The
US is more or less self-sufficient for milk. The exports of dairy products
show a modest value and the imports are limited by TRQ's. This is shown
in the table (1997 statistics).
A report on the position of the United
States' dairy sector
in the light of the coming WTO negotiations.
The Ministry of Agriculture, Nature
Management and
Fisheries
Dutch Dairy Association
The Hague
June 1999
The report aims to give further insight into the structure of the United States' dairy sector, the relative importance of this sector for the US, and US national dairy policy to date. The report provides the answer to the question as to whether there are policy issues which might strengthen Europe's position in the WTO negotiations. The report is based on existing studies and analyses and on a dairy exports' mission to the US in March 1999.
The report is organised as follows. A summary
of the study is given in the next section. Section 3 describes the
United States' dairy sector on the basis of a comparison with European
statistics. In Section 4 United States' dairy policy is explained
and US commitments under the WTO. Section 5 concludes with a brief
perspective on the next WTO rounds which is followed by the conclusions
in Section 6.
The US import policy for dairy products is just as restrictive as EU dairy import policy. The management of tariff quotas should be improved. The fact that last spring Congress approved an extensive aid programme for farmers which includes 200 million US dollars of income support for the dairy sector is contestable and contradicts the liberal philosophy of the FAIR ACT. It is not unreasonable to fear further such steps.
Dairy co-operatives have a prominent role in the
milk processing industry as 86% of the milk supplied by dairy farmers goes
to these co-operatives. This does not mean that the co-operatives process
the milk themselves: two-thirds of the co-operatives are bargaining co-operatives
that do no more than market their members' milk. Still 43% of the milk
in the US is processed in dairy co-operatives which are mainly concerned
with the manufacture of butter, skimmed milk powder, cheese and whey powder.
The manufacture of named or branded products such as cottage cheese, ice
cream products and fluid milk is generally in the hands of private companies.
Major US dairy co-operatives are Dairy Farmers of America and Land O'Lakes.
Large multinationals, like Kraft (owned by Philip Morris), Dean Foods and
Suiza, are active in the private dairy industry.
Up to 1999 the milk price is protected by intervention
purchases of butter, cheese and skimmed milk powder by the Commodity Credit
Corporation. Support levels lie at Euro 20.45 per 100 kg. The price paid
to farmers for milk has been much higher over recent years but is subject
to price fluctuations with time and on account of different pricing systems
in the various regions. The latter has to do with the degree of self-sufficiency
in a particular region and the amount of milk processed into fluid milk
which pays better than manufactured products such as cheese, butter and
skimmed milk powder. Prices in areas with an overproduction of milk (Wisconsin
and the western states) are lowest, milk prices are highest in regions
with a milk production deficit (north-eastern states and Florida). The
prices paid in 1996 to milk producers in New Mexico and Florida illustrate
this: Euro 25 per 100 kg in New Mexico and Euro 33.63 per 100 kg in Florida
(at 1998 dollar rates). The increasing demand for cheese have pushed milk
prices up to an average of Euro 35 per 100 kg. Prices levelled off again
in the spring of 1999. US prices are far more volatile than European milk
prices.
38% of the milk produced in the US (or 27 m tonnes)
is used for fluid milk. This figure is far higher than in
Europe where the percentage of fluid milk is 28%. In the EU more milk goes
to manufactured products. US manufactured milk products mainly include
cheese, processed cheese and ice cream. The rise of the fast food industry
has boosted the cheese manufacturing industry and the emergence of non-native
cheese such as Mozarella (for frozen foods).
The
US is more or less self-sufficient for milk. The exports of dairy products
show a modest value and the imports are limited by TRQ's. This is shown
in the table (1997 statistics).
