Wednesday, July 19, 2006

The problems of "free" trade...

There has been something approaching mild panic in the NZ finance and economic markets over the past five days or so, the consequence of a ruling from the European Commission that the access right for NZ butter were discriminatory because they limited the rights to just one supplier.

As a consequence of that ruling, all NZ butter exports to Britain were stopped.

Now don't get me wrong, this is a matter of some considerable moment. The value of the trade has been put at about USD165 million. That is a sizeable amount to be coming from any one market. It is the kind of money that rightly puts the heat on a few Government chairs (who at the same time have made sure that Winnie the Pooh is well tucked into bed in the US where he can insult the likes of US Senators).

But there are a number of "interesting" sidelines to this rather remarkable dust-up.

Briefly, the history -

1. The genesis is a European Court ruling in a case taken by a German company, alleging that Fonterra's right of access to the EU market was discriminatory and hence against EU "Rules".

2. That German company was seeking the right to market in Germany - yep - NZ butter, made by Fonterra. The rights of access made that impossible.

3. The EU Commission responded by cancelling the right of access to the market, and consequently all existing import licenses lapsed. Well, they were polite about it and allowed existing stocks to be sold, but no new shipments allowed.

4. Initial Fonterra contacts, and from the Government, resulted in that being expanded to allow "shipments on the water" to be received and sold.

That is pretty much where things stand at the moment. But there are others buzzing around the wires as well...

5. The accusation has been levelled that Fonterra is a "monopoly". Comment invited, but in so doing there is one very important thing to remember. Fonterra is a cooperative company. Now that might be a very strange, native to NZ only, kind of beastie. What it means is that the Company is acting solely on behalf of its shareholders. Who are they? None other than the 11,600 dairy farmers who sell their milk to Fonterra for processing and sale. Their "shareholding" is valued by the value of the milk they supply to the company; the better and the more milk you supply, the greater your "shareholding".

6. There is description of Fonterra as "the world's biggest dairy company" (not true, I believe that Nestle, and a couple others are larger), the worlds fourth largest dairy processor (probably correct), the worlds largest dairy exporter
7. To modify that, Fonterra describe themselves as "...the world's leader in large-scale milk procurement, processing and management."

In looking through the 'Net on this there were two specific items that make very interesting reading.

The first is dated 4 July, some days before the decision to withdraw the import licenses. This is not being presented as post fact ipso fact argument, because the original Court case has been around for some years, five I believe. It is not causative to the debate on the rules, or the failure of the import licenses as a result, but it might give a handle on the EU Commission's future response.

From Food and Drink Europe -
Most of Europe’s dairy industry will have eyes fixed on World Trade Organisation negotiations over the coming weeks, but there will be time too for lobbying on short-term market support and more debate over export subsidies.

World Trade Organisation (WTO)
A global trade deal between WTO members will set the agenda going forward for the EU dairy industry, including guidelines for initial discussions on the European Commission's proposed review of EU dairy strategy in 2008.

Pascal Lamy, WTO director-general, admitted this weekend that talks over a global trade deal were in crisis, largely because the EU and US delegations could not agree on agricultural subsidies.
Concerns are growing over the EU's butter surplus and dairy associations are set to increase their lobbying of the European Commission to get more short-term market support.

The EU's intervention store for butter was filled by the end of May, while the similar system for skimmed milk powder had not been used.

Britain's Milk Development Council warned recently that a butter glut had appeared in the EU because Europeans were buying less and non-EU producers were able to sell butter to the rest of the world more cheaply.

The surplus has sent butter prices down to the EU minimum, or so-called ‘intervention' level, putting pressure on processors and producers.

Now, what I understand THAT to mean is this...

By its own Rules, the EU must now pay higher rates of subsidy to all of those dairy farmers who supply European firms making butter. That could be a bundle of its own, and a very particular concern to the French.

To that end the Dairy Reporter (which also carried that last article)-
26/05/2006- British dairy officials are lobbying the European Union to stick to its 2013 deadline for scrapping export subsidies, after nations outside the bloc called for aid to end faster.

Industry association Dairy UK said the latest proposals from certain non-EU countries, including Australia, New Zealand and the US, would require the EU to cut export subsidies by 80 per cent in volume and value terms by 2010. Half the cuts would also take place in the first year.
European Commission figures show Europe’s dairy sector was the biggest recipient of EU export subsidies in 2004, getting nearly €1.5bn in aid. No other sector broke the €1bn barrier.

Government figures obtained by the campaigns group show that big firms take the most money. France’s Danone and Lactalis got €25m and €20.5m in 2004, while the export arm of Britain’s Dairy Crest got £8.3m last year.
Joop Kleibeuker, the body’s secretary general, also told the EU should treat subsidies for different products separately. “In dairy, butter especially should be at the end of the process because of the significant difference between world and EU prices for butter.”

The "process" that last comment relates to is not the making of the butter. It is the withdrawal of the government subsidies on dairy production and export.

Earlier on Dairy Reporter had this as well...
02/05/2006 - The European Commission has raised export subsidies available for butter for the second month running, bowing to pressure from member states concerned at volatile markets.

The Commission's Milk Management Committee has agreed to increase the common subsidy available for butter exports by three per cent to €99.5 per 100kg. Subsidies for butter exports in the Commission's ‘tender' system were also increased.
The Commission has now increased butter export aid in two consecutive months, following a two per cent increase to €96.5 per 100kg in March.
Common butter export aid is also due to be slashed by another €23 per 100kg after the 1 July, intended to reflect cuts to the EU butter price as part of the bloc's Common Agricultural Policy reform.

The idea is that as the Commission cuts EU commodity prices to move them closer to world prices, less export subsidies are needed to make up the difference and keep European firms competitive on the world stage.

Interesting mechanisms there, what?

Let's be honest about things here.

There are some very fancy dances going around one central fact. The general form of that fact is this -

When it comes to agricultural products in particular, there are very large manufacturers who are capable of producing a superior product far cheaper than those originating from Europe, or the US.

In the particular instance of dairy products, NZ has (despite the difficulty of shipping half the world round) a producer that has developed start to market control of its product. The consequences of that producer's skill are;

> Being able to land better product than the local, in Europe cheaper than the local industry can make it.
> Being able to compete with the same product on all international markets at governing commodity prices.
> Most importantly, there is no government assistance or subsidy on the NZ product. Here in NZ, I pay the same price for butter (plus mark-ups) as the European bound product leaves port.

What this whole raruraru does is give a picture of the kind of machinations that cloud the diplomacy of international trade, and especially the likes of the Doha round.

Thanks FIL and NZ Dairy Farmer MMagazine)
Why is the NZ dairy so good? The first photo is a farm holding vat. The second is a milking race. That will give you some idea of the capital investment required, just in the milking shed. There was a very interesting little radio programme - have a listen here if you're lucky last weekend including an interview with a tanker (milk collection) driver doing a run through the Coromandels. An eight hour day, but about a 15 minute segment of the broadcast. It gives an interesting sound picture to a small part of what NZ dairying is about.

It also will give a small glimpse of the technology behind Fonterra's success.

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