Economic Implications of the
AUS-FTA for
U.S. Dairy Markets and Policy
Presentation by Joseph Balagtas
at the
Silverado Symposium on Agricultural Policy Reform
Napa, California
December 19, 2004
Based on a Preliminary Report prepared by
Daniel Sumner, Julian Alston, Joseph Balagtas, Henrich Brunke
for Dairy Australia
Issues

Proposed AUS-FTA may include key agricultural
commodities, including dairy


Dairy has been left out of CUSTA, NAFTA.
What’s the likely impact on U.S. dairy markets?




Quantity of imports
Prices of milk components
Prices and quantity of milk produced
Domestic dairy farm policy
Approach: Overview

Develop a simulation model of world dairy
trade



Model underlying supply and demand
relationships
Allow for trade-distorting policies around the
world
Simulate the effects of the AUS-FTA
relative to a baseline
Modeling Approach:
Country Groups

Principal idea is to represent the facts that




Trade barriers limit movement of dairy products across borders
in many parts of the world
Local sanitation and product quality limits the movement of dairy
products across borders
It is impossible to specify the details of these arrangements and
limitations in an empirically tractable way, so some
approximations and simplifications are necessary
We approximate the trade barriers and sanitary limits on
trade by dividing the world into several aggregates:

Represented in the model as quantities or shares of milk that
had particular trade openness for Australian dairy products.
5 Country Groups Defined
(A) Australia
(U) United States
(Z) Suppliers that are open to market trade and export directly in
competition with Australia in relevant markets (NZ data represents
the milk quantity for this aggregate).
(R) Milk markets and suppliers that participate in global market driven
trade, but their internal prices are only partially open to influences
outside their borders (Southeast Asia, Latin American, etc.)
(O) Milk markets that export and import mainly on non-market basis
with trade barriers or export subsidies or who do not trade in
markets in competition with Australian dairy products (e.g., India,
Japan, and EU)

We do not specify countries in R and O
Modeling Approach:
Trade in Milk Components


Manufacturing capacity is not fixed to
specific products over the 5-10 year
horizon for AUS-FTA implementation
We model derived demand and supply for
milk components


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Fat
Solids-not-fat (SNF)
Other aggregations possible (protein)
Key Information Requirements


Elasticities of supply and demand
Baseline U.S.-Australia price wedge


Depends on world supply and demand
projections, and also policy projections
Measure of international price
transmission

Depends on the size of each region, as well as
domestic and border policies in each region
Baseline Alternatives


Status quo policies
Liberalization following Doha round


We model Doha’s effects as a rise in world
market prices due to tariff cuts and TRQ
expansion in the U.S., Europe, and elsewhere
FTAA
AUS-FTA Scenarios

Gradual elimination of trade-distorting policies

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Moderate trade liberalization

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Expansion of quota
Reduction of TRQ
Free trade by 2009
Slow trade liberalization

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Expansion of Australian quota, price wedge remains
Free trade by 2014
With and without Doha trade liberalization
Preliminary Results: Production and Trade
2009
2014
Changes in:
Slow
Moderate
Without
WTO
With
WTO
U.S. Fat Production
(million pounds)
-17
-135
-160
-18
U.S. Snf Production
(million pounds)
-40
-318
-376
-43
U.S. Fat Imports
(million pounds)
43
210
248
28
U.S. Snf Imports
(million pounds)
23
394
466
54
Preliminary Results: Production and Trade
2009
2014
Percentage Changes
in:
Slow
Moderate
Without
WTO
With
WTO
U.S. Fat Production
(percentage of base)
-0.3
-2.0
-2.3
-0.3
U.S. Snf Production
(percentage of base)
-0.3
-2.0
-2.3
-0.3
U.S. Fat Imports
(percentage of base)
0.6
3.0
3.4
0.4
U.S. Snf Imports
(percentage of base)
0.2
2.6
2.9
0.3
Preliminary Results: Prices and
Quantity of Milk
2009
2014
Changes in:
Slow
Moderate
Without
WTO
With
WTO
U.S. Fat Price
(cents per pound)
-5.0
-7.4
-8.8
-1.1
U.S. Snf Price
(cents per pound)
1.3
0.0
0.1
-0.03
U.S. Milk Quantity
(billion pounds)
-0.46
-3.7
-4.3
-0.50
U.S. Milk Price
($/cwt)
-0.03
-0.24
-0.28
-0.04
Preliminary Results: Prices and
Quantity of Milk
2009
2014
Percentage Changes
in:
Slow
Moderate
Without
WTO
With
WTO
U.S. Fat Price
(percent)
-3.0
-5.7
-6.5
-0.7
U.S. Snf Price
(percent)
1.6
0.1
0.1
-0.03
U.S. Milk Quantity
(percent)
-0.3
-2.0
-2.3
-0.3
U.S. Milk Price
(percent)
-0.3
-2.0
-2.3
-0.3
Summary of Preliminary Results

AUS-FTA would have very small to moderate effects on
U.S. dairy sector, depending on


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Pace of implementation
Contingent possibility of lower pre-existing price wedges
resulting from WTO
By 2009, as a result of the AUS-FTA


Slow scenario => 0.3 percent reduction in U.S. price and
quantity of milk (3% decrease in price of fat offset by 1.6
increase in price of snf)
Moderate scenario => 2.0 percent reduction in U.S. price and
quantity of milk (5.7 percent decrease in price of fat and 1.0
percent decrease in price for snf)
Summary of Preliminary Results

By 2014, without a WTO agreement in force


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Impacts of free bilateral trade similar to those in 2009
(the moderate scenario), but slightly larger
2.3 percent reduction in U.S. price and quantity of
milk
A WTO agreement would pre-empt most of
those effects by eliminating most of the
Australia-U.S. price wedge

Price and quantity effects of AUS-FTA all less than 1
percent
Implications for U.S. Dairy Farm Policy

U.S. dairy programs potentially affected by
the AUS-FTA

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Dairy price support
Milk Income Loss Contract (MILC)
Dairy Compacts
Milk Marketing Orders
AUS-FTA and U.S. Dairy Price Support

U.S. government supports a target milk price
with purchases of butter, cheese, NFDM.

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Purchase prices are set by formula intended to ensure
a minimum farm price of milk.
The target price has fallen over the last 20 years.
Purchase prices adjusted periodically
Baseline projections indicate market prices
above purchase prices.
Small effects of AUS-FTA do not induce
additional purchases and increased outlays.
AUS-FTA and MILC

MILC is a deficiency payment that pays
0.45 x ($13.69 – Class 1 Mover) per cwt
up to 2.4 mil. lbs of milk per farm per year
(output of about 110 cows)
 MILC may cushion the impact of AUS-FTA
on producer revenue.
 In that case, AUS-FTA also increases
taxpayer cost of MILC.
AUS-FTA and Dairy Compacts

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Compacts are currently not a part of U.S. dairy
policy, but continue to be considered as a
potential policy tool.
Similar to MILC, but the target price is legislated
as a minimum pay price, so consumers pay, not
taxpayers.
Dairy Compacts could cushion the impact of
AUS-FTA on U.S. milk revenue.
The cost born by consumers, with no additional
government outlays.
AUS-FTA and Marketing Orders


Marketing orders transfer income from consumers to
producers by price discriminating against fluid
consumers and pooling milk revenue.
Fluid price set as a fixed differential above the
manufacturing price.


Any change in the manufacturing milk price (from the AUS-FTA)
is matched with a change of equal magnitude in the fluid milk
price, and thus in the average milk price.
Our model captures the effect on the average milk price.