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«Paper No. 51 March 1995 Dairy Exporting Organizations for the Post GATT Agreement Era by William D. Dobson Copyright (c) 1995 by William D. Dobson. ...»

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University of Wisconsin-Madison

Department of Agricultural Economics

Marketing and Policy Briefing Paper Series

Department of Agricultural Economics, College of Agricultural and

Life Sciences, University of Wisconsin-Madison Cooperative

Extension Service, University of Wisconsin-Extension

Paper No. 51

March 1995

Dairy Exporting Organizations for the

Post GATT Agreement Era


William D. Dobson

Copyright (c) 1995 by William D. Dobson. All rights reserved.

Readers may make verbatim copies of this document for noncommercial purposes by any means, provided that this copyright notice appears on all such copies.

Paper No. 51 March 1995


* W.D. Dobson The U.S. Congress approved and the President signed the Uruguay Round General Agreement on Tariffs and Trade (GATT) late in 1994. Other major trading nations also have approved the agreement.

These approvals effectively gave the green light to implementing the GATT agreement which initiates trade reforms that begin in 1995 and extend to 2000 and beyond. While many parts of the U.S. agricultural economy expect to gain from the more open world markets produced by the GATT agreement, the U.S.

dairy industry represents an exception. The U.S. dairy industry will lose border protection enjoyed under Section 22 import quotas. Export subsidies employed under the USDA’s Dairy Export Incentive Program (DEIP) also will be reduced by the GATT agreement.

Farmers, officials of dairy cooperatives, dairy processors, legislators, and others concerned with economic prospects for the U.S. dairy industry have sought to expand exports of U.S. dairy products partly to offset expected losses of market under the GATT agreement. They also were prompted to find ways to expand dairy exports because of the maturing domestic cheese market, reductions in U.S. dairy price supports, and prospects for a greater market orientation for the U.S. dairy industry.

Their proposals include plans to use industry boards, marketing-agencies-in-common and produceroperated exporting organizations. Some would be entirely private organizations. Others would have powers granted by the federal government. After summarizing GATT agreement provisions that will affect U.S. dairy imports and exports, this paper analyzes the effectiveness of selected dairy export marketing organizations. The dairy exporting mechanisms evaluated are the Gunderson proposal (Gunderson Substitute for H.R. 4235), DariMac (an export marketing-agency-in-common for dairy cooperatives), and the New Zealand Dairy Board.

–  –  –

The Uruguay Round GATT agreement includes the following provisions that affect U.S. dairy

imports and exports [8]:

• Countries are required to convert all non-tariff import barriers (quotas, import licenses, etc.) to tariffs and reduce those tariffs by an average of 36% over six years with a minimum reduction for individual products of at least 15% from 1986-88 base levels.

• Where current access to a country’s market is less than 3% for a product (based on estimated consumption during a 1986-90 base period), the country must open its market to a minimum amount of access of at least 3%. This minimum access is to be increased to 5% by 2000.

• The amount of agricultural products exported with subsidy and budget outlays for export subsidies must be reduced by 21% and 36%, respectively, from 1986-90 base period amounts.

* W.D. Dobson is Professor and Extension Specialist in the Department of Agricultural Economics at the University of Wisconsin-Madison.

Impact of Tariffication and Minimum Access Requirements Prior to the GATT agreement, U.S. dairy markets were protected by Section 22 of the Agricultural Adjustment Act of 1933, as amended, which prevented dairy imports from interfering with the USDA’s price support program. Under the GATT agreement, the Section 22 quotas will be converted to tariff-rate quotas and gradually lowered. These tariff-rate quotas are two-tiered tariffs that establish one duty for imports within the quota and a higher duty for imports exceeding that level of imports. The U.S. will convert its 110,999 metric ton Section 22 cheese import quota into a tariff-rate quota and increase the within quota access to 141,991 metric tons (28% more than under the 1994 quota) by 2000. The within quota cheese tariff will permit commercial trade in the product. Tariffs on out-of-quota cheese imports under the new GATT agreement initially will provide relatively high tariff barriers to out-of-quota imports.

The U.S. has established tariff-rate quotas for other dairy products. However, imports of the other products are expected to be limited in the near term. Consequently, the major impact of additional U.S.

dairy imports under the GATT agreement will be felt in domestic cheese markets.

Impact of Lower Export Subsidies

Export subsidies under the GATT agreement are defined to include direct government or producer subsidies on exports, transportation and freight subsidies, marketing subsidies and the sale or disposal of government stocks below domestic prices [8]. Moreover, export subsidies cannot be extended to any new products that were not subsidized during the 1986-90 base period.

The lower export subsidies mandated under the GATT agreement will curtail the amount of dairy exports made with subsidy under the USDA’s DEIP program by amounts shown in Table 1. U.S. exports of nonfat dry milk (NFDM)—the major export item under the DEIP—will be reduced most (41% from 1992-94 average by 2000) under the GATT agreement.

Table 1. Quantity of U.

S. Dairy Products Exported under the DEIP and Maximum Allowable Exports with Subsidy under the GATT Agreement.*

–  –  –

EU firms are market leaders (accounting for about 50% of world dairy exports) and collectively set world prices for major bulk dairy products. In particular, world prices for many bulk dairy products tend to equate to the internal supported price in the EU less the available export subsidy. When smaller quantities of subsidized EU dairy exports begin to enter international markets, this should exert upward pressure on prices.

The lower subsidized cheese exports and additional market access for cheese in the EU, U.S., and Japan are likely to enhance world cheese prices significantly by 2000—perhaps by as much as 20% in the late 1990s [7].

–  –  –

A number of export marketing organizations have been proposed as models which might be used in the U.S. Three models, representing a cross section of proposals, are described below.

