United States Department of Agriculture

Economics and Statistics

. Service

National Economics Division

ESS Staff Report

ANDREW. M. ~OV MOVie

u.s. Casein and Lactalbumin Imports: An Economic and Policy Perspective

Number AGESS 810521

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U.S. CASEIN AND LACTALBUMIN IMPORTS: AN ECONOMIC AND POLICY PERSPECTIVE. By the Food and Agricultural Policy Branch; National Economics Division; Economics and Statistics Service; U •. S. Department of Agriculture; Washington, D.C. 20250; June 1981. ESS Staff Report AGESS810S21

ABSTRACT

This study examines the economic implications of restricting the impor­tation of casein and lactalbumin--dairy proteins used in various food, feed, and industrial products. Under existing legislation and trade agreements, the most extreme restrictions that may be imposed are a SO-percent quota or a SO-percent ad valorem tariff. If either of these were imposed, users of casein would shift to soy-based protein and other ingredients wherever possi­ble, although product quality could suffer. Some casein use would be replac·ed by skim milk solids, but not enough to significantly affect CCC purchases under the dairy price · support program. Import restrictions would l ncrease the cost of producing goods containing casein, and thus raise prices to consumers.

Keywords: casein, lactalbumin, Section 22, U.S. Dairy Price Support Program

The study team for this report included Kenneth C. Clayton, Felix Spinelli, Thomas Stucker, Howard Leathers, James Johnson, and Le tricia Womack.

This report was prepared for limited distribution to the research community outside the U.S. Department of Agriculture.

CONTENTS

Summary. . . . . . . . . . . . . . . . . . . . . . • . . • . . . • . • . . . . . . • . • . . . . . . . . . . . . . . . . . . . . . . . iv

Introduction ••••••••••••••••••••••••••••••• Casein as a Milk Component ••••••••••••••• Institutional Setting ••••••••••••••••••••••••••••••••••• Major Determinants of Growth in Casein/Lactalbumin Use •••••• Purpose of the Study ............•...•.•.......•.............

The Supply Perspective •.••••••••••••••••••• Oceania: New Zealand and Australia •••••• The European Economic Community •••••• Summary Perspective ••••••••••••••••

U.S. Casein and Lactalbumin Use ••••• Historical Patterns of Use •••••••• Measuring Use in 1980 ............................... .

Casein Product Use and Substitution ••••••••••• Feed Product Use of Casein...... • •••••• Food Product Use of Casein...... • •••••• Industrial Products Use of Casein •••••••• Lactalbumin Use •.•.•..................... Classification of Casein Uses ••••••••••••

Economic Implications of Restrictions on Casein Imports •••••.•••• The Casein Market •.................. . -......... .

Skim Milk Solids •••••• ..... Displacement of Domestic Economic Implications of Trends and Implications.

Restricted Casein Imports •••••

1 1 2 4 6

7 12 16 22

24 25 26

28 30 33 39 41 42

44 44 51 53 56

References.. . . .. . . . . .. . . .. ... . .. .... .. ...... . ..... . .. . ... . ...... . . . . . . . . 59

Append ices .....•.......................•....•..•........... 0 • • • • • • • • • • • 62

iv

SUMMARY

This study was initiated in May 1980 at the request of the Secretary

of Agriculture. It examines the economic implications of imported casein

and lactalbumin--dairy proteins used in various food, feed, and industrial

products. Of particular interest are the economic effects of any restrictions

that might be placed on the availability of these imported proteins. The

effects of such restrictions would be felt by manufacturers of products

using casein; by consumers of products containing casein; by manufacturers

of domestic dairy products; by U.S. farmers; and by the U.S. Government

through any effect that such a limitation might have on the cost of the

dairy price support program. In addition, restrictions would also affect

casein exporting countries and, as a consequence, might affect existing or

potential trade agreements.

Those who favor import restrictions on casein and lactalbumin assert

that these imported dairy proteins displace domestic skim milk solids in

commercial channels. As a consequence, the cost of the dairy price support

program is said to be higher. They suggest further that the imported milk

proteins are heavily subsidized, thereby placing domestic milk producers at

an unfair competitive disadvantage.

Suppliers and users of casein do not agree with the view that imported

casein and lactalbumin interfere with the domestic dairy price support

program. They argue tha t these imported dairy proteins are unique inpu ts

that do not displace significant quantities of domestic skim milk solids.

Some also suggest that certain products would not be produced if imported

casein was unavailable.

To deal with the issues being raised concerning casein and lactalbumin,

a basic supply and demand formulation was adopted in this study. By looking

v

at the market for these dairy proteins it was possible to identify the

economic implications of their use. It was found that of the 152 million

pounds of casein imported by the United States in 1980, 128 million pounds

were used in manufacturing and processing with 24 million pounds being

added to inventory.

Major suppliers of casein in 1980 included New Zealand (SO p~rcent),

Australia (12 percent), and European Community countries (28 percent).

Since the late sixties, there has been no domestic production of casein.

The U.S. support price for nonfat dry milk has made casein production

noncompetitive.

Review of the dairy production situations and programs in major casein

exporting countries suggests that in the case of the Oceania countries, i.e.,

New Zealand and Australia, some amount of subsidization does occur out that

the cost of producing milk is significantly lower than elsewhere. European

Community countries directly subsidize casein production, which is viewed

as an economical method of disposing of surplus skim milk.

For purposes of analysis, the end uses of casein were categorized

into three groups. First, a class of applications (including industrial

products and pet food uses) was identified in which soy-based proteins

or other ingredients would subs ti tu te in place of casein. This subs ti tu tion

has already been occurring and would be further encouraged if the price of

casein rose by only a very small amount. These applications consumed

about 36 million pounds of casein in 1980, and are represented by shaded

area A in the accompanying figure.

Second, a class of applications (including imitation cheese, coffee

whitener, and most animal feed uses) was identified in which skim milk

solids could be substituted in place of casein. This substitution would

vi

occur if the price of casein rose to a level where it was equivalent, on a

protein basis, to the price of nonfat dry milk (more than double its 1980

price). These applications used about 68 million pounds of casei.n in 1980,

and are represented by shaded area B in the figure. It is impor t ant to note

tha t as the price of casein rises, the quan ti ty of casein used in group B

applications declines. · This is because the higher casein prices result in

higher consumer prices for the end products; and faced with higher prices,

consumers buy less of these end products.

Third, a class 'of applications (including medical and pharmaceu tical

products) was identified which required the special characteristics of

casein. These applications used 24 million pounds in 1980, and are shown

as area C in the figure.

Simply converting total casein use (128 million pounds) to a nonfat dry

milk equivalent (510 million pounds) using technical relationships between

the two produc ts overs tates the quantity of skim milk solids displaced by

impor ted casein. Such a compu ta tion ignores the po tential subs ti tu tion

of soy-based proteins for casein and the impact of higher prices on consumer

demand for the end products manufactured using this imported dairy protein.

Actually, if no casein had been imported in 1980, commercial disappearance

of domestic skim .milk solids would have increased by the equivalent of 333

million pounds of nonfat dry milk. Thus, Government purchases of nonfat dry

milk would have been 333 million pounds lower, saving about $300 million in

Commodity Credit Corporation (CCC) outlays. In 1980, however, the Government

purchased 635 million pounds of nonfat dry milk. Thus, if no casein had been

imported, producer milk prices would have remained at support levels since

the CCC would still have purchased approximately 300 million pounds of nonfat

dry milk. Consumer expenditures would have increased in excess of $115 million.

vii

Under Section 22 of the Agricultural Adjustment Act, the United States

cannot completely prohibit imports of casein; the most extreme restrictions

that may be imposed are a 50 percent tariff or a quota equal to 50 percent of

the amount imported during a representative period. Athough other tariff and

quota levels up to those specified are available, only the extremes have been

considered. This study identified tl).e effect that these restrictions might

have on uses of casein, on consumers of products containing casein, and on the

cost of the dairy price support program.

Imposition of a 50 percent quota would permit the importation of only

76 million pounds of casein. The price of casein would rise to the protein

equivalent of the nonfat dry milk price. This price would precipitate the

replacement of 36 million pounds of casein with soy-based proteins and

other ingredients. It would also cause a decline of 13 million pounds 'in

casein usage due to decreased purchases of the affected end-products. At

this price, the quantity of casein demanded would amount to 79 million pounds,

equivalent to 333 million pounds of nonfat dry milk. Thus, with a 76 million

pound quota, 3 million pounds of casein use would be replaced by domestic

skim milk solids (equivalent to about 10 million pounds of nonfat dry milk). o

This 10 million pound increase in commercial demand for nonfat dry milk would

replace CCC purchases valued at $9.3 million. Consumers' expenditures would

increase by almost $115 million.

A 50 percent tariff would cause the price of casein to increase to about

$1.80 per pound ($0.60 greater than the 1980 price of $1.20). This price is

still lower than the protein equivalent nonfat dry milk price. Therefore, the

tariff would cause a shift in some applications (Group A) to soy-based proteins

or other ingredients, but would not cause any increase in commercial demand

viii

for skim milk solids. Thus, a 50 percent tariff would have no impact on the

cost of the price support program. Consumer expenditures woul d increase by

about $50 million.

In the future, increased use of casein in food and feed applications,

where casein competes more directly with skim milk and nonfat dry milk, may

mean that imported casein will have a greater impact on the United States

dairy industry. However, the already rapid development of nondairy alterna­

tives to casein may eliminate much demand for both casein and skim milk solids.

This would seem to be particularly likely and may actually be accelerated if

the price of casein increases or if its quantity is restricted.

ix

Casein Usage and Nonfat Dry Milk Equivalent. 1980

Casein Use

Price ($/Ib.)

2 .65

1.40

o 24

50% Quota I I

y 92 76 A 79

I I I I I I II *

128 152 (use) (i mports)

Nonfat Dry Milk Equivalent I I.------"~----. Y,I-' _________ -----LI....I.I ______ -.L.-_______ M i 1.1 bs .

o Y 323.333

A Decrease in use du e to quota is 3 mil. lb.

* Switch to soy and other ingredients due to quota is 164 mil. lb .

• Change in NFDM use due to quota is 10 mil. lb.

510

INTRODUCTION

Casein and lactalbumin are proteins derived from milk. Casein has a

history of use in a number of industrial applications. However, since the

late sixties it has increasingly been used in the manufacture of many food

and feed products. Lactalbumin use is limited primarily to food applica­

tions (41). ]j

Recently there has been much debate as to whether imported milk proteins

are displacing domestic dairy products in commercial use and thereby raising

dairy price support program costs. Those who make this assertion favor

import restrictions. However, there is equally strong sentiment that these

imported dairy proteins are, in fact, a differentiated input, and that they

therefore do not displace domestic dairy products.

This study examines this issue by looking at the conditions under which

casein and lactalbumin are produced and the economics of their use in v,arious

end-products. Particular attention is paid to the alternative :lngredients

that are available to manufacturers and processors who use casein and

lactalbumin. Knowledge of the conditions under which these ingredients

are substituted for one another is basic to the analysis of this issue.

The information assembled is then utilized to evaluate the effects that

available policy actions would have on casein users, consumers of products

containing casein, and the cost of the U.S. dairy price suppo,rt program.

Casein as a Milk Component

Casein is the principal protein in milk, accounting for roughly 3 per­

cent of the weight of whole milk, and 80 percent of the total protein content.

Whole milk is made up of fat, water, and "nonfat milk solids". When the

butterfat component of whole milk is skimmed off in making but ter, still

remaining as skim milk are casein, water, and other nonfat milk solids.

1/ Underlined numbers in parentheses refer to references at end of text.

2

This skim milk can be dried and made into nonfat dry milk (NFDM) or it can

be made into casein.

When the casein is removed from skim milk, whey remains; just as when

casein and fat portions of milk are combined to make hard cheese. Whey,

in turn, can be broken down into lactose (milk sugar) and whey proteins

which are known commercially as "lactalbumin."

Neither casein nor lactalbumin are produced in the United States . In

1980, total imports of casein and casein derivatives totaled 152 million

pounds, and lactalbumin imports reached 1.4 million pounds (~). This total

of imported nonfat milk solids was equivalent to 4.4 percent of U.S. nonfat

milk solid production in 1980.

Institutional Setting

Imported milk proteins have recently received considerable attention.

On May 21, 1979, the Commi ttee on Ways and Means, U. S. House of Represen ta­

tives, requested the United States International Trade Commission to study

the issue. In the fall of 1979, the Subcommittee on Dairy and Poultry of

the House Committee on Agriculture held hearings on casein imports. The

International Trade Commission (ITC) report was completed in December 1979,

and an update was sent to the House Ways and Means Committee in March 1981.

At first glance, the interest in casein might seem misplaced ; casein

imports would not appear to harm either the nonexistent domestic casein

industry or the domestic nonfat dry milk (NFDM) industry, since the price

of NFDM is supported by the dairy price support program. However, it is

the price support program which makes casein imports an issue in agricul­

tural policy.

When Congress created the agricultural price support and stabi lization

programs, it recognized the potential for imported products to interfere with

the programs' operation. When domestic prices are artificially held above

3

world prices, import restrictions are needed to keep the lower-priced

world supplies from entering the domestic market and reducing the effective­

ness of the price support program.

The Government supports milk prices indirectly by supporting the prices

of American cheese, butter, and NFDM at levels which will allow butter and

cheese manufacturers to pay farmers the targeted support price for their

milk. The Government stands ready to buy unlimited quantities of these dairy

produc ts at the specif ied prices (which can later be resold at a higher price

or disposed of through donations and other means). Whenever butter and cheese

manufacturers are unable to sell their products at prices higher than the

Government purchase price, they sell to the Government--which then accumulates

stocks of butter, cheese, and NFDM. In effect, the Government purchases all

milk supplies which are not used commercially at the Commodity Credit Corporation

(CCC)-specified price. Therefore, with a relatively fixed supply of milk,

any decrease in commercial demand for milk means a greater amount of product

must be removed from the market through the price support program.

