How many cows need to go?

Bidding has been underway for 10 days in Cooperatives Working Together’s herd retirement round No. 7. CWT officials are mum about how many cows they want/need/hope to remove from the national dairy herd, but it’s easy to see the number needs to be much bigger than in any previous round.

Our estimate is 353,970 head that are making milk we don’t have a market for. Fortunately, about one-third of them are already gone.

According to the U.S. Dairy Export Council, foreign sales in 2009 will use approximately 7 percent of all U.S. milk production, versus 10.8 percent in 2008. The 3.8 percent difference times last year’s national dairy herd of 9.315 million cows equals 353,970.

The dairy industry could eliminate that many cows if every herd in the country culled 6.2 extra animals. Another way would be to let fatally low milk prices keep slowly bleeding the entire industry to death. CWT’s latest call for herd retirement volunteers will hopefully be quicker and much less painful. There are at least two good reasons why it may work:

1. Market prices for cows and heifers are much lower than they were last year, so CWT’s resources should go farther than ever before.

2. A big part of the cow removal job was already done before CWT bidding began. According to USDA’s Dairy Market News, total dairy cow culling through March 28 was 114,300 head more than the same period in 2008, and it’s on pace to be 15,000 head higher by the time CWT bidding ends.

That leaves about 225,000 more that need to go. It’s a huge number, but it’s one that looks within reach.

Resurgent dollar played a role in milk price collapse

No one thing ever triggers a farm milk price collapse all by itself, although the simple explanation usually boils down to too much supply and not enough demand. That's the case this time, as well, but what dairy producers may not appreciate is that currency exchange rates play a role in today's imbalance.

Not only has recession in the U.S. spread like an infection around the world to sicken other economies, it has also pushed the value of the dollar higher in relation to other currencies. Thus, when it comes to buying U.S. dairy products today, foreign buyers not only are more fiscally cautious but they also have less buying power.

Take Mexico for example. The No. 1 buyer of U.S. dairy products has seen the value of the peso drop from about 9.8 cents in mid-2008 to barely 7 cents today, almost a 29 percent decline. Canada, our No. 2 buyer, has seen its currency drop from $1.03 in late 2007 to just 80 cents today, a decline of 22 percent.

But that's just part of the problem. Partly because the dollar was so weak for so long, the percentage of total U.S. milk production that was exported soared in recent years. According to the U.S. Dairy Export Council, 3.6 percent of all U.S. production was sold abroad in 1996. In 2008, it is expected to be between 10 and 11 percent. U.S. dairy producers boosted production to meet that growing demand.

The effect of even a modest slowdown in foreign purchases of U.S. dairy products is drastically more sudden and painful today than ever before. That's one reason why the pipeline of dairy product sales plugged up virtually overnight, why domestic sales alone are hopelessly unable to keep up with production, why producer milk prices imploded, and why this situation in unlikely to turn around soon.