US dairy subsidies spark trade war fears

The United States Government's reintroduction of export subsidies for dairy products has sparked fears of a trade war in a sector vital to the New Zealand economy.

The dairy sector accounted for 27 per cent of all New Zealand exports for the year to last May.

The US move followed the reintroduction of dairy export subsidies by the European Union in January.

Prime Minister John Key said the US move was a step in the wrong direction.

"The risk is not in the level of subsidy to US producers but rather that there will be further retaliation from the EU, which is a much larger exporter and capable of much larger subsidies," Key said.

Trade Minister Tim Groser, a former World Trade Organisation chairman of agricultural negotiations, said the US subsidies were predictable but deeply unfortunate.

The subsidies would have some de-stabilising effect.

"But my own instinct is that it will be limited if this is where it stops," Groser said. "What I am concerned about is what will the Europeans do."

The world was facing the most severe downturn in global trade since the Great Depression, he said.

"I'm waiting to see just how irresponsible the two entities who are meant to show leadership in the international trade system want to be."

New Zealand gave up subsidies 25 years ago, he said.

"We haven't got the appetite for it and we haven't got the money for it."

The European Union last year accounted for 32 per cent of the dairy commodity export market by volume, with New Zealand on 22 per cent and the US third on 16 per cent.

The US Dairy Export Incentive Programme included allocations of 68,201 tonnes of nonfat dry milk, 21,097 tonnes of butterfat, 3030 tonnes of cheeses and 34 tonnes of other dairy products.

Stephen Jacobi, executive director of the New Zealand International Business Forum, said he was disappointed the US had followed Europe.

"It's bound to have an effect on prices and market opportunities for New Zealand dairy and we're kind of back in the old days of the two giants slugging it out," Jacobi said.

"We've just got to get the [World Trade Organisation] round finished because had we had Doha concluded the recourse to these sorts of measures would be illegal."

Fonterra managing director of global trade Kelvin Wickham said European use of subsidies had been controlled and measured.

"The market's just getting to somewhat stability, why come out now and create that uncertainty."

The benefit to US farmers would be minimal, Wickham said, with international sales made below a minimum price at which the US Government purchased produce and the subsidy used to make up the difference.

It was hard to predict the impact on global prices but the US move created more uncertainty, Wickham said.

Fonterra planned to announce its payout forecast for the 2009/10 season and fair value share tomorrow.

Westpac economist Doug Steel said the biggest impact would be on international prices but there could also be a production response by US farmers.

"The product's already made but if they make more because the US dairy farmer's getting the wrong price signal, or at least the non-market signal, then you get more product than what economic conditions would justify," Steel said.

"Whether it actually pushes them [prices] lower it's very difficult to isolate individual effects at the moment as every part of the game is moving."

Global supply appeared to be contracting in many parts of the world, demand was likely to be soft but could change with recovery and there were stockpiles to take into account.

"There's a lot of factors in play and so to decipher what impact either the European subsidies or these new subsidies from the US [have will] be pretty tricky to say the least," Steel said. "The direction's clear, the magnitude's not so clear."

The impact on farmer payout here was not clear and farmers could be paid the same should the New Zealand dollar lose value if currency markets treated it as bad news.

"So that will insulate the effect on dairy farmer payout but effectively means that for everyone in New Zealand the dollar in the pocket now buys less stuff on international markets."

The US retaliation seemed to have taken a little bit longer than might have been expected, Steel said.

"In its own right it's not massive, but I think it's the signal and the fear of what might come next that should have us worried."