To avoid having significant commercial demand for dairy products met by

lower-priced imports and large quantities of domestic production being sold

to the CCC, strict import restrictions are imposed on butter, cheese, and

NFDM. Furthermore, the Department of Agriculture is required, under Section

22 of the Agricultural Adjustment Act of 1935, to report to the President

whenever the Secretary has reason to believe that imported commodities are

ma terially interfering wi th the operation of the price suppor t program.

Casein and lactalbumin, although derived from milk, are not included

in the programs that support prices and limit imports of manufactured dairy

products. At the time that basic dairy legislation was adopted (1949) the

U.S. casein production industry used only a small percentage of milk, and

casein was used in the manufacture of industrial rather than food products.

Domestic casein production totaled 18 million pounds in 1949, but fell to

4

3 million pounds in 1955 as NFDM producers diverted milk supplies away from

casein production to nonfat dry milk whose price was supported. During this

same period imports rose 38.1 million pounds to a total of 74.5 million

pounds. The commercial production of lactalbumin had not yet been developed

at the time this legislation was adopted.

Major Determinants of Growth in Casein/Lactalbumin Use

Concern about the effect of imported milk proteins, primarily casein,

on the dairy price support program has grown in recent years because of the

overall increase in casein use (which has nearly tripled since the late 1940's)

and the expanded use of casein in food products, where it may compete more

directly with domestically produced skim milk solids. Although growth in

casein/lactalbumin use has been influenced by technical, economi c , social,

and regulatory factors, technical advances made in casein/lactalbumin pro­

duction and in the manufacture of products requiring casein/lactalbumin have

been the primary growth factor.

Technical advances in ~e manufacturing process for casein/lactalbumin

have made it possible to meet the increasingly higher quality standards that

characterize the more sophisticated edible product markets (~). This has

developed at a time when traditional markets for casein, especia lly the

industrial market in adhesives and paper products, are being lost to syn­

thetic and vegetable protein replacements. There have also been technical

advances in the manufacture of products that use casein/lactalbumin. Higher-

fat veal feeds, nondairy creamers (1967), and imitation cheeses (early seventies)

are examples of end-products that have increased the demand for casein.

The supply/demand situation for casein/lactalbumin indicates that

supply has been growing while demand fluctuated--dropping in some product

lines and growing in others. In addition, new product lines have developed.

5

This situation has created only moderate increases in the price of casein;

in fact, the real cost of casein has probably decreased over much of the

last decade. Only in the last 1-2 years have casein prices increased and

failed to return to previous price levels. The relatively stable casein

price encouraged its use over nonfat dry milk, which is perceived by many

as a product with "built-in" price increases due to the dairy pric~ support

program.

Much of the technical progress has been encouraged by changing life

styles and diet preferences (26,30). Increased quantities of consumer

products that contain less fat, that meet certain individual dietary goals,

and that are more convenient have promoted the use of casein. Instant

breakfasts, diet drinks/meals, and lowfat imitation cheeses a r.e all products

that can be made with casein and which have experienced a growing market.

Manufacturers' perceptions of positive consumer acceptance of products

utilizing casein have influenced increased casein use.

Government regulations can also affect the amount of casein/lactalbumin

used. Import restrictions (tariffs and quotas) can directly influence the

use of any import, and Government regulation can influence how imports are

allocated once received into the United States. Quality standards, identity

standards which state the ingredients to be used in certain products, and

an outright ban on use can all be imposed to limit use. Currently, casein

use is prohibited in many specified meat products and restricted in ice

cream.

General economic conditions also exert some influence over the quantity

of casein that is utilized in anyone year. Past recessions have generally

reduced the demand for casein. However, with the advent of consumer pro­

ducts such as imitation cheese that are priced lower than conventionally-made

6

counterparts, poor economic conditions could actually increase the demand

for casein.

Given our experience to date, future use would appear to depend on

(1) growth in the use of these milk proteins as substitute ingredients in

existing products (for example, calf milk replacers and margarine); (2) entry

of new products which require their use (coffee whiteners and imitation

cheese); and (3) general market growth of products that have historically

required these milk proteins as ingredients (glues and adhesives).

Purpose of the Study

The specific purpose of this study is to determine the extent to which

these two imported milk proteins--casein and lactalbumin--are used, and the

degree to which they substitute with other inputs. The results of sUGh an

assessment have direct implication for the outcome of possible policy actions.

To do this, an extensive review of all available information has been under-

taken. To achieve the specific objectives of the study, it was necessary

to:

o determine the conditions under which imported casein/lactalbumin is produced--in particular, the competitive position of the dairy industries in major casein/lactalbumin exporting countries;

o examine current uses of casein/lactalbumin to learn why they are used, to identify alternative inputs that could be used in their place, and to establish the relative economics characterizing their use;

o review the role that casein/lactalbumin plays in the marketability and sales of selected end-products;

o evaluate the implications that casein/lactalbumin availability restrictions would have on their use and on end-product sales;

o estimate any domestic milk or milk product displacement that may be occurring; and

o determine the impact that such displacement may be having on the U.S. dairy price support program.

7

The next section of the paper presents a perspective on the availability

of casein and lactalbumin. Major exporting countries are examined and

economic conditions of milk production, marketing, and use are described.

The importance of casein and lactalbumin production to the dairy industry

of each country and the government's role in influencing the production and

marketing of milk and milk proteins are highlighted.

In the third and fourth sections of the paper, major uses of these

imported dairy proteins in the United States are identified. For each use

category, reasons for using casein/lactalbumin, possible substitutes, and

the economic importance of these proteins are described.

The final section of the paper provides an evaluation of the effect

that imported milk proteins may be having on the domestic dairy industry

and dairy price support program costs, assesses possible consumer effects of

policy options, and reviews possible trends and prospects for change in

impor ts.

THE SUPPLY PERSPECTIVE

Casein and lactalbumin are supplied to processors and manufacturers in

the United States entirely from foreign sources. This was not always the

case, as a domestic casein industry existed through the forties and fifties,

and some casein was produced as late as the mid-sixties. However, a changing

economic environment, influenced largely by government policy, resulted in

a shift from casein to nonfat dry milk production.

An evaluation of the economic and policy forces affecting milk and

casein/lactalbumin production in major exporting countries is therefore

necessary to an understanding of casein/lactalbumin supply. In this context,

two issues are particularly important:

o the rela ti ve cos ts of milk produc tion in .· casein/ lac tal bumin exporting countries and in the United States, and

o the existence of any subsidies paid by the exporting countries which causes an artificially low price for casein/lactalbumin imported into the United States.

Because the cost of milk is the major component in the cost of producing

casein and lactalbumin, the competitive position of major exporters relative

to the United States can be gauged by their respective costs of producing

milk. In the absence of any governmen t in terven tion, casein would be impor ted

to the United States only from those countries which can produce milk at a

lower cost than U.S. producers.

In addition, exporting countries may choose to subsidize the production

and export of their milk or milk products. A variety of policies, e.g.,

pooling and equalization plans, are possible to make milk produc t s, including

casein/lactalbumin, competitive in world markets. To the extent that casein/

lactalbumin imports to the United States are subsidized, the ava:llability

and price of these dairy proteins now and in the future will be :lnfluenced by

policy decisions in other countries. This makes assessing current and

anticipated casein/lactalbumin production and exports a rather difficult

matter, at best. Still, comparative costs of production data and knowledge

of subsidies currently in place are basic to the supply perspective for

casein and lactalbumin.

Casein and casein mixtures are supplied to the United States by a

relatively few countries (table 1). New Zealand is by far the most signifi-

cant exporter. Australia has been important, too, and most recently Ireland

has expanded its exports of casein. Collectively, the European Community

countries of France, West Germany, the Netherlands, and Ireland provide a

sizeable portion of our casein.

These six countries--two in Oceania and four EC countries--accounted

9

for 86 percent of U.S. casein imports in 1980, 88 percent in 1979 and 86

percent in 1978. Their combined share of world casein production was also

significant: 78 percent of the world's casein in 1980, 73 percent in

1979, and 69 percent in 1978.

Casein imports presently total just over 152 million pounds per year

(table 1). The exact amount has varied from year to year depending on

casein prices and existing stocks. Imports have increased by over 40

percent since the early seventies, growing from an average annual quantity

of 106 million pounds during 1971 and 1972 to over 152 million pounds by

1979 and 1980.

Casein producing countries exhibit a rather diverse set of production

circumstances. Some countries can produce milk at a relatively low cost

because inexpensive feed sources are available. Others have surplus milk

that must be removed from the market to support their domestic dairy indus-

try. Between these are a variety of production situations that result in

a range of milk production costs. 4f

Total estimated costs of producing milk range from just over $t per

hundredweight to - just under $10 for the six EC and Oceania casein-producing

countries and the United States (table 2). The U.S. cost of production

figure differs from that reported in the Committee Print on Costs of Producing

Milk in the United States. This difference stems from the need to develop cost

estimates that are consistent across countries. A major cost item omitted

from the total reported in Table 2 is depreciation on the cattle herd. New

Zealand and Australia appear to have a distinct cost advantage, due primarily

to their low feed costs. The larger herd sizes in the Oceania countries

also reduce management and labor costs per unit of milk produced.

,..

Table l--U.S. Imports of Casein and Casein Mixtures

Country of origin 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980

Million pounds

New Zealand 63.0 37.9 29.7 31.4 33.5 14.7 56.0 96.3 84.3 92 .1 76.8

Australia 34.3 31.8 27.3 23.9 18.3 10.0 33.4 23.1 22.9 21.7 17.9

Ireland a/ .9 4.4 13.6 7.3 5.7 3.3 4.3 9.2 14.8 24.0

France 11.2 8.3 8.7 10.3 22.9 5.2 0.2 a/ a/ 2.0 8.9

West Germany 0.4 2.3 2.6 2.5 5.5 3.5 1.2 0.4 0.2 0.2 0.6 r-'

Ne therlands 0.2 1.7 4.6 1.8 2.7 2.3 1.1 0.6 1.5 2.5 2.5 0

Others 26.2 23.1 28.1 29.3 22.7 17.0 16.9 19.5 19.0 17.5 21.5

Total 135.3 106.0 105.4 112.8 112.9 58.4 112.1 144.2 137.1 150.8 152.2

a/ Less than 100,000 pounds.

Source: United States Department of Commerce, Bureau of the Census.

11

Table 2--Milk : Cos ts of production in major exporting coun'tries and the United States,

Costs :New Zealand :Australia : Ireland France : Ne therlands : West Germany

United States dollars 2er hundredweight

Cash Cos ts

Feed Purchased .38 . 42 .98 2.02 3.52 1.85

Feed Grown .30 sJ .39 .60 .52 .52

Breeding .06 .04 c/ c/ s./ c /

Heal th .11 .06 c/ c/ c/ 5:./

Utilities .09 .21 b/ s./ c/ s../

Repairs .35 .52 .11 .45 .39 . 93

Hired labor .61 .25 .12 .21 .32 . 13

Miscellaneous .73 .48 .19 .41 .65 1. 47

Total """"2":63 1:98 1:79 3.69 ~ 4.90

Im2u ted Cos ts

Family labor .45 2.11 3.95 3.09 2.47 2. 46

Depreciation .35 .80 .34 .65 .66 . 57 (excep t 11 ves tock)

Oppor tuni ty Cos t !!../ .19 .40 . 20 .39 .40 . 33

Management .26 .20 .18 .37 .54 . 49 Total l.'2S 3.51 4.67 4.50 4.07 3.85

Input Subsidy -.,~ .20 .00 .00 .00 . 00

Less Taxes on Inpu ts ( .00) (.19) (.36) (.64 ) ( . 33) ( . 53)

Land Cos t .20 .18 .63 .20 .63 .29 ---C-RAND TOTAL _ ~·Z.1 5.68 6.73 7.75 9.78 8.51

a/ Calendar year except for New Zealand (June-May) and Australia (July-June). h/ Details and sources are given in Appendix I. e/ Not calculated or given separately.

1978 ~/ E!

Uni ted S ta tes

3.98

s./

.08

.22

.25

.24

.59

.28

~

.97

.81

.86

.55 3.19

.04

( .00)

.16 d/ 8.92 -

~/ The difference between this amount '-and that given in the Congressional COllllllitee Print on Costa of Producing Milk for 1978 ($9.34/cwt.) is due to the different methods employed in the studies and the omission of depreciation on livestock in this report. This omission was necessary in order to be consistent in making comparison between different countries. Strict comparisons with foreign countries' cost of studies cannot be made due to different exchange rate levels and also due to different methodologies e~ployed.

!!../ Imputed interest on the value of all livestock, equipment, and machinery.

12

To provide a context for understanding the supply of casein and lactal­

bumin, a more detailed review of the forces shaping the dairy industries in

the major exporting countries is provided below.

Oceania: New Zealand and Australia

New Zealand and Australia, although both major casein exporters and

located in the same part of the world, differ significantly in their outlook

for production. New Zealand, the principal casein exporter to the United

States, has recently reached record milk production. Australia, with a

less favorable set of production circumstances, is making efforts to ease

producers out of the dairy industry. Both ~ountries' dairy industries

were developed to accommodate the United Kingdom's demand for imported

milk products. Since the United Kingdom joined the EC in 1973, both · New

Zealand and Australia have sought alternative markets for at least part of

their production.

New Zealand

In 1980, New Zealand produced a record 15.1 billion pounds of milk;

however, 1981 milk production is expected to decrease slightly. The impor­

tant point to be made about New Zealand's milk production is ~at only 10

percent is consumed fresh. The rest is processed into butter, nonfat dry

milk, cheese, and other dairy products. New Zealand relies heavily on dairy

exports, and processed products are therefore a major end use. In 1979/80

(July-June), 87 percent of New Zealand's dairy products were exported,

representing 14 percent of the country's total exports (~).

