Reading the latest CWT tea leaves

Now that the dust is settling a week after results of the 10th and most recent Cooperatives Working Together (CWT) Herd Retirement were announced, let’s look at what they might say about dairy producers and the state of dairying.

Of 209 bids submitted, 194 were accepted. They accounted for 34,442 cows and 653.9 million pounds of milk production per year, which is equal to about one-third of the total output in Illinois.

One thing that sticks out is the relatively low participation rate. One hundred and ninety-four herds is the fewest in all but three previous retirement rounds. This may be due as much to the $3.75 per hundredweight maximum bid limit imposed, as to the return to modest profitability that most dairies are enjoying in 2010.

Along with the low participation rate were commensurately low removal totals for both cows and milk production. Only the CWT removals held in early 2008 and in 2003 were smaller.

Sifting through the tea leaves reveals that cows taken in the latest herd retirement were mediocre for milk production. In 2009, average production for all cows in the U.S. was 20,576 pounds. By comparison, average production for all cows accepted into CWT round 10 averaged just 18,986 pounds.

One possibility is that herds submitted were not highly efficient, or were unable to maintain production during the financial meltdown in 2009. They were, however, of roughly average size at 178 head. Average U.S. herd size in 2009 was 170.

188,000 head down, but so many more still to go

Even the combined effects of the two biggest CWT herd retirements ever, Rounds 7 and 8 held this year, are unlikely to make milking cows profitable again anytime soon.

Granted, 188,000 fewer cows and 3.8 billion pounds less milk will put a dent in the problem. But they won’t fix it. The big reason is the estimated loss of 6.9 billion pounds of U.S. dairy product exports in 2009 due to the global recession. Any losses in domestic use will only add to that number.

Also worrisome is that, as 2009 has unfolded, the onset of roughly break-even Class III futures prices ($15) at the Chicago Mercantile Exchange have kept receding into the distance like a teasing mirage in the desert. At the end of April, $15 milk was on the board starting in January 2010. At the end of May, $15 had backed off until March 2010. At the end of July, $15 was back but not until April 2010.

One explanation why may be that traders at the CME don’t believe that eliminating 188,000 cows and 3.8 billions pounds of milk is going to translate into a shortage of dairy products anytime soon.

Another is the inflow of extra heifers into the national milking herd that are the result of sexed semen use. Ray Nebel, senior reproduction and dairy herd management specialist at Select Sires, says that while only a few thousand such animals began milking in 2008, he estimates 63,000 will do so this year, and 161,000 more are in the pipeline for 2010.

That’s why, although so many cows have already been removed, many more still need to go.

Third CWT herd retirement in nine months to remove 87,000 cows

Cooperatives Working Together announced today that it has tentatively accepted 294 bids in the third herd retirement it has conducted in the last nine months. The 86,710 cows and 1.8 billion pounds of milk accepted in this round, combined with CWT’s previous two herd retirements, equal a total production capacity of 4.8 billion pounds of milk being removed since December 2008. 

This is the second-largest herd retirement since the farmer-funded self-help program started in 2003. The previous retirement round completed in July removed a record 101,000 cows and 1.96 billion pounds of milk. 

Farmers in 38 states submitted a total of 312 herd retirement bids last month to CWT. This eighth CWT herd retirement in the past six years was also the first to feature a maximum acceptable bid threshold of $5.25 per cwt. This round is also removing 3,104 bred heifers. 

Starting next week, CWT field auditors will begin visiting the 294 farms whose bids were accepted, checking their milk production records, inspecting their herds, and tagging each cow for processing. All farmers will be notified no later than August 31, as to whether their bid was among those accepted. Once CWT field auditors inspect and accept the herds offered as part of the bidding process, farmers have 15 days in which to send their animals to a processing plant. 

Producers whose bids are accepted in this herd retirement will be paid in two installments.  The first installment will pay 90 percent of the amount bid times the producer’s 12 months of milk production, when it is verified that all cows have gone to slaughter. The remaining 10 percent plus interest will be paid at the end of 12 months following the farm audit if both the producer and his dairy facility, whether owned or leased, do not become involved in the commercial production and marketing of milk during that period.

CWT herd retirement No. 8 could be huge

The clock is ticking fast for dairy producers to submit bids in the second installment of the Cooperatives Working Together Herd Retirement program for 2009. Postmark deadline is July 24, eight days from today.

Even though it comes just 10 weeks after the close of the huge Herd Retirement Round No. 7 in May, and there are many new rules about bidding and participation, and there is a $5.25-per-hundredweight limit on how much producers can bid, we have a feeling participation from the West and Southwest in retirement Round No. 8 could be huge. Continued steep losses in the dairy economy since Round No. 7, plus a weak milk price outlook that extends well into next year, are big reasons why.

