The Dairy Trade Coalition
   Saving the Spotted Cow for Generations to Come


 

 
 
The following is the body of a letter from Nigel R. Mitchel, Manager External Policy or the New Zealand Dairy Board to Peter Gallagher, Australian Dairy Industry Council. The letter is dated June 14, 1995.

Dear Peter

At our meeting last Friday we raised the possibility of our two industries working together to mutual advantage on the supply of products for the new European Union quotas to be opened next month. We undertook to provide you with a note on this matter. This is attached.

Advancing this proposal into any level of detail is dependent entirely on your industry being prepared to work through a central marketing channel. We are looking forward therefore to the outcome of your consideration of this.

With the start up of the new quotas close, we will need to resolve quickly how we are to proceed, one way or the other. In the meantime, and in any case, we will need to handle these proposals with sensitivity, for obvious reasons.

Yours sincerely

[Nigel Mitchel]

Nigel R. Mitchell
Manager External Policy

 

EUROPEAN UNION : MFN IMPORT QUOTAS

Introduction

There are significant gains to be had from the new dairy product import quotas to be opened by the European Union on 1 July this year in the form of:
  • increased opportunities for trade
  • more particularly, "quota rents" (the financial benefits from the lower rates of duty payable on imports within the quota).
The advantages of these new opportunities will be better able to be maximized if there is careful management of the supply of product offered for import under the quotas. If supply is not coordinated then it is likely that, over time, most of the premium returns available will be captured by importers in the European Union rather than by external suppliers.

It is proposed therefore that the Australian and New Zealand industries develop a means of jointly coordinating the supply of product for all, or at lease some of the new quotas.

Background

The regulation under which the new quotas will be administered has been finalised. The main features of the administrative system to be applied are:
  • Imports under the quota will require an import license.
    • applications for licenses will open every three months with the annual quota amounts divided into four equal quarterly tranches.
  • The requirements to qualify to apply for import licenses are loose and leave the way open for a great many potential applicants.
    • where the amounts of licenses applied for exceed the available quota quantities it is likely that approvals will be made by applying an arbitrary reduction coefficient to all applications (though other means may also be used).
  • Applicants must however post a substantial guarantee when applying for licenses which likely will prove to be a strong deterrent to individual and speculative applications.
  • More important in this context, applications must also state the country of origin from which it is intended imports be sourced and the import license, when issued, will be useable for product from that designated country of origin.
It is the last two of these elements which provide a possible means of control and influence over the use of quotas by suppliers. Importers will be reluctant to apply for licenses in advance of securing a firm prospective supply source because of the potential significant loss of security if licenses are issued and not used. In other words, sourcing supply and applying for licenses will need to go hand in hand.

Suppliers

The two key principal supply sources of product for these quotas to which importers are likely to turn will be New Zealand and Australia. This is especially so now that it is clear that, for the time being at lease, import quotas from Poland and other Eastern European sources are to be operated separately from the MFN quotas.

Supply from the United States and/or Canada may be possible but, below a certain price threshold, will not be competitive without the use of export subsidies. These subsidies are not currently available from the United States, and, in any case, both the United States and Canada will be constrained by the limits on subsidized exports which will apply from 1 July.

The possibility obviously will continue to exist for importers in the EU to secure product from elsewhere but for various reasons such as simple product availability, quality and pricing the options they have are likely to be quite restricted. New Zealand and Australia will be where attention is focused.

Method of Management

The supply of New Zealand origin product can, and will be, carefully managed by the NZ Dairy Board.

It is highly desirable that the supply of Australian product similarly be managed to limit the potential for importers in the European Union to play individual manufacturers and/or exporters off against each other. This will leave the trade without any secure framework within which to build and develop stable business relationships with (the lowest) pricing quickly likely to become the overwhelmingly dominant determinants of what sales are made, and from whom the product is supplied. Especially with licenses allocated on a three month basis, there will be a very flimsy foundation for production and supply planning.

The central management of the supply of cheese for Australia's existing EU country specific quotas for cheddar cheese and cheese from processing enables earnings from those quotas to be maximized. These gains may not be exactly replicated under the MFN quotas but substantial benefits are there to be realized nonetheless.

By extension, collaboration between New Zealand and Australia on supply will provide benefits to both. The lack of it will be costly to both.

Proposal

This collaboration could take a number of forms but essential components of it would be:
  1. The establishment of a single channel through which supply of product for these quotas would be managed. (This would take the form of a jointly owned company or other jointly controlled venture).
  2. Each side would undertake to ensure that no product from it would be offered for supply against these quotas other than through the joint venture. They would be responsible for ensuring that offers of product diverted through third countries would be embodied.
  3. The activities of the joint ventures would be limited solely to the business opportunities defined by the European Union quotas - converting some or all of the quotas.
  4. The joint venture would secure product from the two countries on a split to be agreed, quota by quota.
  5. Supply to the joint venture would be on the basis of product being delivered to designated points in Europe (i.e., on a CIP basis).
  6. Payment to suppliers would reflect the full resalable value of the product in the European market, less selling costs.
  7. There would be full disclosure to both parties of details of all selling prices.
  8. Any cost would be shared in proportion in the revenues generated for both sides (or on some other agreed basis).
  9. The details of the arrangement would be confidential to the two sides.

NEXT STEPS

For this proposal to be advanced it will be necessary for the Australian industry's intentions with respect to supply against the quotas to be clarified. Without firm, coordination within Australia there will be no basis for cooperation with New Zealand.

 


Graphic Image of Original Letter