The CWT Program: How does it compare to recent Federal Government Supply Management Programs?

1. The CWT Program: How does it compare to recent Federal Government Supply Management Programs? Bob Cropp, Professor Emeritus and Dairy Marketing Economist University of Wisconsin-Madison September 18, 2003

2. What is the CWT program? • CWT stands for Cooperatives Working Together. • CWT was developed by NMPF • It is a voluntary milk supply management program run by dairy cooperatives and financed by dairy producers. • CWT was developed to address the long period of low milk prices.

3. Class III Price, 2000-2003 $16 2000 ? 2001 $15 2002 $14 2003 $13 Dollars Per Hundredweight $12 $11 $10 $9 $8 Jul Oct Jan Apr Mar Feb Dec May Aug Nov June Serp

4. Objectives: • Control the milk supply and increase milk prices to producers. • Originally: 4.6 Billion pounds of milk, about 2.7% of milk production during period of July 2003- June 2004 Increase milk price $1.30/Cwt.; net increase $0.82/Cwt. Financed by 17.9 cents/Cwt. , $200 million • Revised: 1.2 Billion pounds of milk, less than 1% of milk production Increase milk prices $0.36/Cwt.; net increase $0.23/Cwt. Financed by 5 cents/Cwt., $60 million

5. Midwest reluctant to participate 100% • Supported the concept, but concerns Free rider problem Strong competition for milk Alternative markets other than cooperatives Needed 70% commitment in Midwest and nationally Already short of milk supplies

6. Program addresses concerns of milk supply in Midwest • 5 regions • Proportion of milk supply reduction equal to 4-year average annual production growth or 0.5%, which ever is higher • Region 3: Illinois, Indiana, Iowa, Michigan, Minnesota, North Dakota, Ohio, South Dakota and Wisconsin 0.5% • Of 5 regions, 3 at 0.5%, one at 4.3% and one at 5.0%

7. Supply reduction achieved by: • Originally 4 programs: Bred Cow Cull Herd Retirement Reduced Milk Marketings Dairy Export Assistance • Now 4 programs: Herd Retirement Reduced Milk Marketing Dairy Export Assistance

8. Contribution of Each Program: • Herd Retirement 45% • Reduced Milk Marketings 10% • Dairy Export Assistance 35% Total 90% Remaining 10% allocated at later date for maximum benefit

9. For producers to participate in CWT: • Producer who belongs to a cooperative that is participating 100% • Producer who belongs to a service, testing, bargaining cooperative, but ships directly to a processor and receives a milk check from the processor must request a form from the cooperative for an assignment of 5 cents by processor directly to CWT. • Independent producers need to obtain forms from NMPF.

10. Program administered by: • NMPF CWT Committee with representatives from: - each participating cooperative and - regional representatives from the independent producer community

11. Bids for participation needed to be submitted by August 22,2003 • Bids submitted to an independent audit firm • Active bids based upon removing the most milk at the lowest cost • Producers with accepted bids notified by September 12, 2003

12. Herd Retirement • Suggested bid: Compensation of difference between the slaughter value and the amount a producer would receive for the sale of the cow’s milk production. • Notified by September 12th • Field auditor to each farm Sept 12 –Oct. 13th (6-wks) to: - Review cow numbers - Compare current milk volumes to base period - Provide CWT ear tags for each cow

13. Herd Retirement Continued: • Producer will arrange for the slaughter of all cows immediately after approval by field auditor • Document of sale to slaughter must be sent to CWT prior to payment by CWT. • Expected all herds liquidate by mid to late October • No slaughter of dairy replacements • No restriction on re-entry to dairy

14. Reduced Milk Marketings: • Submitted a bid for reduction of 10% to 50% • Successful bids also notified by Sept. 12th • Reduce milk marketings October 1, 2003 – September 30, 2004 • Measured each quarter compared to same quarter previous year.

15. Reduced marketings continued: • Producer may miss specified percentage on a given month, but at aminimum, must reduce marketings by percentage during each quarter. • CWT will pay for actual reduction up to 3% over bid percentage. • Payments made quarterly • Can’t lease, sold, lent, exchange or otherwise transferred cows other than for slaughter since July 1, 2003

16. Impact of CWT: • Milk prices are improving very nicely now. Did CWT have anything to do with this? Probably yes, but market fundamentals also explain improvement. • CWT kicking in in October can help to sustain improvement • History shows us that relatively small changes in either milk production and/or commercial disappearance can have a big impact on milk prices.

