Milking Trade Subsidies


Wall Street Jounal
Opinion – Asia
By Don Nicolson
June 8, 2009

Less than six months into his new administration, President Barack Obama has already managed to spark a trade war with Mexico over trucking. Protectionist measures like quotas on Chinese tires could be on the cards, too. Now, newly expanded milk subsidies also threaten both America’s reputation and its trade leadership.

Last month the U.S. Secretary of Agriculture, Tom Vilsack, implemented the Dairy Export Incentive Program, or DEIP. Under the program, re-authorized by Congress in last year’s Farm Bill, the U.S. Department of Agriculture pays subsidies — euphemistically described as "bonuses" — to cover the difference between American farmers’ cost of production and prevailing international prices.

While DEIP is legal in the U.S., its implementation is a political decision. In the past, annual dairy export DEIP "bonus" values have ranged from about $20 million up to $140 million. While these are miniscule figures for the U.S., the payments distort the international price of dairy products. The first post-DEIP auction price for whole milk powder, conducted earlier this month, fell by 12% — the biggest price reversal since February.

Mr. Vilsack is taking an expansive view. In May, he announced the program will offer the maximum allowable subsidies on the largest allowable quantity of dairy products — 92,000 metric tons, or 7% of total U.S. dairy exports. The USDA notes this program is allowed under America’s World Trade Organization commitments. But two wrongs — subsidies and retaliation against the European Union — don’t make a right.

Subsidies negatively impact consumers everywhere. In the U.S., DEIP means American families pay higher taxes to support subsidized dairy farmers, wiping out any savings they might enjoy from lower dairy prices. As in other countries, subsidies effectively shield farmers from true competition. Higher prices always result, and this price increase is passed straight onto consumers. There’s nothing inherently "fair" about any form of subsidy.

Just as relevant, especially given Mr. Obama’s stated desire to improve America’s image abroad, is how unfair this subsidy is to dairy farmers in countries like mine, New Zealand. We’re the world’s second-largest dairy exporter, after the EU and ahead of the U.S. And we’ve reached that market position without any farm subsidies whatsoever.

In 1985, Wellington was forced to abandon all farm subsidies because they had grown impossibly expensive. It was an extremely painful time for us. Some farmers were only able to stay in business because of subsidies. When those went, they lost everything. Many are back in business farming now and farming profitably without subsidies.

In fairness to other governments, such a bold step was only politically possible when the continuation of subsidies became fiscally impossible. But we emerged from that period with a leaner, meaner agricultural industry now among the best in the world. On-farm productivity growth has outstripped productivity growth in every other sector of New Zealand’s economy for 25 of the last 27 years.

Now programs like DEIP are punishing us for our hard-won success. The American dairy lobby likes to complain of the squeeze put on U.S. farmers by Fonterra, a farmer-owned cooperative and New Zealand’s largest dairy exporter. They complain Fonterra is "flooding" the market with milk products at less-than-market prices, but even as the world’s second-largest dairy exporter, New Zealand accounts for only 22% of the global market. The U.S. has 16% global market share.

Because New Zealand dairy farmers aren’t subsidized, they cannot engage in selling at a price that’s less than the cost of production. Dumping is an illegal trade practice, and if we did that we’d go out of business. Indeed, we’ve felt the pinch from last year’s world-wide decline in market prices as keenly as other farmers, if not more, given we are not shielded by compliant governments. In New Zealand, next season’s forecast payout for many farmers is around $2.88 for every 2.2 pounds of milk solids. The cost of producing those 2.2 pounds of milk solids is currently $2.87. Some farmers will inevitably fail, but that’s all part of the risk and return of doing business.

Now Messrs. Obama and Vilsack would punish us for our adaptability by subsidizing New Zealand’s competitors. That’s not only bad for us, it’s bad for American consumers and taxpayers. It’s also bad for America’s image and for Washington’s moral authority in advancing the kind of free trade that is so critical for prosperity in the U.S. and around the world.

Mr. Obama’s predecessor, George W. Bush, seemed to understand these principles, at least for a time. For a brief period, between 2006 and 2009, neither America nor Europe imposed dairy export subsidies. That’s why 2008 marked the best returns for dairy farmers in New Zealand, as well as in the U.S. The question moving forward will be whether Mr. Obama will improve on his current record, or backtrack. To judge from his administration’s DEIP decision, the early signs aren’t exactly promising.

Mr. Nicolson is president of Federated Farmers of New Zealand, which advocates for farmers and free-market principles.

Printed in The Wall Street Journal, page A17

Leave a Reply