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

The U.S. Dairy Industry STEs Are Potential Barriers to 
Market Development

State Trading Enterprises:

STEs often receive preferential treatment from their governments such as subsidies, tax breaks, statutory authority to act as a monopoly, or other measures which private sector competitors do not enjoy. Thus, STEs are able to control price and quantity of product into any targeted market to the detriment of their non-STE competitors.

New Zealand and Its NZDB:

While some of the aforementioned are factors to consider, Professor Ronald D. Knutson of Texas A&M University wrote in March 1994 in a policy issues paper that the successes of the NZDB as a single-desk seller is due to the fact that the NZDB has, 

pricing power to lower its price on sales .... In lowering its price, there is not explicit subsidy paid but there is an implied subsidy in the markets are being cross-subsidized to maintain them. Such pricing is also implied by the grain marketing boards in Canada and Australia. 

Additionally, by letter dated July 28, 1995, Mr. Henry R. Wray, Senior Associate General Counsel of the GAO wrote to the Congress that, "STEs have the potential for distorting international trade through explicit or implicit subsidy policies or artificial pricing strategies." As the sole exporter of New Zealand dairy products, the NZDB, through its 106 subsidiaries throughout the world, including the United States, makes the issue of State Trading Enterprises (STEs) a major concern for the U.S. dairy industry. 

Dr. Andrew M. Novakovic, professor of Agricultural Economics at Cornell University, has written in his publication, Outlook for the International Dairy Industry - American View, that 

In my view, New Zealand's potential in this regard [ability to expand milk production] may be seriously underestimated. It seems to me that the potential for New Zealand to convert more resources to dairying and/or convert to more intensive production systems has been unchallenged to date ... 

A recent study conducted for the Dairy Trade Coalition (DTC) by the economic and marketing firm of Abel, Daft, Earley & Ward International concluded that the NZDB's monopoly impedes U.S. dairy products and milk markets.

• New Zealand despite its small size, is the single most dominant player on the world dairy market with 15% of the world market for cheese, over 40% for butter/butteroil, nearly 18% for nonfat dry milk, and over 30% for whole milk powder.
• New Zealand milk production has risen nearly 25% from 1990-1995.
• New Zealand's dairy product exports through a statutory monopoly, the NZDB, whose marketing practices in the U.S. preclude direct access to New Zealand dairy products, particularly cheese, disrupt U.S. dairy product markets, and depress returns to U.S. milk producers.
• The NZDB's practices undermine U.S. competitiveness in foreign markets and may well raise the level of per unit subsidies that are required under the Dairy Export Incentive Program for the U.S. to compete with New Zealand in third world markets.
• The NZDB's aggressive sales and pricing strategies, including price discrimination among markets, has been negative for U.S. milk producers.
• The NZDB's monopolistic structure allows it to capture most profits on its markets on which it does not have to pay income taxes in New Zealand. This transfer pricing mechanism has two consequences. The U.S. government loses revenue to which it is entitled and the NZDB's captive subsidiary in the U.S., Western Dairy Products, Inc., has a competitive (tax cost) advantage over American trading companies whose income is subject to taxation.
• The NZDB uses its monopoly status in a predatory manner to disadvantage its customers and competitors.
• The NZDB's anti-competitive tactics in third country markets are very relevant to the U.S. dairy industry because the U.S. must compete with the NZDB in export markets and faces, or will face, the same aggressive selling practices that other exporters have experienced on a regular basis.
• In a recent NZDB communication to their Australian counterparts, the NZDB proposed that the Australian and New Zealand dairy industries work together to monopolize the European market for imported dairy products.

The Antitrust Implications of the NZDB's USA Trade Practices:

The NZDB has elected to create a cartel in order to export its products even though it is not required to do so by New Zealand statute. It is important to note that the USDA has branded the NZDB an unreformed and anti-competitive entity; therefore, the anti-competitive conduct of the NZDB is not condoned by USDA and flies in the face of U.S. laws. The collusive and anti-competitive conduct of the NZDB is repugnant to the American system of law.

Comments of Public Officials on the NZDB:

• Dr. Franz Fischler, European Community Commissioner of Agriculture, has stated publicly that the "monopolistic situation of the New Zealand Dairy Board" is one of three main problems in a post-GATT world.
• Former New Zealand Finance Minister Ruth Richardson has written in her book, Making a Difference, that "to enter the world of New Zealand's producer boards is to enter a world of distorting mirrors, where the normal market relationships between price and quantity, investment and return do not apply." Ms. Richards also writes that, "producer boards remain the largest area of uncompleted business in microeconomic reform."
• USDA has called the NZDB an "unreformed and anti-competitive entity" in its FAS Circular Series FD 1-94, March 1994, Report entitled Dairy: World Markets and Trade.
• Officials representing several million American agricultural producers, including but not limited to the American Farm Bureau, The National Association of Wheat Producers, the Dairy Trade Coalition, National Barley Growers Association, National Milk Producers Federation, the North American Export Grain Association, and Farmers Union Milk Marketing Cooperative, are concerned that the competitive position of U.S. agriculture may be undermined by the practices of STEs in a post-Uruguay round world to the extent that American agriculture, despite its many competitive advantages, is prevented from competing on a level playing field in key export markets.

Conclusion:

Prepared by the Dairy Trade Coalition/June 19, 1996