New Zealand has been shifting its exports from the United Kingdom to

the United States and Japan. To accommodate these and other new markets,

the commodity mix of dairy exports has changed. More emphasis has been

13

placed on exports of casein l/, nonfat dry milk, and wholemilk powder. This

new emphasis for New Zealand's dairy products has been facilitated through

the operation of the New Zealand Dairy Board. This board, operated by New

Zealand dairy farmers, owns all dairy processing plants and markets New

Zealand's dairy products--both domestically and overseas (23).

Based on industry organization and actions, New Zealand's dairy ' policy

goals apparently are to:

o increase dairy production efficiency,

o keep dairying profitable, and

o promote!the export of dairy products.

To accomplish these goals, over IS programs have been undertaken in

the areas of land fertilization, flood and drought relief, agricultural

sanitation, bovine genetics, feed storage, forage establishment, and credit.

About $180 million in grants and subsidies were allocated to agriculture

(in general) for 1978/79 with much of this funding

These funds constitute an input subsidy equivalent

for dairy support (~). , l't

to $1IIi per hundredweight

of milk produced. However, no subsidies were found which specifically

encourage casein production or export.

\ New Zealand has the lowes t es tima ted average cos t of milk produc tion .

in the world. The cost of producing one hundred pounds of milk in New q. Z,7

Zealand was estimated to be $ .... in 1978. This relatively low cost is

primarily the result of small purchased feed requirements as compared with

other countries.

Skim milk stocks are expected to be available for NFDM or casein

production at the discretion of the New Zealand Dairy Board. New Zealand's

productivity per cow is growing at roughly 1 percent per year. Average

2/ New Zealand has been exporting casein since about 1928.

14

herd size, already the largest in the world, is growing at an annual rate

of 4 percent. Thus, labor and management cost per unit of milk produced

is expected to remain low.

Although the United States purchased a large proportion of New Zealand's

casein exports in the past, a growing demand for casein by other countries

will be more of a factor in allocating exports. The U.S. export share of

New Zealand's casein production has ranged from 25 percent in 1971 to 61

percent in 1979. For the foreseeable future, production and supplies of

casein for export are expected to continue strong and to contribute toward

the New Zealand Dairy Board's policy goal of maximizing joint profit from

the sale of all dairy products.

Aus tralia

Following the U.K.'s entry into the European Community (EC), Australia

has attempted to develop new export markets while scaling back its dairy

indus try.

Australian milk production has declined from 17.0 billion pounds in

1970 to 12.4 billion pounds in 1980. Further declines are expeeted in 1981.

Casein production was highest in 1969/1970 when 71.2 million pounds were

produced, and had declined to 33.1 million pounds by 1980. Butter sold to

the United Kingdom had once been Australia's primary dairy export product

(1968/69), but currently most of the $250 million in annual dairy exports

(1979/80) is in the form of cheese shipped to Japan and dry whole milk

shipped to third world countries. Current casein exports . are about half

the size of exports of a decade earlier; chief recipients are the United

S ta tes and J apan (~).

Only a small proportion of Australian farmland is well sui t ed to dairy­

ing, and production is concentrated in those areas. The number of dairy

farms has fallen dramatically as consolidation has occurred.

15

Australia approaches dairy policy in a manner more like that ·of the

United States than of New Zealand. The goals for dairy are apparently to:

o minimize price fluctuations,

o facilitate adjustments in industry structure, and

o increase efficiency.

The Government has four major programs to ease the pressure of severe price

fluctuations on the dairy industry:

o price supports for fresh milk, which provide most of the industry's financial support.

o price supports for processed dairy products, which main t ain retail prices above export (world market) prices. Returns are pooled by the dairy board for most processed products, with producers receiving the average price less transport, processing, and handling costs.

o underwriting the dairy program. The government guarantees a minimum pooled price on processed products.

o price protection from imports. Tariffs are levied on i mported dairy products, most of which come from New Zealand. Also, the New Zealand Dairy Board has agreed to limit its exports to Australia.

To facilitate structural changes in the industry, two programs are

maintained. First, farm structural assistance is offered for farm develop-

ment and relocation of displaced farmers; and second, special provisions

are made for unemployment benefits. The objective of efficient production

is pursued through government matching funds for research.

These latter programs constitute input subsidies to Australia's dairy

sector. On a production basis, these programs translated into a $0.20 per

hundredweight input subsidy in 1978. No specific subsidies were found to

encourage the production or export of casein over other dairy products.

Australia's cost of milk production was relatively low at $5.68/cwt.

in 1978 (table 2). This is primarily the result of small amounts of pur-

chased feeds being utilized in the dairy operation.

16

Available export quantities of casein will likely range from 25 to

35 million pounds annually. The dairy industry is decreasing in size, and

government efforts have facilitated this trend. Downward trends in the

production of milk, cheese, and butter have reduced the quantities of skim

milk available for casein production. The downward trend in milk production

has led to what may be stability at current levels, and milk production is

expected to increase 1/2 to 1 percent annually due mainly to improved herd

management practices.

European Economic Community

The dairy indus tries wi thin the various European Communi ty (EC) coun­

tries are protected from most world agricultural supply conditions primarily

by the collective effort of all countries under the Common Agricultural

Policy (CAP). CAP's marketing and pricing arrangements can have a signifi­

cant effect on the amounts of casein available from the EC and subsequently

to the United States in any given year.

Because of this important common policy mechanism, overall EC policies

for milk and milk products are discussed first. The discussion then focuses

on actual pricing arrangements employed in the EC as they relate to casein.

EC Policies for Milk and Milk Products

The pricing system for EC dairy products is intended to a chieve an

average target price for whole milk (3.7 percent butterfat) delivered to the

dairy. This price goal is achieved through "intervention" purchases of

butter, nonfat dry milk, and certain cheeses; variable levies on imported

milk products; and subsidies on exports to maintain control over domestic

supplies. Thus, the price for whole milk is not directly supported, but

is - buoyed up by support of products and exports. The target price for

17

whole milk, intervention prices for butter, nonfat dry milk and cheese,

and the threshold prices (minimum import prices) for various dai.ry products

are shown in table 4.

Domestic prices in each EC country are maintained above world prices

by import levies on products coming into the EC. In the case of selected

processed products, for which threshold prices are fixed, the levies are

equal to the difference between the threshold price and the lowest corres­

ponding cost, insurance, and freight (c.i.f.) price. For other dairy

products, such as casein, levies are derived by making adjustments in the

levies for the nearest corresponding selected processed product.. Complement­

ing the import levy is the availability of export subsidies for use in

moving products out of the domestic market. This subsidy helps bridge the

gap between higher internal agricultural prices and the lower world price

levels. This makes EC products competitive on world markets despite the

high internal price levels. Export payments are provided to allow sales

of selected dairy products (nonfat dry milk, butter, and cheese) on the

world market. Grants have also been available to encourage use of liquid

skim milk for animal feed and for processing into casein for domestic or

export sales.

Casein--The EC provides financial aid (subsidy) for processing liquid

skim milk into casein and caseinates. The aid granted for casein is the

only subSidy of its type (manufacturing subsidy) within the ECls common

market organization for dairy products. The subsidy is paid directly to

the processor for manufacture of a casein product, and is adjusted period­

ically to take into account the movement of prices for casein in domestic

and world markets. There is no internal price support for casein in EC

member countries, nor is there a threshold price (minimum import price)

18

Table 3. EC Dairy Price Program Summary for 1980/81 1/

Target price for milk

Intervention prices bu t ter skimmed milk powder cheese (Parmesan)3

Threshold prices bu t ter skimmed milk powder whey powder dry whole milk evaporated milk condensed milk (with sugar)

parmesan cheese3

ECU per me tric ton

222.6

2,916.0 1,215.1 3,807.4

3,215.4 1,396.9

391.8 2,155.6

344.2 1,095.3

4,175.7

$ U.S. per cwt. 2/

14.15

185.16 77.11

241. 77

204.21 88.72 24.90

136.90 21. 86 69.54

265.17

1/ For dairy marketing year 1980/81 starting April 1980. 2/ Prices were converted from April 1980 European Currency Units

of-Value at $1.40 = 1 ECU. 3/ Parmesan cheese is used as example of price levels for cheese.

19

established on which a variable levy is charged. Instead, imports of

casein incur an ad valorem tariff ranging from 2 to 14 percent--depending

on the type of casein imported. Domestic EC casein prices thus respond to

fluctuations in world (open market) prices for casein, and are roughly

equivalent to world price levels. Because of the high price for the raw

material (liquid skim milk) in the EC, resulting from supports, payment of

some aid (manufacturing subsidy) is necessary if EC casein is to remain

competitive in both domestic (EC) and world markets.

Summarizing the aid given to manufacturers of skim mi lk processed into

casein and caseinates draws a clear picture of how returns from casein

production in the EC are determined:

o aid is fixed at levels such that income derived from the sale of skim milk (liquid) processed into casein or caseinates cor"responds to that derived from the sale of skim milk processed into skim milk powder (table 3).

o level of aid is based on quantities of skim milk required for manu­facturing different grades of casein or caseinates---generally 2. T to 3.7 kilograms of skim milk per kilogram of casein.

o aid is paid only after the product has been sold. In April 1980, the EC reduced aid to casein manufacturers from 6.25 ECU/100 kilograms skim milk to 5.75 ECU/100 kilograms. This decision was based on rising casein prices in the EC "and world markets.

This subsidy helps explain the dramatic increase in ,:xportable supplies

of casein from the EC. In 1978, the share of total U.S. casein imports

supplied by the four EC countries studied was 8 percent; in 1979, 13 percent;

in 1980, 24 percent. The initiation of the above subsidy occurred in late

1979 at a rate of $1.28 per pound of casein manufactured to dairy processors.

The output subsidy for dairy processors was $.82/lb. in Ireland, $.83/lb.

in France, $.87/lb. in Germany, and $.83/lb. in the Netherlands for 1980.

The following discussion highlights EC production potential in the

major exporting countries and summarizes, on a country basis, important

factors affecting production.

20

Ireland

Ireland's dairy industry is the fastest growing of all major exporting

countries examined. Its milk production is growing at a rate of 4 percent

each year. Larger and more specialized farms will likely lead to reductions

in Ireland's costs of milk production. Casein production and exportable

supplies could easily reach Australia's former levels of 30-40 million

pounds annually within 3-5 years.

Production of all dairy items has shown a steady increase since 1970.

The current annual output of milk for Ireland is trending upward as Ireland

attempts to replace New Zealand as the U.K.'s major supplier of dairy

products.

Casein production has shown the fastest rate of growth for processed

milk products in Ireland, but still trails nonfat dry milk, butter, and

cheese in quantity produced. Though it is unlikely that the total output

of processed products will continue to increase at more than 4 percent

annually, the production of any single item, such as casein, could change

as price relationships are altered.

Most of Ireland's processed dairy exports (56 percent) were sold with­

in the EC in 1978. Trade with the United States had not been s ignificant

until the recent development of large exportable supplies of casein; by

1978, nearly all dairy exports to the United States were casein . Exports

of casein increased rapidly from 1970 to 1978, but have not surpassed nonfat

dry milk and butter.

Ireland receives funds under a number of regional investment programs

of the CAP for irrigation and general infrastructure improvement. Costs of

producing milk in Ireland averaged $6.73/cwt. in 1978, reflecting low feed

costs of grazing as opposed to high outlays for purchase of supplemental feeds.

21

West Germany

Production and exports of all dairy products are increasing in West

Germany. EC policy has stimulated consolidation of West Germany's tradition­

ally small dairy farms. Growth in casein exports is expected to continue

as production of milk and milk products has grown steadily over the past

20 years.

No input subsidization was found to exist for West Germany's dairy sec­

tor, although the general EC policies do apply. Costs of milk produced in

West Germany were estimated to be $8.51/cwt. in 1978.

France

Milk production in France has risen rather steadily in recent years. Milk

production rose 17 percent between 1969 and 1979, and output of some processed

dairy products has increased dramatically. Production of casein more , than

doubled in that period, and exports have kept pace with production, rising

from 24 to 59 million pounds annually during the 1970's. France accounts

for a large share of the production of dairy products within the EC.

Much of France's dairy policy revolves around the CAP. However, an

input charge of $.64 cents/cwt. of milk is estimated to have accrued at

the farm level as a result of domestic tax programs. Output subsidies have

been substantial, and are basically determined through the CAP .

Cost of milk production in France is estimated at $7.75/cwt. Despite

the EC's overall intent to curb milk production, French milk output contin­

ues to rise. Increased output per cow has more than offset declines in cow

numbers. Continued production increases will make necessary continued

exports of cheese, butter, nonfat dry milk, and casein.

The Ne therlands

Encouraged by EC milk price supports, dairying in the Netherlands has

developed into a highly capitalized, intensive industry with an annual

22

growth rate of 3 percent over the past two decades. This rate of growth

is second only to Ireland in the EC, and with approximately double the

total milk production of Ireland, the Netherlands has the capacity to

easily increase casein production from the 30 million pound level achieved

in 1978.

The Netherlands operates under the EC's Common Agricultural Policy.

Costs of producing milk are calculated to have been $9.78/cwt. i n 1978.

Growth in dairy production is expected to hold at current levels,

but casein production could easily double or triple current low export levels.

Casein and dried whey production have grown at an 11 percent annual rate

since 1960, from a relatively insignificant 7 percent of total output to

16 percent in 1978.

Summary Perspective

The United States currently imports all of the casein and lactalbumin

that its manufacturers and processors use. The situation regarding foreign

milk and milk products production thus has great bearing on the availability

and price of imported dairy proteins.

Affecting the marketing decisions of major casein exporters are the

costs of producing milk, the existence of any input or export subsidies on

milk or milk products, and the market for those milk products. Together,

these factors have a major influence on the current and future supply of

imported casein and lactalbumin.

New Zealand is the world's leading producer and exporter of casein.

Decisions by the New Zealand Dairy Board regarding the level of casein pro­

duction and exports are guided by several factors: the relative jJrices of

casein and NFDM on the world market; the availability of skim milk supplies;

23

and such non-price factors as the potential for market growth. Generally,

when NFDM prices rise, skim milk supplies are diverted to NFDM, and casein

production declines. When NFDM prices fall, the opposite occurs. The

total skim milk supply available for either casein or NFDM production,

moreover, is influenced by the relative prices of cheese and butter. With

greater butter production, more skim milk is produced; cheese production

draws the milk input away from NFDM and casein.

