Dairy Policy Reform and Trade Liberalisation

image of Dairy Policy Reform and Trade Liberalisation

This report is an attempt to improve understanding of the dairy sector through an analysis of the trade and economic effects of the main policy measures (subsidies) applied to it. In particular, it examines the effects of both milk price support measures and milk quota systems. The removal of individual policy measures is modelled in order to assess the impact of international dairy trade liberalisation on production, consumption, trade, prices, income, and welfare.

The primary focus of this report is the impact of policies and reform in the OECD area, although the consequences for other economies are also examined. In addition, this report offers economic insights into the workings of complex dairy policy measures and provides a discussion of the potential of the dairy sector -- globally and in individual countries -- as it adjusts to liberal trading conditions.

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Analysis of International Dairy Trade Liberalisation

This chapter briefly describes the basic characteristics of world dairy markets and presents an empirical analysis of dairy trade liberalisation. The empirical work was carried out using the Secretariat’s Aglink and PEM models in order to assess the impact of dairy policy reforms on production, consumption, trade, prices, income and welfare. The empirical results have to be viewed within the limits of these models and should be interpreted as giving broad indications of the possible direction and potential changes in markets, income and welfare due to liberalisation in the dairy sector, rather than as definitive forecasts of the outcomes. The simulation results of international dairy trade liberalisation suggest that there is potential for significant net welfare improvements, with consumers being the main beneficiaries and taxpayers also realising gains in reformed countries. The size of benefits to consumers, however, is subject to the degree of price transmission along the supply chain. It can also be expected that producers and exporters in developing countries gain from the reform, while consumers in these countries would face a reduction in welfare. Following international dairy trade liberalisation, world dairy prices would be lifted substantially, by 17 to 54%. While supply would shift towards more efficient areas, there would not be any significant change in total world milk production. In this respect, the assumption concerning the production potential in quota operating countries plays an important role in the analysis. Sensitivity analyses to test for this, however, confirm the results, and do not lead to fundamentally different conclusions. The results further suggest that market price support not only artificially depresses world market prices but also creates considerable distortions in price formation of dairy products. The analysis points to the logical fact that domestic price and supply adjustments can be expected to be highest if a country reforms its dairy policy unilaterally. As more countries join the reform process, adjustments become smaller and are least in the case of multilateral reform. This is also the reason why in this case the dairy sectors in countries where market price support is eliminated are ultimately not greatly affected.

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