17. U.S. dairy Situation: WI Milk Prices U.S. dairy Situation: WI Milk Prices U.S. dairy Situation: WI Milk Prices U.S. dairy Situation: WI Milk Prices 2000, 2001 & 2002 2000, 2001 & 2002 2000, 2001 & 2002 2000, 2001 & 2002 Market Factor Market Factor Market Factor Market Factor 2000 2000 2000 2000 2001 2001 2001 2001 2002 2002 2002 2002 % change % change % change % change % change % change % change % change % change % change % change % change Cow numbers Cow numbers Cow numbers 9,206 + 0.5% 9,206 + 0.5% 9,206 + 0.5% 9,114 9,114 9,114 - - - 1.0% 1.0% 1.0% 9,141 + 0.3% 9,141 + 0.3% 9,141 + 0.3% (1000’s) (1000’s) (1000’s) Milk per cow Milk per cow Milk per cow 18,201 18,201 18,201 + 2.4% + 2.4% + 2.4% 18,159 18,159 18,159 - - - 0.2% 0.2% 0.2% 18,571 + 2.3% 18,571 + 2.3% 18,571 + 2.3% (Pounds) (Pounds) (Pounds) Total milk Total milk 167.6 + 3.0% 167.6 + 3.0% 167.6 + 3.0% 165.5 165.5 165.5 - - - 1.2% 1.2% 1.2% 169.8 + 2.6% 169.8 + 2.6% 169.8 + 2.6% production production ( ( ( Bil Bil Bil . Lbs.) . Lbs.) . Lbs.) Imports ( Imports ( Imports ( Bil Bil Bil . . . 4.45 4.45 4.45 - - - 6.8% 6.8% 6.8% 5.72 + 28.6% 5.72 + 28.6% 5.72 + 28.6% 5.10 5.10 5.10 - - - 8.7% 8.7% 8.7% Lbs.) Lbs.) Lbs.) Exports ( Exports ( Exports ( Exports ( Bil Bil Bil Bil . . . . 1.74 +34.8% 1.74 +34.8% 1.74 +34.8% 1.74 +34.8% 1 1 1 1 .59 .59 .59 .59 - - - - 31.8% 31.8% 31.8% 31.8% 1.58 1.58 1.58 1.58 - - - - 0.01% 0.01% 0.01% 0.01% Lbs.) Lbs.) Lbs.) Lbs.) Commercial Commercial Commercial Commercial 168.7 + 2.3% 168.7 + 2.3% 168.7 + 2.3% 169.6 + 0.5% 169.6 + 0.5% 169.6 + 0.5% 170.5 + 0.5% 170.5 + 0.5% 170.5 + 0.5% disappearance disappearance disappearance disappearance ( ( ( ( Bil Bil Bil Bil . Lbs.) . Lbs.) . Lbs.) . Lbs.) Class III price $ 9.74 $13.10 $10.42 All Milk price $11.70 $14.80 $12.10 Cow numbers 9,206 + 0.5% 9,114 - 1.0% 9,141 + 0.3% (1000’s) Milk per cow 18,201 + 2.4% 18,159 - 0.2% 18,571 + 2.3% (Pounds) Total milk Total milk 167.6 + 3.0% 165.5 - 1.2% 169.8 + 2.6% production production ( Bil . Lbs.) Imports ( Bil . 4.45 - 6.8% 5.72 + 28.6% 5.10 - 8.7% Lbs.) 168.7 + 2.3% 169.6 + 0.5% 170.5 + 0.5% Class III price $ 9.74 $13.10 $10.42 All Milk price $11.70 $14.80 $12.10

18. 2,400 bids were received. • So, if 1.2 billion pounds of milk is achieved, almost 1% of milk marketings, the objective of $0.36 per hundredweight of better milk prices can be realized. • Hard to measure precisely impact of CWT against other market forces.

19. What lessons have we learned from past voluntary supply management programs? • Past programs on a national bases have been federal government programs • Refundable producer assessments if did not increase milk marketings from previous year 1983-1986 - Assessments 11.25 cents/Cwt. – 50 cents/Cwt - Not a big carrot to plan for no increase in milk marketings, but yet there were refunds.

