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' I. ; III "I D IN -' - ..I' ..I III. I I I It“ II .“JI‘ I I ‘I'IJII III'... -,'.| I "L.IIII..' ‘II‘I‘I‘IAdIIJ In}... {IIIILL III. I I | J3 I llllll llllllllllllllll Illlllllllfllllll - LIBRARY 1pm.... 3 1293 10229 5262 Michigan State U . 'ty This is to certify that the thesis entitled N ECONOMIC ANALYSIS OF ALTERNATIVE DAIRY IMPORT POLICIES FOR THE UNITED STATES presented by FRANK SILL IMAN ROSE has been accepted towards fulfillment of the requirements for PhD; degree inAgLiqujuml Econbmics 4402222222222 Major professor Date 12/22/78 0-7639 OVERDUE FINES ARE 25¢ PER DAY PER ITEM Return to book drop to remove this checkout from your record. ‘ 3:1. 2 3397 1: I AN ECONOMIC ANALYSIS OF ALTERNATIVE DAIRY IMPORT POLICIES FOR THE UNITED STATES By Frank Silliman Rose A DISSERTATION Submitted to Michigan State University in partial fulfillment of the requirements for the degree of DOCTOR OF PHILOSOPHY Department of Agricultural Economics 1979 ABSTRACT AN ECONOMIC ANALYSIS OF ALTERNATIVE DAIRY IMPORT POLICIES FOR THE UNITED STATES By Frank Silliman Rose United States imports of dairy products are limited to about l.6 percent of domestic production by import quotas, complemented by strict policies restricting entry of subsidized products. Both aspects of this import policy have been controversial for many years and in the Tokyo Round of the Multilateral Trade Negotiations, the United States has come under renewed pressure from the European Community, New Zealand and other exporters of dairy products for liberalization of these restrictions. In this thesis, a comparative static model is developed to permit estimation of the short-run impacts on price and production in the cheese manufacturing and milk production sub-sectors of the dairy industry as well as the effects on the purchases of the Commodity Credit Corporation under the domestic milk price support program of increasing United States imports of cheese. The import alternatives analyzed with the use of the model are formulated based on the requests for dairy import policy change which the United States has received in thePMltilateralTrade Negotiations from exporters of dairy products. The impact estimates are made assuming that the imports of cheese, Frank Silliman Rose disaggregated by type according to Tariff Schedules of the United States import quota category, increase in 1979. The model calculations are done first assuming that domestic milk prices are at, and then 39933, the support level. The results of the estimation procedure indicate that though the impacts on manufacturers of particular types of cheese could be sub- stantial, depending on the amount of the import increase, effects on the milk production sub-sector, in the aggregate, would be minimal in most cases. Nevertheless, it is pointed out that in the regions of the affected cheese plants, impacts on the dairy farmers are probably under- stated by the model results. Further, dairy farmers producing milk used mainly for manufacturing purposes would likely be the most directly influenced by a policy change. Though no policy prescriptions are made since the benefits of a dairy import policy change are not estimated, it is concluded that the adverse impacts which the model predicts would befall the dairy indus- try would accentuate several industry trends and have important policy implications. Impetus could be given to the decline in the number of small dairy farms and conversion from grade B to grade A milk produc- tion. The latter effect could have ramifications for the method of pricing milk currently used in the United States. Finally, the degree to which milk prices were depressed as a result of an import policy change would bear directly on the level of price support demanded by the dairy industry. This consideration is timely in light of the decision on support level which must be made before October l, l979. To my parents, Frank H. and Beverly L. Rose ii ACKNOWLEDGMENTS I would like to extend my appreciation to all those who assisted me in the research reported in this dissertation. Dr. Vernon Sorenson, my thesis supervisor and major professor, was particularly helpful in the thesis research and throughout my graduate program. The other members of my thesis and guidance committees, Dr. Glynn McBride, Dr. Michael Abkin and Dr. Glenn Johnson gave valuable assis- tance at various stages in the inquiry. I would also like to thank Bryant Wadsworth of the Foreign Agricultural Service and James Miller of the Economics Statistics and C00peratives Service, United States Department of Agriculture, for helping me to understand the intricacies of the government dairy policies. Finally to my wife, Kumiko, and son, Hideki, I would like to express my gratitude for the encouragement and support which they pro- vided throughout the research process. TABLE OF CONTENTS Page LIST OF TABLES .......................... vii LIST OF FIGURES ......................... x KEY TO ABBREVIATIONS ....................... xi Chapter I INTRODUCTION ........................ I The Problem ......................... I The Objectives ....................... 2 The Method ......................... 2 Organization ........................ 3 II THE DOMESTIC CONTEXT .................... 4 Overview of the Dairy Industry ............... 4 The Cheese Industry ..................... 9 Government Programs ..................... 11 Price Support Program .................. 12 Milk Marketing Order Program .............. I4 Import Controls ..................... 15 Federal Cooperative Policy ............... 19 Summary ........................... 19 III THE INTERNATIONAL CONTEXT .................. 20 National Dairy Policies ................... 2l European Community ................... 2l New Zealand ....................... 24 Australia ........................ 26 Canada ......................... 27 Other Countries ..................... 27 The Nature of World Dairy Trade ............... 28 Multilateral Trade Negotiations ............... 30 Summary ........................... 34 IV THE MODEL .......................... 36 Past Research ........................ 36 Methodology--Diagrammatical Development ........... 40 iv Chapter Page VI VII Prices Above Support .................. 41 Prices At Support .................... 43 Methodology--Mathematical Development ............ 47 The Cheese Industry ................... 47 The Milk Production Industry .............. 51 Assumptions and Limitations of the Model .......... 56 Summary ........................... 58 INFORMATION BASE FOR THE MODEL ............... 59 Domestic Cheese Industry .................. 59 Blue-Mold Cheese .................... 60 American Cheese ..................... 62 Edam and Gouda Cheese .................. 62 Italian Cheese ..................... 65 Swiss Cheese ...................... 65 All Other Cheese .................... 65 Imported Cheese ....................... 69 Blue-Mold Cheese .................... 70 American Cheese ..................... 70 Edam and Gouda Cheese .................. 75 Italian Cheese ..................... 75 Swiss Cheese ...................... 80 All Other Cheese .................... 80 Summary ........................... 86 RESULTS AND INTERPRETATION ................. 87 Impacts of Import Expansion ................. 87 Blue-Mold Cheese Imports ................ 93 American Cheese Imports ................. 95 Edam and Gouda Imports ................. 100 Italian Cheese Imports ................. ‘03 Swiss Cheese Imports .................. 105 Other-NSPF Imports ................... 109 Impacts of Import Expansion on Milk Producers ........ 115 Effects of Changing the Model Parameters on Projections . . . 120 Summary ............................ ‘22 POLICY IMPLICATIONS AND CONCLUSIONS ............. 125 Further Aspects of Domestic Adjustment ........... 125 The Cheese Industry ................... 125 The Milk Production Industry .............. 127 Importers ........................ 130 Benefits of Policy Change .................. 130 Policymaking Process .................... 132 Overview of the Study .................... I34 Page APPENDICES ............................ l37 A. Milk Production Regions Defined in the USDA Production Cost Study ....................... 137 B Milk Marketing Areas Under Federal Orders; January l, 1978 .......................... l38 C. Organization Chart of the Multilateral Trade Negotiations l39 D Short-run Price Effects in the United States Cheese Industry of Changing Cheese Imports ........ '. . . 140 E. Short-run Price Effects in the United States Milk Produc- tion Industry of Changing Manufacturing Milk Demand as a Result of Expanded Cheese Imports ............ l42 BIBLIOGRAPHY ........................... I44 vi Table 2.1 2.2 LIST OF TABLES United States Milk Production Industry-~Relevant Statistics; 1970-1979 ......................... Costs and Returns of Milk Producers in the United States-- Twenty-four Production Regions; 1976-1978 ......... Producer Milk Deliveries to Handlers Regulated Under Federal Orders, Deliveries Used in Class I, Minimum Class I and Blend Prices; 1976-1977 .................. Refunds Made by the European Community on Exports to the United States--Se1ected Cheese Types; Effective October 1, 1978 ............................ Blue-Mold Cheese--Production, Number of Plants, Wholesale Price, Imports and Consumption; United States; 1970-1979 . . American-type Cheese--Production, Number of Plants, Whole- sale Prices, CCC Purchase Price, Imports and Consumption; United States; 1970-1979 .................. Edam and Gouda Cheese--Production, Number of Plants, Whole- sale Prices, Imports, and Consumption; United States; 1973- 1979 ............................ Italian Cheese--Production, Number of Plants, Wholesale Prices, Imports and Consumption; United States; l970-1979 Swiss Cheese--Production, Number of Plants, Wholesale Prices, Imports and Consumption; United States; 1970-1979 All Other Cheese--Production, Number of Plants, Wholesale Prices, Imports and Consumption, United States; 1970-1979 . Imports of Blue-Mold Cheese, 1970-1977 ........... Imports of Cheddar Cheese, 1970-1977 ............ Imports of American-type Cheese, Other Than Cheddar, 1970- 1977 ............................ vii Page 25 61 63 64 66 67 68 71 72 73 Table 5.10 Imports of Other Cheese--Not Specifically Provided For, l970-l977 ......................... 5.11 Imports of Edam and Gouda Cheese, l970-1977 ........ 5.12 Imports of Processed Edam and Gouda Cheese, 1970-1977 5.13 Imports of Italian Cheese--In Original Loaves, l970-l977 . . 