Could new dairy margin insurance plan risk WTO challenge?

By Agri-Pulse staff

© Copyright Agri-Pulse Communications, Inc.



WASHINGTON, Oct. 15, 2015 - The launch last month of USDA's new Margin Protection Program (MPP), intended to help America's 45,000 dairy farmers survive when feed costs overtake milk income, has provoked a debate over whether it is compatible with U.S. trade interests.

Payouts under the program are “likely to be frequent and may be very substantial,” said Colin Carter, professor of agricultural economics at the University of California-Davis. Should dairy margins fall to the levels of 2009 ($2.49/cwt.) and 2012 ($2.88/cwt.), indemnities to dairy farmers could reach $5 billion, according to University of Wisconsin analysts.

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Expenditures of that level could be contrary to current U.S. trade commitments and are “likely to adversely affect the ability of the United States to negotiate new trade agreements (such as through the Trans Pacific Partnership initiative),” Carter wrote in Choices magazine.

“When dairy margins drop, government payments will be exponentially larger than under the previous legislation.”

The National Milk Producers Federation (NMPF), which developed the concept that Congress enacted into the new MPP, rejects his contention. “Carter's article and its associated claims are long on opinion but void of substance,” NMPF said in a statement provided to Agri-Pulse.

Carter suggested that World Trade Organization members such as New Zealand, “who have a comparative advantage in dairy exports, could challenge the U.S. meld of a subsidy and an insurance program.” The scheme could be vulnerable under either the WTO Agreement on Subsidies and Countervailing Measures (SCM) or through antidumping and countervailing duty laws, he wrote.

The NMPF disagrees. “In making this claim, he fails to cite any specific provisions of the WTO SCM agreement for which the United States would be in violation of its commitments under the circumstances envisioned,” NMPF said. “Anyone can state that a program can be challenged under the GATT (General Agreement on Tariffs and Trade) or WTO agreement, but only one who understands those agreements can point to specific articles that the program could be violating.” Those making such assertions “are not trade lawyers,” said Jaime Castaneda, NMPF's senior vice president for strategic initiatives and trade policy.

Carter's thesis is based on the hypothesis that, if a significant spike in prices of corn or other dairy feed triggered “a big subsidy payout to U.S. dairy farmers, then export prices would be lower than domestic U.S. milk prices inclusive of the subsidy.” Citing a 1999 decision by the WTO that Canada's dairy exports received implicit export subsidies from its supply management program, he concluded, “It is plausible that the new U.S. dairy subsidies could be similarly viewed as constituting an export subsidy even though payments are tied to a dairy's recent historical production rather than current year production.”

Dairy farmers have until Nov. 28 to sign up at local USDA offices and pay a $100 fee to guarantee payments if the national average margin between milk prices and feed costs is below $4/cwt. of milk sold. Farmers can protect a margin up to $8/cwt. for a higher premium. Some are concerned that many producers do not understand the new system and will be reluctant to enroll and instead will take a chance that current margins of more than $12/cwt. this year will remain. NMPF's Castaneda concedes that some producers could have “a sense of comfort” with projections of healthy margins next year and delay enrolling. Should margins decline sharply, he said, producers would be allowed to sign up next year for coverage the following year.

A national survey that generated 669 responses from dairy farmers found that 28 percent were not aware of the new program; nearly 40 percent of respondents with fewer than 100 cows said they knew nothing about it and more than a third of farms with fewer than 100 cows viewed MPP unfavorably. The survey's authors said they would not be surprised if the participation rate for 2015 were around half of U.S. dairy herds accounting for 60 percent of US milk production. NMPF's Castaneda said he would “not put a lot of stock in” the survey results because of the small sample size.

The new dairy program is an example of a trend that began with the 1996 Farm Bill, Carter wrote. Whereas the European Union and Japan (which with the U.S. provide 80 percent of farm subsidies worldwide) have reduced trade-distorting support, the 2014 Farm Bill “not only expands subsidies paid to U.S. farmers but also ties those subsidies more directly to recent and current production and market conditions and, therefore, makes them more production- and trade-distorting,” Carter wrote.

The bill made crop insurance even more trade-distorting, he argued, which “could be successfully challenged by WTO members.” In the bill, he said, “Congress also missed an opportunity to modify mandatory Country-of-Origin Labeling (COOL) on meat products despite its clear violation of WTO rules.” Carter asserts that the chairs of both congressional agriculture committees “recognized that COOL was probably a serious WTO violation but found it more politically convenient to ignore the issue.”

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