Market Watch Diary EU subsidies are back

February 2, 2009 06:00 PM
Alan Levitt
From 2004 through 2008, U.S. milk production has increased 2.6% per year, and about 40% of the incremental milk supply was sold overseas as milk powder, cheese, butter, whey proteins and other dairy products.

When the global recession and credit crisis caused dairy demand to dry up in the fourth quarter of 2008, U.S. milk producers couldn't put the brakes on fast enough. Overall U.S. dairy export volumes in November were down about 30% from the pace of the first eight months of 2008. Without those overseas outlets, and with sluggish demand at home, excess product backed up onto the U.S. market and sent prices crashing to support levels.

Recapturing export sales is critical to the recovery of the U.S. dairy markets. Over the last two years, exports have been the outlet for more than 10% of the industry's milk production.

That's why the European Commission's January decision to reinstate export subsidies is particularly bad news for U.S. dairy producers. The European Union's (EU) generous export subsidies, used aggressively until the middle part of the decade, distort dairy trade by allowing European exporters to sell at below-market prices while the government makes up the difference.

In the summer of 2003, EU subsidies were 31¢/lb. on skim milk powder (SMP), 58¢/lb. on cheese and 97¢/lb. on butter. These subsidies priced U.S. product out of world markets (except what moved through Dairy Export Incentive Program subsidies).

But as global dairy supply tightened, the EU cut bonuses on SMP to zero in June 2006 and did the same for cheese and butterfat a year later. It's no coincidence that U.S. commercial dairy exports flourished once the EU's market distortions were removed.

Europe had pledged to eliminate its export subsidies in the Doha Round of World Trade Organization (WTO)talks, but unfortunately those talks have stalled. Now, with European farmers facing the same sort of low prices that American farmers are facing, government officials have pulled their trusty tool off the shelf in hopes of clearing some excess into overseas market channels.

Under the WTO rules, the EU is allowed to subsidize nearly 2 million tons of butter, cheese and milk powder annually. From 2000 to 2004, the bloc took advantage of nearly all of that, shipping more than 1.6 million tons per year. However, as subsidies have phased out, EU exports have dropped by more than a fourth.

This latest move will likely forestall the natural recovery in global dairy prices. And that means the U.S. dairy industry's surplus will be prolonged as well.

Bonus content:

Click here to read a news release by the U.S. Dairy Export Council titled "EU Dairy Export Subsidy Measures Requires U.S. Response"

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