5.14 Imports of Italian Cheese--Not In Original Loaves, l970-1977 5.15 Imports of Swiss or Emmenthaler Cheese, 1970-1977 ..... 5.16 Imports of Gruyere-Process Cheese, 1970-1977 ........ 5.17 Imports of Other-Low Fat Cheese, 1971-1977 ......... 5.18 Imports of Cheese Above Pricebreak, 1970-1977 ....... 5.19 Imports of Non-Quota Cheese, l970-1977 ........... 6.1 Short-run Impacts on United States Cheese Manufacturers, Milk Producers and Government Support Purchases of Increas- ing Imports in 1979 by 100 Million Pounds of Milk Equivalent in the Form of Various Cheese Types ............ 6.2 Conversion Factors ..................... 6.3 Short-run Impacts on the United States' Blue-Mold Cheese Manufacturers, Milk Producers and Government Support Pur- chases of Increasing Imports of Blue-Mold Cheese in 1979 . . 6.4 Short-run Impacts on the United States' American-type Cheese Manufacturers, Milk Producers, and Government Support Pur- chases of Increasing Imports of American-type Cheese in 1979 6.5 Short-run Impacts on the United States' Edam and Gouda Cheese Manufacturers, Milk Producers, and Government Support Purchases of Increasing Imports of Edam and Gouda Cheese in 1979 ............................ 6.6 Short-run Impacts on the United States' Italian Cheese Manu- facturers, Milk Producers, and Government Support Purchases of Increasing Imports of Italian Cheese in 1979 ...... 6.7 Short-run Impacts on the United States' Swiss Cheese Manu- facturers, Milk Producers and Government Support Purchases of Increasing Imports of Swiss Cheese in 1979 ....... viii Page 74 76 77 78 79 81 82 83 84 85 88 91 95 98 102 104 108 Table 6.8 6.9 6.10 Page Short-run Impacts on United States' American Cheese Manufac- turers, Mozzarella Cheese Manufacturers, Milk Producers, and Government Support Purchases of Increasing Imports of Other Cheese-NSPF in 1979 .................... 112 Short-run Impacts on United States' Milk Producers of Increasing Imports in 1979 by 100 Million Pounds of Milk Equivalent in the Form of Various Cheese Types ....... 117 Sensitivity of Model Estimates of Milk Price Impacts to Alternative Elasticity Assumptions--Imports of Cheese Increase by 100 Million Pounds of Milk Equivalent in 1979 . 121 Effects on the Endogenously Determined Impact Estimates of Increasing the Parameters and Projections Used in the Com- parative Static Model ................... 123 ix Figure 4.1 4.2 4.3 4.4 LIST OF FIGURES Page Short-run Effects of Increasing Cheese Imports--Prices Above Support ....................... 42 Short-run Effects of Increasing American Cheese Imports-- Prices At Support ..................... 44 Short-run Effects of Increasing Imports of Non-American-type Cheese—-Prices At Support ................. 45 Short-run Effects on Farm Milk Price of Increasing Cheese Imports—-Prices Above Support ............... 2 AMS APB BPB CAP CVD DLP EC ESCS FAS GATT IOL M-W MTN NFDM NIOL NSPF TSUS USDA KEY TO ABBREVIATIONS Agricultural Marketing Service Above Pricebreak Below Pricebreak Common Agricultural Policy Countervailing Duty Dairy, Livestock and Poultry Division European Community Economic, Statistics, and C00peratives Service Foreign Agricultural Service General Agreement on Tariffs and Trade In Original Loaves Minnesota-Wisconsin Multilateral Trade Negotiations Non-Fat Dry Milk Not In Original Loaves Not Specifically Provided For Tariff Schedules of the United States United States Department of Agriculture xi CHAPTER I INTRODUCTION The Problem In 1977, United States imports of dairy products were equivalent to 1.6 percent of domestic production. Restrictive import quotas and strict policies limiting subsidized imports account for the low level of imports and these policies have increasingly become a contentious issue in international negotiations between the U.S. and trading part- ners who would like greater access to the U.S. market, particularly for cheese exports. The issue has come to a head in the Tokyo Round of the Multilateral Trade Negotiations (MTNs) now underway in Geneva, Switzerland and some nations have tied U.S. action on dairy import policy to their own decisions regarding treatment of imports from the U.S. With over $27 billion of agricultural exports annually and serious balance of payments problems, the U.S. does not wish to jeopardize its overseas markets. However, opening the U.S. market to substantially greater dairy imports would likely have adverse impacts on employment, output and income in the domestic dairy industry and could significantly increase the costs of the government support program. This study investigates the probable effects on the U.S. dairy industry and the related price support program of opening the U.S. market to greater imports of cheese. The benefits which the U.S. could derive from making this concession in the MTNs are not estimated here, but policy- makers must, of course, weigh both the costs and the benefits in reaching a decision. The Objectives The specific objectives of this study are: 1. To develop a model which will be useful in estimating the magnitude of the short run domestic impacts of liberalizing dairy import policy. 2. Based on requests which the U.S. has received from trading partners for greater market access, to develop import policy alterna- tives, and, for each alternative, use the model to assess the likely short run effects on the price and production of domestic cheese, the farm price and production of milk and the quantity of dairy products purchased by the government under the milk price support program. 3. From these estimates and from an evaluation of characteristics of the cheese and milk industries, to infer some of the short and longer run adjustments which would likely take place in these two sectors of the economy if dairy imports were expanded. 4. From the above quantitative and qualitative assessments, to draw implications for U.S. dairy import policy and U.S. action in the MTNs. The Method A comparative static model is developed which links adjustments made by cheese manufacturers in response to import expansion to prices and production in the milk industry. The model construction permits estimation of imports, whether the import increase is assumed to occur while milk prices are either at_or abgyg_the support level. The import increase is assumed to occur in 1979 and linear pro- jections of relevant variables are developed based on past market performance to permit the desired estimation. The model estimates are incorporated into a discussion of adjustment possibilities in the two industries which takes account of dynamic relationships not captured in the model. Organization The next two chapters describe the domestic and international contexts upon which the problem impinges. In Chapter II, the U.S. dairy industry and related government programs are discussed, while Chapter III examines the dairy policies of key trading partners and the developments in the MTNs as they relate to international trade in dairy products. The comparative static model is developed in Chapter IV and Chapter V presents in detail the information necessary for determining the projections to 1979 and for evaluating the model estimates. Chap- ter VI formulates import alternatives based on requests for concessions on dairy imports which the U.S. has received in the MTNs and, for each alternative, outlines and interprets the import estimates. In the concluding chapter, implications which these results have for resolving the conflict surrounding U.S. dairy import policy are suggested. CHAPTER II THE DOMESTIC CONTEXT Overview of the Dairy Industry The dairy industry in the United States is an important element of the agricultural sector. In 1974, consumer expenditures for milk and dairy products accounted for sales of $22.7 billion and dairy products made up about 16 percent of the at-home expenditures for food. There were 350,000 farms reporting milk cows in 1974 and dairy process- ing plants employed about 200,000 people.1 Table 2.1 indicates the changes that have occurred since 1970 in some of the important milk production and price variables. Manchester2 suggests that large Commodity Credit Corporation (CCC) stocks of feed grains accounted for much of the stability which existed in the dairy industry for the twenty years prior to 1973. When feed prices rose sharply in the early seventies, cutbacks in feeding rates and the resulting lower rates of increase in production per cow led to a decline in milk output. CCC purchases under the price support program3 1Charles N. Shaw, "Commodity Background--Dairy," Farm and Food Policy--l977, Committee on Agriculture and Forestry, United States Senate, September 15, 1976, p. 252. 2Alden 0. Manchester, Dairnyrice Policy--Setting, Problems, Alternatives, Agricultural Economics Report No. 402, USDA/ESCS, April, 1978, p. 7. 3 Explained later in this chapter. .xvaum mean we mmmoaeaa so; xgmmmmomcca mmumsppmmo mumewamun peepe>_=ae x_eza .mnmauouma .mmsmmm maowem> .cowuaaupm xmwmo .mumm\ .u>oo Pw< acheauummzcmz eo ucoaqzm can co maveau uvapu punch ucvucu memecmu xn .umm mmu.ea acmogmm cowuuauoca mzou numwacmz manTONma "mupumvumum ucc>wpmm .xgumzuc~ copuusvoga xpvz mmumum vmuwca ~.~ mpnmh fell to extremely low levels. As feed prices tapered off, milk produc- tion rose once more and CCC purchases again reached the high levels of the sixties. Regionally, milk production costs and prices vary considerably, as shown in Table 2.2 with reference to production areas indicated in Appendix A. Feed costs account for nearly one-half of the estimated production costs. Prices depend importantly on the government programs as shown later in this chapter. Most of the grade B or manufacturing grade milk is produced in the upper midwest though, like other regions, these states are rapidly converting to grade A or fluid grade produc- 1 tion. Today only about 20 percent of the U.S. milk production is classified grade 8.2 Numbers of both commercial dairy farms and processing plants have declined over 50 percent in the last 25 years. According to Manchester, "Both technological and economic forces were responsible for these changes. New technology all the way from the milking parlor to the retail store made bigger units possible at each level. Combined with rising wage rates, the technology changed the economies of scale in every enterprise so that the cost advantage shifted increasingly to larger and larger units."3 Cooperatives have become increasingly dominant in milk marketing though their numbers have been declining due to mergers. Today, over 1Grade A milk meets strict sanitary standards for use as fluid milk. Grade B milk meets lower standards which are acceptable because milk undergoes processing at high temperatures for a longer period of time than in pasteurization of fluid milk. 2 Manchester, Dairy Price Policy, p. 7. 