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A Solution Looking for a Problem

A bad idea from the U.S. dairy industry.

12:00 AM, Oct 3, 2007 • By DAVE JUDAY
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AS SENATE MAJORITY leader, Lyndon Johnson used to attribute the politics of the dairy industry to the fact that every state had "at least one dairy cow and two senators." But today, with the global expansion of agricultural trade, Johnson's adage would have to be amended to note that many foreign countries also have dairy cows, but no U.S. senators.

Indeed, protectionism is a staple of U.S. dairy policy. Taxpayer funded dairy support programs account for nearly a third of the U.S. farm subsidies that the World Trade Organization considers "trade distorting." Moreover, U.S. milk producers are further protected by tariffs and quotas on imported dairy products. Apparently, that's not enough for them. With the omnibus farm bill legislation pending in the Senate, U.S. dairy producers are trying to add a new tax to their anti-import arsenal--the so-called dairy import assessment (DIA).

Their proposal is like the proverbial wolf in sheep's clothing. It is cleverly structured to appear at first blush like a simple expansion of the domestic assessment U.S. dairy farmers willingly place on themselves to promote consumption of milk and dairy products. The proceeds of this domestic assessment go to various joint marketing efforts, including the familiar "Real Dairy" seal on cheese, ice cream, cottage cheese, whipped cream, and other dairy products.

In defending the import assessment proposal, the dairy farmers' lobby group, the National Milk Producers Federation, argues it is "basic fairness that if imported products enjoy access to our consumers, they should help pay the same promotion assessment that our own farmers pay to develop the U.S. dairy market." But their basic fairness argument falls flat on its face considering the dairy promotion program explicitly prohibits the use of the Real Dairy seal to market imported dairy products or any products containing imported dairy ingredients.

Furthermore, even if that were to change (which is not part of the proposal, by the way), the basic fairness argument still rings hollow. If Swiss cheese from Switzerland, gouda from the Netherlands, and Parmesan from Italy were eligible for promotion under the assessment, those products nevertheless could not benefit because they are subject to the current complex and rigid tariff-rate-quota and licensing system that effectively limits the volume allowed to be imported. Any kind of successful marketing campaign would be a sort of cruel hoax on consumers--building demand for the authentic imported product that could not be supplied by those paying the import assessment.

Perhaps the biggest inequity, however, is the assessment of dairy ingredients--mostly solid proteins derived from milk that are used as food ingredients. Many of these products, ironically, are not even produced in this country. Much of their use by food manufacturers is because of their functional properties, such as stabilizers and binders in products that by no stretch of the imagination could be included in the dairy promotion. Consider some of the grocery items that contain these ingredients: hot dogs, English muffins, Twinkies, protein energy bars, breath mints, and even the white powder mix for coffee that legally has to be sold under the name, non-dairy creamer!

The dairy import assessment was first proposed as a provision of the 2002 farm bill; it has never been enacted because both the U.S. Trade Representative's office and the Department of Agriculture concurred that it violated U.S. commitments to international trade laws. Its proponents are pushing for it to be included in the 2007 farm bill--and it still falls afoul of international trade rules.

In fact, if this new tax is levied on dairy imports, many countries legally could--and likely would--start to retaliate with trade barriers to U.S. dairy exports. That would be harmful to American dairy farmers as their exports are on track this year to double the level they were at as recently as 2001. Moreover, dairy imports are actually tailing off. Last year, imports were down from the two previous years, and they are holding at that level so far through 2007. In short, the unfair, ill-timed dairy import assessment is a solution looking for a problem.

Dave Juday is a commodity analyst.