A3O-L*ncaster Farming, Saturday, June 22, 1996
RONALD D. KNUTSON
Materially increased interest has
developed in the potential useful
ness of marketing boards as a
means of expanding the exports of
dairy products.
In fact, the passage of the 1996
Farm Bill included a mandate for
the USDA to assist the U.S. dairy
industry in creating one or more
export companies.
According to the Farm Bill,
“The secretary (of agriculture)
shall, consistent with the World
Trade Organization (which admi
nisters the General Agreement on
Tariffs and Trade), provide neces
sary advice and assistance to the
U.S. dairy industry to establish and
maintain one or more trading com
panies for the purpose of facilitat
ing international market develop
ment and exports of dairy
products.”
But even without that, this
increased interest in developing a
New Zealand-type dairy board
comes from several issues:
* Reductions in support levels
have made U.S. butter and nonfat
dry milk prices more nearly com
petitive in international markets.
As a result, the potential for export
has been enhanced.
• Questions have arisen regard
ing the legality under GATT of the
proposed “self-help” plan, which
called for the establishment of as
sessments for producers who in
creased production and the use of
those assessments to dispose of
products on the world market
• Questions have also arisen re
garding the potential for increased
competition from foreign dairy
products within U.S. domestic
markets resulting from reductions
in the effectiveness of Section 22
provisions under the GATT tariffi
cation policy. The spirit of GATT
indicates that the long-run level of
tariff protection may be gradually
reduced, forcing the U.S. dairy in
dustry to operate in an internation
al market environment
• The effectiveness of DEEP as
an export enhancement tool has
demonstrated the effectiveness of
market promotion in expanding
markets. Yet, the GATT outcome
mandates reductions in export sub
sidies through programs such as
DEIP.
* Concern has arisen that the
U.S. dairy industry, despite being
the largest of any nation, has not
been a significant factor in the
world market except in periods
when the CCC has been willing to
subsidize exports through either
direct sales, under programs such
as DEIP, or during unusual periods
such as 1988-1989 when world
nonfat dry milk supplies became
short This concern was high
lighted in a recent GAO report ti
tled Dairy Industry: Potential for
and Barriers to Market Develop
ment.
• Philosophically, the United
States’ policy has changed in the
direction of favoring market solu
tions to problems and more direct
exposure of producers to market
forces.
The purpose of this article is to
explore the potential consequences
of utilizing a marketing board to
export dairy products. This ap
proach is employed by the New
Zealand Dairy Board (NZDB).
Therefore, the leaflet begins with a
description of the NZBD. It then
proceeds to describe alternate
ways a comparable structure might
fit into the U.S. dairy industry. It
ends by pointing out areas of com
patibility and conflict with -U.S.
dairy policy, the impact on the
The Use Of Marketing Boards To Expand Exports
world dairy market, and the spirit
of the GATT accord.
New Zealand Dairy Board
The NZDB is the exclusive ex
porter for the New Zealand dairy
industry. It markets the products
manufactured from 85-90 percent
of New Zealand’s milk produc
tion.
New Zealand generally is recog
nized as being the lowest cost pro
ducer of milk in the world. While
producing only about 1.5 percent
of the world’s milk supply (rough
ly equivalent to California’s pro
duction), New Zealand has an ex
port share of approximately 25
percent of the world’s market.
The New Zealand Dairy Board
is a quasi-govemment corporation
in that it is explicitly created under
statutory law, giving it exclusive
export authority. It is governed by
13 board members, 11 of whom
are directors of New Zealand’s co
operatives and two of whom are
appoiinted by the government.
The 11 cooperative NZDB
members are elected by their ap
proximately 17 cooperatives
whose votes are based on the vol
ume of their members’ production.
As the sole exporter of 85-90
percent of the nation’s milk pro
duction, the NZDB is in a unique
position to guide the products
manufactured by the cooperatives.
It does this through a differential
system of premiums and penalties
designed to encourage the manu
facture of products forecast to be in
greatest export demand and dis
courage those that are in surplus.
In other words, it adjusts the
quantity of manufactured products
processed through its own internal
pricing system. Payments are
made to the cooperatives on the
20th day of the month following
purchase in the form of an advance
price which is adjusted regularly
according to market conditions.
Before the pool is closed, final
payments are made to the coopera
tive to reflect the differential prem
iums and penalties for specific
products during the course of the
season.