316id.. pp. 3-4. Table 2.2 Costs and Returns of Milk Producers in the United States--Twenty-four Production Regions 1976, 1977, 1978 . . . 1976 1978 Estimated 1977 Preliminary Final Subregiona Cost of Agigzge Net Cost of Agigzge Net Net Production Received Income Production Received Income Income $/cwt. NE-l $10.08 $10.51 $0.43 $ 9.95 S 9.97 $0.02 $(0.03) NE-Z 9.47 11.00 1.53 9.40 10 43 1.03 0.88 NE-3 9.79 10.57 0.78 9.50 10 02 0.52 0.39 NE-4 9.58 10.61 1.03 9.56 10 06 0.50 0.44 NE-S 10.13 10.72 0.59 10.06 10 17 0.11 0.12 NE-6 10.07 10.97 0.90 10.13 10 40 0.27 0.44 A-l 10.19 10.57 0.38 10.27 10 02 (0.25) (0.02) NC-12, A-2 10.26 10.02 (0.24) 10 43 9 50 (0.93) (0.87) SE-l 9.43 11.15 1.72 9 80 10 57 0.77 1.16 SE-lO 11.33 12.94 1.61 11.65 12 27 0.62 0.59 NC-7 9.67 9.70 0.03 9.37 9 20 (0.17) (0.87) SC-8 12.72 11.19 (1.53) 12.72 10 61 (2.11) (1.36) SC-3 10.80 11.29 0.49 10.71 10 71 0.00 (0.25) NC-14 9.65 9.81 0.16 9.83 9.30 (0.53) (0.75) NC-9 9.36 10.38 1.02 9.19 9.84 (0.65) 0.51 NC-lO 9.14 10.20 1.06 9.04 9.67 0.63 0.91 NC-ll 9.54 10.17 0.63 9.48 9 64 0.16 0.67 NC-8 9.38 9.81 0.43 9.88 9 30 (0.58) (1.39) NC-15 9.17 9.70 0.53 9.49 9 20 (0.29) (1.25) NC-6 9.51 9.63 0.12 9.96 9 13 (0.83) (1.86) NC-2 8.74 9.32 0.58 9.11 8 84 (0.27) (1.33) NC-5, GP-7 8.58 9.31 0.73 8.63 8.83 0.20 (1.01) W-9 8.71 10.26 1.55 8.83 9 73 0.90 (0.09) W-8 10.18 10.26 0.08 10.27 9 73 (0.54) (0.91) weighted Averaoe 9.52 10.24 0.72 9.64 9.71 0.07 (0.43) Source: "Super Income Year for Dairymen in 1978, Hoard's Dair man, September 25, 1978, p. 1093 (Taken from Costs of Producing Milk in the United States--Fina1 1976 Estimated 1977 and Pro'ec- tions for 1978, prepared 5y USDA/ESCS for the Committee on Agriculture, Nutrition, and Forestry, United States Senate as mandated by the Agriculture and Consumer Protection Act of 1973, April 21, 1978). a Production subregions indicated in Appendix A. three-fourths of U.S. milk production is sold by farmers through their cooperatives,1 with an even higher proportion of fluid grade milk production handled by cooperatives. Over 87 percent of the producers in 2 Federal market orders are members of producer cooperatives. Butter and non-fat dry milk (NFDM) production is dominated by cooperatives, which produce over two-thirds of all butter and more than 85 percent of 3 Cooperatives now account for over 36 percent of 4 dry milk products. natural cheese production, doubling their share of twenty years ago. About 15 percent of the packaged fluid milk market is now in the hands of cooperatives.5 Manchester6 points out that since 1956, per capita consumption of dairy products in the aggregate has drapped 22 percent and total con- sumption has only risen 2 percent. A third of the decline in per capita consumption is attributed to a drop in domestic sales and the remainder is due to lower levels of consumption of milk on farms where it is produced and to smaller U.S. Department of Agriculture (USDA) donations of government-held supplies. 1Paul W. MacAvoy, ed., Federal Milk Marketing Orders and Price Su orts, (Washington, D.C: American Enterprise Institute for Public 0 icy Research, 1977), p. 47. 21bid. 3Manchester, Dairy Price Policy, p. 7. 41bid. 51bid., p. 5. 61bid., p. 9. Consumption trends vary by dairy product. Per capita sales of beverage milk dropped 12 percent between 1956 and 1976, while butter and non-fat dry milk sales have declined 42 and 30 percent respectively. Per capita cheese sales on the other hand, have doubled over the 20 years period and cheese production accounts for the largest share of manufacturing milk--using 42 percent of available manufacturing milk in 1977 (24 percent of the total milk supply).1 The Cheese Industry As cheese demand expands and the percentage of marketed milk used in cheese production rises, the cheese industry is becoming an increas- ingly important determinant of the well—being of the U.S. dairy industry. For this reason and because understanding of domestic cheese manufactur- ing is important for the analysis later in this study, an overview of the cheese industry is presented here. This discussion is supplemented in Chapter V by a more detailed description. The number of plants manufacturing all types of natural cheese,2 except Italian, is declining, and the average plant production is increasing. There were 806 cheese plants in 1977 averaging 4.2 million pounds of production, whereas in 1950, 2159 plants had an average out- put of 552,000 pounds.3 Plants are located in the greatest numbers in the North Atlantic and North Central regions. Production of American-type cheese is 1Ibid., p. 11 and U.S. Department of Agriculture, Dairy Situation, ESCS, July 1978, p. 27. 2Natural cheese is made directly from milk by a curdling and aging process. Processed cheese is a blend of natural cheeses heated to a point at which all further aging steps. Emulsifiers and other ingredi- ents may be added. 3U.S. Department of Agriculture, Dairy Products-~Annua1 Summary, 1 77, Crop Reporting Board, ESCS, June, 1978, p. 16. 10 heavily concentrated in the North Central region near large milk sup- plies. Wisconsin and Minnesota are by far the largest production states. Plants in Minnesota are generally much larger, averaging 16.4 million pounds of production in 1977 compared to 3.1 million pounds per plant in Wisconsin. Sixty-one percent of all U.S. cheese production in 1977 was American-type. Wisconsin, New York and California are the largest producers of Italian-type cheeses including Mozzarella, with California and Minnesota having the largest plants. Twenty-four percent of 1977 cheese production was Italian. In 1977, Illinois, Wisconsin and Ohio produced 60 percent of domestic Swiss cheese, a variety accounting for 6 percent of total cheese production. Wisconsin leads in the pro- duction of brick, Munster, Blue and other less important cheese types.1 A survey conducted by Lough in 19732 indicated that 53 percent of the manufacturing plants were pr0prietary corporations accounting for 59 percent of total natural cheese production, 22 percent were c00pera- tives producing one-third of the cheese and the remaining plants, pri- vately owned, produced only 8 percent of the total output. A merger movement among cooperatives in the late sixties, particularly in the central U.S., resulted in a consolidation and expansion of many cheese manufacturing facilities and a conversion of some butter-NFDM production capacity to cheese production. As a result, cooperatives have a larger proportion of the higher capacity cheese plants and have an important share of the production in an industry traditionally dominated by small proprietary firms. llbid., pp. 15-29. 2Harold W. Lough, The Cheese Industry, Agricultural Economics Report No. 294, USDA/ERS, July, 1975, p. 24. 11 In 1977, about one-third of U.S. natural cheese production was further processed into pasteurized process cheese products whose manu- facture is dominated by large national cheese companies. The natural varieties most often used in these products are Cheddar, Colby (both American types), and Swiss. The growth of c00peratives in natural cheese production has pro- vided the industry with more flexibility to adjust production to chang- 1 that ". . . 15 ing market conditions. It is estimated in Manchester percent of the current cheese capacity could be converted back to butter-powder production with minimum loss of time and expense." Manchester points out that this flexibility exists primarily in the large regional cooperatives which resulted from the merger movement in the late sixties, but that national cheese corporations, single plant c00peratives and private firms are less flexible because of the special- ized nature of cheesemakers, equipment, and storage facilities. The question of flexibility in the cheese industry is important and will be discussed further with reference to the manufacture of par- ticular types of cheese in Chapter V and VI as the effects of expanded cheese imports are analyzed. Government Programs In the 1930's, federal programs were instituted to deal with the level of milk prices, and with problems of milk price instability and dairy farm incomes. The basic structure of these programs is unchanged today. 1Manchester, Dairy Price Policy, p. 7. 12 There are four interrelated government programs undergirding the industry: 1. The dairy price support program which establishes a floor price for manufacturing grade milk, thus maintaining a floor under all milk prices. 2. The milk marketing order program which establishes minimum prices for fluid grade milk in most of the country. 3. Import controls which protect the price support program and keep the U.S. government from supporting world milk prices. 4. Federal c00perative policy which fosters the development of farmer-owned cooperatives but discourages them from using their market power to raise prices inordinately. Each program will be described briefly below. Price Support Program. The Agricultural Act of 1949 requires that the price of milk to producers be supported at such level between 75 and 90 percent of parity as will ensure an adequate supply, reflect changes in the cost of production and assure a level of farm income to maintain productive capacity sufficient to meet future needs. The basic 1949 Act was amended by the Food and Agriculture Act of 1977 by raising the minimum support level to 80 percent of parity through March 31, 1979.1 The amendment also requires that the support price be adjusted semi-annually, through March 31, 1981, to reflect any esti- mated change in the Parity Index (index of prices paid by farmers) during the first six months of the marketing year. 1Effective October 1, 1977, the beginning of the marketing year was changed from April 1 to October 1. Therefore, support prices at 80 percent of parity will prevail through September 30, 1979. 