Dairy Disputes in North America: A Case Study

Tom Cox

University of Wisconsin-Madison

Danny Le Roy

The University of Lethbridge

Ellen Goddard

University of Melbourne

2

Introduction

Analyses of three disputes

Comparison of US and Canadian dairy

policy

Summary

3

Comparison of US and Canadian Dairy Policies: Similarities Dairy versus Total Agricultural Producer Support: OECD

PSE Measures. Border Protection:

– TRQ’s: Quotas, Within and Over Quota Tariffs.

Export Subsidies. Intervention Prices/Price Supports. Classified Pricing.

– Provincial versus Federal/California MMOs.

Regionalism !!!

4

Comparison of US and Canadian Dairy Policies: Key Differences Milk Production Quotas.

– Basis for Two-Tiered Export Pricing via Class Vd/Ve.– Clever Way to “Buy Off” Pressure to Increase/Eliminate Quotas

???• But, via WTO Ruling, Not Clever Enough !!!

– Difference with US Classified Pricing ???• US Pricing Not Targeted to Export Market !!!

– Dynamic Growth versus Stagnant Quota Industry Implications ???

Level of Protection and Domestic Pricing.

5

OECD Producer Subsidy Equivalents (%)

0

10

20

30

40

50

60

70

80

Milk 92-94 Milk 95 All AG 92-94 All AG 95

Canada OECD average United States

6

OECD Producer Subsidy Equivalents (%)

1995

0

10

20

30

40

50

60

70

80

90

100

NewZealand

Australia EU Japan Canada UnitedStates

OECDaverage

MilkAll Ag

7

Table 1. Percentage PSE and CSE, by Country1.

Percentage PSE Percentage CSE

Milk All PSECommodities

Milk All CSE Commodities

1986-88

1992-94

1995 1986-88

1992-94

1995 1986-88

1992-94

1995 1986-88

1992-94

1995

Australia 31 29 25 10 10 10 -31 -29 -23 -9 -7 -6Canada 77 72 57 51 32 22 -63 -58 -46 -35 -20 -12

EU 64 62 60 48 48 49 -54 -52 -47 -44 -38 -33Japan 90 88 88 73 74 76 -77 -74 -70 -57 -51 -51New Zealand 12 2 1 18 3 3 -7 0 0 -8 -4 -6United States 65 54 38 30 21 13 -52 -48 -33 -15 -13 -9OECD average 66 62 60 48 42 40 -56 -53 -51 -40 -34 -32

1. EstimateSource: OECD Secretariat, 1998.

8

GATT Increased Import (Quota) Access

Cheese Butter/Butteroil Skim Milk Powder Whole Milk PowderBASE 37.1 79.5 41.2 0.7

W. Europe GATT 2000 123.1 91.3 69.2 1.1BASE N/A 3.5 99.8 0.0

Japan GATT 2000 N/A 3.5 99.8 0.0BASE 20.4 2.0 0.9 0.0

Canada GATT 2000 20.4 3.3 0.9 0.0BASE 116.4 7.5 1.3 0.5

USA GATT 2000 136.4 13.1 5.3 3.4BASE 9.4 0.0 56.0 24.0

Mexico GATT 2000 9.4 0.0 56.0 24.0Notes:A. Data source: International Dairy Arrangement, Fifteenth Annual Report. November 1994.B. BASE and GATT 2000 follow the URA of the GATT, assume linear changes.

