff did an analysis which showed if CWT did nothing in 2009, the number of cows needed to produce the milk that the market was demanding would reach equilibrium sometime in late spring or early summer 2010.

With CWT taking out 240,000 cows, plus the culling that obviously goes on naturally as well, the estimate shows that we will reach that equilibrium level in the early fall of 2009. So what would take longer to happen naturally CWT makes happen faster because when a dairy farmer goes out of business in the CWT program, all of his milking and dry cows go out of business as well.

They don’t go some place else, they don’t hold on another six months to a year and slow the recovery for dairy farmers who want to stay in the business.

Q. So you’re saying CWT’s primary purpose is not to decrease the number of producers in the U.S.?
TILLISON: Yes. When I first joined the Alliance of Western Milk Producers in California, I went to Monsanto’s test facility in St. Louis in 1991 and I asked the herdsman, “Have you ever tried bST on these low-producing cows?”

He said, “Yeah, we had about 400 cows that produced 14,000 pounds of milk or less the year before they arrived. Before we even injected them with bST, we put them on the pre-bST feeding regime and their production went up to 18,000 pounds.”

So just because a cow is producing 12,000 pounds on a farm and that farm goes out of business, that same cow can go to another dairy farm and produce 16,000 to 18,000 pounds. CWT removes future milk production by removing cows, not farmers.

Q. How much of CWT’s recent activity has used the line of credit CWT secured earlier this year?
TILLISON: The first herd retirement that we carried out in 2009, in which we took out 101,000 cows, we did not need to go into the line of credit at all. And we’ll have to see how this herd retirement shakes out after the final payout.

Going into 2009 and looking at what we thought we’d have to do, we felt it was prudent to get a commitment from our members for two years and then use that commitment to secure a line of credit should we need it. Now that doesn’t mean that we have borrowed money to this point. It means that if we need to borrow money on a short-term basis we have the line of credit that we can do so.

Q. Why do you think milk futures remained relatively unchanged immediately following the announcements of recent CWT herd buyouts?
TILLISON: I think when we announce a herd retirement program the market attitude tends to be wait-and-see. The market says, “Let’s see how much participation they can get.” When I look at 2009, because we’re dealing with more of a demand situation and less of an overproduction situation, I think there were a lot of other factors impacting the futures markets than CWT.

When you look at the cold storage numbers, for example, we have almost 1 billion pounds of cheese in storage, almost 700 million pounds of American cheese overhanging the market, and that certainly provides a damper on the reaction to an announcement that CWT is going to take out x-number of cows.

But I believe when we get to October of this year and there will be 400 million fewer pounds of milk in the market because of the three herd retirements in the last nine months, I think that’s when the price that is most important to dairy farmers, which is the actual milk price, will show a strong response.

Q. Do you think the current dairy downturn will make producers more willing to participate in CWT in the future?
TILLISON: I think the participation in CWT in the future is going to depend on how CWT progresses. The herd retirement program has been an effective program, but going forward is it the only program CWT should have?

I have talked to dairy farmers who have said they didn’t get into the program because they didn’t want to go out of the dairy business, but if they could have participated in some other way they would have done that. So we’re considering the partial herd retirement and the milk production reduction program to make CWT more attractive to more producers.

Q. What’s your campaign speech to producers who demand some type of intervention or a new supply program?
TILLISON: The cost of the CWT program, relative to what a program like this would cost if the government were running it, is very cost-effective. CWT’s administrative costs are less than 2 percent of the total dollars invested into the program. It’s a program that is nimble.

I think one of the things that dairy farmers need to consider very strongly is that the CWT program has had an impact on the price that they get for their milk both in terms of managing milk in terms of supply as well as expanding the market overseas for sales of their milk in foreign countries. PD

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