The three plans were evaluated using (1) general marketing and policy principles, and (2) criteria specified by the U.S. General Accounting Office (GAO) in a report entitled Strategic Marketing Needed to Lead Agribusiness In International Trade [9]. In the GAO report, the agency said that successful export marketing in the emerging market-oriented environment includes the following practices: (1) developing a long-term market development plan that identifies markets and growth potential; (2) designing positive product images to satisfy consumer needs and preferences, such as style, quality, and packaging; (3) improving the ability of distribution systems to deliver products efficiently; (4) positioning the products through competitive pricing and credit policies; (5) making consumers aware of the products through promotional activities in targeted markets, (6) differentiating products so they stand out; and (7) continually innovating to be ahead of global competition. To a substantial extent, the GAO report equates successful exporting with emphasis on exporting differentiated products.

Gunderson Proposal Characteristics: In brief, this proposal (technically called the Gunderson Substitute for H.R. 4235)

which was advanced by Congressman Steve Gunderson of Wisconsin, would [3]:

1. Require the Secretary of Agriculture to contract with an autonomous industry board which would export DEIP and other dairy products at an "export class" price. Under the plan, a Class IV export class price would be created in the federal order market system and the board would be given access to market order pool revenues to carry out export functions and cover administrative costs.

2. Require the Secretary of Agriculture to purchase 2.4 billion pounds of dairy products (milk equivalent total solids basis) for domestic and international feeding and donation programs on a bid basis. This is the average quantity historically purchased and donated by the USDA. No bids equivalent to less than $10.10 per hundredweight of milk would be accepted.

3. Delegate to the autonomous industry board the responsibility for coordinating the exporting of dairy products under the DEIP to the maximum extent permitted under the GATT agreement and purchasing 2.4 billion pounds (milk equivalent) of dairy products for government feeding and donation programs.

4. Call for no other government dairy product removals from the U.S. domestic market except in emergencies.

5. Reduce producer assessments to $.03 per hundredweight and refund the assessments to those producers who did not increase year-to-year milk production.

6. Create a no-net-cost recourse loan program under the Commodity Credit Corporation (CCC) for processors who need to carry inventory from periods of peak production to peak demand.

Analysis: The Gunderson proposal is a quasi-privatization measure which places DEIP exporting, commercial dairy exports, and purchases of dairy products for government domestic and international feeding and donation programs largely in the hands of an autonomous industry board. Under the proposal, board personnel would have to learn to perform certain tasks now performed by the USDA. Presumably this would be a manageable job. Examples of successful privatization measures exist around the world.

Moreover, the measure would be attractive to budget cutters because it would reduce CCC purchase costs by $400 to $500 million during fiscal 1995-fiscal 1999 compared to expenditures under the President’s 1995 budget baseline and essentially cap expenditures for U.S. dairy programs.

The no-net-cost recourse loan program (under which the government would be under no obligation to acquire product put under loan) is consistent with a greater market orientation for the U.S. dairy industry. However, it is not clear why the inventory financing described in the proposal could not be handled through private lenders rather than the CCC.

Questions arise regarding the proposed quasi-privatization measure. How would California and Grade B milk producers, two groups of producers who do not market milk under federal orders, be included in the pool envisioned under the Gunderson proposal? Presumably their participation would be essential.

Second, it is unclear whether the autonomous industry board would be effectively a monopoly exporter. The board might find it advantageous to obtain monopoly powers such as those possessed by the New Zealand Dairy Board. But there undoubtedly would be opposition to giving such powers to the board from a number of sources, including private exporters who would lose business to the autonomous board.

Administrative agencies (Justice Department, Federal Trade Commission, Council of Economic Advisers, etc.) that have a well known dislike for monopolies also might oppose the measure. A monopoly dairy exporting board undoubtedly would be a tough sell in the U.S.

Third, while the Gunderson proposal would leave in place tariff-rate quotas and thus provide significant price support for the domestic industry, downside pressures on milk and dairy product prices could arise under the measure. U.S. butter prices which occasionally have been supported by USDA purchases of a third or more of domestic butter production at times could fall to world price levels. U.S.

NFDM prices also could come under downward pressure since DEIP exports of the product—which equalled about 28% of domestic production in 1992-93—will be reduced under the GATT agreement and price support purchases of NFDM (except for feeding programs and food aid) would be eliminated under the proposal. U.S. cheese prices probably would not be affected much by the proposal since USDA price support purchases of cheese have been small under the present price support program. These developments could put significant downward pressure on milk and dairy product prices, especially if BST, good crops or other developments expanded U.S. milk production by larger than normal amounts.

Finally, milk and dairy product prices would become more variable in the absence of price floors provided by the USDA’s dairy price support program. Dairy firms could reduce the risks associated with more variable prices by using dairy futures markets.

The above developments would concern some domestic milk producers and processors. The level of industry support for the proposal would depend partly on how these questions and concerns are addressed.

The Gunderson proposal could serve as a vehicle for meeting certain GAO criteria which emphasize expanding exports of differentiated (value-added) products. For example, the board could develop a long-term market plan which identifies markets with growth potential, make consumers aware of U.S. dairy products, and improve dairy product images to satisfy foreign consumers’ needs and preferences.

These initiatives are already being carried out in a limited way by the National Dairy Promotion and Research Board. The autonomous board could take steps needed to expand such initiatives.

However, the autonomous board would find it more difficult to meet other GAO criteria. For example, it would be difficult for the board to differentiate U.S. dairy products so that they stand out and continually innovate to be ahead of global competition. In the past, U.S. dairy exports have consisted mainly of direct sales of bulk products by the government or under the DEIP. Moreover, most DEIP exports of NFDM have been made by U.S. affiliates of EU firms. This history limits the experience with differentiated products that U.S. dairy exporters could bring to the autonomous board.

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