The world market for NFDM is much larger than the world market for

casein. No one buyer dominates the demand for NFDM in the way that the

United States does for casein. However, much of the NFDM entering the world

market is subsidized by the exporting countries (particularly, the EC, Canada,

and the United States). The world markets for NFDM, butter, and cheese,

moreover, are strongly affected by the existence of import restrictions in

most developed countries. ./9

New Zealand subsidizes its milk production by an estimated $l1li per

hundredweight. Even without this subsidy, the cost of producing milk in

New Zealand would be lower than anywhere else in the world. To be competi-

tive with New Zealand in world markets, other major exporting countries

therefore find it necessary to employ various subsidization schemes.

Australia, for example, has costs for milk production that are fairly

close to those of New Zealand. Still, it is necessary for the Australian

Dairy Corporation to become quite involved through production controls,

import restrictions, and the pooling of returns across dairy product sales

to ensure a price that is higher than costs.

For European casein to be competitive in world markets, the EC has found

it necessary to directly subsidize its production. This subsidy allows Euro-

pean manufacturers to sell casein at world prices; and thereby has diverted

24

skim milk from NFDM manufacture to casein production. This subsidization

of casein manuf ac ture is directly rela ted to the growth of the "EC as a sup­

plier of casein to the United States.

Looking ahead, it can be expected that New Zealand will maintain its

position as a major force in world dairy markets. Milk production in New

Zealand will continue to expand with milk supplies directed to casein pro­

duction as long as the demand for casein remains strong and whenever the

market for NFDM is weak. New Zealand appears to be a reliable supplier of

low-cost dairy proteins.

Australian milk production seems likely to decline in the years ahead.

Casein exports will continue to be a major source of revenue for the Australian

dairy industry, with export levels in the 2S to 30 million pounds per year

range.

In the EC, milk production is expected to continue the upward trend it

has exhibi~ed over the past decade. Perhaps more so than for other exporters,

casein production and exports are greatly influenced by government policies.

These policies are known to change in the face of changing conditions in

the dairy industry and in the economy asa whole. If current skim milk

powder inventories remain high, continued subsidization of casein seems

likely. If these surpluses are eliminated, a lower rate of subsidization

might ensue. Without the subsidies, it seems unlikely that the EC would

be a major supplier of casein to the United States.

U.S. CASEIN AND LACTALBUMIN USE

Evaluation of the impact of imported milk proteins on the U.S. dairy

industry requires that major U.S. casein and lactalbumin uses be identified

and substitute inputs considered. In this section, the quantity of casein

-

2S

used in various produc t ca tegories during 1980 is es tima ted. The nex t sec-

tion will examine the potential for substituting soybean products and other

ingredients, including nonfat dry milk (NFDM) and skim milk, for casein.

Historical Patterns of Use

Uses of casein in the United States as early as the forti es are rela-

tively well known; however, the quantities involved were only occasionally

documented. In those early days of use, almost all casein was used strictly

for such indus trial uses as glues, adhesives, paper coatings, and paints (28).

Developments in cosmetics and textiles in the late forties and early

fifties, as well as the introduction of dried casein lactate as a medical

dietary supplement by 1953, marked the beginning of attempts to more

fully utilize the unique characteristics of casein. Soluble casein was

made available in 1955, and by 1960 casein was being applied to human

dietary preparations (~). Through the sixties, development of casein's

proper ties--especially emuls Hying and stabilizing quali ties--facili tated

the successful introduction of a powdered non-dairy coffee whitener.

Various sources indicate 1967 as the year when imitation milk products

were formally introduced (19). By 1969, as much as one-quarter of the

world's annual production of casein (estimated to be about 240 million

to 320 million pounds) is believed to have gone into coffee whiteners and

other food applications (40). Besides the use of casein in coffee whiteners,

other major edible applications at the time were:

1) medical/dietary products,

2) flavor enhancers,

3) imitation whipped cream for desserts/bakery goods, and

4) introduction into meat products, especially sausages, for water­binding qualities.

26

Domestic use of casein in 1969 was still mainly in industrial applica­

tions, although over 20 million pounds of casein, or one-fifth of casein

imports in that year, were used in food and pet food applications (12).

These food uses were limited mainly to beverages, breakfast food, coffee

whitener, desserts and toppings, and dietetic food products. Apparently,

casein had not yet been widely applied to baby foods, baked goods, confec­

tionery products, processed meats, dry soups and pet foods. In all these

food uses, however, there did seem to be a very high likelihood of ingredient

replacement of the functional protein at some time in the future. All of

these products primarily relied on dry whole milk and nonfat dry milk for

protein enrichment and other functional requirements.

From the sixties to the present, changing technology and economics have

resulted in increases in casein use in both new and in many existing products.

Current uses can be described under the three general end-product groupings

of feed, food, and industrial product applications.

Measuring Use in 1980

In preparing this report, USDA's Economics and Statistics Service (ESS)

surveyed all firms which were known or thought to be probable users of

casein or lactalbumin. These firms were requested to provide i nformation

on the quantity of casein or lactalbumin used, the products in which these

proteins were used, beginning and end of year inventory holdings, the reason

for using casein or lactalbumin, and the possible substitutes for these

proteins.

Firms responded positively to the questionnaire, and the USDA survey

was able to ,account for over 51 percent of the casein imported during 1980.

The survey results are summarized in table 4 and are compared with the results

of a recent telephone survey conducted by the ITC for a similar time period.

27

Table 4--Results of USDA Survey of Casein Users

Casein use

Indus trial

Pet and animal feed

Pe t food Animal feeds

Total

Medical, pharmaceutical, nutritional; and specialty

Food

Imi ta tion cheese Coffee whi tener Bakery and Breakfast Desserts & Confec-

tionery Breakfast and Other

Total

Total reported use

Increase in inventory

Exports

Total reported 1/

1980 Reported use

of casein and caseinates

Million lbs.

11. 662

2.523 10.100

12.623

4.292

20.710 6.182 3.238

.471 1. 919

32.520

61. 097

15.080

.963

77 .140

Percen t of

reported use

19

4 17

21

7

34 10

5

1 3

53

100

Percent

Percent of total reported

by ITC

17

13

5

37 11 10

7 0

65

100

1/ USDA survey accounted for 51 percent of imported casein in 1980; ITC survey accounted for 58 percent of total imports.

28

The results of the USDA survey provide a comprehensive information

source on total casein use in 1980. The survey reported information on

changes in inventories during the year and shows a sizable increase in

inventory stocks. 3/ This increase is the result of the recent increases

in prices of casein/caseinates, the prospect that these price increases

will continue, and the heightened Government interest in the question of

import restrictions for casein.4/

It should be noted at the outset that several large manufacturers of

bakery items and whipped toppings did not respond to the USDA questionnaire.

Therefore, the percentages reported in the survey tend to understate the

actual use in these categories. The survey results were thus adjusted on

the basis of f6110wup telephone conversations with nonrespondents, informa-

tion available from other sources about sales of products known to contain

casein, and conversations with individuals knowledgeable about the industries

using casein. Out of this process the total pounds of casein used in each

use category during 1980 have been estimated (table S).

CASEIN PRODUCT USE AND SUBSTITUTION

Casein has functional as well as economic characteristics that are

reflected in its current use. The use of casein in feed, food, and indus-

trial products is discussed below, and the availability of substitutes is

noted.

3/ Total increases in inventory stocks are estimated at 23 mil lion pounds-­IS-percent of imports in 1980.

4/ For the purposes of this study, increased inventory holdings are not considered as use in 1980. The increase in casein inventories i s a result of factors peculiar to the casein market (increasing prices and the threat of import restrictions). Furthermore, casein inventories cannot be thought of as replacing any NFDM in commercial channels, since CCC holdings act as inventory for users of NFDM.

29

Table 5--Estimated total use of imported casein, 1980 1/

Industrial uses Medical uses and

specialty products

Feed uses Pet food Animal feed Total feed

Food Uses Imitation cheese Coffee whitener Bakery Desserts Other foods Total food

Total use Increase inventories Exports

Total imports

Percent of casein used

13

7

4 16 20

33 10

9 5 3

60

Percent of casein imported

84.2 15.2

.6 100.0

Quantity of casein used

Million pounds

16.6

9.4

5.3 20.6 25.9

41.9 12.3 11.4

6.8 3.8

76.2

Quantity of casein

Million pounds

128.1 23.1 1.0

152.2

1/ Additional detail on how these estimates were derived is shown in Appendix II.

30

Feed Product Use of Casein

Major products found in this product category include calf milk replacers,

animal feeds (e.g., horse feeds and feed supplements), pet foods, veal feeds,

and weaning feeds for young pigs. All feed products utilize casein: pet

foods utilize caseinates, as well as casein; only research formulations

require lactalbumin.

Desirable attributes of animal feeds are that they:

o meet the nutritional requirements for growth, maintenance, and reproduction in farm, pet, and test animals;

o be more economical than homegrown feeds; for example, in the case of milk replacers, they should be more economical than feeding calves whole milk; and

o have physical characteristics that make them convenient to use.

Casein's primary role in feed use is to provide a quality source of pro-

tein to meet product specifications related to nutrition. All respondents

to the USDA survey in this end-product category indicated high protein quality

as the most important factor favoring casein use over the use of substitutes.

Because it tends to impart certain functional characteristics in some feed

products, however, casein plays a more expanded role than just to provide

protein fortification (as in most cases of lactalbumin use). The ability

to encapsulate fat particles in high-fat veal feeds (20 percent fat formu-

lation) and to enhance the appearance, nutrition, and convenience in certain

brands of dry dog food are examples of casein's unique qualities.

Reasons for casein use and the potential substitution for casein in

each specific feed product are given below. This information is based on

USDA survey responses and a review of the technical literature.

Calf Milk Replacers

Calf milk replacers rely on casein primarily for reasons of economy.

When this end-product was introduced in the fifties, it was made from by-

31

products of the butter and cheese industry--dried skim milk, dried butter-

milk, and dried whey (31). As skim milk prices rose in the mid-1960's and

when "simulated skim milk" (a casein and whey mixture) was found to perform

equally as well as skim milk-based feeds, casein began to appear in these

products. Estimates of the market share of casein-whey based feeds relative

to skim milk powder based calf milk replacers are difficult to obtain. Rates

of use of casein in these products range from 20 to 40 percent on a dry

weigh t bas is.

Young calves can readily use only two carbohydrates--Iactose and dex-

trose. In order to make a digestible product, milk replacer manufacturers

must either use NFDM or recombine casein and whey (which is over 50 percent

lactose), as dextrose is too expensive for use. <..lith existing prices, the

recombined casein and whey--which in fact, simulates skim milk powder--costs

about $0.52 per pound, compared with the NFDM support price of $0.94 per

pound. :l./

High quality calf milk replacers require milk-based protein sources (i).

USDA survey respondents indicated that soy protein concentrate could be used

as a partial replacement for dairy-based proteins in calf milk replacers.

Current research and the literature (31) suggest that perhaps up to 22-30

percent of the calf milk replacer protein can be derived from specially

manufactured soy protein or soy concentrates, while still producing an

acceptable product. The remainder of the product's protein content would

be based on skim milk powder.

Animal Feeds

Feeds, such as supplemental feeds, depend on casein primarily for pro-

tein fortification purposes. USDA survey results indicate that some

l/ In the past year, the CCC has sold some NFDM which was spoiling in Government storage. This NFDM could be used only for animal feeds, and was priced at $0.52-$0.54 per pound.

32

manufacturers could substitute nonfat dry milk and/or additional whey for

casein, if imported casein was no longer available. According to many

professionals consulted, animal feeds made from NFDM would not be exactly

identical to animal feeds made from casein. However, the NFDM feeds would

be an acceptable product--especially in pig weaning feeds. If casein prices

were to rise to a level where NFDM was an economically viable substitute,

animal feed manuf ac ture rs would a t temp t to .. ex tend" the NFDM by adding soy

or whey protein. Special ty feeds for horses and certain feed supplements

need a quality protein source: casein use is favored over skim milk powder

in these animal feeds because casein is free of lactose. There are no

good substitutes for casein in specialty feeds.

Veal Feeds

Veal feeds use casein to encapsulate fat particles and supply protein

to the growing vealer calf. Since many modern veal operations are not

necessarily connected to dairy operations, they must use prepared milk

replacer mixes that can be reconstituted on the veal feeding site. Thus,

convenience is an essential quality in these veal feeds.

There seems to be considerable agreement that milk-based proteins are

currently the best source of protein for these products. All manufacturers

of this product responded that they would not be able to supply the same

quality product without using casein; but feed experts agree that manufac­

turers could make a similar product using, for the most part, nonfat dry

milk to supply the protein/functionality of the end-product.

Pe t Foods

Pet food products use casein because it is a high-quality protein, and

because it can impart certain functional characteristics in the end-product.

33

One of these characteristics is the ability of the casein product to closely

resemble fresh meat upon the addition of water.

A limited response was received from firms in this product class. Sev­

eral large users of casein maintained that their pet food product could not

be supplied without casein. However, one producer did state that nonfat dry

milk would be substituted in casein's place. No technical literature could

be found which evaluated substitutes for casein in pet food. However, much

of the pet food now on the market is made with soy-based protein, and con­

tains no casein. Soy-based protein must be considered a viable alternative

to casein in pet food manufacture.

Feeds for Research Animals

Many research feeds for testing animals presently require casein.

Without casein, many of these tests would lose their comparability with

past experiments through replication. If imported casein was not available,

researchers would have to find a domestic source of casein.

Food Product Use of Casein

Major products in the food product category reported by the USDA survey

include imitation cheese, nondairy coffee whiteners, medical products, imi­

tation dairy products, and bakery products. Other uses include confectionery

products, meat products (such as luncheon meats), nutritional and specialty

human foods, and prepared alcohol mixes.