The table further shows that the imports and exports
of dairy products are negligible compared to the European Union. The world's
largest milk producer hs fairly modest dairy exports. Dairy imports are
limited too, except for cheese. On balance the US is a small net importer
of dairy products. In comparison the EU is a far larger net exporter of
milk and dairy products. Discussions with United States' dairy people have
taught us that few really believe in a substantial growth of US dairy exports
to the world market. Only the large-scale Californian dairy producers would
be able to operate on the world market without government aid. The structure
of the United States' dairy market is such that at times a protein surplus
arises which is why large quantities of skimmed milk powder are being sold
on to the world market at regular intervals to keep the United States'
dairy market in balance.
The table is corroborated by US dairy trade value
figures. 
Dairy
imports for 1997 are estimated at US $1.3 billion whereas in the same year
dairy exports amounted to $0.9 billion. These products go to Mexico, Canada
and Japan mainly and include (processed) cheese, ice cream products and
whey derivatives. US dairy products do not account for much in total agricultural
exports.
Domestic market policy
Domestic market policy consists of price support,
that is the practice of buying up butter, cheese and skimmed milk powder
for fixed minimum prices, and the strict regulation of milk production
and milk prices through the Federal Milk Marketing Orders.
The system of price support was introduced by the 1949 Agricultural ACT and has been upheld by every agricultural act since then. The objective of the Dairy Price Support Program (SPSP) is:
The Federal Milk Marketing Orders (FMMO) are another crucial aspect of domestic policy, which are authorised by the Agricultural marketing Agreement Act of 1937. This complex system assures dairy farmers a fixed price for their milk and offers protection against buyers' cut-price tactics. With the orders, farmers are under less pressure to make price concessions to buyers while at the same time safeguarding the supply of fluid milk for urban consumers. Unlike the CCC intervention scheme, orders do not set a minimum market price; prices are established per region and depend on the use made of milk. In addition, all regional orders operate market-wide pools in which the total order value of the milk (all classes) is pooled and divided by the total milk deliveries to determine the so-called blend price for the market. Dairy farmers in a single region thus get the same blend price for their milk regardless of whether it has been processed into a higher-valued fluid product or into lower-valued products such as cheese, butter and skimmed milk powder.
In
the United States, there are two quality grades for milk, grade A and grade
B. Grade A milk, or fluid milk, is suitable for human consumption, but
grade B milk may only be used in manufacturing, mostly cheese. The FMMO
only applies to Grade A milk, but these days that means 95% of all farm
milk produced in the United States. When the demand for Grade A milk is
lower than the supply, which it usually is these days, it is processed
into other products.
How do the orders operate? We will try to explain this very complicated and detailed system below. Milk buyers are required to pay farmers an officially established price for the milk depending on its use. The highest price is paid to Class I milk, the lowest to Class III milk. Prices are based on the average price paid for manufacturing grade milk (Grade B) in Minnesota and Wisconsin - two traditional dairy states where the biggest surpluses always occur. Price differentials are given for Class I and Class II milk on top of this basic price. The result is a set of minimum prices for milk depending on what the milk is used for, with the higher added value resulting in a higher minimum price. Market wide pooling in a single marketing order region is an essential part of the scheme.
Milk marketing orders are initiated by dairy farmers and are established regionally by the federal government. In establishing the prices, the distance from the largest surplus region (Minnesota and Wisconsin) is taken into account. Thus, the further an FMMO region is from these two Mid-western states, the higher the minimum price for fluid milk. The reasoning behind this measure is that dairy farmers in regions without a dairy farming tradition (such as Florida) should be given sufficient incentives to produce enough fluid milk for their region.
With the FAIR ACT, Congress has authorised the Secretary of Agriculture to reform the FMMO system and to reduce the number of orders from 31 to about 10 or 14. In early 1998, Secretary Glickman presented a provisional proposal in which the number of regional milk marketing orders were cut down to 11. He also proposed reducing the range of Class I price differentials which would reduce the regional differences in the price of fluid milk. Finally, he suggested developing a new formula to establish the basic milk price in the FMMOs. These proposals have been the subject of heated debate. As consensus could not be reached the implementation of the FMMO reforms, originally planned for 1 April 1999, had to be delayed to the autumn of 1999. Finally, it is interesting to note that some states, including California, have their own milk marketing order which generally apply lower prices.