The NZDB places a high pri
ority on exports of branded and
specialty products which consti
tute about 35 percent of its product
mix. The development of this mar
ket which has been a major goal, is
dependent on integration of prod
uct research, processing, quality
control, transportation, packaging,
and shipping.
In other words, the NZDB has
substantial influence on what
when, and how the product is pro
duced.
The NZDB operates in the
world dairy market through a net
work of wholly-owned subsidiar
ies, joint ventures, affiliated, and
associated companies. These com
panies deal in New Zealand dairy
products as well as other New Zea
land products, and the products of
other countries. For example, the
NZDB has imported European
cheese into the United States.
The NZDB is not without con
troversy. Some New Zealand co
operatives have, from time to time,
desired to export on their own.
Moreover, New Zealand govern
ment officials have proposed re
moving the board’s export mono
poly in order that it might have a
belter guide to its performance in a
more competitive market context
Application
To The United States
This section deals only with
how an export marketing board
(hereinafter USDB) might operate
in the context of the U.S. dairy in
dustry.
Issues relating to how the USDB
might operate in the context of
U.S. dairy policy is not discussed
in detail. Rather, the focus is on the
concept of a producer-controlled
export agency.
Three operational alternatives
for the USDB will be discussed:
• Exclusive exporter.
• Nonexclusive exporter.
• Clearing house for exports.
Each of these options will be
discussed without the USDB hav
ing the power to control produc
tion. A broader array of marketing
board and “self-help” concepts are
discussed in leaflet P-15.
Exclusive Exporter
A USDB could be authorized as
the exclusive exporter of U.S.
dairy products by the U.S. Con
gress. making the board a govern
ment-sanctioned monopoly.
This would mean that no other
cooperative or proprietary firms
would be allowed to make export
sales without the approval or in
volvement of the USDB.
Opposition could be anticipated
from companies that are currently
involved in the dairy product ex
port business, from companies an
ticipating becoming involved, or
from companies who see a dairy
board as an undesirable prece
dence for similar developments in
other commodities.
Some of this opposition from
within the dairy industry might be
stifled by the potential for current
exporters becoming joint ventures,
affiliates or associates with the
dairy board. Opposition might also
be curbed by limiting USDB ex
clusive export authority to certain
products such as manufactured
hard products and their deriva
tives.
The USDB could be either an
extension of the current dairy pro
motion board or an entirely separ
ate entity. It could contract with
cooperatives (or potentially pro
prietary processors) for the pro
duction of specific .products con
sidered to have market potential.
Payment to the cooperative
would be based upon the price the
USDB could obtain in the world
market The USDB could take
over the functions currently per
formed by the CCC and the acqui
sition of products for domestic
food assistance programs (school
lunch, WIC, etc.).
While DEIP is in existence, the
USDB could handle export deci
sions under it In the absence of
price supports, the USDB would
be the exclusive interface between
domestic and international mar
kets.
An exclusive USDB would need
to have the authority to establish
marketing offices in other coun
tries. Such offices may, like the
NZDB, be wholly owned subsidi
aries, joint ventures, or affiliates.
Such agents would have exclu
sive authority for handling export
sales on behalf of the USDB in the
country involved. Such a system
would have the potential for being
highly efficient in that it would be
the sole U.S. operator in the export
market.
It could be more competitive
than current U.S. exporters in that
it would have pricing authority or
latitude not enjoyed by current
U.S. companies operating in the
export market.
Therefore, it would meet trad
ers, such as the NZDB, on a one
for-onc basis in markets such as
Mexico or Japan. As the exclusive
exporter, it should be in a better
position to develop markets for all
types of products.
If the USDB agent was not per-
forming in a particular country, the
USDB would need to have the au
thority to shut it down and/or
switch affiliates.
The USDB would have the pow
er to set guidelines for the terms of
sale and to determine the sourcing
of supply for the product
Therefore, even if a particular
cooperative or proprietary firm
was awarded the exclusive USDB
agency for sales in a particular
country, the source of the product
sold would be determined by the
USDB based on competitiveness,
product quality, and performance
criteria.
To be effective and equitable,
the USDB would have to have the
authority to operate a pooling sys
tem that spreads the receipts from
exporting across the entire U.S.
dairy industry.
Such a mechanism could in
volve either a system of assess
ments or the operation of an export
pool whereby all costs and returns
from export operations would be
shared equally. As a result, pro
ducer returns would be directly af
fected by the returns that the
USDB achieves in the export mar
ket.