Imitation Cheese

The desired characteristics of imitation cheese products revolve around

their resembling natural cheeses as closely as possible--in taste, nutrition,

and texture.

34

Casein's role in these products is to provide the protein component

that binds together the other components of the product (fat and water with

some additional minerals and a small amount of carbohydrate). Casein also

gives imitation cheese proper texture and other functional properties, such

as the capacity to be melted, cooled, and melted again without burning and

changing flavor. As most imitation cheese products are used in more highly

processed food products (frozen and restaurant pizza, prepared dinners,

etc.) these functional properties are a very important factor for success

in use (43).

No alternative to dairy proteins exists at the present time for use in

imitation cheese products. However, many present imitation cheese manufac­

turers, when posed with the question of how they would react if imported

casein were no longer available, indicated that they would use skim milk or

NFDM as a protein source. Much of the imitation cheese manufactured is of

the skim milk mozzarella type, used in frozen and fast food pizzas. The

natural cheese alternative to this imitation cheese is made from fluid skim

milk (or reconstituted NFDM). Filled cheese products (made from skim milk,

but with the fat portion provided by vegetable oil) would be of as high

quality as imitation (casein-based) cheeses, and would be significantly

less expensive than natural cheeses which contain butterfat. Thus, the

alternatives to casein-based imitation cheeses use skim milk, but not butter­

fat. Casein-containing imitation cheeses, therefore, do not directly displace

natural cheeses (except for skim milk/vegetable fat based cheeses).

Coffee Whiteners and Dessert Toppings

Coffee whiteners must be able to satisfy the characteristics demanded

by users of this product (change the color of the coffee, add a slight cream

flavor, and offset somewhat the naturally bitter taste of coffee) (12),

3S

be convenient to use, and have a long shelf life. Coffee whiteners contain­

ing sodium caseinate possess all these characteristics. They also appeal to

consumers who want to avoid or reduce their intake of animal fat (30).

Sodium caseinate's most important traits in these products are its abil­

ity to prevent the fat component of the powdered coffee whitener from rising

to the top of the emulsion (commonly referred as to the problem of feathering)

and its ability to remain stable in flavor and color during storage (40).

Currently, only one viable technical substitute for sodium caseinate in pow­

dered coffee whiteners exists: soybean-based protein products. Powdered

coffee whiteners made with soy-based proteins are currently available (20),

but are inferior to those manufactured with sodium caseinate because of poor

taste quality (due to the soybean based ingredient) and poor emulsifying

properties. These products cater to special religious groups who must re­

strict their intake of dairy products with other food products. On the other

hand, liquid coffee whiteners made from soy isolates are currently marketed

and find wide consumer acceptance although they do not have the shelf life of

powdered coffee whiteners. However, the technology for formulating soy-based

liquid coffee whitener is not widely known in the industry.

If importe~ casein was no longer available, the powdered nondairy cream­

ers available for home use would probably continue to use casein (domestically

produced). These products require long shelf life and good flavor; it may

therefore be assumed that casein will be the ingredient used to supply those

attributes in this product. The market share of coffee whiteners used at

home is estimated to be 72 percent of the total market, based on the propor­

tion of consumer expenditures for food consumption away from home (~). That

portion of the present nondairy creamer market utilizing reconstituted pow­

dered ingredients to make creamers for the restaurant and institutional trade

36

would most likely begin to make a similar reconstituted product, but using

skim milk and vegetable fat. Their market share of the total coffee whitener

market is estimated to be 28 percent. Because coffee whiteners and many

dessert formulations, especially substitute topping products, are very sim­

ilar (~), this market share assumption can also apply to the home and away­

from-home share of dessert product markets. To the extent that soybean

isolates and whey could be substituted for the casein/caseinate portion in

future ingredient formulations, less casein (imported or domestically

produced) and less skim milk would be required in the manufacture of both

of these products <.~).

Medical Preparations and Special Diet Products

This product group involves specially formulated food and medical pro­

ducts needed by a wide range of consumers. The desired charac teris tics' for

these products are that they be low in cholesterol and lactose free. Casein­

based products provide a protein source that is easily introduced and accept­

ed into the body (~) for consumers with medical problems related to poor

food intake and digestion, to lactose intolerance, or sensitivity to intact

proteins from milk, soy, or other protein sources. Other applications of

casein in this end-product grouping are: coatings and binders for pills,

the major source of protein in weight reduction formulations and protein

powder formulas, and in other special dietetic and infant food products.

Based on manufacturers' responses to the USDA survey and testimony

given by many of the leading U.S. users of casein in these food and medical

applications (ll), no technical substitutes could be found that would repli­

cate casein's role in the majority of these products.

Thus, if imported casein was no longer available for use in these pro­

ducts, production could cease. Manufacturers might use domestically-produced

37

casein if they felt that their products could still be sold at the increased

price levels reflecting these increased ingredient costs. Many companies

surveyed responded that if price increases in casein reached levels at which

domestic production of casein became viable, they would produce their product

overseas where casein is available at lower cost unless laws prohibited

importation back into the United States.

Bakery Products and Breakfast Foods

The desired characteristics of many bakery products that currently use

casein and/or caseinates are good crust formation, moisture retention, taste,

flavor, texture, and nutrition (~,~,l4).

Many of these characteristics were once imparted by the addition of

nonfat dry milk into bakery mixes. However, changing technology (~,~)

and relative prices (~) led to the development and introduction of nonfat dry

milk replacers in the early 1970's. These NFDM substitutes have effectively

eroded this once-largest domestic market for nonfat dry milk.

Many of these milk replacers contain casein (ll); however, there are

replacers available which contain little or no casein/caseinate, but rely

on soybean-based proteins--especially soy isolates and whey (1,~,!,1l,1,~).

These milk replacers apparently are capable of imparting the desired charac­

teristics for many of the end-products manufactured.

The role of casein in bread manufacture is to interact with the sugar

component (ll,l) in order to build body or structure and retain moisture.

Casein's high water-binding capacity is important in controlling texture and

uniformity in doughnuts, cookies, waffles, and yeast raised doughs (9).

In the past, soybean derived protein substances have extended many

NFDM milk replacers, and in some applications, such as in breads, soy flour

and soy concentrate/whey blends, have replaced the use of milk-based protein

38

in the bread formulation. In other bakery applications, such as in cakes,

soy isolates reportedly can replace caseinates and/or non-fat dry milk (1);

in others, blends of soybean isolate and caseinate can further reduce

caseinate needs up to 90 percent (~). Many food processors feel that the

application of milk-based proteins for this use will cease completely in

the near future. One executive from a large dairy replacer manufacturing

concern s ta ted in Augus t 1979, "If the price of casein continues to go

higher and higher, then soy isolates would replace caseinate ••• The day

that they come up with a soy isolate that's completely bland, or which

gives the same flavor as the caseinate, then you're going to see caseinate

fall off to nothing" (10).

If imported casein was no longer available to manufacturers of bakery

products, their demand for soy-based protein would increase. Also, at higher

prices for casein, little casein and/or caseinate would be demanded, and

this would be mainly in the production of some specialty items (such as the

use of caseinates in mixtures to glaze certain breads). Very small increases

in the quantity of nonfat dry milk demanded would result if imported casein

were not available.

Imitation Dairy Products, Meat Products, and Other Foods

The desired characteristics of products in this group include protein

fortification and various functional characteristics. For example, meat

products, such as imitation sausage, non-specified loaves, and stews/soups

demand an ingredient that can bind water in the product and reduce fat exu­

dation (12, 4Q). In many imitation dairy products, an ingredient which

prevents weeping of liquids from the product is also desired. In most of

these products, skim milk solids can impart the desired characteristics;

casein and/or caseinates were introduced and are widely used mainly for

economic reasons (ll). Thus, this diverse group of products can be classi-

39

fied into one general food product group because they could all use skim

milk solids; most do not because of the higher cost involved.

There is some evidence that soy-based proteins could replace casein in

certain of these uses. Complete replacement of dairy protein is reportedly

possible in many cream fillings and icings (10), and whipping creams; but

further development of soybean based protein in a complete formulation is

apparently necessary.

Industrial Products Use of Casein

Major products found in this product category include adhesive and glue

products, and paper coating products. Other products using imported casein

in this end-product grouping include paint products, rubber products, leather

products, and a miscellaneous group containing lubricants, cleaning agents,

and related products. All major industrial products identified use casein

and caseinates, although leather products use only casein, not caseinate

formulations.

Adhesives and Glues

The desired characteristics of adhesives and glues containing casein/

caseinate mixtures are quick-setting ability, water-resistance, a high de­

gree of durability, the ability to adhere to different surfaces (such as

paper on glass, aluminum foil to paper), and convenience in use.

The role that casein plays in these products is to serve as the main

binding agent in the adhesive mixture (29). The colloidal properties of casein

have been recognized for some time. Many users indicate that casein _ in the

adhesive mixture results in a product that is water and temperature shock

resistant (important in bottle labeling) and that is stable when mixed with

water as in the case of dry powder glue mixes.

40

There are few perfect technical substitutes for casein in the produc-

tion of glues and adhesives. Some glue and adhesive manufacturers indicated

that soy-based proteins and synthetics such as polyacrylate could be substi-

tuted for casein. Most USDA survey responses in this category claimed that

soy or synthetic-based glues and adhesives would be inferior to the casein

based products. Buyers of these products primarily are interested in low

cost, rather than high quality, glues and adhesives. In the past, when

casein prices have increased, many glue manufacturers have substituted soy

protein for casein.

Paper Coatings

The desired characteristics of paper coatings are to bind color and

print to paper and to be waterproof. Casein's role is to provide that

binding quality. Technical substitutes for casein in paper coating products

include soy-based protein substances, starch, synthetic-resin material, and

combinations of these materials. Soybean-based substances have been avail-

able since the late forties. Together, with starch (the former leading

adhesive in paper coating), it is estimated that all casein use in paper

coating would be eliminated if low-cost imported casein was unavailable.

This determination is based on past trends (1l, 18) and from USDA survey

responses. Many companies contacted have begun the process of switching

over to available substitute ingredients, primarily soy-based protein

material, in response to recent increases in the price of casein.

Other Industrial Products

The major products in this general grouping are leather products, rub-

ber products, and paints. Casein's role in these products is to serve as:

o a combined dispenser and binder of pigments in leather finishes, and to furnish a glaze and a protective shield for many leather products, such as shoe leather;

41

a a dispenser agent in the manufacture of rubber-dipped goods, such as gloves, medical supplies, and balloons; and

a a stabilizer for resin-emulsion and latex paints.

In all of the above, except perhaps for the use of casein in rubber

products, suitable substitutes for casein exist and indeed have been used

in these products (37). This fact is evident in USDA survey responses and

from inquiries to professionals in the field. In the miscellaneous indus-

trial grouping (including such products as hair setting lotion, lubricating

fluids in insecticide formulations, lace scouring cleaning agents, spackling

paste, and resilient floor covering) the use of casein is so specialized that

replacements, for all practical purposes, do not exist for the end-product.

This observation is also based on USDA survey responses.

Lactalbumin Use

Use of lactalbumin in the United States is far less extensive than the

use of casein. Lactalbumin applications tend to be much more specialized.

The total quantity of lactalbumin imports represented less than one percent

of casein imports in 1980.

Information on the use and availability of substitutes for lactalbumin

is extremely limited. The only feed use of lactalbumin reported in the 1980

USDA survey involved the manufacture of material used for microbiological

analyses and biological studies. These applications appear to be quite speci-

fie in their research needs. Lactalbumin unavailability for these uses would

imply use of a domestically produced substitute, if one was available.

Lactalbumin usage in industrial products was not reported. Lactalbumin

use in food products in the United States is limited to bakery, pasta, other

cereal food product applications and some soup preparations. Much of this

42

use is related to the protein complementarity of lactalbumin with the amino

acid deficiencies common in most cereals (13).

Lactalbumin has excellent nutritional value, exhibits moderate water

absorption in doughs, and is insoluble in many applications. Because lac­

talbumin serves such a small and specialized end-product line, no increases

in nonfat dry milk use would be expected to occur if lactalbumin was unavail­

able. USDA survey results seem to substantiate this point as present users

indica ted that, at bes t, only a few soy-bas'ed protein subs tanceswould have

application for their products. Most firms did not identify dairy based

protein materials as possible substitutes; however, some might use whey

protein concentrates.

Because of the small amounts of lactalbumin imported, the effect of

lactalbumin imports on the U.S. dairy industry was not further analyzed.

Classification of Casein Uses

Based on the information presented, casein uses can be classified into

three groups (see table 6).

Group A includes products in which soy-based proteins, whey proteins,

and synthetics could be substituted for casein. In some c?ses (certain pet

foods and glues), the soy-based proteins are not absolutely perfect substi­

tutes for casein; the resulting end-products would have slightly different

characteristics if they were made from soy-based proteins. It does not

appear that these differences would be significant for the vast majority

of casein users in this category. Certain individual products. for which

the difference between alternative protein formulations and casein based

formulations is significant are considered specialty products and are

included in Group C.

Group B contains uses in which nonfat dry milk or fluid skim milk could

be substituted for casein. Because casein contains no fat, products containing

43

Table 6--Casein Usage by Product Grqup, 1980

C/ Group ~: . Substitutes for Casein not Available

Coffee whitener (72%) Medical and Specialty Desserts (72%) Bakery and breakfast foods (10%)

C/ Group K'Total

8.9 9.4 4.9 1.1

24.3

Group B: NFDM or Skim Milk can be Substituted for Casein

Imitation cheese Animal feed (80%) Coffee whitener (28%) Desser ts (28%) Other foods

Group B Total

k

41.9 16.5 3.4 1.9 3.8

67.5

Group It: Soy or 0 ther pro tein can be Subs ti tu ted for Casein

Millions of lbs. of casein

Industrial Bakery and breakfast foods (90%) Pet food Animal food (20%)

A-Group /Z Total

16.6 10.3 5.3 4.1

36.3

44

butterfat or butterfat itself cannot be considered substitutes for casein.

