The past, present and future of trade in dairy products:

Insights into the impact of reduced protection and increased

globalization on once-protected industries.James Dunn

Professor of Agricultural EconomicsPennsylvania State University

Changes in World Economy• Population growth (esp, Africa & S.

America)• Economic growth (China, India, etc.)• Globalization• Freer trade – WTO, NAFTA, etc.• Better transportation• Global banking system• Internet

Some Dairy Trade History

• Originally cows• Still happens – grad student from

Columbia• Frozen embryos – 200 to Kazakhstan• Semen – world market

Transportation

• Refrigerated rail car – ice• Milk train• Refrigerated trucks• Refrigerated containers• Container ships

Railcar Using Ice

Milk Train in Wales

Farm Pick-up

Refrigerated truck

15,000 containers

Milk Collection in Ukraine

Demand growth

• China• Southeast Asia• Middle East• Africa• South America• Biggest drivers of trade growth – more

people & more prosperity

Dairy Policy Traditionally

Most developed countriesClassified pricing

Higher drinking milk price Cheaper price for productsPrice discriminationSome countries really discriminated –Australia

& Canada

1 2 3 4 5 6 7 8 90

5

10

15

20

25

30

Price Discrimination

PD'

Pc'P*

QD' Qc'QD=Qc

DD

Dc

Price Discrimination

• Must keep markets separate • Tools

– Quota for drinking market– Pooling – everyone receives a weighted

average of prices

More Policies

Protection from imports – which would undercut price

Subsidized exports – or surplus undermines program

Dairy Policy Recently

Lower domestic supportUruguay round simplified trade barriersLower trade barriersFewer export subsidiesFewer quotas

US Policy Summary

• Meaningful supports until mid 1980s• Support reduced and has been trivial since

1988• Some export subsidies• Classified prices and regional pooling

1977 1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010$0

$4

$8

$12

$16

$20

$24$/cwt.

Class IIISupport

Class III Milk Price and Support Price1977-present

European Union Policy Summary

• Quotas • Big surpluses sold into intervention• Export subsidies• Expansion issues• WTO issues• Quotas to end in 2015 – then what?

EU Expansion & Trade

• Before expansion EU had surpluses, but had to allow limited access because of WTO agreements

• Much of this access went to countries now on the inside – e.g., Poland

• With expansion, these countries contribute to a greater surplus, but EU must allow access to some other countries

Australian Policy Summary

• Each state had own rules• Some had quotas for fluid milk, others

pooling• Very high fluid premium

– 52 cents vs 21 cents - 13% in US• Competition policy review• Bought out quota – ended fluid premiums• Ended domestic support levy

New Zealand Policy Summary

• Very controlled and subsidized until mid 1980s

• Then subsidies ended• In 2001 NZ Dairy Board ended and

Fronterra Cooperative emerged as the largest exporter in the world

Canadian Policy Summary

• Market sharing quotas• Milk pooling - Eastern & Western pools• Classified pricing• Price supports for butter & skim-milk

powder• Extremely high prices and expensive

quota - $20,000/cow

1967 1972 1977 1982 1987 1992 1997 2002 20070

500

1,000

1,500

2,000

2,500

3,000

3,500M

il $

2009 dollars

US Dairy Exports1967-2010

Source: USDA, BLS Deflated by PPI Dairy

2000 2002 2004 2006 2008 20100

100

200

300

400

Mil

$

importsexports

US Dairy Trade2000-10

Source: USDA

1990 1993 1996 1999 2002 2005 2008$0

$200

$400

$600

$800

mil

2009

$

importsexports

US Dairy Trade with Mexico1990-2009

Source:USDA

1990 1993 1996 1999 2002 2005 2008$0

$100

$200

$300

$400

mil

2009

$

importsexports

US Dairy Trade with Canada1990-2009

Source: USDA

Nor Amer

EU

Other EurLatin Amer

Oceania

Asia

SE AsiaMiddle East

Africa

Share of World Milk Production 2008

Source: FAO

Nor AmerEU

Other Eur

Latin Amer

Oceania

Asia

SE Asia

Middle East

Africa

Share of World Population 2008

Source: FAO

US

EU

NZ

AUST

Others

Share of World Cheese Exports2009

Source: USDA

US

EU

NZ

AUSTOthers

Share of World Butter Exports2009

Source: USDA

US

EU

NZ

AUST

Others

Share of World NFDM Exports2009

Source: USDA

US

EU

NZ

AUST

Others

ARG

Share of World WMP Exports2009

Source: USDA

1993 1997 2001 2005 20090

300

600

900

1,200

1000

met

. ton

sWorld Trade in Cheese

1993-2009

Source: USDA

EU46%

NZ22%

US10%

AUST9%

Others13%

1995

EU31%

NZ28%

US10%

AUST9%

Others22%

2008

Exporters of Dairy Products1995-2008

Future of Dairy Trade

• Population & income growth in China and India – also more dairy consumption

• Population growth in Africa and Latin America – not much income

• Further globalization• More new products• Fewer trade barriers? • Less support for agriculture?

What about European Union• Quotas end in 2015 & are ratcheting up now• Industry will relocate• Movement to Poland, Slovenia, etc.• Less in UK & France, Greece, Portugal, etc.• Limits in Netherlands – environmental rules (like

Chesapeake)• Without quotas, lower costs, more exports to

Ukraine & Russia• How big will the industry be?

1990 1995 2000 2005 20100

0.25

0.5

0.75

1

1.25

1.5

milk/cowpopulationcowsfarms

Milk/Cow, Population, & Cows 1990-2010

Concluding Comments

• If US doesn’t export the industry will continue to shrink every year

• Canada is in the same situation, only worse, because of proximity to US

• Free market world price (if there was a free market) would probably be about US price