POLICY AND PROGRAM DEVELOPMENT HIGHLIGHTS
WTO: As discussed in the January 1998 and July 1998 issues of this circular, certain elements of Canadas dairy marketing system have been challenged under the World Trade Organization (WTO). In March 1999, the World Trade Organization Dispute Settlement Panel on the Canada dairy case determined that Canada provided export subsidies to certain dairy commodities in excess of agreed upon reduction commitments, and that by restricting access to the fluid milk tariff rate quota (TRQ) for consumer packaged milk to less than $20 for personal use, Canada acted inconsistently with its market access commitments. Almost immediately, the Canadian Government announced its intention to appeal the WTO panel decisions on its dairy export pricing and market access policies. Canada's appeal was filed in late June and is expected to be heard in early September.
The United States submission to the Panel had two separate claims. The first, which was also joined by New Zealand, relates to Canadas Special Class milk system and involved issues of export subsidies relating to butter, cheese, and other dairy products. The volume of exports in each of these categories has exceeded the level of Canada's reduction commitment for those products. The second U.S. claim addresses the treatment of fluid milk imports subject to a TRQ. Canada implemented the 64,500 metric ton TRQ in such a way to exclude all but small retail purchases for the personal consumption of Canadian residents.
Butteroil Blends: In early 1998, 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 dairy product imports pay. Imports of the blends mainly consisting of 49 percent butteroil and 51 percent sugar have increased sharply in the past few years, substituting for domestic milk in the manufacture of ice cream and some other products.
The CITT report, released in early July1998 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.
In August 1998, the CITT was asked to review the current tariff classification for imported butteroil blends, which are not subject to a TRQ as are most other imported dairy products into Canada. The Canadian dairy farmers had been lobbying the federal government to have the butteroil-sucrose blend reclassified as a butter substitute under HS 2106.32 or 2106.34, which is subject to a tariff rate quota with zero access and an over-quota tariff of 237 percent.
On March 26, 1999, the CITT determined that butteroil blends comprising less than 50 percent butter oil and more than 50 percent sugar (sucrose) are properly classified under tariff item 2106.95. Blends comprising less than 50 percent butter oil and more than 50 percent glucose are also classifiable under tariff item 2106.90.95. Dairy Farmers of Canada filed an appeal in late July 1999.
The 1996 Federal Agriculture Improvement and Reform (FAIR) Act required USDA to use informal rule making to reform the Federal Milk Marketing Order System. After obtaining public comments on its proposed rule, USDA announced its final decision in late March.
Some highlights of that decision include:
According to regulations, the newly consolidated orders must be approved by either two-thirds of producers, eligible and voting, or by producers who supply two-thirds of the milk for a marketing area. USDA-conducted producer referenda are under way and will be completed by August 6. If approved by referendum, the changes will take effect on October 1, 1999.
Currently, the U.S. Congress is debating some of the major provisions of USDAs final decision. The debate also concerns some closely related topics such as dairy price supports and regional dairy compacts.
In 1998, as part of its effort to increase efficiency, the Government of Mexico (GOM) decided to phase CONASUPO, the traditional importing agency, out of existence and allow LICONSA, the distribution agency, to import directly. In early 1999, LICONSA began officially managing the importation of milk powder for social programs. The full extent of how private imports are to be managed is still not fully clarified.
LICONSA plans to continue opening new milk stores throughout Mexico as the budget permits. Currently LICONSA distributes about 4.6 million liters of reconstituted milk per day. LICONSA's subsidized milk prices are currently 2.00 pesos per liter (US$0.20/lt).
According to LICONSA, 60 percent of imported NDM is consumed by lower-income Mexicans.
The EU dairy reform passed by EU heads of government in Berlin on March 15, 1999, essentially maintains the status quo. As passed, the entire dairy reform package includes quota increases of over 2 percent, support price cuts (15 percent on butter and SMP intervention price levels), premiums to offset some of the impact of the price reductions, and, as proposed by EU farm ministers to satisfy their farm constituents, a two-year delay in the implementation date.
Thus, though the original reform plan was called Agenda 2000 and was offered as a way to move EU agriculture towards international markets, the only changes that will take place in the year 2000 is a increase of quota for some member states. That is, the EUs first step in the reform process can be viewed either simply as a move to reduce the normal level of over-quota penalties for certain states or as a step that will tend to further increase its dairy surpluses.
Relative to quotas, the reform plan extends the milk quota regime from the current end-date of March 31, 2000 until March 31, 2006. For all EU member states (other than four member states granted earlier special increases) dairy quotas will be increased by a total of 1.5 percent over three years beginning in 2005/2006.
Four EU member states benefit from a more immediate two-step increase starting in 2000/2001: Greece will receive an additional 70,000 tons, Spain 550,000 tons, Ireland 150,000 tons, and Italy 600,000 tons. Northern Ireland will also receive an increase of 19,700 tons.