13 The aim of the program is for the annual average price for manu- facturing grade milk (average milkfat content of approximately 3.67 percent) to equal the support price announced by the Secretary of Agriculture at the beginning of the marketing year. To accomplish this objective, the CCC offers to buy carlots of butter (U.S. Grade A or higher), cheese (U.S. Grade A Cheddar and U.S. Extra Grade barrel cheese), and non-fat dry milk (U.S. Extra Grade) at prices calculated so as to enable processors to return the support price to producers of manufacturing grade milk. Thus, when necessary, the CCC removes milk from the market, in the form of these dairy products, at prices cor- responding to the support price for manufacturing milk. These support purchases and CCC acquisitions under other legislative authority and terms are used in various food distribution programs. Prices paid to farmers for manufacturing grade milk are deter- mined by market forces and are free to move above the support level if supply and demand conditions warrant. In most years, these prices do move above the support in the short supply season (late fall and winter) and, at times, even in the flush, or peak production, season (spring and early summer). Minnesota and Wisconsin produce about half of the manufacturing grade milk in the U.S. Several hundred dairy product plants compete actively for this milk and the price determined in this market reflects, in addition to the announced support price, the overall supply-demand situation for milk. For this reason, the Minnesota-Wisconsin (M-W) price is used by the Federal milk marketing orders as an important determinant of the minimum fluid grade prices. It's role in this regard will be discussed further below. 14 Table 2.1 indicates, for recent years, the support prices, the actual prices received by farmers for manufacturing grade milk, and year-end government stocks of dairy products, which reflects the quan- tity of CCC support purchases during the year. Milk Marketing Order Program. The Agricultural Marketing Agree- ment Act of 1937, as amended, provides the Secretary of Agriculture with the authority to issue, with producer approval, milk marketing orders which are designed to aid in stabilizing market conditions in the sale of milk by dairy farmers to handlers (milk dealers). within the designated marketing area of a given order, a Federal milk market administrator supervises the following activities;l 1. Establishing minimum prices to be paid grade A producers (usually through farmer cooperatives) according to the use made of the milk by handlers.2 2. Pooling of the proceeds of the sales, usually on a marketwide basis, so that grade A producers can be paid a uniform "blend" price-- a weighted average of the prices received for grade A milk used for different purposes. 3. Impartial auditing of handlers' records to verify the payments of required prices. 4. Verifying the accuracy of weights and butterfat content of milk sold by producers. 1“Marketing Agreements and Orders," Farm and Food Polic13-1977. p. 192. 2Over 80 percent of the U.S. milk supply is grade A. After bottling needs are met, the remaining fluid grade milk is used in manufacturing products. 15 5. Providing information on the handling of milk in the marketing area so that interested parties can evaluate the market situation. In most of the 47 Federal marketing orders, located as shown in Appendix B, the prices for milk used in manufactured products--desig- nated as Class II or Class III milk]--are at or near the M-W price. Demand for these products is national and transportation costs are relatively low. Minimum prices for milk for fluid use--C1ass I milk--are higher than the M-W price by fixed differentials Specified by each order. The Class I price within a given order is based on the distance of the order from the upper midwest, the area which has the largest production sur- plus with respect to fluid milk needs. As the distance increases, the Class I price rises, reflecting transportation costs and local supplies and demands. The price received by the farmer is the "blend price" reflecting the pr0portions of all milk used in the market in Class I and Class II. The blend price is influenced strongly by the amount of fluid grade milk in surplus of fluid use needs, i.e., a greater surplus would mean a lower blend price. 1Some orders have two classes of milk; most have three. Class I products generally include fresh whole milk, skim milk, milk drinks, buttermilk, etc. Class II products, often referred to as "soft" manu- facturing products, include sour cream, cottage cheese and similar products. Class III products, called "hard" manufactured products, include such items as hard cheeses, butter, evaporated or condensed milk and dry milk powder. Orders having only two classes of milk distinguish only between fluid (Class I) and manufacturing (Class II) uses. For simplicity, in further discussion of classified pricing in this thesis, this distinc- tion will be used. 16 Table 2.3 indicates how Class I minimums vary according to dis- tance from the uppernndwestand how the blend prices are sensitive to the amount of order milk used for Class I purposes. In 1956, the Federal Order system regulated over 50 percent of the nation's grade A milk and about 33 percent of all milk. Coverage has grown and in 1977 over 80 percent of U.S. grade A production and about 66 percent of total milk marketed was regulated by Federal milk orders. Milk is subject to extensive state regulation which in some cases overlaps with Federal regulation. In total, over 95 percent of grade A milk production is priced under either Federal or state orders:l Import Controls. With U.S. prices of dairy products supported at levels substantially higher than world prices, import controls are required if the domestic market is not to be flooded with foreign dairy products. Section 22 of the Agricultural Adjustment Act of 1933 provides the authority for the President, based on the advice of the Secretary of Agriculture and the findings of an International Trade Commission investigation, to impose fees or quotas on any article which is being imported under such conditions as to interfere with the price support program. Quantitative import controls on dairy products were first imposed in 1951 under emergency legislation and the first use of the authority provided by Section 22 was in 1953. All dairy imports are subject to quotas except certain higher priced cheeses, casein and lactose. The quotas on cheese have the greatest relevance for this study and these are described in detail in Chapter V. 1Shaw, Farm and Food Policy--l977, p. 255. 1‘7 Tabl! 2.3 Producer Milk Deliveries to Handlers Regulated Under Federal Orders, Deliveries Used in Class 1, Prices, 1976.77. Minimum Class I and Blend Producer Del i varies Producer Deliveries P. rcen E US Ed Min imum Blend Used in Class I in Class I Class I Priceb Priceb Marketing Area. 1977 1976 1977 1976 1977 1976 1977 1976 1977 1976 (million pounds) (million pounds) (DOrcent) (S/art.) (S/cwt.) New England 4,993.9 4,993.8 2,937.1 2,972.1 59 60 11.46 11.58 10.39 10.44 New York-New Jersey 9,628.9 9.484.2 4,544.0 4,668.4 47 49 11.12 11.24 9.85 9.91 Middle Atlantic 5.664.1 5,387.9 3,265.9 3,278.6 58 61 11.26 11.38 10.10 10.23 Tampa Bay 538.4 540.2 473.2 471.5 88 87 11.42 11.55 11.31 11.39 Southeastern Florida 762.8 775.2 693.5 689.5 91 89 , 11.63 11.75 11.59 11.63 Upper Florida 666.1 677.9 617.3 598.9 93 88 11.32 11.44 11.36 11.34 Georgia 1,528.0 1,502.5 1,188.5 1,180.8 78 78 10.78 10.90 10.31 10.43 Southern Michigan 4,179.1 4,028.6 2.251.7 2,327.4 S4 58 10.08 10.20 9.43 9.50 E. Ohio-u. Pennsylvania 3,493.1 3,488.6 2,098.6 2.133.3 60 61 10.33 11.45 9.59 9.65 Ohio Valley 3,155.9 3.011.6 1,942.4 1,893.6 62 63 10.19 10.30 9.60 9.65 Michigan U.P. 84.2 92.1 48.4 51.3 57 56 9.83 9.95 9.27 9.27 Chicago Regional 10,067 4 9,779.0 3,053.2 3.115.3 30 32 9.74 9.86 9.08 9.06 stille-Lxgton-Evnsville 1,197.2 1,207.5 741.7 752.8 62 62 10.18 10.12 9.58 9.52 Indiana 2,023.6 2,160.3 1,332.8 1,413.1 66 65 9.93 10.07 9.48 9.54 S. Illinois 1,095.4 1,126.0 583.4 613.3 53 54 10.01 10.13 9.49 9.55 Central Illinois 258.2 252.7 161.8 142.1 63 56 9.87 9.99 9.43 9.38 Upper Midwest 7.001.3 5,351.5 1,557.1 1,507.6 22 28 9.60 9.70 8.86 6.87 E. South Dakota 292.0 289.7 135.5 136.9 46 47 9.88 10.04 9.25 9.26 Black Hills 73.4 71.4 38.4 38.1 52 53 10.45 10.54 9.58 9.52 Iowa 1,687.9 1,403.0 750.0 719.4 44 51 9.87 .95 9.25 9.31 Nebraskaou. Iowa 1.091.9 l.l37.6 548.8 562.7 50 49 10.08 10.20 9.30 9.33 St. Lauis-Ozarks 1,804.8 1,698.8 1,212.2 1,151.1 56 58 10.08 10.20 9.53 9.58 Greater Kansas City 970.9 1,090.9 509.6 566.9 52 52 10.22 10.35 9.45 9.51 Neosh: Valley 6.8 7.0 6.2 5.2 91 89 10.15 10.26 9.98 10.05 wicnita 343.2 343.2 204.0 201.9 53 59 10.28 10.40 9.51 9.58 Paducah 120.9 130.4 94.4 103.1 78 79 10.17 10.30 9.86 10.00 Nashville 586.0 590.4 327.3 335.4 56 57 10.33 10.20 .3: 9.47 Helonis 308.4 303.9 259.5 262.6 84 86 10.41 10.55 10.11 10.24 Tennessee Valley 1,159.8 1,100.7 861.1 841.0 74 76 10.58 10.67 10.10 10.15 Cent. Arkansas-Fort Slflth 381.6 361.4 322.5 319.0 84 88 10.42 10.54 10.10 10.26 Oklahoma Metropolitan 833.6 809.6 549.2 514.2 66 64 10.46 10.58 9.83 9.83 Red River Valley 131.0 159.7 92.8 114.5 71 72 10.66 10.81 10.07 10.17 Texas Panhandle 103.6 88.8 76.2 73.3 74 82 10.73 10.85 10.12 10.39 Lubbock-Plainvien 75.5 77.9 65.1 66.2 96 95 10.90 11.0? 10.55 10.61 Greater Louisiana 626.3 528.9 526.9 440.2 34 33 10.94 11.01 10.57 13.57 New Orleans-Mississippi 1,100.0 959.7 789.0 671.3 72 70 11.32 11.40 10.62 10.59 Texas 3,457.3 3,442.8 2,598.7 2,543.3 75 74 10.80 10.92 10.23 10.27 Eastern Colorado 819.5 822.0 605.1 595.0 74 72 10.70 13.90 10.22 10.26 Great Basin 771.0 728.7 423.4 408.6 55 56 10.39 10.49 9.63 9.62 Hestern Colorado 72.6 58.3 54.5 42.2 75 72 10.48 10.60 10.04 10.03 Central Arizona 865.6 844.7 537.8 517.6 62 61 11.00 11.12 10.10 10.12 Rio Grande Valley 420.7 408.7 . 329.3 321.0 78 78 10.83 10.95 13.33 10.40 Lake Mead 135.8 131.5 92.4 84.3 68 64 10.08 10.20 9.70 9.71 Puget Sound 1,677.0 1.575.2 688.5 645.3 41 41 10.34 10.44 9.36 9.32 Inland Empire 288.0 253.2 142.6 139.4 50 55 10.44 10.55 9.52 9.59 Oregon-Hashington 1,407.3 1,308.1 793.6 753.5 56 58 10.44 10.55 9.66 9.67 411 Market Total 77.949.6 74,586.2 41.126.2 40.983.8 53 55 10.59 10.70 9.69 9.75 b Milk of 3.5 percent butterfat content. f.o.b. aerket. All averages are weighted. for 1977. Statistical Bulletin No. 611, July 1978, Source: USDA/MS, Fi?fll Milk Order mast SgtistigI Annual Sue-an pp. 2"25. - e ‘ Marketing Areas shown in Appendix 3. 