EU, US dairy subsidies to cost NZ economy $122 million: NZIER

Friday 26th June 2009

Export subsidies for dairy farmers in the US and Europe could cost the New Zealand economy around $122 million by encouraging more milk products onto global markets and driving down prices, according to the New Zealand Institute of Economic Research.

New Zealand’s dairy output may fall by around 5% and the value of milk, butter and cheese exports could decline some 8% as American and European subsidies create an oversupply of product, according to the NZIER’s latest Insight newsletter. The think-tank predicts the global economy will be worse off by around US$41 million, although countries such as Japan and Korean would benefit from lower world prices.

The prospect of lower dairy prices “will cause kiwi farmers’ incomes to fall below where they would otherwise have been, through no fault of their own,” said the institute’s deputy chief executive John Ballingall. “The risk of ongoing retaliation between the US and EU, and potentially others, could lead to larger increases in subsidies, tariffs and other trade barriers over time.”

Last month US Agriculture Secretary Tom Vilsack said the US Department of Agriculture will subsidise more than 92,000 metric tons of American dairy products. This followed moves in January by the EU to refund European dairy producers the difference between the EU price and world price for dairy products.

New Zealand Trade Minister Tim Groser slammed the US Dairy Export Incentive Program, calling it “short-sighted” and “counterproductive”.

The resumption of the stalled Doha round of World Trade Organisation negotiations could see the removal of agricultural export subsidies, and would be of great benefit to the New Zealand economy, Ballingall said.

ASB Bank rural economist James Shortall said the subsidies had already played out with a reduced forecast payout to New Zealand dairy farmers by Fonterra Dairy Cooperative, the world’s largest dairy exporter.

“It’s already had an effect on international prices and has flowed through to the payout impact on farmers,” Shortall said. “If the subsidy levels increased or stuck around for one, two or three years, export prices could be hit” by as much as the projected $122 million, he said.

Fonterra announced an opening forecast payment for the 2010 season of $4.55 per kilogram of milk solids, a decline of 13% from this season’s $5.20, blaming the strong kiwi dollar for the reduced payout. The currency has gained as much as 34% from its sub-50 US cents low in early March, and recently traded at 64.23 cents.

Dairy products account for some 20% of New Zealand’s annual $43.2 billion of exports, and rose 4.8% in the 12 months to April 30, according to government figures.

Statistics New Zealand will release the overseas merchandise trade figures for May on Monday, but the impact of the US subsidies, which were announced on May 25, won’t become apparent until the June data is released.

Businesswire.co.nz

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