The immediate quota increase for the four member states and the 1.5 percent increase for the other members beginning in 2005 will translate to a 2.4 percent overall increase in quotas at the end of the implementation period.
Legal questions on the ability of implementing a reform which would extend the Agenda 2000 mandate of European institutions until 2008 instead of 2006 were resolved in May 1999. The dairy quota system will be extended until 2008 so that agreed changes to quotas and intervention prices can be introduced over 3 years. However, the mid-term review will be conducted in 2003, as originally scheduled.
Legislation to deregulate New Zealand's dairy industry was introduced in Parliament in mid-July 1999, after negotiations between the Dairy Board and the Government concluded. The Dairy Industry Restructuring Bill covers commercial levies, taxes, quotas, and industry issues required by the new mega-cooperative proposed to meet Government deregulation and competition requirements.
Elements of the bill include:
1. Preparation for creation of a single, integrated co-operative dairy company which would process and market an estimated 95 percent of New Zealand milk. Dairy farmers would own the mega-cooperative directly. The Dairy Board would be reconstituted as a commercial company, and become a 100 percent owned subsidiary of the mega-cooperative. Existing cooperatives would merge to form the mega-cooperative
2. From September 1, 2000, the statutory export monopoly would be removed, opening the way for exporters of dairy products to choose how and through whom they market their dairy products.
3. The mega-cooperative would, for the first 6 ½ years, have exclusive rights to specified EU, U.S., Japanese, and Canadian butter and cheese markets where New Zealand has specific quota rights. This provision would be phased out during the following four years. These quota rights currently account for 16 percent, on a volume basis, of New Zealands dairy exports.
4. The establishment of two classes of shares for the cooperative. The "Q" class of shares covering returns on quota milk, would be tradeable among farmer suppliers. The A class of shares covering all other returns, would be tradeable among farmer suppliers within a range linked to volume of milk supply. Thus, farm returns will depend both on the price of milk as a commodity and the return on shares.
5. The Dairy Board Act would be repealed on September 1, 2000.
The draft legislation is one of four steps necessary to enable the New Zealand dairy industry to restructure. The merger of New Zealand's dairy cooperatives into one mega-cooperative will require approval from the Commerce Commission, dairy farmers and Parliament. If those approvals are obtained, the mega-cooperative is expected to be operational as early as possible, after the merger vote but no later than September 1, 2000.
Also as a part of the restructuring, the dairy industry is expected to be forced to sell existing domestic market companies that handles about 40 percent of the domestic supply of milk and other fresh products. This sale is needed to satisfy Commerce Commission concerns about market dominance. The Commission is scheduled to release a draft determination on the proposed merger of the Dairy Board and New Zealand's nine dairy cooperatives in early August, and its final decision in late September 1999.
The industry will also have to put the mega-cooperative proposal to dairy farmers, where 75 percent of farmers will have to approve the move. Also each cooperative will have to gain 75 percent approval from its suppliers on a milk volume basis.
If Commerce Commission approval is not received or farmers do not vote to merge, the reform legislation is scheduled to expire on September 1, 2000. In that event existing legislation will remain in place.
The current dairy market support arrangements for the Australian dairy industry were put in to place on July 1, 1995. These arrangements which are referred to as the Domestic Market Support Scheme (DMS), basically provide the same level of assistance as the old scheme and are scheduled to terminate on June 30, 2000. As a result the dairy industry is currently seriously debating deregulation. While there is some opposition within the industry to deregulation, most part of the industry have accepted that it will proceed.
Under the current system, farmers pay a levy on milk consumed domestically as drinking milk and manufacturers pay a levy on milk used in the production of finished products for domestic sale. The rate of the levy for 1998/99 is approximately 3.7 Aust. Cents/liter. Milk embodied in exports of finished dairy products is exempt from the levies.
The money raised by these two industry levies is placed in the Domestic Market Support Fund, which is administered by the Australian Dairy Corporation. The money, in turn is used to make a domestic market support payment to farmers who supply milk for manufacturing.
Relative to the deregulation debate, the dairy industry favors the simultaneous repeal of the Dairy Industry Acts in each State and Territory, and the DMS scheme on June 30, 2000. This proposal is based on the provision of a A$1.25 billion dollar package to restructure the industry. This package would be funded by a levy on domestic market milk sales (processors have a strong preference for a retail levy).
This proposal has been framed to avoid regional, economic and social disruption which might if deregulation is not coordinated. As one state, Victoria produces over 60 percent of Australia's milk and almost all the milk for export, deregulation would have major but differing impacts on Victoria and the other States.
Industry sources indicate that the Government of Australia (GOA) will be more sympathetic to the compensation package if the dairy industry can offer a united approach to deregulation. The current proposal has the advantage of not resulting in a cost to Government, and is consistent with GOA policy of providing increased competitive efficiency in the domestic market and a more internationally competitive export sector.