18 Virtually all of the Section 22 dairy quotas are allocated by country of origin on the basis of the pattern of trade which existed during some representative base period. Import licenses designate country of origin but the USDA may transfer this country designation for the remainder of the quota year if it becomes apparent that the original exporting country is unable to supply its annual allocation. A second major import regulatory mechanism is the countervailing duty (CVD). Section 303 of the Tariff Act of 1930 directs the Secretary of the Treasury to impose CVDs on imports when it is determined that subsidies are being paid on the articles' production or export. The legislation does not require that any formal proof of injury to domestic industry be demonstrated prior to taking action. The Trade Act of 1974, however, authorized the Secretary to waive the imposition of CVDs if a) countries involved reduce substantially or eliminate the adverse effects of the subsidies, b) there are reasonable prospects that suc- cessful trade agreements will be negotiated to reduce or eliminate trade barriers and distortions, or c) imposition of CVDs would be likely to seriously jeopardize the satisfactory completion of negotiations aimed at reaching such agreements. Though it was determined in 1975 that European exporters were paying subsidies on cheese exports, the Secre- tary of the Treasury granted temporary CVO waivers in the interest of promoting the MTNs. The waiver agreement will be discussed in detail in Chapters V and VI with respect to specific cheese types relevant to this study but generally, on cheeses for which subsidies were not completely prohibited, it was agreed that there would be no significant reduction in prices of these cheeses to the U.S. relative to U.S. domestic January 5 peniits 11085 1 coopera functic sale of DTOCES‘ 19 domestic prices for cheese of similar type. The agreements expire January 4, 1979. Federal Cooperative Policy. The Capper-Volstead Act of 1922 permits farmers to act together in marketing their products and pro- vides limited antitrust immunity for such activities. Producer cooperatives formed under the authority of the Act perform a variety of functions, including provision of a guaranteed outlet for producer milk, sale of supplies and equipment, coordination of raw milk flows to processors, and manufacture of surplus milk into factory products. Summary This chapter has provided a brief description of the domestic dairy industry and related government programs, with somewhat greater emphasis on aspects which are relevant for the analysis of Chapter IV- VII. Chapter III describes the international agricultural trading situation and shows how the domestic dairy program constrains policy- markers' freedom to tailor foreign agricultural policy to satisfy other goals. CHAPTER III THE INTERNATIONAL CONTEXT A nation's international policies, in many cases, can be viewed as extensions of domestic policies and therefore, the objectives of the domestic agricultural policies, politically determined, often con- strain action in the international sphere. Further, the beneficial effects of trade may be unevenly divided among nations as well as among population segments within nations. Therefore, in spite of the well developed theory which demonstrates the advantages to global welfare of conducting trade based on the principle of comparative advantage, free trade ". . . remains at best a controversial blueprint of international organizations, and at worst the naive ideal of the theoreticians."1 The maze of trade restrictions surrounding virtually every country is the result of policy decisions which ". . . are mostly suboptimal for ."2 but the economist bent on maximization of economic variables. . which reflect the policymarkers' response to the interplay of economic and political forces bearing on their countries. The U.S. dairy policy described in Chapter II is the product of a decision process which has attempted to balance the interests of 1Klaus Friedrich, International Economics--Concepts and Issues, (New York: McGraw-Hill, 1971), p. 65. 2Theodor Heidhues, "Current Problems in North American-EurOpean Agricultural Trade," Lecture presented to the Global Issues Group, Michigan States University, October 14, 1976. 20 21 consumers, producers, public officials, cooperatives and other agents with an interest in the production and consumption of milk and dairy products. Efficiency has been sacrificedirisome areas in the interest of equity goals as the policymakers have sought to improve the "general welfare," as they perceive it. To understand the agricultural trade policy stances of the major participants in world dairy trade--positions whose incompatibility has\ led to the problem analyzed in this thesis--it is necessary to under- stand the underlying domestic policies. The next section of this chapter sketches these domestic policies particularly as they relate to the national dairy industries and to the formulation of agricultural trade policy. A general discussion of the nature of world trade in dairy products is followed by the concluding section in which the controversy surrounding U.S. dairy import policy is elaborated in the context of the Multilateral Trade Negotiations. National Dairy Policies European Communiry. Nearly 90 percent of European Community (EC) farm output, including milk production, is subject to a system of support and protection policies known as the Common Agricultural Policy (CAP). The objectives of the CAP are to increase farm productivity, stabilize markets, ensure a fair standard of living for the agricul- tural population and for consumers with regular and reasonably price 1 2 supplies of farm goods. Hudson describes the CAP in terms of three principles: 1Richard B. Schroeter and Omero Sabatini, "The EC's CAP: How It Work," Foreign Agriculture, USDA/FAS, January 9, 1978, pp. 2-5. 2John F. Hudson, The Common Agricultural Policy of the European Community, USDA/FAS, November, 1973, pp. 3-4. pri the in H0! C0 t. 22 1. Common pricing--Prices are regulated throughout the EC so as to promote and facilitate free trade among the nine member countries. Before 1969, when exchange rates among member countries were fixed, application of the CAP regulations resulted in the price of any farm product being the same throughout the EC. Since then, though support prices fixed by the EC Council of Ministers are applied to all coun- tries, the price of the same product can vary substantially from one 1 provides a good description of the com- country to another. Conable plex agrimonetary system currently used in the EC to relate mandated support prices to member countries' currencies and to provide an orderly basis for pricing commodities in intra-EC trade. 2. Community preferences--Through the use of minimum import prices, variable import levies and export subsidies, the CAP ensures that EC products will always be cheaper than imports and that their products, supported domestically at high prices, are competitive on world markets. 3. Comnon financing--All EC member countries agree to share the cost of agricultural support. The CAP cost EC taxpayers $8.6 billion in 1977; and 75% of the total EC budget went to the farming sector.2 The soaring costs and the unequal distribution of the benefits have made the CAP an issue of contention among the EC member countries. In dairy, as well as in other agricultural sectors, high guaran- teed prices have led to large production surpluses. At the end of 1Dan Conable, "Green Rates and MCA's: Workings of the EC Agrimo- netary System," Foreign Agriculture, USDA/FAS, September 11, 1978, pp. 8-10. 2 "The EEC's Farm Policy," The Economist, April 1. 1978. PP- 60. 63- net tiv for nor an: ari 1'85 6111 PM Die far the SET 23 1977, EC stocks of butter and NFDM, the two commodities purchased under the support program to ensure that the market price of milk approxi- ] were at 400 thousand and 1 million mates the announced target price, metric tons respectively. Though some tendency toward a more restric- tive price policy has been shown recently, the announced target price for the 1978-79 marketing year has still been set at about $12.00/cwt., more than 20 percent higher than the U.S. manufacturing milk support,2 and over 2 percent more than the 1977-78 EC target. The EC purchase prices for butter and NFDM for 1977-78 are $1.60 and $0.65 per pound respectively. (U.S. purchase prices announced October 1, 1978 are $1.135/pound for butter and $0.7375/pound for NFDM.)3 Other measures have been considered and tried in an attempt to deal with the surpluses and to stem the chronic overproduction in dairy. An EC Conmission recorrmendation to suSpend intervention pur- chases during some periods of the year was recently rejected by the Council. A "co-reSponsibility levy"--a marketing fee on milk production which was to be used to stimulate dairy product consumption and to subsidize exports--was instituted at 1.5 percent in September, 1977 but recently lowered to 0.5 percent. A premium system is in effect to encourage withholding of milk production and conversion to beef 1In Italy certain cheeses are also purchased under the support program. 2Except for the U.K., the EC does not have classified pricing plans and therefore the EC target price applies to both fluid and manu- facturing grade milk. The EC target price might better be compared with the 1978 expected U.S. average price received by farmers for all milk sent to plants of $10.50/cwt. (Table 2.1). to dollars is done 3Conversion from EC units of account (u.a ) = 50. using the early August, 1978 rate: 1 u.a. $1: pro: trac 24 production. Measures which have caused particular strain in U.S.—EC trading relations have been a now defunct program requiring the incor- poration of surplus NFDM into livestock feed, the continuing programs to subsidize NFDM use in hog and poultry rations and subsidization of the export of dairy products. The subsidies which the EC grants on cheese exports are particu- larly relevant to this study. Table 3.1 indicates, for selected cheese types, the subsidies which the EC has paid on exports to the U.S. since October 1, 1978. The part which these subsidies play in the contro- versy surrounding U.S. dairy import policy will be discussed further, later in this chapter. New Zealand. A recent study by Buxton and Frick] showed that because housing the supplementary feeding were unnecessary, the New Zealand dairy industry had the lowest milk production costs of any major dairy producer. About 90 percent of the milk production is used for manufactured products, a large portion of which are available for export. Farmers deliver their milk to dairy manufacturing companies, almost exclusively farmer c00peratives, and receive preliminary pay- ments authorized by the New Zealand Dairy Board. The Board, which has sole responsibility for acquiring and marketing dairy products for export, sets these payments based on expectations of export revenues for the various products and thus the farmers are paid according to the final use of their milk. The preliminary payments are supplemented when actual export returns are realized. There is no direct export subsidy 1Boyd M. Buxton and George E. Frick, "Can the United States Com- pete with Dair Exporting Nations?", Journal of Dairy Science, Vol. 59 (January, 1976 , pp. 1184-1192. 