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3 open minutes with Jim Tillison and Chris Galen

PD Editor Walt Cooley Published on 27 December 2010

Progressive Dairyman Editor Walt Cooley interviews CWT management staff — Jim Tillison, Chief Operating Officer of Cooperatives Working Together, and Chris Galen, Vice President of Communications of National Milk Producers Federation — about the program's shift toward funding export assistance instead of herd retirements.

Q. How and why did CWT first start an export assistance program?

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A. GALEN: You have to go back to 2003 when CWT was first created to answer this question. There were actually three different elements to CWT in its first year.

One of the three, which lasted only a year and was dropped, was paying producers for reducing their milk output, but that didn’t prove to be cost-effective or easy to manage.

What we ended up with was a two-sided coin –one being the herd retirement program and the other being the export assistance program. And the reason that we had the export program was, and still is, because it has a more immediate impact than the herd retirement program.

Think about how we conducted herd retirement rounds. You have to decide to have one, you announce it, you have a period for producers to send in their bids. That usually takes about a month or so. Then you have the auditors visit farms. Then you have a couple weeks to go through all the bids and decide which ones get accepted. Then you have the auditors go out and remove the cows. The cows have to go to slaughter.

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It’s a multi-month process, but the export assistance program is something that can be done relatively quickly. You accept the bids, we announce those at the beginning of every week, and then the bonuses are awarded and the product can be shipped. So it’s a way of addressing supply and demand in a more expeditious way than the herd retirement program.
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TILLISON: The export assistance program was first initiated in November of 2003. At that point in time, we were focusing pretty much on cheddar cheese.

The program really has evolved over the last number of years from a very modest program to one that in 2010 is going to assist our members in exporting close to 80 million pounds of various dairy products.

GALEN: If you look at when the real acceleration began in U.S. dairy exports, it is coincidentally when we implemented the export assistance program.

I'm not saying there is any correlation there. But I think the export assistance program came in at a time when, for a variety of reasons, the U.S. was becoming more capable of exporting more of its production.

Q. Why will this program be more effective than herd retirements?
A. GALEN:
The herd retirement program has had its benefits over the years, but we’ve come to an inflection point after seven years where we and our members felt it just wasn’t going to be as useful going forward because we’re seeing less demand for it and less interest on the part of producers in selling out and liquidating their herds. So that’s why we’re going to be focused on export assistance going forward.

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Q. How did CWT come up with its magic three qualifications for participating in CWT – time (a two-year commitment), cost (2 cents) and percentage of participation (75%)?
A. TILLISON:
First of all, just to clarify, there will be a CWT export assistance program in operation in 2011 and 2012. That will be funded by a carryover of funds from the 2009/2010 budget period. We expect to carry over somewhere around $30 million dollars, and that money will be divided evenly between 2011 and 2012.

The two-year commitment is something that was approved by the CWT committee two years ago and makes it a lot easier to budget what monies will be available. The two cents was a number that was developed in working with our CWT strategic planning committee.

Again, the goal was to maximize participation as well as funding. One of the concerns that our members had was the level of participation by dairy farmers. So the two-cent number was one that would provide us with adequate funding for the program over a two-year period and would hopefully garner us to 75 percent participation.

Q. How close you are at this point to 75 percent participation?
A. TILLISON:
We’re certainly getting there. I think we’ll retain the participation that we’ve had. It’s a matter of picking up some additional participation. And, frankly, there are a number of cooperatives out there that did not participate in CWT before because they did not want to have their monies used for the retirement program.

We had a couple co-ops that said, “If you’d just use our money for the export assistance program, we’ll be in.”

But CWT can’t allow individual members to decide where their money is going to go, so those cooperatives now have indicated that they will participate. I think we’ve got a very very good chance of getting to that number.

Q. Which of the three participation factors, do you think will be up for reconsideration in the future?
A.
TILLISON: Obviously, the program is reviewed on a continuing basis. I don’t want to speculate on what the CWT committee will or won’t do once this first two-year period is up.

Q. What have CWT staff learned about operating an export assistance program that will be helpful in managing the program moving forward?
A.
TILLISON: The big thing we’ve learned is the importance of the export assistance program to the U.S. dairy producer. Peter Vitaliano of our staff did an analysis of what happened in 2009. His analysis shows that there was not a decline in demand worldwide for dairy products or even domestically.

What happened is that the worldwide recession caused a drop in world prices that, frankly, helped our competitors. The U.S. was not able to compete at that level in 2009. But had the export assistance program been available in 2009, the outcome might have different.

