World Dairy Trade Reform: Perspectives from Europe and the USA

1
World Dairy Trade ReformPerspectives from
Europe and the USA

• Trevor Donnellan1 and Patrick Westhoff 2
• 1 Dairy Economist, Irish Agriculture and Food
  Development Authority (Teagasc), Dublin.
• 2 Program Director International Affairs, Food
  and Agricultural Policy Research Institute
  (FAPRI), University of Missouri.

2
Overview

• Focus mainly at an EU level
• Develop a Baseline outlook to 2010
• Contrast it with two policy change scenarios
• reduction in export subsidies
• elimination of export subsidies
• Draw conclusions about EU implications
• Comment on the implications for Ireland

3
A Time of Change ?

• Dairy farmers should not be given the impression
  that the present system, with its intrinsic
  rigidities, can last forever.
• The recent debate on long-term prospects has
  revealed factors of uncertainty in particular
  the results of the next WTO Round could also
  affect the dairy sector.
• (European Commission 199731)

4
URA per cent reductions Developed countries

• 6 years 1995-2000
• Tariffs
• average cut for all agricultural products - 36
• minimum cut per product - 15
• Domestic support
• cuts in total ("AMS") support for the sector -
  20
• Exports
• value of subsidies (outlays) - 36
• subsidised quantities - 21

5
Pressure for Continued Trade Reform

• Export subsidies face greatest pressure.
• EU alone accounts for more than 75 per cent of
  these export subsidies (USDEC 2001).
• 20 of butter
• 24 of SMP
• 32 Cheese
• 40 WMP
• of world trade in 1999 (IDF 2000).

6
EU Domestic Wholesale and FOB Northern European
Ports (World) Butter prices 1982-2000
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EU Domestic Wholesale Cheese and FOB Northern
European Ports (World) Cheddar prices 1982-2000
8
EU Domestic Wholesale and FOB Northern European
Ports (World) SMP prices 1982-2000
9
Historically EU v World price Summary

• EU internal dairy prices above world level
• Gap is closing but remains large
• Exception is SMP
• Price has approached world level in last year
• A result of international market factors and
  exchange rates rather than policy
• prices could diverge again

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Baseline and Two Scenarios

• Baseline continuation of existing policies
• Final year URA limits hold to 2010
• Measured against two alternatives for 2004-2009
• Scenario 1 Export Subsidy Reduction (gradual)
• Scenario 2 Export Subsidy Elimination (gradual)
• volume reduction is more important
• We have not assumed anything about compensation
  for the resulting price drops at farm level

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Scenario 1 Export Subsidy Reduction

• Reduction of Export Subsidies at the same rate as
  under the URA
• From 2004-09 progressively reduce the volume of
  subsidised exports
• by same proportion as under the URA (relative to
  the 1986-90 base period)
• By 2009 a 42 reduction relative to the 1986-90
  base
• Must reduce intervention prices - so market
  clears
• Butter and SMP Intervention price -10 each
• Assume quotas remain in place up to 2010

12
Scenario 2 Export Subsidy Elimination

• Total abolition of export subsidies 2004-2009
• Related assumptions are important
• Elimination of export subsidies could lead to a
  large build up of intervention stocks
• Not a credible Commission approach
• Must reduce intervention prices - so market
  clears
• Intervention Butter price -20 and SMP -10
• Assume quotas remain in place up to 2010

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Macro Assumptions

• Macro projections early 2001
• Favourable world outlook
• Some subsequent signs of downturn
• Tech stock crash and 11th September Events
• Outlook now more uncertain
• Difficult to call outcome
• Unless slowdown is extreme or longterm - this
  analysis remains valid
• IMF outlook yesterday shows strong outlook
• Key factor - Euro Dollar exchange rate

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Euro Dollar Exchange Rate
1.14
Some strengthing of euro against dollar Negative
implications for EU competitiveness
15
Baseline Position

• No policy changes
• other than the Berlin Reforms
• Quotas remain in place

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Dairy Prices in Dollars FOB N Europe (Baseline)
Price increases in Dollar terms
17
Dairy Prices in Euro FOB N Europe (Baseline)
But prices are flat in Euro terms
18
EU Dairy Prices in Euro (Baseline)
Prices decline under Berlin Reforms
19
EU Average Milk Price in Euro(Baseline)
Milk price down to 7 on the 2000 level
20
EU and World Prices - Baseline
350
300
250
200
Percentage
150
100
50
0
1990
1993
1996
1999
2002
2005
2008
Butter
SMP
Price gaps are narrowing and will continue to do
so
21
EU Export Subsidy Limits