In certain imitation dairy products, NFDM or skim milk could replace casein

and be combined with vegetable fat, resulting in "filled dairy products".

Group C contains uses for which there are no apparent technical substi-

tutes for casein.

ECONOMIC IMPLICATIONS OF RESTRICTIONS ON CASEIN IMPORTS

In this section, a review of the basic economic or market setting for

casein is provided first. Then, an estimate is made of the physical displace-

ment of nonfat dry milk by casein during 1980. The effects of available policy

options to limit casein imports are also considered. The analysis draws

heavily on the previous discussion of the substitutability of skim milk solids

and soy proteins for casein.

The Casein Market

In order to evaluate the effect of imported casein on the commercial dis-

appearance of domestic skim milk solid supplies, and to discuss the potential

effects of certain policy options, it is necessary to have an understanding

of how the market (i.e., supply and demand) for casein operates. 6/

Supply

The supply relationship for casein shows how much casein would be made

available for use at various price levels; that is, it shows how high the

price would have to be to bring forth any given quantity of casein.

The United States is the world's largest user of casein, but currently

produces none. This is essentially the result of a casein price that is

not high enough relative to the supported price of NFDM to attract skim

milk into the production of casein. Still, there is some price (Pd) at

6/ Appendix III provides a detailed presentation of the economic framework being used in this study.

45

which edible grade casein would be produced in the United States. \-lhen the

price is below this level, casein will be supplied only from the world mar-

keto When the price reaches Pd, the supply relationship will be flat over

some range as the casein industry draws off surplus quantities of skim milk

without lifting milk prices off support levels (see figure 1). If an import

quo ta is imposed a t some quantity" there will be a sharp kink in the supply

relationship at that quantity, since any larger amount would have to be

supplied by domestic production at price Pd' If a tariff was imposed on im-

ports, the world market supply would be shifted up by the amount of the tax.

Figure 1

The Supply Relationship for Casein Price

p ------------------d

Demand

Quantity

The demand relationship for casein shows how much casein would be de-

manded at various price levels. Casein is used as an input in the production

46

of other products. The shape of the demand relationship for casein,

therefore, will be influenced by the technical relation of casein and

other production inputs, by the availability and prices of substitutes for

casein, and by the demand for the final products in which casein is used.

Casein is a specialized input for some of the products in which it is

used. There do exist, however, perfect (or nearly perfect) technical sub­

stitutes for casein mixtures: products such as NFDM and soybean isolates.

~These substitute inputs can be used instead of casein mixtures, replacing

casein in some technically fixed ratio. As an example, liquid coffee

whitener can be made using 2 pounds of casein and no NFDM, 6 pounds of

NFDM and no casein, or some combination of the two inputs. The choice

between these substitute inputs will depend on their relative prices.

The demand relationship for casein will have plateaus where the price

of casein reaches a point at which large classes of users switch from one

input to another. Between the plateaus, the quantity of casein demanded

will decline as the price goes up, because, as casein gets more expensive,

products containing casein get more expensive, and consumers use less of

these products, so less casein is needed. The demand relationship for

casein will look something like Figure 2.

When the casein price reaches some level (P*), casein becomes more

expensive to use than soy protein and other ingredients. There is a "plateau"

in the demand relationship at this price, as casein users switch to soy

protein and other ingredients wherever possible. As the price rises above

P*, other users continue to use casein, but they must raise the prices of

their products to reflect the higher casein prices. Consumers then demand

less of these products containing casein, and less casein is needed to make

these products. When the price of casein reaches P**, casein becomes more

expensive than NFDM, and many users switch out of casein into NFDM. There

Figure 2

The Demand Relationship for Casein Price

p •• - - -:=-..------

47

p. - - ------ -- - ---=-------

Quantity

will also be a plateau in the demand relationship at this price. At prices

above P**, the only users of casein will be those for which there is no good

casein substitut~

The supply and demand relationships described above do not represent a

completely realistic view of the market for casein. A domestic casein indus-

try would not be expected to suddenly appear. Nor would every use for casein

have either a perfect substitute or no substitute at all (the plateaus in

the demand relationship are not perfectly flat). But this representation of

the casein market does aid in understanding the impact of casein imports on

manufacturers using casein, the domestic dairy industry, and the dairy price

support program.

48

Estimation of Casein Supply and Demand

Available information on the production and use of casein, and discus­

sions with those in industries that use casein, provide insight as to what

the supply and demand relationships look like and at what prices and quanti­

ties the kinks in the relationships occur.

The price at which casein would be produced in the United States (Pd

on the supply relationship) can be estimated from the NFDM price. Domestic

supplies of skim milk would be shifted between domestic production of NFDM

and production of casein until the price returned to farmers is the same

for both products. The value of milk in both uses can be calculated from

data on product prices, yields, and costs of production. Since the value

of milk in the two uses must be equal, the following relationship can be

derived:

(YcPc + YwPw) - Cc = YnPn - Cn

where Y is yield per hundredweight of skim milk, P is product price, and C

is cost of manufacturing 100 pounds of skim milk, and where subscripts

c,w, and n refer to casein, whey, and NFDM, respectively.

The yield factors are technical coefficients: from 100 pounds of skim

milk, 8.8 pounds of NFDM can be made, or 2.8 pounds of casein and 6 pounds of

dry whey (35). The current price of NFDM is $0.94 per pound (the CCC purchase

price), and the price for dry whey is about $0.14 per pound. If processing

costs were exactly equal for casein and NFDM (if Cc = Cn), then the price of

casein would have to be $2.65 in order to induce domestic casein production.

The average casein price in 1980 was about $1.20 per pound.

The relative costs of production for NFDM and casein are crucial pieces

of information. No recent data measuring and comparing these costs exist.

However, consideration of production methods leads to the conclusion that

production costs are higher for edible grade casein than for NFDM. The

-

49

production of edible grade casein involves many of the same steps as the

production of NFDM, plus additional washing and drying of the final product-­

casein. Therefore, there is good reason to believe that the price needed

to induce domestic casein production (Pd) is higher than $2.65.

The importance of this conclusion can be seen in light of the plateaus

in the demand relationship. For some uses, a casein-whey blend is used to

recrea te NFDM or skim milk. At current prices, this "recons ti tu ted" NFDM

costs about $0.52 per pound. The whey-casein blend (32 percent casein and 68

percen t whey) will be less expens ive than NFDM as long as casein cos ts $2.',65

per pound or less. If the casein price rises above $2.65, this class of

users will shift to NFDM or skim milk. Therefore, the higher plateau on

the demand relationship would be expected to occur at about P**=$2.65.

The price at which the lower plateau occurs (where casein users switch

to soy-based protein and other ingredients, if such a switch is technically

feasible) is more difficult to pinpoint. However, the recent trend of glue,

paper, and pet food manufacturers away from casein to nondairy proteins

suggests strongly that the current price levels ($1.20 to $1.40) are high

enough to encourage extensive switching from casein to soy protein and other

nondairy products.

The earlier estimates of the quantity of casein used in each category,

and the discussion of available substitutes for casein in each use, allow

estimation of the length of the plateaus on the demand relationship (showing

substitution of soy protein and other ingredients, for casein at P*, and the

substitution of NFDM or skim milk for casein, at P**). The slope of that

portion of the demand relationship connecting the two plateaus can be estimated

from available or assumed measurements of the extent to which the quantity

demanded by consumers will decline for products containing casein, as the

price of casein rises from p* to P**.

t I ,

50

The information in the preceding section of this report allows identifi­

cation of those casein users who would shift to alternative protein sources,

such as soy protein, whey, and synthetic materials (Group A), those who would

shift to NFDM and skim milk (Group B), and those who would continue to use

casein (Group C), as the price of casein rose. Table 6 contains estimates

of the quantity of casein in each category used in 1980.

As the casein price rises above P*, the quantity of casein demanded

would drop by 36.3 million pounds, as Group A users switch to soy proteins

and other ingredients.

As the price approaches P**, casein would still be used for Group Band

C uses, but the quantity demanded for certain of these products would be

lower, and the quantity of casein used, likewise, would decline.

For most remaining uses in Groups Band C (coffee whitener, desserts,

bakery and breakfast foods), casein is a very small factor in the value of

the final product. Even a large increase in the casein price would have a

negligible impact on the retail prices of these products, and the quantity

demanded should not be greatly affected. For the medical and specialty

products category, the quantity demanded would hold fairly constant no

matter what the price, since the consumers of these items have a special

need for the products.

The price of imitation cheese to wholesale users, and the price of calf

milk replacer and other animal feeds would increase significantly as the

casein price rises to p**. Imitation cheese prices would increase about 50

percent, and the price of calf milk replacer would increase 55 percent

(allowing for soy protein substitution in 20 percent of the final product).

As a result of these price increases, consumers will demand less of these

51

products, and demand for casein would fall by about 12.7 million pounds. l/

For uses in which NFDM or skim milk could be substituted for casein,

there would not be a one-for-one substitution for the entire amount of casein

used in Group B in 1980. If, for example, 80 million pounds of imitation

lowfat cheese had been made from casein in 1980, the amount of skim milk which

would have been used in the absence of imported casein would have actually been

less than the 1,280 million pounds of skim milk needed to make 80 million

pounds of lowfat cheese. The reason for this is found in the economics of the

marketplace. A 40-percent increase would have been expected in the price of

imitation cheese if casein had been unavailable, thereby reducing the quantity

demanded by about 20 percent. Thus, instead of the 1,280 million pounds of

skim milk equivalent, only 1,024 million pounds would have been utilized to

produce lowfat cheese. Because the price of the cheese would have been

higher, consumers would have demanded less, and less skim milk would have

been used.

Because of the output price effect, 12.7 million pounds of casein

must be deducted from the Group B total in measuring the length of the

demand plateau at P**, where casein users switch to NFDM and skim milk.

Pounds of casein use in product Group B are thus 54.8 million.

The remaining casein use--24.3 million pounds in Group C--is a quantity

which would be used essentially at any price. It is used in pharmaceuticals

and specialty products, and in other uses where casein is a necessary ingre-

dient, but not a significant part of the value of the end product.

Displacement of Domestic Skim Milk Solids

Given the estimated supply and demand relationships for casein, it

becomes possible to estimate the displacement of domestic skim milk

7/ Demand elasticities of -.5 for cheese and -.33 for animal feeds are assumed. See Appendix III for further explanation.

52

solids that is occurring through the importation of casein and lactalbumin

(see figure 3). In the absence of casein imports, the price of casein would

rise to Pd, higher than p**. Actual casein use would be less than 24.3 million

pounds, and this casein would be produced domestically, utilizing skim milk

equivalent to about 77 million pounds of NFDM. NFDM or skim milk used in

imitation cheese, calf milk replacer, and coffee whitener away from home

would increase commercial disappearance of skim milk by about 256 million

pounds of NFDM equivalent which corresponds to the 54.8 million pounds of

casein formerly used.~/ Total commercial disappearance of skim milk amounting

to 333 million pounds of NFDM equivalent is, therefore, being displaced by

imported casein and lactalbumin.

Figure 3

Supply and Demand in the Casein Market Price

P d --------r----------.....,I""""""--

p" = 2.65

p' = 1.40

- - Ii""-------~ , ,

I I I I I

I ' I I

--+-------I I I

I I I I t-- ___ ~/_ I: / I " .i--r' --~------------~II I

I I I I I I

,~I--~----------------~I~I--_I~--------~I--------------24.3 75.8 91.8 128.1

79.1 Quantity Mil. Ibs-.

~/ The technical relationship between casein and NFDM varies by product. For imitation cheese, the amount of skim milk equivalent needed is larger than for products such as calf milk replacer.

53

Economic Implications of Restricted Casein Imports

A complete curtailment of casein imports is not legally possible under

existing legislation and trade agreements. The most extreme actions permitted

by Section 22 of the Agricultural Adjustment Act of 1935 are a 50 percent

quota or a 50 percent ad valorem tariff. A quota would be set at 50 percent

of the import levels during a "representative period." If 1979-1980 was

chosen as the base period, the quota would be 75.8 million pounds of casein

and casein mixtures per year. If 1975-1980 was used as the base period, the

quota would be 62.9 million pounds per year. For purposes of illustration, the

larger quota based on 1979-1980 will be used in this report. An ad valorem

tariff of 50 percent of the value would add 60 cents to the 1980 price of

$1.20 per pound of casein.

Impacts on Casein Users

If a 50 percent tariff was imposed, and the casein price rose to $1.80

per pound, users of casein would shift to the use of other ingredients,

primarily whey proteins, soy-based proteins, and synthetics, wherever possi­

ble. Industrial users and pet food manufacturers would shift primarily to

soy-based protein. In bakery and breakfast food applications, 90 percent of

the casein use would be replaced by combinations or single ingredient mixtures

of soy-based and whey proteins. Animal feed manufacturers would replace about

20 percent of their casein with soy proteins. In total, about 36 . 3 million

pounds of casein use would be replaced by these proteins. All remaining

users of casein would continue to use imported casein; in some products,

casein use would decline because consumer demand for the final products

would decline. In total, between 79.1 and 91.8 million pounds of casein

would be imported and used if a 50 percent ad valorem tariff was imposed. No

increase in the use of domestically produced skim milk solids would result.

54

If a quota was imposed limiting imports of casein to 75.8 million

pounds, most Group A users identified in the preceding paragraph would shift

out of casein into the alternative proteins mentioned above. Total demand

for casein by other users would drop by 12.7 million pounds. Importation

and use of casein would amount to the 75.8 million pounds allowable under

the quota. The majority of the casein used by manufacturers of Group B pro­

ducts would be unaffected; however, about 3.3 million pounds of casein use

would be directly replaced by skim milk solids by these manufacturers.

Most of this 3.3 million pound reduction would occur in coffee whitener

and calf feeds. Casein use in imitation cheese would not be affected

because of different technical relationships between skim milk and casein

in the manufacturing process for cheeses.