Secretary Glickman presented the final reforms to the federal order system in March 1999. As in the original proposals, the number of regional orders were drastically reduced to 11, from the original 31. In addition, the rather quaint system of basing prices on the Wisconsin cheese price has been replaced by a pricing system that takes into account the total volume of US-produced cheese, butter and skimmed milk powder. Finally, the most important reform measure is that the price differentials for fluid milk have been reduced, although the final reduction is less than originally proposed. In other words, the enormous regional variation in the price of fluid milk will persist despite Mid-western farmers' complaints. The milk market will continue to be controlled by the FMMO, so that we see no reason to withdraw our original objections to the distorting effects of this instrument.
In 1996, six states in the north-east of
the United States developed their own system to fix the price for fluid
milk, which has been approved by Congress. The North-eastern Dairy
Compact guarantees a higher price for fluid milk than the FMMOs (about
Euro 34.54 per 100 kg). In effect, the Compact is a governmental
approved cartel in a region where most milk is produced for fluid uses.
Producers in this region also effectively keep out milk surpluses from
other states by charging such a high 
tariff
that it hardly pays to ship milk from any distance, for example the Mid-west,
to New England. Oddly, there is little anyone can do, legally speaking,
to lift this restriction on free trade within the US (which happens to
be a constitutional right). Milk production in the region covered
by the Compact has risen significantly since the introduction of the higher
milk price, so much so that much of this milk must be processed into cheese
and other manufactured products. Dairy farmers in these states pay
a levy to cover any costs made by the CCC to buy up these surpluses.
Congress has only given its provisional consent to these compacts pending
the implementation of the new federal orders on 1 October 1999. However,
it is possible that its consent will be extended because several other
states in the north-east and the south are preparing similar legislation.
It is possible that in the future, the large fluid milk market in the densely
populated areas might be governed by two compacts, one for the north-east
and one for the south. There is active lobbying in Washington at
the moment to extend the consent for the first compact and obtain approval
for a new compact in the south.
It is interesting to note that the USDA
(United States Department of Agriculture (has launched a pilot project
to teach dairy farmers the ins and outs of dairy options. The objective
of the project is to familiarise dairy farmers with commodity options so
that they will be able to protect themselves against price fluctuations
on the dairy market. As yet, the pilot is of limited scope with a
maximum of 8,400 participants and a budget of $11 million.
Finally, a dairy sector support programme
has been included in the 1999 budget. The support, a total of $200
million, is paid to farmers as transition payments. These payments
are part of a $6 billion package of financial aid to the agricultural sector,
established by Congress in October last year to alleviate the poor situation
on the cereals and soya markets. Although the dairy sector, unlike
the arable sector, suffered little hardship in 1998, aid has been set aside
for the dairy sector as a political spin-off. At the end of March,
Secretary Glickman announced his intention to distribute the $200 million
among small dairy farmers (with a maximum of 150 cows) on the basis of
a fixed rate per kg of milk with a maximum subsidy of $5000 per farmer.
This is a fairly modest subsidy in American eyes.
The US laid down prohibitively high import tariffs for dairy products in the Uruguay Round schedules. Below, we compare American and European import tariffs, in US dollars, per tonne of skimmed milk powder and butter at the start of the GATT agreement (1995) and at the end of the current agreement (2000), and we predict the height of future tariffs, on the assumption that they will be cut as much again in the next WTO round.
