Fran O'Sullivan: US after pound of Fonterra's flesh

New Zealand's "moo-opolist" just can't get a fair break these days. It was bad enough for Fonterra when the European Union blindsided our largest exporter with its unexpected suspension of our butter trade.

The legislated monopoly position Fonterra enjoys in European dairy quota was the root cause of that particular flare-up, which has not been resolved, even if a temporary agreement has been forged to land New Zealand butter.

But it now seems the United States also has Fonterra in its sights.

US Agriculture Secretary Mike Johanns suggested as much in an interview with the Australian's Washington correspondent about next month's meeting of the Cairns group of agriculture-exporting nations.

The thrust of Johanns' comments was a call to Australia to take the lead in resurrecting the stalled world trade talks by ending the monopoly on exports enjoyed by that country's discredited wheat board. The US was prepared to resume talks on its own controversial farm subsidies at the Cairns Group meeting, as long as Australia was prepared to end its market-distorting monopoly.

Johanns' sting in the tail has now put the wind up New Zealand: "Whether it was the wheat board in Canada or Australia or a single-desk approach in New Zealand, there was probably going to be a point during negotiations where we said: 'If you want your subsidies down, fine. We are happy to make that happen but we have to have market access and you have to contribute'."

Johanns did not mention Fonterra directly. He didn't have to. Nor did he flesh out his comments about New Zealand's so-called "single-desk issue".

But the dairy company is the only New Zealand "state-trading enterprise" to attract attention at World Trade Organisation level. It's usually the European trade commissioners that sing that tune, not the US agriculture and trade players, with whom our trade ministers and officials like to believe they share a special understanding on WTO issues.

Trade Minister Phil Goff had not seen the Johanns report when I spoke to him before his departure for the Asean trade talks on Monday evening.

Goff initially played down Johanns' comments. But he conceded the US would hardly have got itself tied up in knots over Zespri, which is basically the only single-desk exporter left in New Zealand.

It is clear he was bugged by the suggestion that New Zealand and Australia might have to give up some privileges to help revive the stalled Doha Round talks.

It's clearly a bit rich for Johanns to point the finger at New Zealand's unsubsidised agriculture framework when his own farmers are swaddled in "pork", which is my interpretation of Goff's much more diplomatic comments on this score.

After all, it was Johanns himself who, following his visit to New Zealand last year (the first Cabinet-ranked official from the Bush Administration to visit), said he planned to use the efficiency gains our farmers had achieved in the post-subsidy era as an example of what was possible if US agriculture protectionism, worth some US$19 billion ($29.7 billion) was dismantled.

The issue over the Cairns Group's "STEs" did come up at last December's WTO ministerial meeting in Hong Kong.

The draft declaration specifically said that as a means of ensuring the trade-distorting practices of STEs were eliminated, exporting STEs needed to stop using monopoly powers to circumvent rules on export subsidies, Government financing and the underwriting of losses.

Goff's line was that Fonterra's 12,000 dairy farmers did not enjoy Government subsidies (like US farmers) nor was Fonterra the beneficiary of soft state loans or financing guarantees (like most official STEs).

So what's the problem?

What seems to be at issue is the way New Zealand's competition laws were over-ridden to enable Fonterra to be formed through the amalgamation of two competing dairy producers and the Dairy Board.

The EU maintains Fonterra is thus an "STE in disguise", as not only was it created by special Government legislation, but it also enjoys exclusive export rights in a raft of higher-value quota-controlled markets - again through legislation, not competition.

The argument is that by controlling virtually all dairy production, holding exclusive rights to access high-value markets, and through continued moral and diplomatic support from the Government, Fonterra cross-subsidises its dairy exports. Using revenues generated in high-value quota-protected markets, Fonterra can sell into other more competitive markets at lower prices.

Naturally, Fonterra and the Government deny this claim.

Goff and his officials appear to have believed they had scotched this implicit threat to New Zealand's largest agriculture exporter during the WTO talks.

But with Johanns emerging to spout similar lines to the EU there will be renewed concerns over just what will be on the table when the US Agriculture Secretary, US Trade Representative Susan Schwab and WTO director-general Pascal Lamy blow into Cairns next month.

EU Trade Commissioner Peter Mandelson and leaders of the G20 group have opted to stay away unless assurances are given that the Cairns nations agree to put their own trade-distorting practices up for discussion.

The trouble is that New Zealand unilaterally dismantled its agriculture subsidies in the 1980s and maintains very slight tariff protection to just a few industries.

There is not much left to give up, but that will not impress either Mandelson or Johanns' farming lobbies, which are refusing to budge unless they can get greater access to the G20's industrial markets, and reduce the market power of efficient agriculture players such as our dairy farmers to try to tilt the playing field their way in a subsidy-reduced era.

Goff's contention is that, irrespective of Johanns' jaw-boning, the US will not be in a position to signal movement on any front until after the congressional elections.

He took soundings from a visiting bunch of congressional staffers in Wellington this week - among them Hayden Milberg, who serves as senior professional staffer to chairman Saxby Chambliss, head of the Senate committee on agriculture, nutrition and forestry.

Other prominent players in the delegation included James White, who plays a key role in shaping Democratic policies on international trade, and Manisha Singh, who works on international trade and economic issues for Richard Lugar, the chair of the Senate foreign relations committee.

International trade does not directly feature as a bellwether issue for the November 7 election. But the US economy is centre-stage.

The rapport between Goff and the visiting congressional staffers was good but it would appear that Johanns' comments have yet to be discussed on this particular trip.

But if New Zealand wants the WTO trade round to resume it now seems obvious something will have to give.

The $50,000 income bonus per dairy farmer that New Zealand expects to achieve through an ultimately successful round, even if that does not come through until 2013, might be lessened if Fonterra is forced to give up its perks.