1000 MT

9

GATT Import Tariff Reductions

In-Q Over-Q In-Q Over-Q In-Q Over-Q In-Q Over-Q

BASE 547 3,643 1,189 3,971 639 1,956 1,773 4,102GATT 2000 768 2,362 1,225 2,572 632 1,561 1,760 3,486

BASE 56 3,794 193 3,483 48 1,720 48 3,315GATT 2000 24 3,231 83 2,915 21 1,462 21 2,820

BASE ad valorem 10.5% 0.0% 5.0% 5.0% 0.0% 0.0% 0.0% 0.0%plus spcific duties 0 1,924 62 2,004 33 1,018 68 1,320

GATT 2000 ad valorem 10.5% 0.0% 4.3% 4.3% 0.0% 0.0% 0.0% 0.0%plus specific duties 0 1,636 62 1,703 33 865 68 1,122BASE 50% 95% 35% 35% 0% 139% 0% 139%

GATT 2000 49% 89% 31% 31% 0% 131% 0% 131%Notes:

A. Data source: International Dairy Arrangement, Fifteenth Annual Report. November 1994.

B. BASE and GATT 2000 follow the URA of the GATT, assume linear changes.

US$/MT

C. Under the URA, the tariff rates on the increased cheese and butter import quotas (called minimum accesss) are higher than the tariff rates on the initial tariff quotas (called current access), thus, the average tariff rates on cheese and butter in year 2000 increases from the BASE rates.

USA

ad valorem

Canada

Mexico

specific duties

specific duties

WMPSMPButter/ButteroilCheese

W. Europe

10

GATT Reduced Subsidy Commitments

1000 MT BASE GATT 2000 BASE GATT 2000

West Europe 563 431 513 407E. Europe/FSU 15 13 17 15Australia 72 50 64 39Canada 12 9 9 4USA 4 3 47 21

BASE GATT 2000 BASE GATT 2000

West Europe 374 298 594 480E. Europe/FSU 145 119 0 0Australia 106 68 102 65Canada 55 45 6 5USA 116 68 15 0NOTES:

B. BASE and GATT 2000 follow the URA of the GATT, assume linear changes.

A. Data source: International Dairy Arrangement, Fifteenth Annual Report. November 1994.

Cheese Butter/Butteroil

Skim Milk Powder Whole Milk Powder

11

US/Canada Intervention Prices

ButterNonfat Dry

MilkCheese

EU Intervention 3,798 2,378 -- U.S. CCC Purchase 1,433 2,225 2,426 U.S. Wholesale 3,254 2,258 2,980 FOB Northern Europe 1,798 1,260 2,316 Canadian Support 3,608 2,987 5,475 Canadian Retail 4,294 6,845 8,264 Australian Export 1,516 1,367 2,564

Milk US$/MT US$/cwt

Relative to Australian Industrial

Price EU Target 35.51 16.10 123.6% U.S. Support 21.83 9.90 37.5% U.S. Farm 26.96 12.23 69.8% Canadian Target, Industrial 37.64 17.07 137.1% Canadian Fluid Milk, Ontario 41.56 18.85 161.8% Australian Industrial Milk 15.88 7.20 0.0% Australian Fluid Milk 33.38 15.14 110.2%SOURCE: http://www.fapri.iastate.edu/outlook99/

Policy Prices and World Prices by Commodity (US$/MT)FAPRI 1999 World Outlook

12

Dairy Disputes

US typically initiates action against Canada– Ice cream and yoghurt– Conversion of import quotas to tariffs– Canadian classified pricing

13

Ice Cream and Yoghurt

Background• CUSTA• Consumption trends

Action• Import Control List• GATT panel

Outcome• Import controls converted to tariffs

14

Ice Cream and Yogurt Evidence of the costs

– Imports of Ice Cream into Canada 1994-98

15

Ice Cream and Yoghurt

Year Imports Production

1998 650 172,3821997 569 173,9241996 494 181,589

Imports/production

0.4%0.3%0.3%

16

Ice Cream and Yogurt Evidence of Costs

– Imports of yoghurt into Canada 1994-98

17

Ice Cream and YoghurtYoghurt production and imports

(000) kgsYear Imports Production

1999 339 114,7881998 428 110,8931997 307 101,5921996 224 100,0901995 300 95,1901994 380 95,4121993 587 92,5651992 518 87,7911991 325 89,2201990 322 90,9401989 801 91,0861988 1,146 87,567

