Self-regulation or free-for-all

FARMERS will make the most of the high milk and grain prices while they last.

Unfortunately, no one can tell them how long they will last.

That depends on markets and prices, but perhaps more than anything else on how many farmers pile into grain growing, or into milk in areas around the world not controlled by quotas.

There’s good news from Brussels, with European Agriculture Commissioner Mariann Fischer Boel seeing no reason why milk quota expansion shouldn’t start as early as next April, unless her economic analysis of the dairy market in December indicates otherwise.

That gives seven years in which to expand quotas before abolishing them in 2015. The EU dairy industry faces a major test then, with the milk quota — one of the EU’s most effective ever control mechanisms — gone.

That could unleash huge market volatility. The US experience has been price swings of plus or minus 30%. In the EU, that would mean over-production of milk knocking the price back to 20c per litre, after enough farmers go out of business, a price recovery.

It’s worth looking at how the Americans solved that painful cycle. In one of the greatest feats of farmer co-operation, 38 dairy co-ops and about 300 individual dairy farmers have come together to regulate their own industry.

They pay 10 cents per 100 lbs of milk (€ 0.17/100 kg) to Co-operatives Working Together (CWT), which has the task of bringing better balance to milk supply and demand, in order to strengthen and stabilise prices to dairy farmers.

Farmer-led and farmer-funded, CWT has used its members’ investment since July 2003 to deliver a significant return on that investment, in the form of higher, more stable milk prices.

There are two ways CWT does this — reducing production through herd retirements, and assisting in marketing American dairy products overseas.

To participate in a herd retirement round, interested farmers across the US submit bids to be compensated for selling their herds. Independent auditors oversee the bidding and the slaughter of the herds. The farmer pockets the slaughter sales cheque and the bid compensation.

No effort is made to keep these farmers out of future dairy production.

Since 2003, 200,000 cows have been retired. As a result, US dairy cow numbers are now 66,000 head fewer than they would have been without CWT’s activities, according to independent analysis.

CWT’s export assistance program has helped members export 97 million pounds of cheese, butter, anhydrous milk fat and whole milk powder over the past two years.

Each week CWT and the US Dairy Export Council evaluate bids against prevailing world commodity prices. The successful bidder has six months in which to ship the product.

Currently, 69.1% of the nation’s milk supply is paying into CWT, which has now raised its target price benchmarks in light of the higher costs of production being faced by US dairy farmers.

That benchmark is a key determinant of when CWT decides to conduct activities to tighten up supply.

Independent analysis has now shown that CWT raised milk prices for members by at least 75 cents per 100 lbs (€ 1.17/100 kg) in 2007, by 67 cents in 2006, by 42 cents in 2005, by 18 cents in 2004, and 5 cents in the brief time it operated in 2003.

CWT has put over $3.3 billion in its farmer’s pockets, according to this analysis — representing an eight-to-one return on the investment in CWT made by farmers and their co-ops.

CWT’s well-timed herd retirements are believed to be a major factor in US dairy farmers enjoying their longest period ever of milk prices over the $14 threshold.

All member co-ops are staying with CWT in 2008, even at a time of record high milk prices.

It’s just one of the possibilities for calming the milk market in the EU after quotas are gone — if dairy farmers can pull together in 27 EU member states as well as they do in 50 US states.

However, the hope of some — that an EU CWT could work in tandem CWT in the US — may be wildly ambitious.

It’s a long way down the road, and WTO and the markets may have changed utterly by then, but it will be very interesting to see if CWT is still bringing stability to US dairy farming in 2015.

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