• Possible future levels

22
EU Butter Exports to 2000Export Subsidy Volume
Limits to 2010
Little pressure from butter limits
23
EU SMP Exports to 2000Export Subsidy Volume
Limits to 2010
SMP limit already biting
24
EU Cheese Exports to 2000Export Subsidy Volume
Limits to 2010
Cheese situation a bit different. Price is not
the only consideration.
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Scenario 1

• Reduction of Export Subsidies
• (by and amount similar to URA)

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Implications of existing limits

• Existing exports and existing limits present a
  mismatch
• No pressure on butter, unlike other products
• If existing butter limit was lower then the high
  level of the EU butter price would present a
  serious problem
• But the high EU butter price will only become a
  problem is limits are cut drastically - as
  we will see later

27
EU Domestic Product Prices (Export Subsidy
Reduction)
Powers prices decline most due to limit
reduction. Little effect on butter due level of
limit.
28
EU Domestic Prices (Export Subsidy
Reduction)Percentage change from Baseline
Powers prices decline most due to limit
reduction. Little effect on butter due level of
limit.
29
EU Third Country Exports(Export Subsidy
Reduction)
Steep decline in powder exports Butter exports
relatively unaffected
30
EU Average Farm Milk Prices (Export Subsidy
Reduction)
Milk Price down to 6 by 2010 compared with
baseline
31
FOB Northern European Prices(Export Subsidy
Reduction)
Prices stronger than in baseline
32
FOB Prices (Export Subsidy Reduction) Percentage
Change from Baseline
Powders show strongest price increase Butter
price down - due to strong supplies
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EU Implications of Reduction Scenario

• The EU implications are not very significant
• Milk price in EU is down 6 relative to baseline
• Effect on individual product prices differ
• Lower export limits place pressure on powders
  more so than butter or cheese
• Powders in EU suffer greater price decline than
  butter or cheese

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Scenario 2

• Elimination of Export Subsidies

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EU Third Country Exports (Export Subsidy
Elimination)
Butter exports collapse
36
EU Average Milk Prices(Export Subsidy
Elimination)
Milk prices down 17 by 2010 compared with
baseline
37
EU Domestic Product Prices (Export Subsidy
Elimination)
38
EU Domestic Prices (Export Subsidy
Elimination)Percentage change from Baseline
Butter and Powders suffer more than Cheese
39
FOB Northern European Prices (Export Subsidy
Elimination)
Prices up relative to baseline - particularly for
powders
40
FOB Northern European Prices (Export Subsidy
Elimination)Percentage change from Baseline
Powders show strongest increase
41
EU Domestic Product Prices as a Percentage of FOB
N. Europe prices (Export Subsidy Elimination)
Commercial (subsidy free) EU exports of SMP
possible but EU butter price still too high
42
EU Implications of Elimination Scenario

• The EU implications are quite significant
• Milk price in EU is down 17 relative to baseline
• Again, effect on individual products differs
• Elimination of exports limits causes severe
  pressure on butter exports and prices decline
• Pressure on powders and cheese is less
• Commercial exports of SMP are possible
• But all products price reductions are significant

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Implications for Ireland
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Dairy Export Subsidy Elimination
Irish Farm Milk Price 3.7 fat
Revenue of Irish Milk sector
2010 Value Down 20 on 2000 2010 Revenue down 13
on 2000
Under export subsidy elimination the 2010 price
down 20 on 2010 baseline
45
Beef Export Subsidy Elimination
Irish Cattle Price
Revenue of Irish Cattle
Under export subsidy elimination down 20 on 2010
baseline
2010 Value down 34 on 2000 2010 Revenue Down 13
on 2000
46
Reduction V Elimination EU Level Implications

• Difficult to generalise about relative effects
• Reduction scenario price effects are not severe
• Subsidy elimination has severe implications for
  all EU dairy product prices
• Negative price effects of reduction scenario
• about one third that of elimination scenario
• Implications are quite modest for cheese and
  butter under the reduction scenario

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Reduction v EliminationWorld Level Implications

• General result is that world product prices
  improve
• butter prices in export subsidy reduction
  scenario an exception.
• Positive price effects in reduction scenario
• about one-third that of the price effects of the
  elimination scenario
• Elimination scenario, EU third country exports of
  dairy products fall dramatically

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Some Caveats

• Exchange rate between the euro and the dollar
• a weaker euro would make EU agricultural products
  more competitive on international markets
• Global economic conditions
• Compensation to farmers for price reductions
• Enlargement of the EU

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For More Information

• See
• www.tnet.teagasc.ie/fapri