0.3%

Imports/production

0.4%0.3%0.2%0.3%0.4%

0.9%1.3%

0.6%0.6%0.4%0.4%

18

Tariffication

Background• CUSTA, NAFTA, GATT and WTO• Article XI.2.c

Action• Import quotas converted to tariffs• NAFTA challenge

Outcome• Tariffication conformed fully with NAFTA

19

Tariffication

Evidence of costs• 1$ billion (United States Dairy Export Council)• Meilke, Sarker and Le Roy (1998)

– Welfare gains (C$331 m)» gains to consumers and taxpayers larger than

losses to producers

20

Canadian Classified Pricing Background

• Levies to fund Canadian Exports• Special Milk Classes Scheme

Action• US, NZ claimed new CDN pricing system subsidizes

exports (5d & 5e)• WTO panel

Outcome• Panel ruled in favour of the complainants• 5d/5e in violation of WTO Agreement on Agriculture

Articles 9.1(a) and 9.1(c)

21

Canadian Classified Pricing

22

Canadian Classified Pricing

97/99 98/99 99/00

I-V 1.3% 1.3%Ia 33.6% 33.7% 35.1%Ib 1.9% 2.0% 2.3%Ic 1.8% 1.9% 2.3%Id 0.1% 0.1% 0.1%II -V 2.8% 3.9% 4.0%II 3.8% 3.3% 3.5%IIIa 20.0% 20.1% 19.7%IIIb 13.6% 12.9% 12.9%IV(a-d) 0.3% 0.3% 0.1%IVa 4.2% 4.3% 3.2%IVb 0.6% 0.6% 0.5%IVc 0.0% 0.0% 0.0%IVd 0.6% 0.6% 0.7%Va 2.2% 1.5% 2.4%Vb 1.1% 0.9% 1.1%Vc 1.2% 1.2% 1.4%Vd 4.2% 5.4% 4.8%Ve 6.6% 6.1% 4.7%

DAIRY YEAR 1999/2000 MILK UTILIZATION BY CLASS

CUMULATIVE (AUGUST 1999 TO DECEMBER 1999)

23

Canadian Classified PricingCanadian Exports of Selected Dairy Products, 1995-97.

Product Dairy YearOutlayCeiling

(C$'000)

QuantityCeiling(MT)

QuantityExported

(MT)

QuantityNotified

(MT)

% Change:Exported/

CeilingButter 1995/96 $38,874 9,464 14,845 4,429 57%

1996/97 $33,304 8,271 11,639 41%

Skim MilkPowder

1995/96 $45,750 54,910 38,444 38,073 -30%

1996/97 $42,830 52,919 25,172 -52%

Cheese 1995/96 $26,852 12,448 13,751 0 10%1996/97 $26,327 11,773 20,335 73%

Other MilkProducts

1995/96 $33,054 36,990 37,289 0 1%

1996/97 $30,944 35,649 62,846 76%

NOTES:Dairy Year: August-July.Base Outlay: Average budget outlay for export subsidies for 1986-90.Base Quantity: Average quantity of subsidized exports for 1986-90.Outlay and Quantity Ceilings - Canada Country Schedule.Quantity Exported – TIERSQuantity Notified to WTO: 1995/96 Canadian Export Subsidy Notification

SOURCE: 1997 Annual Ag Attaché Report, USDA/FAS.

