Editor’s note: Below is a letter critical of Cooperatives Working Together (CWT), submitted by Gary Genske, CPA, Genske, Mulder & Co., LLP, and an editorial response from CWT chief operating officer Jim Tillison.
Dairyman wants answers
July 17, 2008
National Milk Producers Federation
2101 Wilson Blvd.
Arlington, VA 22201
ATTN: Jerry Kozak, Jim Tillison and the CWT Committee
RE: Cooperatives Working Together
For two days in a row, I have received bad news for the dairy industry. Yesterday (July 16) the CWT officials announced a 25,474 cow and 358 heifer retirement. Then today (July 17) the class 3 futures continued to decline .10 to .20 cents per hundredweight.
As a current supporter of the CWT program I continually field criticism from numerous dairy clients, who, by the way, produce about 12% of the nation’s milk in 28 states. The 3 dairies of which I am a member, (2 – New Mexico, 1 – Virginia), “invest” $10,000 to $12,000 per month into the CWT program. As an industry, we would like some very specific answers to questions that have been asked but not answered.
There exists a two part program within the CWT: Cattle retirement and Export Assistance. I was told in February this year, that the CWT fund should have approximately $140 million in the bank as of June 30, 2008 from producer investments (10 cents assessment)…I hereby request a full accounting of all sources and uses of funds in the CWT program since the program’s inception.
In February 2008, I questioned the propriety of the export assistance part of the CWT program, reciting my view that we producers realize very little, if any, benefit in subsidizing sale of surplus production. We, as producers, would prefer to not have any surplus by retiring more cattle. In February, I asked for data, which would disclose follow-up sales to those customers who received our subsidized products. We were told that the export assistance sales would lead to new customers, so we ask: How successful has this plan been in attracting new customers worldwide?
I am disturbed that the impact of our meager 26,000 head retirement plan resulted in a decline, not an increase, in the class 3 futures today. As a committee, you are charged with the responsibility to “strengthen and stabilize the national all milk price” (a quote from the CWT press release).
The net prices paid to the average dairy farmer today does not cover the cost to produce milk. So why is so little being done to improve the milk price when this committee has $140 million invested by its underlying producer membership?
It was reported today, that national production is 2.4% ahead of last year. Because of the weak dollar worldwide (not because of our CWT subsidies), our surplus products are being sold to customers outside of this country and not to the U.S. government for $9.90 per hundredweight.
The dollar will regain its strength, (it always has in the past) and when it does, our exports will drop off and we producers will have an enormous milk surplus problem, as we have seen in past years.
Being much more aggressive with cattle retirement is necessary for acceptable producer pay prices short-term and for the future. The CWT’s purchase of 125,000 day-old heifers, ($800 x 125,000 head) would not be enough, we have e3xcess production from nearly 250,000 cows today and in 2-3 years, that cow number will not only be higher, but there will probably be no home for that milk other than the U.S. government warehouses, at $9.90 per hundredweight.
I look forward to your response and more importantly, to the requested accounting.
Gary B. Genske, C.P.A.
Dear CWT Member:
As a result of the just-completed Herd Retirement Program and the recently increased activity under the Export Assistance Program, we have received inquiries from a few producer-members asking about the overall operation of the CWT program. Rather than respond individually, I felt all CWT members would be interested in the nature of the questions and our responses.
Question: In the most recent herd retirement, CWT selected bids covering 26,000 cows that produced a half billion pounds of milk. Why weren’t more bids selected?
CWT: With each round of the Herd Retirement Program, CWT’s staff economists conduct a nationwide survey of the cost of replacements cows in the marketplace. From the data collected, a maximum replacement cow value is established. Based on this dollar amount, CWT management then determines the maximum bid per 100 pounds of milk that should be accepted in the Program.
This same methodology has been employed by the CWT program since its inception and has served not only to maximize the effectiveness of the available funding, but also to establish a sound basis for acceptance of bids should CWT be challenged legally by those whose bids were not accepted.
All of the bids selected in this most recent herd retirement were less than or equal to the established maximum bid level and all had consistent milk production on a month-to- month basis indicating that the cows CWT removed had, in fact, produced the milk on which the bid was based.
At a time of relatively high dairy prices, and the large measure of media attention given to rising food prices in general, it would have been imprudent for CWT to overreach in accepting bids that were beyond our well-researched maximum level. To date, our methodology and strategic initiatives have enabled CWT to avoid any negative media attention during the most recent herd retirement program.