A tiny two-week window for bidding, which is by far the shortest in program history, and a $5.25 bid limit are odd features of Round No. 8. As seen below, average bid price accepted in both rounds in 2008 were above $6. (CWT officials have not announced the average price in Round No. 7 and pointed out there is no guarantee that $5.25 offers will be accepted this time.)

CWT Herd Retirement average bid prices accepted:
Round No. 1 (2003) – $4.02
Round No. 2 (2004) – $5.24
Round No. 3 (2005) – $6.75
Round No. 4 (2007) – $5.50
Round No. 5 (2008) – $6.10
Round No. 6 (2008) – $6.49

For cows producing the 2008 U.S. average of 20,396 pounds per year, a $5.25 bid translates into $1,070 per head which is right in line with current market prices. Producers also receive whatever beef price is realized. With most herds estimated to still be losing between $3 and $5 per cow per day, that three-part combination may be all the incentive they need to get out while it is still possible to do so.

CWT announces eighth herd retirement

Last Friday, Cooperatives Working Together (CWT) announced that it will conduct its eighth herd retirement and second retirement of 2009. CWT announced that this round the bid submission time frame will be shortened, and they will instate a maximum bid level in order to have a more immediate impact.

The bid window has been reduced to two weeks and will have a maximum bid level of $5.25 per hundredweight. According to Jerry Kozak, president and CEO of the National Milk Producers Federation, “Carrying out a second herd retirement right on the heels of the largest-ever herd retirement should give us a double-barreled attack on milk production in a very short period of time, resulting in a farm level price recovery several months sooner than would otherwise occur.”

Farmers will also have the option of offering all bred heifers at a price of $700 per animal. Herds retired in any of the previous seven rounds will not be allowed to bid again. Bids are due July 24 to CWT. More information, including bid forms, can be found at CWT’s website.

CWT accepts 388 bids representing 102,898 cows

Cooperatives Working Together (CWT) announced today that it has tentatively accepted 388 bids representing 102,898 cows and 2 billion pounds of milk production capacity in the first of a series of herd retirements planned over the next 12 months. The number of cows and pounds of milk represent the largest single-herd retirement carried out in the six-year history of CWT.

Dairy farmers in 41 states submitted a total of 538 herd retirement bids by the May 1 deadline. The 388 bids tentatively accepted represent 72 percent of the total bids received by CWT. The number of cows now scheduled to be removed account for 64 percent of the total number of cows offered, and the 2 billion pounds of milk account for 67 percent of the milk production offered. “The high percentage of bids CWT selected this time around is an indication that producers understood that CWT would only be able to accept reasonable bids per hundred pounds of milk in order to adjust the nation’s dairy herd and better align supply and demand,” said Jerry Kozak, President and CEO of the National Milk Producers Federation (NMPF) which administers CWT.

Starting next week, CWT field auditors will begin visiting the 388 farms whose bids were accepted, checking their milk production records, inspecting their herds, and tagging each cow for processing. All farms should be audited by early July, and cows should begin moving off dairies by late May. All bidders will be notified no later than June 12, 2009, as to whether their bid was among those accepted.

“The bids selected ranged from farms with fewer than 50 cows to dairies with over 5,000, demonstrating that farms of all sizes in all areas are facing a very difficult year in 2009,” Kozak said. “Those who took advantage of CWT’s offer to retire their herds will aid others still wanting to farm by reducing the amount of milk coming to market and strengthening prices going forward.”

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.

CWT accepts 184 bids representing 61,000 cows

Cooperatives Working Together announced today, December 10, that it has tentatively accepted 184 bids in its second herd retirement of 2008, representing 61,078 cows and 1.2 billion pounds of milk. In addition, CWT has accepted bids for 1,548 bred heifers in this herd retirement program.

Together, CWT’s two herd retirements this year account for 85,663 cows that produced 1.637 billion pounds of milk, along with another 2 billion pounds, milk equivalent, that CWT’s Export Assistance program has removed from the market.

Farmers in 40 states submitted a total of 471 herd retirement bids in late November to CWT, reflecting “the continuing financial stress that many farmers are facing as milk prices plunge below the cost of production,” said Jerry Kozak, president and CEO of NMPF, which administers CWT. Kozak noted that, although the costs of dairy feed and diesel fuel have dropped, milk prices have fallen faster.

Starting next week, CWT field auditors will begin visiting the 184 farms whose bids were accepted checking their milk production records, inspecting their herds, and tagging each cow for processing. All farmers will be notified no later than January 12, 2009, as to whether their bid was among those accepted in this sixth herd retirement round that CWT has conducted since 2003.

“In this retirement round, the bids were more competitive and came from larger dairy operations,” he said. “Still, we were careful to expend CWT funds on bids that were commensurate with current overall market prices for cows.”