24

Canadian Classified Pricing

Milk Class Class PriceIIIb (Cheddar)

BaseVe (Surplus

Removal) BaseVe (Surplus

Removal) Base

Ia 62.19 10.02 40.54 187%Ib 59.26 7.09 37.62 174%Ic 61.18 9.01 39.53 183%Id 52.32 0.15 30.67 142%II 56.37 4.20 34.72 160%IIIa 53.32 1.15 31.67 146%IIIb 52.17 0.00 30.52 141%IVa 51.97 (0.20) 30.32 140%IVb 53.68 1.51 32.03 148%IVc 52.51 0.33 30.86 143%IVd 51.65 (0.52) 30.00 139%Va 39.23 (12.94) 17.58 81%Vb 38.71 (13.47) 17.06 79%Vc 32.57 (19.61) 10.92 50%Vd 24.61 (27.56) 2.96 14%Ve 21.65 (30.52) 0.00 0%Total 52.30 0.13 30.65 142%Source: Canadian Dairy Commission.(1): Canada does not includes Newfoundland.Calculations done by the Dairy Section, AAFC.

$ per hl @ 3.6 kg / b.f. Classified Pricing "Wedges": Class Price - Base

MILK PRICES PAID BY PROCESSORSDAIRY YEAR 1997-98

25

Canadian Classified Pricing

Canadian Classified Pricing "Wedges" (Can$/hl):1997-98 Dairy Year

(40)

(30)

(20)

(10)

0

10

20

30

40

50

IIIb (Cheddar) Base

Ve (Surplus Removal) Base

1997-98 Average Milk Price: C$52.30/hl

26

Canadian Classified Pricing

Canadian Classified Pricing "Wedges":1997-98 Dairy Year

-100%

-50%

0%

50%

100%

150%

200%IIIb (Cheddar) Base

Ve (Surplus Removal) Base

27

Canadian Classified Pricing Costs

– Loss of millions in sales• through exports domestic prices

– Increase (maintain ???) US-Canada dairy trade tensions.

– Increase quota management tensions• Need to decrease production (enforce quotas)• Or WTO legally increase exports• Rock and a hard spot ???• US MMO relevance ???

28

US Classified Pricing

FAT PROTEIN LACTOSE SNFTOTAL SOLIDS

FLUID PRODUCTS 19% 36% 40% 38% 32%SOFT PRODUCTS 11% 5% 4% 4% 6%FROZEN PRODUCTS 19% 8% 9% 9% 12%TOTAL CHEESE 32% 29% 2% 14% 20%- AMERICAN CHEESE 18% 15% 1% 7% 11%

- ITALIAN CHEESE 11% 11% 1% 6% 7%- OTHER CHEESE 3% 3% 0% 1% 2%BUTTER 18% 0% 0% 0% 6%NONFAT DRY MILK 0% 9% 10% 9% 7%RESIDUAL MANUFACTURED 1% 12% 35% 25% 17%

Commodity Share of 1995 US Wholesale Component Utilization

29

Canadian Classified Pricing

Milk Class Class Fat

Share

Class Protein Share

Class Other Solids Share

Ia 15.0% 30.6% 31.0%Ib 8.8% 1.7% 1.8%Ic 0.6% 2.3% 1.9%II 8.4% 4.0% 4.0%IIIa 16.5% 20.9% 20.7%IIIb 17.5% 16.2% 16.1%IVa 18.3% 3.7% 3.6%IVb 0.7% 0.8% 0.8%IVc 0.0% 0.0% 0.0%IVd 0.2% 0.5% 0.4%Va 2.0% 2.8% 2.9%Vb 2.1% 1.2% 1.2%Vc 1.5% 1.7% 1.7%Vd 2.1% 6.5% 6.6%Ve 4.9% 5.5% 5.7%TOTAL 100.0% 100.0% 100.0%

DAIRY YEAR 1999/2000 MILK UTILIZATION BY CLASS

CUMULATIVE (AUGUST 1999 TO DECEMBER 1999)

30

US Classified Pricing

World Market Based Wedges

US Milk Prices @ 3.5% BF 1995 PricesFMMO Cheese

BasedCAL Cheese

BasedFMMO SMP

BasedCAL SMP

BasedWorld Price

Based

FMMO Class I Min 14.05 2.22 2.77 3.05 3.53 6.85FMMO Class I Actual 14.69 2.86 3.41 3.69 4.17 7.49FMMO Class III (MW) 11.83 0.00 0.55 0.83 1.31 4.63FMMO Class IIIA 11.00 -0.83 -0.28 0.00 0.48 3.80