On average, EU import tariffs are 70% higher
than those of the United States. Nevertheless, in practice dairy
imports in the US are only possible under the tariff rate quotas established
by the American government. The most important tariff rate quota
is for cheese. According to the WTO Agreement, this quota is set
to rise to 
141,000
tonnes in the year 2000. Most of this quota will go to the European
Union which exports 119,000 tonnes of cheese. The Gouda/Edam quota
for the ad valorem tariff is 15%, which of course directly concerns the
Netherlands, will be raised to 5,848 tonnes. Imports that exceed
this quota will be charged the high rate of $1.80 per kg. Tariff
quotas for butter and skimmed milk powder for the year 2000 are 7,000 and
5,000 tonnes, respectively. In the US, tariff rate quotas are distributed
following an extremely confusing system on the basis of import record,
which results in import licenses being granted to traders even though they
stopped importing dairy products a long time ago. In any case, the
United States' high tariffs form a highly effective barrier to the import
of dairy products. Cheese is the only major EU product to be exported
to the US, thanks to the tariff rate quota. Italy is by far the EU's
largest exporter of cheese to the US; its exports had a value of $ 135
million in 1995. The Netherlands takes fifth place in the ranking
of cheese imports, after Italy, France, New Zealand and Denmark.
The US government aims to stimulate export
through the Dairy Export Incentive Program (DEIP), which is the dairy variant
of the Export Enhancement Program. The total volume of dairy exports
under DEIP is modest and will be reduced even further in the next WTO round.
In the year 2000, only 21,097 tonnes of butter, 3,030 tonnes of cheese
and 68,201 tonnes of skimmed milk powder may be exported with export subsidies,
which may not exceed $116 million. The WTO has granted the EU more
export credit, as it may hand out up to $2.5 billion in export refunds
in the year 2000. The product volume ceilings set for EU dairy products
are higher, too.
Despite efforts of export promotion organisation
USDEC, dairy exports only contribute marginally to the sector's income.
For example, 3.5 million tonnes of cheese was produced in 1997, but only
35,000 tonnes was exported, i.e. 1% of total production. However,
the volume of cheese exports has remained stable over the years.
The strongly fluctuating export pattern in skimmed milk powder shows that
the export to the world market is in fact only aimed at reducing domestic
protein surpluses. For example, 184,000 tonnes of milk powder were
exported in 1995, only 43,000 tonnes in 1996 and 90,000 last year.
The US export market leans strongly on Mexican demand for skimmed milk
powder (about 20% of the total export volume).
Under
DEIP, exporters can apply for a bonus for a given transaction. If
an exporter feels other suppliers' prices are preventing him from making
a successful transaction, he may take his case to the USDA, which will
make up the difference between the competitor's price and the exporter's
initial price. In practice, the programme has little impact on the
exports of American dairy products due to the modest proportions and its
accent on bulk products. In the budgetary year 1999, the funds available
to the programme were used up by the end of March. Dairy companies
therefore do not have high expectations for this programme.
A relatively new area of discussion would
be 'consumer concerns'. A number of EU Member States explicitly wish
this to be addressed in the next WTO. European consumers in particular
are concerned about the way agricultural products are produced. Issues
such as animal welfare, the environment, the use of production stimulating
hormones, antibiotics in cattle feed and the genetically modified organisms
in cattle feed are causing concern.
Genetically
modified organisms: The EU does not yet have compulsory safety screening
for raw materials for cattle feed such as maize gluten and soyameal made
from GM varieties of maize and soya. The Dutch dairy industry
would very much like to have compulsory government screening. Within
the US there is very little understanding for the exaggerated reactions
in Europe on this issue. Any labelling of GMOs would be dismissed
by the US out of hand.
Animal Welfare: Animal welfare on dairy farms does not have a high priority in the European Union. In the long term this will probably become increasingly politically important, in the Netherlands the Dutch Organisation for Agriculture and Horticulture is already discussing the necessity of compulsory grazing for dairy cows, forbidding the practice of dehorning, etc. This could also be source of a potential conflict with the Americans, because as yet they have little interest in this issue. Dehorning and tail docking of dairy cattle are widely practised in the US.
Environment:
There is currently discussion in the Netherlands about intensive dairy
farming, which will probably result in a maximum stocking density per hectare.