Nonexclusive Exporter
Without exclusive export au-
thority, cooperatives and proprie-
tary firms could continue to oper
ate in the export market but would
do so in competition with the
USDB.
The terms of competition could
be influenced by the board as a
matter of policy by the board hav
ing the power to influence raw
milk costs. Once again, a system
would need to exist for pooling to
spread costs and receipts across all
producers in all markets.
In any particular country, the
USDB could be selling U.S. dairy
products as well as proprietary or
cooperative concerns. The tradeoff
would be between the influence
and effectiveness of the sole exclu
sive agent (previous option) and
the value (positive or negative) of
competition and product diversity
in the international marketplace.
Potentially,' the USDB could
end up selling only commodities to
the least advantageous markets.
As indicated previously, the is
sue of nonexclusivity has surfaced
in New Zealand. The NZDB views
this option as undermining their ef
fectiveness and efficiency. The
proponents of nonexclusivity be
lieve that competition provides a
yardstick by which efficiency and
performance may be most effec
tively judged.
Clearing House
The USDB could simply act as a
clearing house for facilitating the
movement of dairy products into
the world market
Such a clearing house would
have promotional activities (much
like the current Dairy Promotion
Board). It would not be a direct
sales agent.
Instead, sales would be made
through proprietary and coopera
tive firms based on the prices paid
for raw milk, their efficiency', and
their performance in the export
market
The primary roles of the USDB
under this option would be to pro
mote the utilization of U.S. dairy
products internationally and en
sure equitable pooling arrange
ments.
The difference between this op
tion and the current system is that
U.S. dairy cooperatives and pro
prietary companies would not have
their hands tied in the export mar
ket.
That is, there would be a me-
chanism for all producers sharing
in the costs and benefits of export
ing.
Relationship To
U.S. Dairy Policy
The GAO, in its recent report on
dairy exports, finds that the U.S.
dairy industry is unable to compete
in international markets for four
primary reasons:
• The milk price support pro
gram maintains U.S. raw milk
prices at sufficiently high levels so
that manufactured products are
priced out of the world market
• The industry lacks an interna
tional market-oriented mindset
and strategy. There are many pos
sible reasons* for this mindset or
lack of strategy. For example, U.S.
dairy firms have not had to be com
petitive with a relatively high milk
price support (which no longer ex
ists). Additionally, the structure of
major proprietary dairy companies
which have plants in most major
milk-producing countries with
policies designed to encourage
self-sufficiency inherently dis
courages the development of ex
port markets.
• Moreover, GAO finds that the
NZDB has been exceedingly ef
fective at penetrating international
markets not only because of its
cost advantage in producing milk,
butalsobecauseofits international
marketing skill something it
finds lacking in U.S. dairy co
operatives and proprietary firms.
Part of the NZDB’s success in in
ternational marketing lies in its
ability to sell internationally at
competitive prices. Therefore, the
NZDB is a very effective competi
tor in Mexico in the face of the
U.S. dairy export incentive subsid
ies (DEIP) and EU export restitu
tions, New Zealand is competitive
in Mexico and in other markets be
cause its costs are low and because
it has marketing skill, but also be
cause, as a marketing board, it has
the pricing power to lower its price
on sale to Mexico to meet the com
petition. In lowering its price, there
is no explicit subsidy paid but there
is an implied subsidy in that mar
kets are being cross-subsidized to
maintain them. Such pricing pow
er is also implied by the grain mar
keting boards in Canada and Aus
tralia.
• The trend toward lower price
supports and the developments in
GATT designed to liberalize trade
and guarantee market access has
forced rethinking of current U.S.
dairy policies and should cause
U.S. dairy companies to rethink
their international operational
structure.
U.S. Dairy Programs
And GATT
The Uruguay Round Agreement
(LIRA) of GATT has significance
for both existing U.S. dairy poli
cies and for the operations of a
USDS.
The philosophy of the URA ex
tended into the future implies that
the burden for any export price
concession falls directly on pro
ducers in the form of lower product
prices. Therefore, a marketing
board selling in the export market
at a lower price than in domestic
iharkets is legal where producers
bear the full impact of the lower
price and there is no subsidy from
the government.
The issues from a U.S. dairy
policy perspective is whether a
USDB could accomplish the same
discretionary pricing power in the
presence of CCC purchases under
the price support program and still
not violate the trade liberalization
regimen of GATT.
(Turn to Pago A 33)