CAL Class 1 13.52 1.69 2.24 2.52 3.00 6.32CAL Class 2 11.13 -0.70 -0.15 0.13 0.61 3.93CAL Class 3 10.94 -0.89 -0.34 -0.06 0.42 3.74CAL Class 4b 11.28 -0.55 0.00 0.28 0.76 4.08CAL Class 4a 10.52 -1.31 -0.76 -0.48 0.00 3.32

UMW II/III (A/B) 12.58 0.75 1.30 1.58 2.06 5.38UMW Class I Min 12.93 1.10 1.65 1.93 2.41 5.73UMW Class I Actual 14.69 2.86 3.41 3.69 4.17 7.49

Australian Industrial Milk (FAPRI, 1999)

7.20 -4.63 -4.08 -3.80 -3.32 0.00

Cheese Bases Wedges SMP Based Wedges

1995 FMMO and California Classified Prices for Raw Milk: US$/cwt

31

US Classified Pricing

US Classified Pricing Wedges (US$/cwt)

-2.00

-1.00

0.00

1.00

2.00

3.00

4.00

5.00

6.00

7.00

8.00

FMMOClass I

Min

FMMOClass IActual

FMMOClass III(MW)

FMMOClassIIIA

CALClass 1

CALClass 2

CALClass 3

CALClass

4b

CALClass

4a

FMMO Cheese Based

FMMO SMP Based

World Price Based

32

US Classified Pricing

World Market Based Wedges

US Milk Prices @ 3.5% BF 1995 PricesFMMO Cheese

BasedCAL Cheese

BasedFMMO SMP

BasedCAL SMP

BasedWorld Price

Based

FMMO Class I Min 14.05 19% 25% 28% 34% 95%FMMO Class I Actual 14.69 24% 30% 34% 40% 104%FMMO Class III (MW) 11.83 0% 5% 8% 12% 64%FMMO Class IIIA 11.00 -7% -2% 0% 5% 53%

-100%CAL Class 1 13.52 14% 20% 23% 29% 88%CAL Class 2 11.13 -6% -1% 1% 6% 55%CAL Class 3 10.94 -8% -3% -1% 4% 52%CAL Class 4b 11.28 -5% 0% 3% 7% 57%CAL Class 4a 10.52 -11% -7% -4% 0% 46%

-100%UMW II/III (A/B) 12.58 6% 12% 14% 20% 75%UMW Class I Min 12.93 9% 15% 18% 23% 80%UMW Class I Actual 14.69 24% 30% 34% 40% 104%

-100%Australian Industrial Milk (FAPRI, 1999)

7.20 -39% -36% -35% -32% 0%

Cheese Bases Wedges SMP Based Wedges

1995 FMMO and California Classified Prices for Raw Milk (%)

33

US Classified PricingUS Classified Pricing Wedges

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

110%

120%

FMMOClass I

Min

FMMOClass IActual

FMMOClass

III(MW)

FMMOClassIIIA

CALClass 1

CALClass 2

CALClass 3

CALClass

4b

CALClass

4a

FMMO Cheese Based

FMMO SMP BasedWorld Price Based

34

Canadian Classified Pricing

Canadian Classified Pricing "Wedges":1997-98 Dairy Year

-100%

-50%

0%

50%

100%

150%

200%IIIb (Cheddar) Base

Ve (Surplus Removal) Base

35

Summary Policies similarities, differences

Case studies• Yogurt & Ice Cream• Tariffication• Special Class Pricing

Economic Evidence• Full World Dairy Sector Deregulation; US MMO Deregulation.

• A US-Canada dairy trade liberalization:

– work in progress ….