Prof. Bob Cropp, Ag Economist, UW

I talked with Bob Cropp about the system of revolving equity used by US Co-operatives instead of share capital. In traditional co-operatives no upfront capital is required when joining a co-operative. Many co-operatives will never be able to payout their retained equity to their members. Some are instead opting to payout 40% in cash and not allocating the remaining 60%. The members then only get taxed on the 40%. Most farmers are much happier with this arrangement.

Also existing co-operatives who are undertaking significant capital expenditure can find that they can get a lower interest rate from the banks if they can source 40-50% of the finance from their members.

Capital deductions are taken from monthly milk checks on a production basis (US milk coops buy milk by the hundred weight (cwt)). An account of this money kept in a producer capital account, this is separate from the revolving equity account. As the capital expenditure is completed and profits are made, this capital is paid back the farmer.

When starting a new co-operative e.g. organic or speciality cheese, upfront capital is required. These are known as new generation co-operatives. You purchase a marketing right. To ensure that the plant if kept operating at near capacity and that the co-operative meets its contracts a farmer must supply all the milk required by the marketing right. If his supply is less than this he must pay a fine. A farmer may sell part of his marketing right to another farmer.

When co-operatives merge, which Directors go forward onto the Board of the new merged co-operative is often a sticky issue. Sometimes to make a merger happen it is necessary to let all of the Directors remain on the Board of the new merged co-operative for a year. Redistricting can then be done and the Board can be reduced down to size. This is how Dairy Farmers of America have been left with a Board of 100.

With the current very low market returns for dairy produce I asked Rob if there was any move towards a type of quota system.

A Supply Management Bill is being drafted for presentation to the US Congress. This proposes that any farmer who goes over their current level of production (their base level) would have to pay a “market excess fee” (not unlike EU quota superlevy). This money would then be distributed amongst the farmers who did not expand.

However unlike EU quota super levy this market excess fee would only be apply for the first year. The following year the farmers base production would be reset at the previous years higher production level.

This supply management programme is being promoted by Californian producers and is not as popular in the traditional dairying areas of the Mid-West who are receiving around a 20% higher milk price and have lower feed costs. It is very unlikely the bill will be passed into law.

With the advent of sexed semen and its rapid adoption by US dairy farmers there are a lot more heifers set to enter the US Dairy herd over the next year or so.

One dairy magazine that I read said that there was an extra 300,000 dairy heifers set to enter the US dairy herd in the next year. This is more than the total dairy herd of Northern Ireland which stands at around 280,000 cows.

Traditionally US involvement with export markets had been small until the dairy boom of 2007. The US then rapidly expanded to take advantage of the high export markets. At the present time it is estimated that US dairy farmers are losing $60-$100 per cow per month. One dairy magazine I read had an article detailing all the various methods (Chapters) available under US law by which a farmer could file for bankruptcy.