EC puts knife into butter imports

Phil Goff says Europeans have an obligation to honour the quota agreement with NZ. Picture / Peter Meecham

Angry farmers say the European Commission's move to suspend New Zealand butter imports while it sorts out a legal wrangle is nothing short of protectionism.

Dairy exporters and politicians were stunned on Friday when the EC said it would halt New Zealand's $264 million annual butter trade to Europe while it considered a court decision invalidating parts of our market access agreement.

Federated Farmers is comparing the situation to the spreadable butter row in the 1990s, when British customs officials argued that the process used to make the product meant it wasn't really "butter". At one point in the dispute, six then-Dairy Board executives were charged with fraud.

"As a representative of farmers, I've got a pretty cynical view of European Union bureaucracy and attempts to shut our world-class products out of their market," Federated Farmers president Charlie Pedersen says. "They don't like the competition our products create. I'm saying it's an attempt at a non-tariff trade barrier."

Trade Minister Phil Goff has already written to European Agriculture Commissioner Mariann Fischer Boel, telling her that the move is unacceptable, and he says he will be on the phone first thing on the European Monday morning. He says New Zealand has been aware of the court case for a couple of years. German dairy trader Egenberger GmbH went to the European Court of Justice to challenge the EU regulations governing New Zealand's butter quota to Europe. New Zealand has preferential access under arrangements negotiated when Britain joined the European Economic Community in 1973.

Mr Goff says the resulting decision that certain parts of the regulations are invalid is not a surprise. What is surprising is the European Commission's interpretation of the ruling - that it must suspend New Zealand butter imports until the regulations are changed. Mr Goff says that came out of left field.

"The earlier comments from the court had suggested while they had to change the regulations, it could do so while trade continued."

He says that's the legal advice dairy co-operative Fonterra and the New Zealand government have received. "I'm not saying they [the EC] are acting in bad faith. I think they believe that's what the legal requirements are." But the minister says it's simply not on that New Zealand's butter trade to Europe, which accounts for 28 per cent of our total butter exports, should suffer while the EC sorts out an internal regulatory matter.

He is demanding that the Europeans "crank up" their response to the situation and says they have an obligation to honour the quota agreement allowing New Zealand to export 77,000 tonnes of butter to Europe a year.

Mr Goff says option one is for the EC to review its legal advice, although he concedes that that is unlikely.

"The second option is for them to move as quickly as possible to remedy the deficiency in their law and to do so in consultation with New Zealand."

Unfortunately, this could take some time. Mr Goff says European bureaucrats are "notoriously slow", and in two weeks it will be the height of the northern summer, when Europe virtually shuts down for a month.

Mr Goff says the solution will be complex, because the problem is complex, and it's crucial New Zealand has a hand in the changes that are made: "We don't want a quick and dirty solution that, long term, damages our trade."

Fonterra chairman Henry van der Heyden says the Europeans' reaction is extraordinary but all part of an endless juggling act: "The issue of getting butter into Europe has always been a sensitive issue, particularly for the EU - they've always felt extremely uncomfortable about it, and they do everything they can to slow it down or stop it. It's just the games that get played."

Federated Farmers says its members are still stewing over restrictions the EC placed on imports of New Zealand butter in 2003, subdividing the annual butter quota and preventing more than 55 per cent of the volume from entering in the first half of the year.

Even though New Zealand can still sell the same annual quota of 76,766 tonnes, it means its exports in the first half of the year, when prices are usually higher, are constrained.

And, of course, there was the spreadable butter row. In 1996 Fonterra's predecessor, the Dairy Board, began earning about $50 million annually with a spreadable butter produced by filtering out of "hard" fats. British Customs officials took away New Zealand's low-tariff access for the spreadable butter under the quota. The technical decision stopped butter made in a manufacturing system known as ammix - which did not exist when the original quota agreement was made - qualifying for the concessionary rates of duty. When a complaint to the World Trade Organisation looked like going New Zealand's way in 1999, the EC did an about-face on the issue.

Henry van der Heyden says this latest antic is "a nonsense". Long term, he says, it should not go on because there is no dispute about whether New Zealand should be selling butter to Europe. However, Mr van der Hayden can't give farmers a guarantee that it won't affect them. "If it went on for a long period of time, then it would start to have an effect."

At the moment, Fonterra has enough stock to keep supplying its European customers.

Mr van der Hayden says the issue is more downstream. "It's the impact it actually has on the global supply chain. We're coming in to the new season, so do we make butter for Europe or do other things - it's those sorts of decisions."

As dairy farmer John Sexton milked his 250 cows near Bombay, south of Auckland, yesterday, he described the EU reaction as "kneejerk" and "gutwrenching".

"It's distressing to New Zealand dairy farmers that we get treated like that when there's been long-term contracts and the problem is only a technicality."

But he says that over the years it's become no more than what farmers expect from the European community.

- Additional reporting by agencies.