World Bank says dairy trade a "quagmire of distortions"

Food & Drink Weekly, Jan 24, 2005

Consumers in northern industrial countries and the dairy industry in Australia and New Zealand would reap the largest gains from liberalization of global dairy trade while producers in the U.S., EU, Canada, Japan and Korea would see significantly lower prices, according to a new World Bank report on developing country trade prospects. But despite overall worldwide economic gains that would accrue from elimination of trade barriers and "the quagmire of distortions," the authors see prospects for dairy trade reform in the Doha Round remaining dim because "dairy interest groups [in the most-heavily protected markets] are entrenched."

In the United States, where producers now "enjoy substantive protection from current trade policy distortions," according to the study's authors Tom Cox and Yong Zhu, both agricultural economists at the University of Wisconsin. Fox and Zhu calculate that production would be down 7%, prices 12% lower and producer benefits reduced 17% or $2.7 billion. U.S. dairy exports would fall 61% while imports would increase 130%. The U.S. consumer gain would be $3.4 billion (4%).

Under full liberalization and elimination of production quotas, EU milk prices would fall 23%, they estimated, "generating a moderately competitive EU milk sector and expanded production [of] approximately 8% at prices roughly 20% less." Such expansion would entail "radical restructuring of the EU milk sector toward more efficient farms" and a 16% gain in dairy exports.

Japanese milk production would fall by 23%, milk prices 54% and the producer surplus by $3.2 billion. Imports would increase by 134%, a net gain for consumers of $4 billion. Under the full liberalization scenario, Canada's milk prices would drop by 44%, output by 4% and exports 6%, while imports would surge 215%. The aggregate loss to producers would be $1.4 billion but consumer gains would be even greater at $1.6 billion. As low-cost exporters, Australia and New Zealand would be able to fully exploit their comparative advantage in undistorted world dairy markets, increasing milk production by 6%, producer prices by 22% and the producer surplus by 42%, or $1.1 billion, they said. Their exports would rise by 21% based on 2005 estimates.

Fox and Zhu see short-term prospects for further liberalization as limited because protected dairy sectors of Canada, the EU, Japan and the U.S. are not likely to open their markets before reducing subsidy levels. The U.S. and Canada would probably support liberalization in grains, oilseeds and livestock products, "dairy remains an especially sensitive industry," they wrote. The EU was "absorbed in its expansion to the East and the new 2003 CAP reforms, which leave dairy relatively unchanged."