Market Watch Diary DEIP thinking

June 10, 2009 07:00 PM
Alan Levitt
Will lower dairy prices stimulate world demand? That's what USDA is counting on.

In late May, the department decided to reawaken the Dairy Export Incentive Program (DEIP) after a five-year slumber. DEIP pays a cash subsidy to U.S. exporters to enable them to sell below cost on the world market.

During June, USDA will take bids for export subsidies on 150 million pounds of nonfat dry milk (NDM), 22 million pounds of butterfat and 7 million pounds of cheese. It has the option of taking bids for another 24 million pounds of butterfat before the end of the month.

In addition, a new DEIP year begins on July 1, so USDA can start the process all over again if it is so inclined, basically doubling the allowable volumes by observing two DEIP years in one calendar year.

The main beneficiaries will be customers in Southeast Asia, China, the Middle East and parts of North Africa. For political reasons, DEIP can't be used to export to Mexico, Japan, South Korea and most of the Caribbean and Central and South America.

The European Union (EU) was quick to condemn the U.S. for bringing DEIP off the shelf, but its objections ring hollow. In January, the EU reinstituted export subsidies of its own. Current subsidy levels at prevailing exchange rates are about 12¢/lb. for skim milk powder (SMP), 35¢/lb. for butter and 14¢/lb. for cheese, which puts EU prices on par with Oceania prices.

New Zealand and Australia also criticized the move, arguing that it will prolong the global slump in dairy prices. Without a government support program to absorb excesses, Oceania suppliers have been very aggressive in moving their production this year, taking share from both the U.S. and Europe.

In first quarter 2009, for instance, Oceania exports of NDM and SMP totaled 321 million pounds, up 64% from last year. Meanwhile, U.S. and EU exports of NDM/SMP were just 203 million pounds, down 40%.

The U.S. dairy industry hopes that increased exports will help clear excesses of NDM and SMP. If more current powder can be exported, that means it will be kept out of the Commodity Credit Corporation (CCC).

USDA has already committed to depleting existing CCC stocks for feeding programs. Throughout the year, powder production will continue to fall and manufacturers' stocks of NDM will draw down as well.

In the short term, suppliers from Oceania may lower their prices and the EU may increase its subsidies in an effort to keep product from accumulating in their warehouses. But as the inventory overhang comes off the U.S. milk powder market, NDM prices may finally be able to rise, which could be the precursor to pulling the entire dairy complex higher.

Bonus content:

USDA''s Foreign Agricultural Service DEIP website.

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