20. The dairy environment at this time. • Federal dairy price support on parity 1950-1981 • Support price: 1972 = $4.93 1988 = $10.60 1976 = $8.13 1990 = $10.10 1980 = $13.10 1995 = $9.90 1984 = $12.60 1985 = $11.60 1987 = $11.35

21. CCC Purchases of Surplus Dairy Products Year Billion Percent of Pounds U.S. Marketings 1982 17.4 13.1 1983 20.6 15.0 1984 12.4 9.4 1985 17.2 12.2 1986 14.3 10.2 1987 9.4 6.7 1988 5.5 3.9 1989 0.5 0.3 1990 - 1998 1.0 – 4.0 1% - 3%

22. Milk Diversion Program • January 1, 1984 to March 31, 1985 • Producers could voluntary reduce milk marketings from 5% to 30%; paid $10/Cwt for reduced marketings. • Program 100% funded by a 50 cent/Cwt. producer assessment on all producers. • Low participation particularly in the Midwest • Only temporarily effective—too short of a program.

23. Dairy Termination Program(Whole Herd Buyout) • April 1, 1996 – September 30, 1987 • Objective: Reduce milk marketings 12 billion pounds, about 8.7% • Producers had to submit bids to: - slaughter or export all female dairy animals - remain out of dairying for 5 years • 105,700 bids submitted (Wisconsin 9,635) • 13,988 bids accepted (Wisconsin 1,681 = 3.2% of production) • 1/3rd funded by assessments: 40 cents Apr. – Dec. 1986, 25 cents Jan – Sept 1987

24. Whole Herd Buyout continued: • Bids ranged from $3.40 to over $1,000 per Cwt. • Maximum bid accepted was $22.50 • Average bid accepted was $14.88 • Bids varied by region: WI = $16.00 average; highest of all states, 3.2% of production CA = $15.58 average, 10.7% of production FL = $13.98 average, 14.0% of production • Achieved a 12.28 billion pounds milk reduction over the 18 months by eliminating 951,619 cows, 346,789 heifers and 257,995 calves

25. The Whole Herd Voluntary Program was successful, but • Whole Herd Buyout followed by a severe drought in 1988 • Support price was reduced substantially—very low safety net, a lot of milk price risk • No major dairy surpluses until 2000, price of milk above support most all of the time 1998-2000 • 2002, first time CCC purchased all three dairy products—butter, nonfat dry milk and cheese since about 1993

27. Long run impact of CWT or other voluntary supply management programs. • No voluntary program will maintain milk prices at a relatively high level, especially with a relatively low federal support price ($9.90) • Milk price volatility will remain due to milk expansions when milk prices are high and contractions when milk prices are low—the time lag is becoming greater, however with changing farm structure.

28. Why such a slow producer response to low milk prices? 1. Structural change at the farm level Herd Size % Of Herds % Of Milk 1 – 29 27.9 1.5 30 – 49 20.1 6.1 50 – 99 30.3 17.4 100 – 199 12.9 15.6 200 – 499 5.6 17.5 500 – 999 1.9 13.9 1,000 – 1,999 0.8 = 1.2% =3.1% 13.0 = 28% = 42% 2,000 + 0.4 15.0

29. Some specific questions/issues with CWT. • The MILC program’s objectives is to keep dairy farmers in operation and maintain the milk supply. CWT’s objective is to take dairy operations out and reduce the milk supply. Of course large producers receive little or no benefit from MILC 2. Is CWT GATT legal? It is argued it is since it is a voluntary dairy producer financed program. However, Canada’s voluntary producer dairy export program recently ruled a violation by WTO

30. The effectiveness of voluntary programs, of course depends upon: • How far in advance can changing milk supply and demand conditions be predicted. • How quickly the program can kick into operation—bids and acceptance of bids and then implementation takes time. • With producer assessments to finance the program, in time the free rider problem becomes greater. Let my neighbor participate and I will receive the benefit of higher prices.

31. The Free Rider Problem is particularly difficult for a voluntary program operated by dairy cooperatives and not the federal government. • Producer assessments are not mandatory on all dairy producers---results in different net milk prices for producers of dairy cooperatives versus producers selling milk to other milk buyers. • Through time dairy producers who are members of dairy cooperatives may need to pay a higher assessment to achieve the same effectiveness, but this leads to a greater and greater Free Rider problem.

32. While dairy cooperatives may experience a reduced milk supply, lower utilization of plant capacity and thus higher operating costs, other milk buyers might be able to maintain and even increase milk volume. • Mandatory federal government operated supply management programs avoid these problems (Canadian quota system, for example), but have other problems. • No supply management program has all pros and no cons.

33. The MILC expires September 30, 2005. • Already discussions in Washington DC what after 2005. • On the table of discussion is: 1. Extending MILC 2. Re-visit Dairy Compacts 3. National type of compact with regional variations and supply management 4. And others.

34. Questions and Comments;