An assessment of market access and export subsidy reforms on the world dairy markets

This research examine the impact of potential changes in the level of protection provided by dairy policies in major dairy trading countries, in the post-Uruguay Round world. It provides quantitative information on the impact of tariff-rate quotas (TRQ) reforms and export subsidy reductions on production, consumption, trade flows and prices on the world dairy market, and assesses their welfare effects on the various participants in the Canadian dairy industry.; To examine these issues, a trade model of the world dairy industry was constructed. The model is composed of six OECD country/regions and one module for the rest of the world. The model includes final demand equations, supply equations of dairy products, milk component supply and demand functions, price equations linking domestic market to world market prices, and balance identities which equate sources and uses of milk and milk components. The analysis covered four aggregated dairy products: (1) butter; (2) cheese; (3) skim milk powder and; (4) a residual category which includes fluid milk and all other fresh dairy products.; The modeling approach used in this research is an improvement over existing dairy trade models in several ways. First, the model endogenized the price of milk components and processor margins. Second, a multistage production setting is developed linking three levels of the dairy marketing chain which are the farm, the processing sector and the wholesale level. This approach allows the processing sector to allocate milk components based on the relative profitability of dairy products which is theoretically more consistent. Third, supply of dairy products are modeled through behavioral equations instead of technical relationships. Fourth, the model was constructed to capture the medium-run effects (3 to 5 years) of partial trade liberalization.; The world dairy model is used to assess the impact of various policy reforms that could be implemented following the next Round of multilateral trade negotiations scheduled to begin in December 1999. The scenarios examined include increases in minimum access, reductions in tariff levels, and the elimination of export subsidy.; The simulation results for partial trade liberalization indicate consistent and sizable impacts on the world dairy market. This is particularly true for the allocation of milk components across products, and the allocation of dairy production among regions which are projected to change significantly. Simulation results also indicate that there is no single partial trade liberalization policy that benefits all participants in the dairy industry. The trade impact of partial trade liberalization varies by country and by sector making a win-win compromise hard to reach among the participants in the industry.; In all the scenarios, market oriented countries such as Australia and New Zealand are expected to improve their competitive position in the world dairy market as border measure are removed. In contrast, the dairy sectors in supply management regions are projected to be better off under complete trade liberalization in some cases, or by opposition when the reforms do not compromise their current policy settings, while giving some additional market access for production surplus.; In a complete free trade world, the impacts on supply management regions are projected to be significant both in terms of growth and economic welfare. For Canada, the simulation results indicate positive effects on the economic welfare of processors and consumers, but largely negative impacts on milk producers and traders.