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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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Trade and Economic Effects of Milk Price Support Measures

The analysis reported in this chapter estimates and compares market and trade effects of alternative milk price support measures, namely i) support due to trade measures – i.e. support attributable to a package of target prices, product support prices and measures at the border and ii) support due to domestic discriminatory pricing. Discriminatory pricing here refers to a government administered or sanctioned practice that leads to domestic market prices paid for some end-uses of raw milk (typically fresh milk products) to be higher by more than the additional marketing costs than prices paid for other raw milk end-uses (typically manufactured milk products). Under a price discrimination scheme, domestic fluid milk consumers partly support farmers through a higher fluid milk price. For the same ‘target’ producer support price, this enables a government to set support measures for the tradable manufacturing milk at a lower level in comparison to a government that does not operate price discrimination and price pooling. Market price support, whether the consequence of trade interventions in dairy product markets or the consequence of discriminatory pricing arrangements, leads to increased production (unless there are quota restrictions) and reductions in consumption, when compared to a situation without such support. In most cases, this will result in higher exports and lower imports. The mathematical analysis shows that on a dollar for dollar basis it is theoretically possible for milk price support resulting from discriminatory pricing to be as, or even more, trade distorting than milk price support resulting from explicit trade intervention in dairy product markets. The empirical results of the assumed change in policy parameters show that, as a practical matter, price-supporting discriminatory pricing arrangements are usually less trade distorting. However, compared to support due to trade measures, the price discrimination scheme imposes a higher burden on one particular group, fluid milk consumers.

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