25 Table 3.1 Refunds Made By the European Community on Exports to the United States-- Selected Cheese Types. -Effective October 1, 1978- Cheese Refunda (illb.) Blue-veined 0.26 Cheddar, Colby, Montereyb O Edam, Gouda, Danbo, Fontal, Fontina, Fynbo, Havarti, Maribo, Samso, Tilsit 0.27 Provolone, Asiago, Caciocavallo, Pagusano 0.62 Parmigiano, Reggiano, Grana 0.59 Emmenthaler and Gruyereb O Cantal, Cheshire, Wensleydale, Lancashire, Double Gloucester 0.25 Processed Cheesec 0.13 - 0.33 Source: European Community, Official Journal of the European Community, Vol. 21, L.275, September 30, 1978, p. 30. a Conversion: 1 unit of account = $1.50 b The EC was required to eliminate refunds on these (and certain Other) cheeses under the terms of the 1975 countervailing duty waiver agree- ment. c Refund varies according to fat and dry matter content. 51 {/3 26 for dairy products but if the Dairy Board has to sell a product at a loss to meet world competition, the loss is made up from profits on other sales. Milk for fluid and related uses is supplied by designated pro- ducers at premium prices. Australia. The current dairy policy in Australia is to reduce dairy production to cover domestic needs while leaving enough margin for profitable exports. Though 2500 farmers per year have left dairying since 1970 in response to the imposition of quotas, levies and other production disincentives and output has been contracting for several years, the dairy industry remains one of the country's larger farm industries, providing about 8 percent of rural incomg.1 About one-fourth of the country's output is used for fluid con- sumption. Milk boards in each state determine the fluid milk prices and the amount of milk which any producer can sell for fluid use. The prices of butter, NFDM, cheese and casein are underwritten by the government at levels designed to allow manufacturing plants to pay a given price per pound of butterfat at the farm gate. In recent years, the government has tried to set these prices so as to keep the incomes of dairy producers stable as it discourages output. All exports of dairy products except evaporated and condensed milk are controlled by the Australian Dairy Produce Board. 1“Australia's Dairy Exports to Decline," Foreign Agriculture, USDA/FAS, February 27, 1978, p. 15. 27 gaaaga. The dual objectives of equitable producer returns and adequate supply to consumers are implemented in Canada through the dairy program's price supports, market quotas and trade policy. The Cana- dian Dairy Commission purchases NFDM and butter at announced support prices and administers a direct subsidy which producers of manufactur- ing milk receive for their milk. The marketing of manufacturing milk is regulated under the Comprehensive Milk Marketing Plan through market share quotas (MSQ). The M305 are administered by Provincial Government agencies or marketing boards on behalf of the Provincial Government. Levies are assessed on deliveries in excess of the quotas and are so high as to be completely confiscatory of the value of over-quota milk. Exports provide the main outlet for products purchased under the price support program. Subsidization of exports is financed by the levies. Quotas are also in effect on fluid milk. Other Countries. In addition to the aforementioned major dairy producers, there are several other countries exporting dairy products to the U.S. whose dairy policies have brought them into conflict with the U.S. Austria pays dairy farmers a guaranteed price and subsidizes exports with revenues coming largely from an assessment levied on milk deliveries. Switzerland, like Canada, establishes production quotas, paying a guaranteed price on deliveries within the quota and penalizing any amount over that level. Export subsidies are financed partially by a "check-off" made against milk producers. In Finland, VALIO, the National Dairy Cooperative, purchases surplus dairy products at prices fixed by the government and exports these products, subsidiz- ing to the extent necessary. Norway fixes minimum wholesale prices for 28 milk, dairy products and dairy product exports. Though government policy does not explicitly provide a subsidy to export sales, a domes- tic consumer subsidization scheme permits export sales at prices lower than would normally be possible. Sweden's dairy policy provides for a price range for dairy products, region-specific price supports to encourage production in higher cost producing areas, an equalization fund to stabilize prices and ensure that milk producers receive the same prices for their milk deliveries regardless of the milk's utiliza- tion, and export subsidies. The Nature of World Dairy Trade Although accounting for less than half the world's total milk output, the U.S., EC, New Zealand, Australia, and Canada produce most of the dairy products moving in world trade. Since less than five per- cent of world milk production is traded internationally, relatively small changes in the quantities entering the world market can have important impacts on world prices and historically these prices have been highly unstable. As is clear from the previous section, national dairy industries are subject to a variety of government controls designed to provide producers with acceptable incomes and consumers with an adequate supply of milk. While the dairy industries of New Zealand and Australia are highly export oriented, other nations enter the export market mainly in times of domestic over production, subsidizing as necessary to meet the world prices. This practice of treating the world market as a residual outlet for domestic output adds additional uncertainty to an already volatile market. 29 The world dairy situation changed from a state of surplus and low prices in the sixties to one of relative shortages and high prices in the early seventies and again back to a situation of overproduction beginning in 1976. National stocks of dairy products have grown and in addition to heavy export subsidization, governments have resorted to extra-market devices to induce domestic uses of dairy products that ordinarily would not be commercially feasible. In some cases, these actions have interfered with the trade of other agricultural commodi- ties.1 Though some countries have made changes in their domestic dairy programs, reducing the incentive to overproduce, the deep social commit- ment to dairy producers precludes much reduction of the structural over- capacity existing in most nations. A preferred course is for the dairy producing nations to expand the market for their milk, domesti- cally or internationally, but in addition to a general decline in the demand for dairy products worldwide, import controls inhibit the expansion of export markets. Buxton and Frick2 analyzed the competitive position of the important dairy traders in the world market and found that though yields per cow are considerably lower in New Zealand and Australia than those in the U.S., EC or Canada, the low cost, pasture-based dairy industries of those countries are the most efficient in the world. The general conclusion of their study is that New Zealand and Australia can, 1An example of this is the mixing regulation instituted by the EC requiring the use of NFDM in animal feed, displacing the U.S. supplied soybeans. 2 1190. Buxton and Frick, "Can the United States Compete?", pp. 1187, some 6- \ '1' 30 without export subsidization, supply butter, NFDM and Cheddar cheese to the U.S. east cost at prices below U.S. production costs, but because potential supply from these countries is small relative to world pro- duction, this could not drive world prices to the level of their low production costs, even if world trade were conducted without distortion. Buxton and Frick determined that, for the above products, the EC and other exporters were not competitive, price-wise, with the U.S. dairy industry. Unfortunately, no studies exist which estimate production costs for the large variety of cheeses other than Cheddar which the EC and others produce and would like to ship to the U.S. in greater quantities. For many of the specialized table cheeses, the EC may have a production advantage over the U.S., though as Table 3.1 indicates, subsidization is required on many of their cheese exports to permit entry into the U.S.1 The specialty cheeses are higher cost and, in many cases, are not sub- ject to import restrictions. Multilateral Trade Negotiations From 1973 until the present, delegates from nearly a hundred countries have been meeting in Geneva, Switzerland to discuss the world trading situation and to try to resolve some of the intractable problems in international trading relations. Since World War II, seven such MTNs have been held under the auspices of the General Agreement on Tariffs and Trade (GATT), an international agreement in force since 1948 which sets out agreed rules and principles for governing trade 1As shown in Chapters V and VI, the cheeses in Table 3.1 are of the most relevance to the confrontation over U.S. import policy. among the < Rounc owing their In ea large serio Agric found U.s, , sever; leasor 31 among the contracting parties, and provides an international forum for the discussion and settlement of mutual trading problems. The need for the current round of talks was first noted in the Smithsonian Agreement on exchange rates in 1971 as the United States, the EC and Japan concluded that the determination of world trade was threatened by mounting protectionist pressures. At a ministerial meet- ing in Tokyo in 1973, formal approval was given to the new trade talks and the "Tokyo Declaration" declared the negotiations officially open. As in previous MTNs, agricultural negotiations in the Tokyo Round, carried in Group Agriculture (Appendix C), have proven difficult owing to the unwillingness of the participating nations to compromise their domestic agricultural support policies. Progress has been made in earlier MTNs in reducing tariffs but non-tariff barriers remain largely in place and constitute an important distortion to trade and a serious stumbling block in the negotiations. The negotiations on dairy trade in the Dairy Subgroup of Group Agriculture have been particularly difficult and the United States has found itself on the defensive from the start. Increased access to the U.S. market for dairy products has been an important goal of the EC, several other western European countries and New Zealand and for this reason the Section 22 quotas have been an important topic of discussion. In 1955, the contracting parties of the