It can be expected that this will also eventually be taken up by other
EU members. There seems to be little interest for the environmental
effects of dairy farming in the US.
We believe that issues not directly related
to tariffs and subsidies will play an important part in the coming WTO
Round. The EU delegation in Geneva is making an issue of multifunctionality.
This means that farming has other functions than simply one of production,
for instance maintaining the landscape, keeping countryside inhabited,
etc. That is why there is a feeling within the EU that dairy farmers
should be properly 
rewarded
for these other activities which involve higher costs for their farms.
This could take the form of using a relatively high milk price compared
to the world market or by granting direct income support. The first
possibility is hard to defend in the WTO while the latter will in our view
be easily accepted. We feel that it would be a good idea to set out
the differences between the EU and the US on multifunctionality, especially
because the American Congress insists that the Administration includes
environmental and labour standards in the WTO agreement in the next round.
Other bees in the American bonnet are the State Trading Enterprises, such as the New Zealand Dairy Board and the Canadian export boards, which the US claim manipulate export prices and thus create unfair competition. The US calls for these boards to be abolished or at least drastically reformed.
The Americans' third priority is to attempt to have the peak tariffs (very high import tariffs) abolished for agriculture and will certainly aim for the abolition of the special status of the blue box support.
There is absolutely no support for including
'consumer concerns' in the WTO negotiations. The United States believes
this to be a myth which the European Union uses to maintain its protectionist
policies. Any concerns consumers might have about the production
of agricultural products can be resolved by product labelling. BST-free
milk is cited as an effective example of voluntary product labelling.
It is recommended that the differences between the US and the EU regarding
'consumer concerns' and 'multifunctionality' should in any event be clearly
defined before determining EU negotiating strategy.
Representatives of traditional Mid-western,
family-owned dairy farms to not see the need for a strong expansion of
the US position on the world market. All these farmers want is a
good milk price on the domestic market and minimal foreign interference
with US dairy policy. They see many similarities with the European
situation and also sympathise with the 'multifunctional role' of agriculture
as it is being championed in the European Union. The Dairy Trade
Coalition (which describes itself as 'a mouse in dairying America') and
a few like-minded politicians are trying to increase support for these
views.
Secondly, the US import system for dairy is very restrictive. Tariff rate quotas effectively protect the domestic market and support an attractive farmgate milk price for producers. We see import tariff reductions and increased access (TRQs) as absolute requirements to further open the American market. The United States' existing system for import licences desperately needs to be improved. The system is completely outdated and gives licences to companies which no longer import dairy products but which are only in it for the TRQ quota rent.
Thirdly, several recent government measures implemented in the US show that the philosophy of the FAIR ACT has had its day. For example, last autumn a $6 billion package in emergency aid for the agricultural sector was announced. The question is, has the drive for liberalisation that dominated the United States a few years ago died down in response to the poor economy in many sectors of agriculture and does the government now propose a more European course? Congress set aside a small part of the emergency aid for the dairy sector. Secretary Glickman recently decided to distribute the $200 million to dairy farmers on a per kg basis. Strictly speaking, this is not prohibited by WTO, but it is a fully linked support mechanism that strongly resembles the direct income payments proposed by the EU in Agenda 2000.
Finally, we can only wait and see if the US really does discontinue its CCC interventions for dairy products at the end of the year, or if it will be extended yet again for a number of years. Political initiatives are already taking place in the House of Representatives to extend the intervention measures.
We wish to conclude this report with a general remark. Our description of the American dairy market and US dairy policy show that the US dairy sector is strongly focused on the domestic market. The country is more or less self-sufficient in milk and government policy is aimed at maintaining a high price for fluid milk. In view of this, it would be logical for the US to request not including the dairy sector in the next WTO negotiations. Other arguments such as the importance of other agricultural sectors and a horizontal approach to the negotiating strategy could indeed lead to an entirely different conclusion.