Impacts on Dairy Program Costs

Because a 50 percent tariff would not increase commercial disappearance

of skim milk solids, the tariff would have no impact on CCC purchases under

the dairy price support program (see table 7).

A 50 percent quota would increase commercial disappearance of skim milk

solids by the equivalent of 10.3 million pounds of NFDM (3.16 pounds of NFDM

are required to replace 1 pound of casein in commercial use). CCC purchases

of NFDM would decline by this amount, saving the Government $9.27 million

(based on a NFDM support price of $.90 per pound). Total CCC purchases in

1980 exceeded $1.3 billion. The savings attributable to a 50 percent quota

would amount to less than 1 percent of 1980 dairy price support program

costs (table 7).

Impacts on Consumers

Import restrictions'would increase the costs of producing goods contain­

ing casein. This might add to inflationary pressures at a time when efforts

are being made to reduce the general rise in prices.

, Table 7--Comparison of policy options

Option

No action

50-percen t tariff

50-percen t quota

Casein impor ts

(1) Mil. lbs.

152.2

79.1-91.8

75.8

II Column 3 plus column 4. 21 Column 5 times 3.14. 31 Column 6 times $.90/lb.

Casein price

(2) $/lb.

1. 20

1. 80

2.65

41 Column 2-$1.20 x (Column 1 + column 5).

Casein use cur tailed

(3) Mil. lbs.

0

0

3.3

Casein Domestic imports Increased

casein replaced by: commercial produc tion domes tic use of

: skim milk 1/: NFDM 21 (4) (5) (6 )

Mil. lbs. Mil. lbs. Mil. lbs.

0 0 0

0 0 0

o 3.3 10.4

Decreased Increased CCC consumer

purchases :expenditures 31 41

(7) ( 8) --Mil. dol.--

0 0

o · 47.5-55.1

9.3 114.7 V1 V1

56

A 50 percent ad valorem tariff, adding 60 cents to the price of casein,

would increase the cost of consumer products annually by $47.5 million to

$55.1 million, given the continued use of casein in the 79.1-91.7 million

pound range (table 7).

A 50 percent quota would raise the price of casein to about $2.65, com­

pared with the 1980 price of $1.20 per pound. Total casein use would be

limited to 75.8 million pounds, but 3.3 million pounds of casein would be

replaced by higher priced NFDM. A total increase in the cost of consumer

products of $115 million would be expected.

Those products for which soy proteins would be substituted for casein

would realize no significant price impact, although quality could suffer.

Trends and Implications

Up to this point, the discussion of the impact of casein imports and

policy options has focused on the situation as it existed in 1980. This

approach enables comparison of alternative policies using historical data

and avoids speculation about future changes in the supply and demand for

casein and products using this ingredient.

Policy decisions regarding dairy protein imports will not only have

an impact in 1981, however, but for some time into the future. While it

is not possible to predict with complete certainty what that future will

hold, a review of past trends in the production, importation, and use of

casein does provide an indication of expected future developments.

One of the most significant trends in casein use has been the increas­

ing importance of food and feed uses. Casein use in imitation cheese has

grown rapidly since 1977, offsetting the declines in industrial use of casein.

In the absence of Government action to limit imports of casein, the market

for imitation cheese will probably continue to grow rapidly during the

next few years. The current alternative to casein in many of these food

57

and feed uses is NFDM. Therefore, import restrictions would be likely to

have a greater impact on the commercial disappearance of NFDM as casein

use increases in food and feed products.

However, there has also been increased research and development activity

directed towards discovery of viable alternatives to dairy protein in many

uses. Breakthroughs seem likely in the development of soy protein products

that have no taste problems and have an acceptable shelf life. Any import

restrictions that result in a higher price for casein would increase the

research effort directed toward such development.

In the past, technological and price relationship changes have resulted

in substitution of non-dairy and whey proteins in products such as bakery

items. Similar future developments could result in the discovery and

acceptance of protein substitutes for casein or skim milk solids in such

products as imitation cheese and coffee whiteners. Thus, domestically

produced skim milk solids would meet considerable competition in the market

even in the absence of imported casein.

Finally, it should be noted that the imposition of import restrictions

often has far-reaching impacts on relations between the United States

and its trading partners. As a signatory to the General Agreement on

Tariffs and Trade (GATT), the United States has agreed in principal not to

use quotas to restrict imports. One exception to this is quotas imposed

under Section 22 of the Agricultural Adjustment Act of 1935. Our trading

partners granted the United States a specific waiver of its GATT obligations

for Section 22 measures. Any legislated trade restrictions or changes in

Section 22 provisions would very likely put the United States in violation

of its GATT obligations. Moreover, restrictions on casein imports, even

restrictions technically allowed under GATT, could easily be considered by

our trading partners to be an impairment of concessions. Such restrictions

58

could result in demands for compensation or in retaliatory actions by casein

exporting countries (i.e., closing export markets for U.S. products).

59

REFERENCES

(1) American Institute of Baking. "Bakery Applications for Soy Protein Products," Unpublished text. Received March 1981.

(2) Andres, Cal. "Soy Isolate/Dairy Blends," Food Processing. May 1980.

(3) Andres, Cal. "Soy Isolate Successfully Replaces Caseinate and/or NFDM in Cakes," Food Processing. May 1980.

(4) Appleman, R.D. and O.E. Otterby. "Milk Replacers in Raising Dairy Calves," Dairy Husbandry Fact Sheet No. 10. University of Minnesota and Agricultural Extension Service, 1978.

(5) Baking Indus try. "Whey in the Bakery World," 1972.

(6) Baldwin, R.R., R.G. Johansen, W. Keogh, S.T. Titcomb, and R.H. Cotton. Cereal Science Today. Vol. 9, Number 7, Sept. 1964.

(7) Blumenthal, Saul. Food Products. New York: Chemical Publishing Co. Inc., 1947.

(8) Bureau of Agricultural Economics. Situation and Outlook 1981, Dairy Products. Canberra, 1980.

(9) Craig, T.W. and J.C. Colmey. produc ts ," The Bakers Diges t.

"Milk and Milk products for Use in Bakery Feb. 1971.

(10) Food Engineering. Ingredient Report. Aug. 1979.

(11) Food Processing. Protein Update. Aug. 1975.

(12) • Update - Milk Replacers. May 1974. -------

(13) Food Product Development. "Meat Engineered with Whey - Soy Blends." Vol. 12 (1), Feb. 1978.

(14) Food Product Development. "Rising Casein Prices Spur Efforts on Economical and Functional Replacers." Aug. 1980.

(IS) Hammonds, T.M. "Utilization of Protein Ingredients in the U.S. Food Industry." Ph.D. dissertation. Cornell University, 1970.

(I6) Hoover, W. "Use of Soy Proteins in Baked Foods," Journal of American Oil Chemists' Society. March 1979.

(17) Kirk, D.J. "Milk and I ts Replacers in Baked Foods," The Bakers Digest. Oct. 1973.

(I8) Miller, Robert R. "Developments and Trends in the Casein Market," USDA, Dairy Situation. DS-334, March 1971.

(19) Milk Industry Foundation. 1980 Milk Facts.

60

(20) Miner, Bert. "Edible Soy Protein: Food for the Future," excerpt from Farmer Cooperative Services Research Report 33, Operational Aspects of Soy Protein Production and Marketing. 1976.

(21) Moore , Jerry." Impact of Casein Impor ts on Domes tic Dairy Indus try. " Hearings before the Subcommittee on Dairy and Poultry of the Committee on Agriculture, House of Representatives, Oct. 24, 1979.

(22) Muller, L.1. "Manufacture and Uses of Casein and Co-precipitate," Dairy Science Abstract. 33 (9), 1971, pp. 659-674.

(23) New Zealand Dairy Board. Casein and Other Milk Proteins.

(24) A Survey of the New Zealand Dairy Industry, Wellington, March 1980.

(25) New Zealand Official Yearbook, 1979. Department of Statistics, Wellington, New Zealand.

(26) Pomerantz, Fern. "Food Additives: An Expanding Market in the '80's", Food Product Development. Vol. 14 (12), Dec. 1980.

(27) The Professional Nutritionist. "Food Ingredients in Milk Substitutes." Fall 1974.

(28) Reed, Pierce M. "Casein and Caseina tes," Technology, Food Series. Volume 2 (1974). Westport, Connecticut: AVI Publications.

Encyclopedia of Food Ed. Johnson and Peterson.

(29) Salzberg, H.K. "Casein Glues and Adhesives," Handbook of Adhesives. New York, N.Y.: Van Nostrand Reinhold Co., 1977

(30) Stanford Research Institute. Long Range Planning Report No. 515, 1974.

(31) Schugel, LaVerne. "Milk Replacers for Pre-ruminan t Calves-Formula tions , Problems, Economics," Proceedings of the 7th Annual Conference of the American Association Bovine Practice, 1974.

(32) Sipos, E.F., E. Turro, and 1.D. Williams. "Soy Protein Products for Baked Foods," The Bakers Diges t. Feb. 1974.

(33) Smith, B. J. "Critique of Cost of Production Studies and Their Use in Pricing Milk," Staff Paper 39. Pennsylvania State University, Agri­cultural Economics and Rural Sociology Department, Dec. 1980.

(34) Swanson, A.M. and W.B. Sanderson. '~ilk Proteins Responsible for Deleterious Effects in Continuous Mix Bread," Cereal Science Today. Vol. 12, Number 9, Sept. 1967.

(35) u.S. Department of Agriculture. Conversion Factors and Weights and Measures. Econ. Stat. Coop. Serv., Stat. Bulletin No. 616, March 1979.

(36) U.S. Department of Agriculture. Developments in Farm to Retail Price Spreads for Food Products in 1980. Econ. Stat. Serv., AER-465, Apr. 1981.

61

(37) "Marke ting Po ten tial for Oilseed Pro tein Ma terials in Industrial Uses," Technical Bulletin No. 1043, September 1951.

(38) Synthetics and Substitutes for Agricultural Products - A Compendium. Econ. Res. Serv., Misc. Pub. No. 1141, Apr. 1969.

(39) United States Department of Census, personal communication, Apr. 1981.

(40) Webb and Whittier. Byproducts from Milk. Westport, Connecticut: The AVI Publishing Company, Inc., 1970.

(41) Wingred, W.H. "Lactalbumin as a Food Ingredient," Journal of Dairy Science. Vol. 54, No.8, July 1970.

(42) Van Kreveld, A. "Casein and its Food Uses," VoIding - 30e joargang No.5, 1969.

(43) Vernon, H.R. "Non-dairy Cheese - A Unique Reality," Food Product Development. Vol. 6 (5), Aug.-Sept. 1971.

62

APPENDIX I: COST OF PRODUCTION ESTIMATES

All costs of production were obtained or derived from secondary sources.

Data were taken from sample surveys, censuses, and typical farm budgets of

university, industry, and government research reports. Also, USDA's Foreign

Agriculture Service (FAS) attache reports were used. Sources referred to were

the most recent cost of production studies available, and cost estimates were

adj us ted to 1978.

Data from all countries were adjusted to reflect costs in 1978 U.S.

dollars. First, indexes of prices paid by farmers in each country were

used to update the respective country costs. Each country's 1978 exchange

rate was then employed to convert the estimates to U.S. dollars. All costs

were per 100 pounds (cwt.) of milk produced. No adjustment was made for

varying milkfat content, although it is known, for instance, that New Zealand

milk has approximately 4.8 percent compared with 3.7 percent in the United

States.

The method used to allocate costs between enterprises for all countries

involved the "whole farm approach" with a "proportional treatment of sideline

revenue" (ll). This requires tha t cos ts associa ted wi th generating nonmilk

revenue bear the same relationship to total costs as the nonmilk revenue

itself bears to total revenue. Sideline enterprises are presumed to be no

more nor no less profitable than milk production. This method is "the simplest

and most common way to account for joint products when farms are highly

specialized;" although "the more highly specialized a dairy farm is ••• the

more accurately estimates of the cost of producing milk can be made" (33).

Costs were divided into cash and imputed categories. Cash costs included

feed, both purchased and grown; breeding expenses, health, utilities, and

63

repairs; hired labor; and miscellaneous. Imputed costs included family labor,

depreciation, land, management, and an opportunity cost.

Cash costs were taken basically intact from secondary data. Imputed costs,

however, were sometimes more difficult to compute. Family labor, when not

given, was computed as family units used on the farm, multiplied by the average

wage rate. Depreciation was estimated at 10 percent of the value of machinery

and buildings; equal to the straight-line method with a usable life of 10 years

and no salvage value. Depreciation of livestock was not considered. A cow's

rate of depreciation depends partly upon the intensity of use, but culling

often is a function of cow beef prices and income tax policies. Thus, cow life

span is not an accurate measure of productive life. By not including an esti­

mate for herd depreciation, it is assumed that cow depreciation per unit of

output is equal in all countries. Management costs were assumed to be a

function of the size of the dairy operation involved; 10 percent of all cash

costs were assessed as management costs. In calculating the opportunity

cost, it was assumed that all dairy capital was borrowed. Due to lack of

data to calculate the real interest rate by country, an estimated charge of 3

percent per year on the value of nonland capital was used. This rate was ap­

plied to yield an interest charge, or opportunity cost, on the dollar value of

all nonland capital (livestock, equipment, and machinery) employed in the

dairy operation.

Land was treated as a special capital input. Normally, capital has costs

associated with depreciation, maintenance, and alternative uses. In this

study, it was assumed that the maintenance costs of the land were part of

cash costs and that the quality of the land remained the same; there was no

depreciation. The unique aspect of land is its ability to increase in value,

64

or appreciate. The rate of appreciation is difficult to ascertain, however.

It would normally be slightly higher than guaranteed interest rates since land

appreciation has some risk. But land price changes often lag behind changes

in the general price level since the demand for land is derived from the

demand for consumer products. The rate of change in consumer prices was

generally rising during the study period, implying a positive gap between

the inflation rate and the rate of land value increase. This study assumed

that the opportunity cost of land was equal to the inflation rate and ex­

ceeded the appreciation rate by one percent. Simply stated, the cost of

land was equal to one percent of the total value of the land per year.

