Milk wars resume

In January, only a few days after the European Union resumed subsidies on its dairy farmers' exports after a relatively brief 18-month break, our own chief producer, Fonterra Co-operative Group Ltd, reduced its forecast milk price for the third time in four months, noting one of the reasons as being the reintroduction of EU subsidies.

This action alone should have brought home to New Zealanders how serious a matter it is for the nation when our (unsubsidised) export traders are suddenly confronted with what amounts to efforts to undercut global prices.

Fonterra accounts for 40% of the world's trade in dairy products, and its 10,700 suppliers represent a crucial segment in the economy.

Thus, when world market prices of butter, milk and cheese fall more than 50% in less than 15 months, as they have done since the recession began in the northern hemisphere, any intervention that further erodes those prices has an immediate effect on our standard of living.

There were plenty of warnings made that the global recession might prompt two damaging strikes on the New Zealand economy.

One related to the lessening of demand for our dairy and other exported foods.

That reduction has occurred but production has not diminished, so the world's stockpiles, particularly of dairy products, have increased, with a negative impact on prices.

The second was a forecast that countries whose farmers were most affected by these circumstances would reintroduce subsidies to support export prices.

The EU did just this on January 23, with support for skimmed milk powder and butter.

The EU also decided to buy 30,000 tonnes of butter and 109,000 tonnes of skim milk powder until August at least to help maintain domestic prices.

Now, to further add concern to New Zealand exporters, the United States - that nominal bastion of free trade but where its farmers enjoy $US30 billion ($NZ48.5 billion) of taxpayer support - is to reintroduce its dairy export subsidies in July, in part because of Fonterra's success and the efficiencies of New Zealand dairy farmers.

This means world market prices will be further depressed, because production will not diminish, with a potentially serious impact on the New Zealand economy.

In January, our Trade Minister Tim Groser happened coincidentally to be in Europe and he expressed New Zealand's strong concerns over the EU's decision to reinstate dairy export subsidies - without obvious effect.

New Zealand will now protest to the United States, but with probably the same result, and the American decision looks like putting further distance on any progress with a free trade agreement with this country.

The great risk of the recession unsubsidised exporters everywhere have feared was that some countries would introduce protectionist measures in short-sighted attempts to placate their own hard-pressed farmers, and now this has happened with the EU and the US, despite all the grand words of the G20 and Apec leaders last year not to resort to such measures during the economic crisis.

New Zealand's best hopes now are that the next Doha round of world trade talks can be concluded successfully and end protectionism, but if the subsidies become entrenched, New Zealand can join - for example - Australia and seek relief and compensation through the World Trade Organisation's disputes process.

There is a Cairns Group ministerial meeting in Bali early next month at which ministers from both New Zealand and Australia are certain to confront their EU and US counterparts over the matter.

As this country's history prior to the 1980s amply demonstrated, agricultural subsidies eventually become welfare for the well-off, paid out of the pockets of the less well-off, are regressive and market-distorting.

Governments able to resist the powerful lobbying of the protectionists are few, as New Zealand discovered when the 2006 Doha round failed because the EU, the US, and other heavy subsidisers of agriculture refused to make concessions that would enable smaller trading nations, such as ours, and especially developing nations, to have easier access to their huge markets.

Neither the US nor the EU was prepared then to make anything but minor reductions in subsidies after five years of negotiations.

In each case, a powerful political constituency - the agribusiness lobby - and the absence of broad voter understanding of the deleterious effects on them of such subsidies won the day.

Now, there is the prospect of tariff barriers in all directions as each exporting country attempts to shore up prices for its own, an action triggered by the distortions and overproduction of the subsidised.

The dismay which followed the failure of the talks three years ago and the fears that hopes for a freer world trading system may collapse are beginning to look ominously justified.


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