European dairy subsidies 'threaten repeat of 1930s'

Reuters

INFLUENTIAL FORCE: German farmers protest in support of higher milk prices in front of the Brandenburg Gate in Berlin. The European Union has responded with export subsidies.

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Europe intends to rebuild its butter mountains with government handouts for uneconomic production. Is this the beginning of a new era of agricultural protectionism?

To say Trade Minister Tim Groser is riled by the European Union's decision this week to re-introduce dairy export subsidies is something of an understatement.

Mr Groser, who has a long history of dealing with the Europeans on dairy in various top trade negotiator roles, says the move risks repeating the failed trade protectionist policies of the 1930s. It also makes a mockery of the G20 declaration of November 15, which highlighted the critical importance of rejecting protectionism in times of financial uncertainties, he says.

An animated Mr Groser reads a passage of the declaration over the phone to prove his point: "In this regard within the next 12 months we [the G20 nations] will refrain from raising new barriers to investment or to trading goods and services." The nations vowed to instruct their trade ministers to achieve these objectives.

"Well, they flunked that test," he says. "Around the world, of all the protectionist measures, the one most reviled of all is export subsidies. They were banned on all international trade 50 years ago with the crucial exception of agriculture.

"So what has the EU done against a very serious background of world trade grinding slowly to a halt? They've reached into their policy toolkit and pulled out the most reviled of protectionist measures. I'm sorry, I just find this totally irresponsible."

European Agriculture Commissioner Mariann Fischer Boel announced the revival of dairy protectionism about a week ago in response to falling dairy prices.

Dairy export subsidies will be reintroduced on butter, cheese and skimmed milk powder. The EU will also increase the amount of dairy it buys through a series of regular tenders and trade bids and raise the level of funding given to private companies that remove dairy goods from the market and put them in storage.

Between March and August it will buy 30,000 tonnes of butter and 109,000 tonnes of milk powder, creating a taxpayer-funded dairy mountain costing hundreds of millions of euros.

EU officials have played down the move as temporary and say they still want to get rid of export subsidies by 2015. The Europeans are within their WTO commitments, although the stalled Doha round of talks had sought to ban all agricultural export subsidies.

The move looks likely to send already flagging prices down further. It is thought it may contribute to a further downgrading of Fonterra's payout forecast next week. However, Fonterra chief executive Andrew Ferrier says it is too soon to say how much price impact there will be.

"The question is going to be how much they will subsidise," he says.

Fonterra global trade manager Kelvin Wickham says: "History tells us that ... the world price comes down by the amount of the subsidy that's introduced. It also creates huge uncertainty in the market.

"Every two weeks they [the EU] will have a meeting and they will decide what volumes, what value and what period of export subsidisation they will use for respective products.

"What's happening now, already, is that European traders are speculating on what subsidy may be available and are already offering to customers in the market subject to the availability of a subsidy.

"All it does is increase the surplus inventory in the supply chain. It's basically encouraging people to keep producing milk in Europe when it's not economic. That's just going to depress the market for longer. "

Mr Groser says he is unsure which EU member states have driven the reintroduction of subsidies. "This is rooted in ambiguity. It's not at all clear where the real push came from. I'm getting conflicted, confidential advice on this."

Ex-Fonterra chief executive Craig Norgate says the European move has been prompted by Fonterra behaving irresponsibly in the market and through its auction system pushing down prices lower than they needed to go.

There is potential for the downward pressure on prices to be exacerbated if the Americans respond with similar measures.

Currently the US has tight restrictions on what can be subsidised. But the European move will provide ammunition to the powerful US domestic dairy lobby.

"That's the number one question," Mr Groser says. "My suspicion is that it's never made much difference on export subsidies whether the Democrats or Republicans are in charge. Their position has always been we will support their [export subsidies'] elimination but we're not going to be the only fools on the block."

Federated Farmers dairy chairman Lachlan McKenzie says he is petrified that 1930 may be repeating itself in 2009. "The 1929 crash didn't directly cause the Great Depression but the regulatory response tariffs and trade barriers did. The US Smoot Hawley Tariff Act, copied in Europe, killed trans-Atlantic trade and that created the depression.

"We have Europe backsliding ... so imagine what the US dairy lobby is up to right now. They will be lobbying both the Congress, House of Representatives and President Obama with an `us too please'."

It's also possible the Europeans will introduce export subsidies on other agricultural products, Mr Groser says. "The strategy I'm following here is not to try and present this as a bilateral problem [between the EU and New Zealand] but actually as a shared issue."

He says he has asked Australian Trade Minister Simon Crean the chairman of the Cairns Group of agricultural exporting nations to raise this with other members of the group before the trade ministerial meeting in Davos next week.

The worst-case scenario is copycat behaviour, Mr Groser says. "They've taken the first step down a pretty slippery slope."

- © Fairfax NZ News