Question: It is my understanding that even after the latest herd retirement CWT has significant funds left. What will happen to that money?
CWT: In establishing the 2008 budget, the CWT Committee allocated $30 million for the export assistance program and approximately $168 million for herd retirements. After the selected herds have been retired and the farmers reimbursed, we will release information concerning the total expenditure for this recent herd retirement program.
After the selected herds have been retired and the farmers reimbursed, we will release information concerning the total expenditure for this recent herd retirement program.
During the remainder of 2008, CWT will continue to monitor the same dairy economic factors –- milk prices, cost of production, cow culling rates, etc. — that led to the decision to initiate a herd retirement round back in June. Should the farm economics indicate that another round of herd retirements should be initiated again year, CWT will have sufficient funding to conduct another one.
Question: Why not use all the money for herd retirements instead of having an Export Assistance Program? What benefit is an export assistance program to dairy farmers?
CWT: Since its beginning, the CWT Committee, made up primarily of dairy famers, has wanted the CWT program to be multi-dimensional. That is why CWT operates both the Herd Retirement and Export Assistance Programs.
According to an independent analysis of CWT’s programs, the Export Assistance Program has returned $570 million to dairy farmers through 2007 at a cost of $46.9 million. In other words, every producer dollar ($1.00) invested in assisting CWT member cooperatives make export sales returned $12.15 to dairy farmers.
Last year approximately 10 percent of U.S. milk production went into exports. This development contributed heavily to overall higher producer milk prices. Our industry is now in a different paradigm, however, in which loss of export sales could negatively impact producer pay prices. It is apparent to almost every economic analyst that the export area is critical to producer well-being.
Question: What about repeat business and the long-term business prospects of CWT’s export assistance program?
CWT: Since 2003, the CWT Export Assistance Program has helped CWT member cooperatives to export 10 million pounds of whole milk powder, 29 milk pounds of butteroil, 39 million of cheese and 71 million pounds of butter. This year alone the milk equivalent of what CWT has helped export is over one billion pounds. That is equal to the production of 50,000 cows.
And, much of that business is repeat business. CWT has assisted members to make 44 sales (6.4 million pounds of cheese) to Japan and 161 sales (9 million pounds of cheese) to South Korea. It has helped them to export repeat sales of butter and butter oil to Mexico (30 sales totaling 19.6 million pounds) and Egypt (20 sales totaling 5.1 million pounds).
This, of course, does not include the tens of millions of pounds of dairy products CWT members were able to export between July 2007 and June 2008 when they needed no CWT export assistance to make sales overseas. This is the way one CWT member put it:
“CWT initially contributed to our ability to pursue export business when US dairy was not competitive on its own, worldwide. When we did become competitive, we were able to quickly capitalize on the new environment because of infrastructure, knowledge, and connections that were in place from the CWT program.”
For the long term, the CWT Committee has approved an Export Assistance Strategic Business Plan that was developed in conjunction with the U.S. Dairy Export Council (USDEC). The purpose of that plan is the development of sustainable export markets for U.S. cheese, butterfat and whole milk powder without CWT Export Assistance.
Question: What are CWT’s plans for the future?
CWT: During August 18th and 19th, three CWT task forces will meet to review past program activities and make recommendations to the CWT Committee for future activities. The Herd Retirement Task Force is made up solely of dairy farmers, the Export Assistance Task Force includes both dairy farmers and member cooperative staff who work in the international sales arena, and the Strategic Planning Task Force will be looking at what other actions CWT should be taking to carry out its mission of providing price stability and good returns to dairy farmers and cooperative members.
The CWT is governed and administered by the dairy producers and cooperatives that contribute to the program. The CWT Committee, through its specialized task forces, establishes the rules governing the program and the Committee also provides advice and counsel to CWT management in executing the individual component programs. It is the members of CWT that establish the basic precepts by which the program operates –- their overriding mantra from the inception of the CWT program has been
“remove the most amount of milk at the least amount of cost”.
We will continue to operate the CWT program with integrity, credibility and fiscal responsibility because it is our responsibility to utilize producer and coop funds in the most cost effective manner to achieve the desired results.
I hope this helps CWT’s dairy farmer investors gain a better understanding of how and why CWT operates. I also want to encourage all CWT members to visit the CWT website, www.cwt.coop, regularly to keep up-to-date on all the things CWT is doing to achieve its mission.
Chief Operating Officer