Peter’s analysis indicates that the turnaround might have occurred faster had CWT used the export assistance program. Of course, there’s nothing like 20/20 hindsight.

Looking back with the analysis we have today, we might have strongly suggested let’s continue the export assistance program in 2009.

I think the bottom line is that the export market is where the growth is going to be for U.S. dairy farmers. The domestic market is growing with the population, at about 1.10 percent.

The world market is growing at eight times that rate, so going forward, CWTs export assistance program in the next couple years is going to be very important for the U.S. in order to not only maintain market share but grow it.

Q. What dairy products are initially being considered for inclusion in this program?

A. TILLISON: There are a number of products that are on our list that can be included in the export assistance program. A number of cheeses, butter, anhydrous milk fat, whole milk powder and skim milk powder are all products that could be included.

However, the CWT staff has the responsibility of looking at what’s happening in the world marketplace and determine which products would be the best place to put the export assistance dollars available in order to have the most positive impact on dairy farmers’ bottom lines.

For example, the program was budgeted in 2010 for $20 million, and in March of this year, we looked at the inventory situation and said we need to do something about the American cheese inventory overhanging the marketplace. So we initiated the export assistance program and said the only products available would be cheddar cheese.

Later on, we added other American varieties and Gouda because they can all be made at cheddar cheese plants. Then in late July, the butter price started to erode, and we had members concerned about our competition undercutting them in the world marketplace and taking business away, so we put in place, export assistance for butter and anhydrous milk fat.

However, once the butter price got over $2.00 and kept going, the decision was made that we didn’t want to make our domestic price so attractive that imports would come in and undercut our domestic products, so that program was suspended.

As far as looking at 2011 and going forward, we’ll sit down with the U.S. Dairy Export Council (USDEC) staff and use their counsel to tell us what the world market looks like, where the potential for growth is and where the product demand is so we can put that into the equation in terms of deciding what products to include in the program.

Q. Mozzarella has never been available for export assistance. Why?
A.
TILLISON: There are some cheeses that, frankly, don’t need export assistance. Mozzarella is one of those products. The market seems to be robust, and we seem to be competitive in the marketplace without the export assistance.

Also, under the current milk pricing system, it’s cheddar cheese that has the most impact on producer milk prices. So at this time, mozzarella and some other cheeses that don’t directly the impact producer milk prices aren’t included.

Q. How would you define what a robust CWT export assistance program looks like in five years?
A.
TILLISON: We’re looking at it from the perspective of Foundation for the Future and what impact it will have on the U.S.’s ability to compete in world markets.

When Foundation for the Future is enacted, it should make us more able to compete in the world marketplace, and I think that the possibility is that CWT’s role will have to evolve somewhat. But again I don’t want to speculate what that evolution might be.

GALEN: Longer term, I think we are looking at a world with a lot fewer, if any, government export subsidies for dairy products. The Europeans have recognized that they see a world without these, and they are by far the biggest user of them. But that leaves open additional opportunities for privately funded, country-specific export programs like CWT to help with market access.

Q. What do you perceive is the biggest obstacle to achieving 75 percent participation in the program?
A. GALEN:
In the past, sometimes producers would say, “What value is CWT to me if I don’t have any interest in selling out my herd?”

They were thinking of it mainly as a herd retirement program, and that’s very much a first-person, self-minded attitude, but the real value of CWT is not because a particular farm could liquidate its herd and be compensated for doing so, the value is in reducing supply or helping supply match demand in a way that enhances prices and helps everyone’s bottom line.

Now we have a number of co-ops that either don’t manufacture products or they don’t manufacture products that would be eligible to export through CWT and so they may be asking, “Why should we contribute two cents a hundredweight on our producer’s milk if we can’t avail ourselves of the export program?”

The answer is it’s not necessarily to help you develop overseas business. That is not the end. That’s the means to an end. But the end is that by exporting more, we help with the bottom line for everyone in the business, whether you sell cheese or butter domestically or internationally.

TILLISON: The purpose of CWT was not to remove dairy farms. The purpose of CWT is to enhance and maintain producer milk prices, and what we’re doing now is taking a different approach.

The herd retirement program was like a hamster on a wheel. When milk prices went down, CWT would remove cows. When milk prices would go up, producers would add cows. It was a continual process of increase and decrease.

I think the export assistance program can be more effective than the herd retirement program from the standpoint of building a permanent market for dairy products, which has a longer term impact than removing cows occasionally. PD

Walt Cooley
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