GATT agreed to grant the U.S. a waiver of its obligations under the GATT insofar as those obli- gations were inconsistent with action required to be taken by the U.S. 32 1 The waiver provides that the U.S. shall consult with under Section 22. and give due consideration to the views of the contracting parties affected by the Section 22 actions; that parties adversely affected by action taken shall have recourse to certain compensatory procedures under the GATT;2 that the U.S. shall remove or relax restrictions imposed under the waiver as soon as possible; and that U.S. action under the waiver shall be reviewed annually by the contracting parties. The U.S. has not removed the quotas and has brought more dairy products under quota since the restrictions were first imposed, and dairy expor- ters have argued that the time has come for the quotas to be removed or expanded. A second main issue in the dairy negotiations is the subsidy- countervailing duty question. As noted in an earlier section of this chapter, the policies of most world dairy traders provide for subsidiz- ing exports of dairy products and the practice is widespread. To pre- vent possible harmful impacts which subsidized impacts might have on the domestic market, the U.S. Trade Act of 1930, as amended by the Trade Act of 1974, provides for the imposition of CVDs on subsidized imports equal to the net amount of the subsidies. The issue here is that GATT Article VI, while permitting importing countries to impose 1The waiver refers to obligations under Article XI, which gener- ally prohibits the use of quantitative trade restrictions. The waiver was granted because of a clause in Article II permitting nations to impose duties or charges in excess of those agreed to on the effective date of the GATT (1948), if such duties or charges are mandated by previously existing legislation. Section 22 was added to the Agricul- tural Adjustment Act of 1933 by the Act of 1935. 2Article XXIII prescribes procedures to be followed in the event that the benefits due to one contracting party under the GATT are impaired by the actions of another contracting party. 33 CVDs to offset subsidies on production or export, requires the importer to first show that the subsidization is causing or threatening injury to a domestic industry. The 1974 Trade Act does not require that injury be proven by the U.S. prior to levying a CVD. However, the U.S. has never imposed CVDs on imported dairy products though a 1975 investiga- tion by the Department of the Treasury conducted under the authority of the 1930 Act showed that subsidized cheese was entering from the EC, Austria, Finland, Sweden, Norway and Switzerland. Instead, using powers given him by the 1974 Trade Act, the Secretary of the Treasury granted temporary CVD waivers which expire January 4, 1979, on imported cheese from these countries. These waivers will be discussed in more detail with reference to particular cheese types in Chapter V and VI. Though GATT Article XVI recognizes the harm that subsidies can cause to domestic industries and export markets of third countries, and seeks to limit their use, the Article has not proven to be a very good guide to the use of subsidies in international trade. Consequently, discussions in the Subsidies Subgroup are directed toward tightening GATT language in this area and devising a code on subsidies which would clearly define subsidization practices, specify permissible conduct, and designate procedures to handle code violations. In the Dairy Subgroup, various proposals have been forwarded which not only suggest method of dealing with the subsidy-countervailing question, but also attempt to resolve the marekt access issue. New Zealand, highly dependent on the export of dairy and other agricultural products for foreign exchange, and confident in its ability to prOvide low cost dairy products to the world, proposed a new international dairy agreement with provisions for minimum product prices and consultations C0un1 inprc injur to 0 state their 34 among dairy traders with a view toward expanding access to markets to the extent possible under existing national dairy policies. The EC, anxious to expand dairy exports, retain maximum latitude to subsidize these exports, and offset some of its chronic agricultural trade defi- cit with the U.S., also proposed a dairy agreement having consultation and minimum price provisions, in addition to a series of “concerted disciplines" for cheese. The "concerted disciplines," as envisioned by the EC, are agreements negotiated between two or among several countries which provide for minimum prices as a discipline on subsidies, improved market access, and in the case of the U.S., institution of an injury test as a condition of levying CVDs. The aspect of these negotiations which is of particular concern to the U.S. is that the dairy exporters, particularly the EC, have stated that U.S. action on market access in dairy is a sine qua non to their concessions on agricultural items of interest to the U.S. The U.S. is especially anxious to gain EC concessions on beef, tobacco, nuts, rice, canned fruits and juices, citrus and grapes, raisins and prunes, and liberalization of U.S. dairy import policy is a quid pro quo often demanded by the EC. Since the negotiations are being held in a time of growing overall U.S. trade deficit and falling dollar, the U.S. negotiations would surely like to find ways to expand exports. Summary This chapter has highlighted some of the important characteristics of the world dairy industry, complementing the discussion of the domes- tic industry in Chapter II. Against this backdrop, the complex set of issues faced by the U.S. negotiators in the Dairy Subgroup of the 35 MTNs can be better understood. It is clear that the U.S. is under pressure to provide greater access to its market for foreign dairy products. To respond to the pressure, U.S. policymakers require infor- mation on the extent to which the domestic dairy industry would likely be affected if it was agreed to open U.S. markets to larger quantities of imports in exchange for certain concessions by dairy exporters. Agreeing to participate in the "concerted disciplines" of the EC pro- posed dairy agreement would almost certainly result in greater quanti- ties of foreign-made cheese entering the U.S. The remainder of this thesis is devoted to estimating the impacts on the U.S. dairy industry which might be expected under various scenarios of expanded cheese imports. CHAPTER IV THE MODEL Before a decision can be reached on whether or not to change dairy import policy, decisionmakers must have an understanding of the likely costs and benefits of such a move. This chapter develops metho- dology to be used to estimate how cheese manufacturers, milk producers and the government dairy support program would be influenced by import expansion. The analysis uses a comparative static model and the esti- mates derived must be interpreted as short-run impacts, though infer- ences will be made as to long-run effects outside the model. In the first section of this chapter, previous studies in this area are reviewed and the distinctive features of this study are indi- cated. Then the theory underlying the methodology used here is described first diagrammatically, then mathematically. Finally, assumptions and limitations of the model are discussed. Chapter V develops the necessary information base to be used in the estimation procedure and in the interpretation of the results. Past Research From the time of the Tokyo Declaration, it was known that the U.S. dairy import policy would be a contentious issue in the MTNs. As a result, several studies have been undertaken in the seventies to estimate the impacts of expanded dairy quotas. 36 37 1 the first such study, suggested The so-called "Flanigan Report," that United States feed grain and soybean exports could be expanded substantially if the U.S. agreed to import more dairy products. The study concluded that even if the U.S. imported as much as 10 percent of 2 considerably more than the 1.6 percent its milk consumption needs, allowed under the current quotas, the adjustments required in the domes- tic dairy industry would be small. Research done by the Atlantic Council3 reported similar conclusions. Buxton and Fallert4 developed a static partial equilibrium model to evaluate the short run impact of increased dairy product imports and concluded that additional imports of 500 million pounds of milk equiva- lent would reduce U.S. milk prices, on the farm about 8¢ per cwt., or nearly one percent. A u s D A study5 mandated by the Agriculture and Consumer Protec- tion Act of 1973 analyzed three trade alternatives and traced their 1Council on International Economic Policy, Agricultural Trade and the Proposed Round of Multilateral Trade Negotiations, Report Prepared at the Request of Peter Flanigan, Assistant to the President for International Economic Affairs, (Washington, D.C., April, 1973). 2In milk equivalent terms. This amounts to 25 percent of U.S. manufactured milk product consumption. 30. Gale Johnson and John A. Schnittker, eds., "Changing U.S. Agricultural Policies: The Relationship to Trade Negotiations," U.S. Agriculture in a World Context: Policies and Approaches for the Next Decade, Atlantic CounCTT of the UnitedEStates, (New York: Praeger Press, 1974). 4Boyd M. Buxton and Richard Fallert, Impact of Dairy Product Imports on U.S. Milk Price, Staff Paper P74I2l, Department ongFTcul- tural Economics, University of Minnesota, October, 1974. 5U.S. Department of Agriculture, The Impact of Dairy Imports on _§he U.S. Dairy Industry, ERS Agriculturfil Economics Report No. 278, January,T1975. 38 impacts over the 1975 to 1980 period--a continuation of current policy; free trade with complete elimination of all barriers to dairy product trade and all domestic dairy price support programs in all countries; and an open U.S. market with removal of the import quotas and price support program with dairy policies in the rest of the world remaining intact. The conclusions of this research contrasted sharply with those of the Flanigan and Atlantic Council studies. USDA predicted severe damage to the domestic industry, particularly for the open market policy alternative under which farm milk prices dropped 22 percent immediately, with subsequent adjustment resulting in significant 1 criticized the USDA declines in farm and plant numbers. A GAO report study for analyzing unrealistic trade alternatives and suggested that research should be directed at examining the likely impacts of more viable and incremental modifications to import policy. Novakovic and Thompson2 developed an econometric model of the U.S. dairy industry which disaggregated manufactured dairy products into six groupings and traced the adjustment path of relevant variables for ten years following an import policy change in 1974. Policies allowing "twice normal" and the high 1973-74 import levels were con- trasted with the current policy and it was concluded that ". . . large changes in import levels are required to bring about substantial 1U.S. General Accounting Office, U.S. Import Restrictions: Alternatives to Present Dairy Programs, Report to the Congress by the Comptroller General of the United States, Washington, D.C., December 8, 1976. 