Subsidies on inputs were then added to costs because subsidies represent

costs of production paid by the government, not by dairy farmers. Only "first­

round" subsidies were included, that is, subsidies paid on inputs used directly

in milk production as opposed to subsidies on inputs used in dairy-related

industries. Taxes, on the other hand, were subtracted because they are cash

transfers from dairy farmers to the Government, not purchases of materials

for production.

65

APPENDIX II: ESTIMATING TOTAL CASEIN USE

A mail survey was utilized to obtain much of the detailed information

needed for this study. Over 640 questionnaires were sent out to known or

probable users of casein and lactalbumin in the United States. The list frame

for the survey was compiled from available lists of users, some of which were

updated as possible.

In 1979, the International Trade Commission (ITC) reported on the issue

of casein imports and CCC removals of nonfat dry milk. At that time, the

ITC developed a list of importers, warehouse operators, casein/caseinate

processors, and users of casein. That list of businesses served as the pri­

mary source for the survey list frame in this study. However, since the ITC

list was approximately 1-1/2 years old and did not contain users of lactalbumin,

the identity of additional users was sought to obtain as current a data set as

possible.

USDA survey recipients were given 6 weeks to respond to the questionnaire.

(Copies of the questionnaire are available from the Food and Agricultural

Policy Branch, ESS, USDA, upon written request.) At the end of this time

period, a followup letter was sent to all nonrespondents. This letter ex­

tended to every nonrespondent a 2-week period for return of the questionnaire.

At the end of this 2-week period, all survey results were tabulated. This

tabulation indicated a total use of casein, as accounted for by the USDA

survey, at 77,140,485 pounds or 51 percent of total 1980 casein imports.

In an attempt to expand the proportion of casein imports accounted for by

the USDA survey, a followup telephone survey of randomly selected nonrespondents

was made. As a result of this followup activity, an additional 32.6 million

pounds of casein use was allocated to various products. This brought the

portion of total U.S. 1980 casein imports that had been accounted for to 72

percent.

66

To allocate the remaining casein use, three methods were employed. First,

since several products which were known to contain casein were not accounted

for by the questionnaire or by the telephone followup survey, estimates of

the amount of casein in these products moving through warehouses were made.

Product movement information was available from the Nielson Directory of

Supermarket Products, which reports movement of products through grocery

warehouses. Using standard product formulations available from National

Academy of Science studies and from recipe formulations from the New Zealand

Dairy Board, the quantity of casein moving through U.S. warehouses in various

products was estimated. This method added just under 4 million additional

pounds of casein to the survey results. More importantly though, this 4

million pounds of use primarily occurred in product groups (desserts and

bakery products) that were initially understated.

The second method employed was to compare USDA usage numbers to pounds

in each category as reported by the ITe for 1980. ITe results were from a

sample of casein users that had cooperated with ITe in their previous casein

use study. Even though ITe did not attempt to account for every pound of

casein used in any year, their total usage numbers in any product group can

be construed as total pounds used by each firm contacted. These figures are

not estimates, but are the summation of all usage numbers given by all firms

in each product category. Thus, each usage figure reported by ITe can be

interpreted as the absolute minimal amount of casein used in that product

grouping. Whenever the USDA survey usage was less than what ITe reported,

the USDA figures were adjusted upward.

This process added over 19 million pounds to the survey results. Signi­

ficant additions of casein usage were made in the following product categories:

imitation cheese, bakery products, desserts, and calf milk replacers.

The final method employed to expand the survey results to more fully re-

z

67

flect total u.s. casein usage was to establish additional allocation factors

for each end-product. These allocation factors were then used to distribute

the remaining pounds of casein (unaccounted for by the survey and by the

previous estimating procedures) into each end-product category.

Based on discussions with trade association and industry representatives,

these allocation factors were purposely designed to give more weight to the

food groups. It was the consensus of those contacted that feed and industrial

use of casein was well accounted for by the USDA survey. Thus, only a small

part of the remaining unaccounted usage was distributed to the feed and in­

dustrial classes. A larger proportion was distributed among the first eight

food group categories (see attached table). Basically, the distribution factors

for these uses were based on previous casein use as a proportion of the total

amount of casein used by the affected food-product groupings.

The results of the USDA survey as supplemented through the random sample

of nonrespondentsand the other adjustments are reported in tables 11.1-11.4.

Estimated casein usage is presented for food products, feed products, industrial

products, and all products combined.

68

Table 11.1. Estimated U.S. casein usage for food products, 1980

Adjusted Adjus ted Allocation Survey per random values of resu1 ts sample of based on ITC: remaining

nonrespondents: resu1 ts imports

Pounds

Imitation cheese 20,709,654 22,108,104 32,529,725 41,850,570

Coffee whiteners 6,181,604 10,984,236 10,984,236 12,330,438

Medical/pharmaceutical 3,850,422 5,384,422 5,384,422 6,927,237

Breakfas t foods 1,700,000 3,000,000 3,000,000 3,859,599

Bakery 1,538,092 1,846,747 5,875,856 7,559,484

Imi tation dairy 1,533,249 1,533,249 1,533,249 1,972,576

Desser ts 471,408 471 ,480 5,244,648 6,747,414

Nutritional and special foods 442,068 1,942,068 1,942,068 2,498,535

Conf ec tionary 221,845 721,845 721,845 794,030

Meat products 163,430 463,430 496,430 546,073

All other food uses 434,900 435,515 479,066

Total 36,811,772 48,890,409 68,147,994 85,565,022

70

Table 11.3. Estimated U.S. casein usage for industrial products, 1980

Adhesives/glues

Paper products

Other indus trial

Leather products

Pain ts

Rubber products

Total

uses

Survey results

6,972,596

4,142,567

344,588

140,821

39,587

21,789

11,661,948

Adjus ted per random sample of

:nonrespondents:

Adjusted Allocation values of

based on ITC: remaining results imports

Pounds

7,172,596 7,672,596 8,056,226

6,842,567 7,342,567 7,709,693

638,328 638,328 670,244

140,821 140,821 147,862

39,587 39,587 41,566

21,789 21,789 22,878

14,855,688 15,855,688 16,648,471

71

Table II. 4. Es timated u.s. casein usage for all products, 1980

Adjus ted Adjusted Allocation Survey per random values of resul ts sample of based on ITe: remaining

:nonrespondents: results imports

Pounds

Es tima ted to tal U.S. casein usage, 1980 61,096,658 85,655,177 108,627,762 128,068,777

Inventory: Food 5,960,485 10,188,243 10,188,243 10,188,243 Feed 2,489,887 4,041,338 4,041,338 4,041,338 Industrial 617,876 747,630 747,630 747,630

Subto tal 15,080,407 23,127,803 23,127,803 23,127,803

Exports 963,420 963,420 963,420 963,420

Total 77 , 140 ,485 109,746,400 132,718,985 152,160,000

72

APPENDIX III--THE DERIVED DEMAND FOR CASEIN

The demand for casein is derived from the consumer demands for products

in which casein is used as an input. This appendix describes in greater

detail than was possible in the text how this derived demand relates to the

conceputal model that was outlined.

As in the text, three groups of products are identified: Group A pro­

ducts which have close substitutes made from soy products; Group B products

which have close substitutes made from skim milk or NFDM; and Group C pro­

ducts which have no close substitutes. For all these groups, casein is

perfectly complementary (or nearly so) to the other inputs--packaging,

labor, and capital.

The derived demand for casein used in the Group C products is relatively

inelastic, either because the product has a specialty use, or because casein

constitutes a very small portion of the final value of the finished product.

The quantity of casein demanded is thus quite insensitive to changes in

price.

In group A, casein substitutes for soy products, and in Group B, it sub­

stitutes for skim milk solids. The relevant economic theory regarding these

two groups is quite similar, so for expositional purposes the derived demand

for casein use in group B products is discussed in more detail.

Derived Demand for Casein in Imitation Cheese

To illustrate the derivation of the derived demand relationship nonfat

mozzarella cheese is examined. The relevant product demand is the consumer

demand for imitation mozzarella cheese made with casein. This demand

depends on the price of imi ta tion mozzarella cheese, the price of "natural"

73

mozzarella made from skim milk and the other normal demand shifters. In

particular, since the end products are virtually identical (casein-based

imitation cheese may be slightly inferior), whenever the price of the

casein-based imitation mozzarella cheese exceeds the price of the natural

mozzarella cheese, then no imitation cheese is demanded. However, as the

price of the casein-based cheese falls slightly below the price of the

natural cheese~ a large increase in the demand for casein based cheese

occurs. This corresponds to the plateau at a $1.20 wholesale price in figure

111.1 on the demand curve for imitation cheese. (The plateau will not be

absolutely horizontal because casein and skim milk solids are not perfect

substitutes). As the price of imitation cheese decreases (holding the

price of natural cheese constant at, or near, $1.20), the demand reflects

normal price-quantity relationships. An elasticity of -0.5 is assumed

for this portion of the product demand curve. 1/

The derived demand for casein for use in imitation cheese can be

obtained quite simply because casein and casein based cheese are fixed in

proportion. This relationship can be expressed as:

Q • V o = qc

where:

Qo lbs. of casein-based cheese

qc lbs. of casein

V lbs. of casein-based cheese per lb. of casein (equal to 4).

1/ See Zuhar Hassan and S.R. Johnson, "Price Elasticity Estimates for Cross section and Panel Data: A Survey", in Food Demand and Consumption Behavior, Robert Rauniker, editor, S-119 Southern Regional Research Com­mittee, Athens, Ga. March 1977. p. 155; and P.S. George and G.A. King, Consumer Demand for Food Commodities in the u.S. with Projections for 1980. Gianinni Foundation Monograph No. 26, University of California, March 1971.

74

The price relationship between the product market and the factor market

can be expressed as

where:

I Po = - Pc + M ,

V

Po price of casein-based cheese

Pc price of casein (currently $1.20 (1980»

M the marketing margin for transforming casein into cheese (assumed to be $.55/lb. of cheese)

Conse9uently, the wholesale price of casein-based cheese will be $.85 per

lb. when casein sells for $1.20 per lb. (.25 x $1.20 + .55 = $.85).

This price relationship can next be used to derive the demand for casein.

For any Qo (casein based cheese), which corresponds to a qc (casein) because

Qo = V q • c' a unique Po exists. Using the price rela tionship be tween the

product and factor markets a unique Pc exists.

That is: Pc = (po - M)V

The price on the casein demand curve that corresponds to Po = $1.21

per lb. of cheese is Pc = $2.64 per lb. of casein «1.21 -.55)4 = 2.64).

This implies that by holding the price of skim milk solids constant at the

NFDM support price ($0.90 per lb.), the demand for casein imitation cheese will

drop to zero when the price of casein exceeds $2.64. As shown in figure 111.1,

the demand curve for casein reflects the demand for the casein-based cheese.

The elasticity of this derived demand is proportional to the demand

elasticity in the product market. That is:

where:

E(qc,Pc)

E(Qo,Po)

derived demand elasticity

product demand elasticity.

~c ) P

o

75

Figure III .1

The Demand for Casein Based Cheese and the Derived Demand for Casein Cheese Price $lIb.

1.20 r---------_

1.00

.80 - - - - SCheese

.60

.40

.20 DCheese

o L-----------------------____ 4-__________________ -------------------

Casein Price $/lb.

3.00

2.50 t:-------__

2.00

1.50

1.00

.50

~o I I Cheese = 4 x Casein

Quantity

Cheese Price = .25 x Casein Price + .54

- - - - - - - SCasein

DCasein o L-__________________________ ~ ____________________ ~---------------

Quantity Casein

76

Thus, with Pc = $1.20, Po = $.85 and V = 4, the derived demand elasticity

is found to be 35 percent of the consumer demand elasticity, or -.176 when

the demand elasticity for cheese is -.5.

If the casein price increased from $1.20 to $2.65 for example, the drop

in demand for casein to be used in imitation cheese would be:

(41.9 million lbs. of casein) • «$2.65 - $1.20)/$1.20) • (-.176)= 8.9 million lbs. of casein.

Price of Natural Cheese -- One pound of NFDM makes 1.71 pounds of moz-

zarella type cheese--or 1.42 pound of NFDM makes one pound of cheese. Lac-

tose, (in the form of whey), has to be taken out of the NFDM to make the

cheese. It is assumed that the whey value is sligh tly larger than the cos t

of extraction. Thus the marketing margin for making cheese is smaller than

that for casein-based cheese. Therefore, based on $.90 per pound NFDM and

a marketing margin of $.27 per pound of cheese, the price of natural cheese

from skim milk solids is:

1. 4 2 ( .90) + .27 $1. 55

Demand for Casein Used in Other Products

A similar process can be applied to the market for case i n in other

Group B uses. In calf milk replacers (assuming a 20 percent shift to soy-

beans), V is about 3 and Po is about $0.70. The elasticity of demand is

assumed to be -.33. The elasticity of demand for casein in this use is -.19.

The estimated decline in casein demanded for this use is 3.8 million pounds.

For other Group B products a completely inelastic derived demand for casein

has been assumed; this assumption can be relaxed without materially affect-

ing the conclusions that are obtained.

77

Aggrega ting the Derived Demands for Casein

The total derived demand for casein is obtained by aggregating across

the derived demands for casein in its various uses in product groups A, B,

and C. Group A demand is similar ' to group B, except that demand for casein

in group A drops to zero at a casein price of $1.40, when the price of soy

demands for casein is illustrated in figure III.2.

Figure III .2

The Total Derived Demand for Casein

Group A Uses

Casein Price $/lb.

3.00 2.70 2.40 2.10 1.80 1.50 1.20

.90

.60

.30 0'--------

Casein

Group BUses

Casein Price

Casein

Group C Uses

Casein Price

Casein

Casein Price

All Uses (A + B + C)

Casein

-