USDA Reinstates Subsidized Dairy Exports in 'Measured Response' to EU

May 25, 2009 07:00 PM

via a special arrangement with Informa Economics, Inc.

History shows not much impact from using DEIP, but program has helped protect trade with Mexico

NOTE: This column is copyrighted material, therefore reproduction or retransmission is prohibited under U.S. copyright laws.

The United States moved to subsidize some of its dairy exports on Friday, via the Dairy Export Incentive Program (DEIP), saying it was forced to respond to new European subsidies that have made it hard to compete in global markets depressed by the economic downturn.

USDA said it will subsidize about 92,000 tonnes of dairy products headed for the world market to help U.S. farmers hit by plunging international prices and trade volumes, the first time in five years it will use its subsidy program. "These (subsidy) allocations illustrate our continued support for the U.S. dairy industry, which has seen its international market shares erode, in part, due to the reintroduction of direct export subsidies by the European Union earlier this year," USDA Secretary Tom Vilsack said in a statement.

The administration of U.S. President Barack Obama remains committed to refraining from protectionism, Vilsack said.

In January, the European Union revived its export subsidies for butter, cheese and skimmed milk powder, which had been suspended since 2007, to help its struggling exporters better compete on the depressed world market.

USTR response."The EU's action is seriously undermining the competitiveness of U.S. dairy products and has forced the United States to respond," said Nefeterius McPherson, a spokeswoman for the U.S. Trade Representative's office. The U.S. crafted its program to keep U.S. products competitive in certain key markets, a "measured response" which complies with World Trade Organization rules, McPherson said, according to Reuters. "We urge the EU to reconsider its dairy export subsidy program and are prepared to sit down with EU representatives to discuss the deactivation of the dairy export subsidy programs," she said.

The EU responds. Europe's farm chief responded to Obama administration comments about restarting DEIP. "I don't like to see that the Americans are using Europe's reinstatement of export subsidies as an excuse to go ahead in this direction," EU Agriculture Commissioner Mariann Fischer Boel told a news conference. "We did not introduce our export refunds until we had calculated the effect on the market ... and we have not covered the gap between the EU and international price," she said, speaking after a monthly meeting of EU farm ministers. "It is very unfair we are suddenly becoming the reason for the Americans to introduce export refunds," Fischer Boel said.

Background: Reauthorized through 2012 via the 2008 Farm Bill, DEIP can be used to subsidize US dairy product exports under certain conditions. Under DEIP, USDA makes cash payments, on a bid basis, to entities that export US dairy products. DEIP has not been active since 2004 because, until late in 2008, market conditions were relatively strong and US trade negotiators have been pursuing the elimination of all agricultural export subsidies as a trade policy objective.

U.S. dairy groups and congressional lawmakers applauded the decision, which they said would help U.S. farmers. House Agriculture Committee Chairman Collin Peterson (D-Minn.) expressed his appreciation for Vilsack's decision, and had previously encouraged the administration t to take this action to provide relief to dairy farmers. “I want to thank USDA Secretary Vilsack for supporting U.S. dairy farmers by using the Dairy Export Incentive Program (DEIP). Dairy farmers across the country are struggling to survive because of low prices and too much product on the market, and DEIP is an important tool that we can use to manage surplus and support producers," Peterson said. "I have encouraged Secretary Vilsack to take these steps to help dairy farmers, and I am pleased that we are able to announce the DEIP purchases today."

Peterson and a bipartisan group of members on the House Agriculture Committee wrote to encourage Secretary Vilsack to use DEIP and other programs to help struggling dairy farmers. Peterson also discussed the issue during regular conversations with Secretary Vilsack.

Comments: The potential for impact on farm milk prices and dairy farmer income depends on how much milk (or milk-equivalent via dairy product exports) is removed relative to the total market. When converted to a milk-equivalent basis, the maximum quantity of subsidized US exports allowed under WTO limits is between 0.5 percent and 1 percent of total US production. A recent Congressional Research Service (CRS) report noted that given that the calculated quantity is a small share of total US milk production, DEIP-assisted exports would be expected to have a relatively small effect on US milk prices and income for US dairy farmers. A USDA analysis in 2004 implied that eliminating DEIP would reduce the farm price of milk by $0.13 per cwt., on average per year, or 1 percent relative to the baseline (base period of 2002-2007). The report noted that gross receipts for dairy farmers (including higher government payments under the Milk Income Loss Contract (MILC) program) would decline $267 million, on average per year, or about 1.5 percent.

One of the initial aims of DEIP was to counter the export subsidies and unfair trade practices of competing dairy exporters, especially the EU. This is why the aim of increasing the US market share in targeted overseas markets was added to the authorizing statute in 1996. However, there have been few evaluations of DEIP to assess its effectiveness in achieving these aims. A 2006 Office of Management and Budget (OMB) assessment of DEIP determined that it was a moderately effective program, but that globally, the Export Enhancement Program (EEP) and DEIP “have not been able to demonstrate an ability to permanently expand exports or build US market share in targeted countries.”

However, OMB noted that DEIP was successful in offsetting EU export subsidies for dairy products to Mexico, which permitted the US to develop and sustain a market for US dairy product exports there.

NOTE: This column is copyrighted material, therefore reproduction or retransmission is prohibited under U.S. copyright laws.


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