POLICY AND PROGRAM DEVELOPMENT HIGHLIGHTS
Largely as a result of pressure from farm groups, the Canadian International Trade Tribunal (CITT) held hearings on imports of sugar/butterfat blends. These blends are readily useable for making ice cream and certain other dairy products but are not subject to the steep tariffs that most other dairy imports pay. The CITT report, released in early July, discussed a number of possible actions, including (a) status quo, (b) reclassification of the blends as dairy products subject to higher tariffs, and (c) compensation for milk producers for their losses due to the imports. The report did not recommend which should be pursued.
Much of the focus of the U.S. dairy industry in the past year is on the reformulation of the Federal Milk Marketing Order system. Two major items of interest are the reduction of the number of marketing orders from the current 33 to between 10 and 14 and resetting the differentials between beverage milk classes and manufacturing milk classes. USDA's proposal was released in January. Since then comments from the public have been submitted and are being analyzed.
Within the dairy sector, the United States has active WTO investigations underway against Canada and the EU. The Canadian investigation has moved to the stage of naming a panel while the EU investigation has not yet moved to that stage. The January issue of this publication gave the background and details of the Canadian investigation. The EU investigation involves its method of applying subsidies to export processed cheese. Since making processed cheese usually involves use of natural cheese plus additional milk powder and butterfat, the EU claims that a portion of the subsidy needed to export processed cheese should be counted against WTO limits for milk powder and butterfat rather than just against the limit on cheese. This method of allocation allows the EU to exceed its limits on subsidizing cheese exports. In recent years, exports of butterfat and NDM have not been close to WTO limits while exports of cheese have been near or over WTO limits.
On December 31, 1997, Mexico removed its last remaining price controls on beverage milk. The change should help make internal allocation of milk more in accord with traditional economics. By late spring, retail prices had largely settled near the 4.70 peso-per-liter ($US 0.55) level. Also in late spring, the Government of Mexico indicated that private processors would be allowed to import NDM for their processing needs but not for direct resale. Some private imports of NDM have been recorded.
Development in the EU mainly concern reform of the dairy regime to make that sector more competitive in the next decade and to facilitate admission of new EU members. The Commission's draft proposal, released in mid-March calls for a 15-percent cut in intervention prices which is expected to spur both domestic consumption and exports The proposal also suggests a 2 percent increase in the EU-wide quota with the increase directed towards young farmers and mountainous areas. To offset the loss of farm income due to the lower prices, the Commission proposes that farmers be eligible for up to 4 annual premiums based on a farm's total milk quota. The proposal covers the 2000 to 2004 period. The Commission's plans call for a consensus to be reached and final decisions made by the spring of 1999.
New Zealand New Payment System: On June 1, 1998, the New Zealand Dairy Board (NZDB) phased in a new commercial pricing model governing its payments to dairy processing cooperatives. The new system replaces a standard cost model which, over the past few years, has encouraged dairy cooperatives to build larger plants and increase production of commodity-type products.
The new payment system puts more focus on a product's market value instead of its cost of production. The new payment system has four different payment categories. Currently, more than 70 percent of New Zealand's output of products fall into the basic commodity category, where NZDB payments will be pegged against monthly average international commodity prices. Beyond the commodity category, firms will share in market premiums that are attributable to manufacturing, to marketing, or to some mix of manufacturing and marketing
Net revenues to the industry are expected to increase as production patterns better reflect market demand. However, the new payment system is expected to result in wider swings in individual cooperative earnings, particularly for those firms with limited production flexibility.
Also under the new pricing system, dairy cooperatives that hold export licenses issued by the NZDB, have agreed to allow those licence agreements to lapse in favor of participation in the new pricing scheme. In the past dairy companies often marketed new or innovative consumer products themselves under an export licence issued by the Board. Except for dairy cooperatives, export rights will continue to be controlled by the NZDB and may be granted to food manufacturers and others for niche products.
Future of the NZDB: In a May 1998 budget announcement, the Government of New Zealand said that all producer and marketing boards, including the New Zealand Dairy Board should start planning for the time they will lose their statutory monopoly rights. The various boards were given until mid-November 1998 to develop strategic plans for that contingency. The announcement suggested that the affected boards would have 3 to 5 years to transition to a new commercial structure.
Other developments indicate the NZDB may not have that much time. New Zealand's two largest dairy cooperatives which process over 75 percent of the milk supply recently announced a strategic alliance to form a joint exporting company. The remaining several cooperatives have been invited to join and the next largest one has expressed an interest.