2Andrew M. Novakovic and Robert L. Thompson, "The Impact of Imports of Manufactured Milk Products on the U.S. Dairy Industry," American Journal of Agricultural Economics, Vol. 59 (August, 1977), pp.*507;519. 39 impacts on the dairy industry."1 Doubling imports changed most varia- bles studied by less than 1 percent, even in the short run. Hypothesizing that Wisconsin would be particularly adversely affected by dairy import increases, Salathe, et al.2 used a simulation model to study the impact on Wisconsin farm milk price and other varia- bles between 1976 and 1980 of various policy changes involving dairy imports of from 1.7 billion pounds (the normal level) to as high as 13.4 billion pounds of milk equivalent. They concluded that imports of twice the currently permitted level would necessitate only moderate adjustments in the Wisconsin and U.S. dairy industries. It was esti- mated that imports of 12 billion pounds of milk equivalent would depress Wisconsin farm prices 18 percent initially, and though prices would recover in three years, this recovery would occur only after 13 percent of Wisconsin's milk producers had left dairying. The present study extends previous work in that the import alternatives analyzed are based on requests for import policy change actually received by the U.S. in the MTNs. U.S. policymakers are being forced to reconsider the Section 22 cheese quotas and the policies pertaining to the handling of subsidized cheese imports. Consequently, the previous studies which have dealt with alternative levels of imports defined in milk equivalent terms or in highly aggregated pro- duct categories are oflimited use to policymakers who must decide whether or not to take action affecting the importation of a particular 11bid., p. 518. 2Larry Salathe, William D. Dobson, and Gustof A. Peterson, "Ana- lysis of the Impact of Alternative U.S. Dairy Import Policies," Ameri- gcdan Journal of Agricultural Economics, Vol. 59 (August, 1977), pp. 496- 6. cnees categ estir prodi ndnui leve' nirki incri side 40 cheese type. This study disaggregates cheese imports according to quota category, formulates import options for each based on MTN requests, and estimates price and production impacts on the particular domestic producers likely to be affected. This study estimates effects of an import increase on cheese manufacturers as well as on milk producers, and recognizes that farm level impacts would be determined by the adjustments in the cheese market. The domestic supply curves of the particular cheese types are incremented here, and this procedure allows for effects on the demand side of the cheese market to be considered in arriving at estimates of farm milk price changes. The methodology to be used in the analysis is developed in the next two sections. Methodology--Diagrammatical Development Opening U.S. markets to increased cheese imports would have impacts on domestic dairy farmers, as well as on the cheese industry itself. The types of effects will differ, depending on whether or not milk and product prices are at the support level. The analysis des- cribed below will estimates short run impact on both segments of the dairy industry under each set of price conditions. As it is a static analysis, all the usual assumptions required to make the relationships exact apply. greate when p donest amount expans curve denanc seen i nenufe fluid lnc1u< cheese iactur Curve Droduc IHIErs above 41 Prices Above Support. Figure 4.1 shows the situation where greater quantities of a particular cheese type are imported at a time when prices are above support. In part B, the supply curve of the domestic cheese manufacturing industry, S, is incremented by the normal arnount of imports, BD=AC, to give the total supply curve before quota expansion, 5 + I. This total supply curve intersects with the demand curve for this cheese, 0, to determine domestic industry output, 08, dernand, OD, and wholesale cheese price, OP. The corresponding situation in the milk production sector can be seen in part 0. SS is the supply curve for domestic milk available for ma nufacturing, i.e., total milk supply net of milk used to satisfy f1 uid demand. 00 is the derived demand curve for this milk. It ‘5 reel udes not only demand for domestic milk used by the particular cheese industry shown in part B, but milk needed for the domestic manu- facture of a1_1_ manufactured dairy products. It is the domestic demand Curve for U.S. milk needed by domestic dairy product manufacturers to produce goods demanded domestically. Before additional imports are allowed to enter, the DD-SS 1. "tersection establishes a price for manufacturing milk of OPP, well above support, and a quantity supplied and demanded of 08’. The left side of Figure 4.1 shows the cost curves of three Si Zes of firms in the cheese (part A) and milk production (part C) ind ustries. In both industries positive profits are being made and b0 th industries can be expected to attract resources and grow. In the Cheese industry, firm 1, the smallest, is producing 0V, as determined by the intersection of its marginal cost curve, MC], and the wholesale price, P. Firm 1 is covering its average variable costs, AVC], and is 42 Figure 4.1 Short-run Effects of Increasing Cheese Imports --Prices Above Support—- __ —— (D) A‘R B’ l . \ ' 9 fi' G.‘I &\ 0) Ala m \4—1 I'2 M O M U IO. U L D. 3 u 3 Q U m > UIMJLIJWLIJ * CCC purchase price for American cheese. (C) 43 just meeting its average total costs. ~Firms 2 and 3 are making profits at output levels OW and OX respectively. In the milk industry, milk producer a is the marginal producer, analogous to cheese firm 1, and milk producers b and c are making profits. Now cheese imports increase from AC to AE in part B. The total supply curve shifts to S+I’ and a new equilibrium wholesale cheese price of OP’ is established. More cheese is demanded at the lower price, OE, but domestic output of that cheese drops to 0A. As cheese manufacture drops by amount AB the demand for domestic milk available for manufac- ture drops a corresponding amount, A’B’, and the demand curve shifts from 00 to D’D’. The manufacturing milk price drops to 0P7P7, still above support, and domestic production drops to OR. Cheese firm 1 and milk producer a suspend production and the other firms in both indus- tries cut back. In the short run, cheese firm 2 and milk producer b will continue production since they are covering average variable costs but if they could not cover average total costs in the long run, they would cease to produce. Prices At Support. Figure 4.2 describes the situation in which greater quantities of American-type cheese are imported at a time when prices in the industry are at the support level.1 Prices in the Ameri- can cheese manufacturing industry are the CCC purchase level, DP, and the price of milk used for manufacturing is at support OPPI Before import expansion, 0A cheese is demanded and 0C is supplied domestically, 1Since American cheese is one of the commodities purchased by the CCC to maintain the dairy support price, the effects on the industry of increasing American cheese imports would be different from those expected if imports of other cheese varieties were expanded in this situation. Hence, the two cases are dealt with separately. 44 Figure 4.2 ports on io.o --Prices At Support-- Short-run Effects of Increasino American Cheese Im >th2oz~ Awwquamv an a o>< Ehscee N O. u>< 8v ue< a u>< ue< a8: 8: 2: ue< F8, Pue< N u: Pu: zmau Aucoaazmv an Ammmcugaav a Zr—ch 45 of which 08 is domestic cheese and BC is the imported foreign produc- tion. The excess supply, AC, is purchased by the CCC to maintain the support price. The CCC purchases domestically produced commodities only. Hence, the quantity, AC, of American cheese purchased would be domestic cheese though part B suggests that some of the purchases would be foreign cheese. OR domestically produced milk is available for manufacture and the excess supply, D’R, which is removed by the CCC, includes the milk equivalent of the American cheese purchased, AC, plus that of the butter and NFDM purchased as well. The cost curves on the left indicate that some firms in each industry are making profits and some are just meeting average total costs. When American cheese imports are increased from BC to BD, CCC purchases of American cheese rise by the amount of the imports, from AC to AD. Domestic cheese production, demand and price are unchanged, though the quantity of domestic cheese going to meet actual commercial 1 Therefore, the needs declines by the amount of the import increase. demand for domestic milk to produce manufactured products for actual consumption requirements drops by C’D’, the milk equivalent of the American-type cheese import increase, CD, and the CCC now must buy C’R milk to maintain the support price. Since there is no impact on prices, the firms shown in parts A and C are unaffected. Figure 4.3 describes the situation where imports of other, non- American type, cheeses are expanded when prices are at support. As shown in part 8 before the import increase, BD=AC is imported, OB is produced domestically, 00 is demanded and the wholesale price is OP. 1This additional quantity of domestically produced American cheese goes to the CCC. 46 Figure 4.3 Short-run Effects of Increasing Imports of Non-American-type Cheese--Prices At Support-- >- E U) :1 8 z a "'7 v ‘ 1:0 ‘ < I i \ O o D. D. * Q. A Q1 11'“ m L 1'0 O U U CL > S- 3 < 3 (I) l o. v .D U > < a—e LL A A < U V V D. \ &A U D. D.“ L O D. D. 3 m UILIJLLIWLU V z—ch * CCC purchase price for American cheese. 47 The price of milk available for manufacturing is at support, OPP, as OR is produced and the excess supply, B’R, is purchased by the CCC in the form of butter, cheese and/or NFDM. When imports of this cheese increase from AC to AE, because there is no floor price as was the case in the American cheese example, prices drop to OP’, domestic production falls to 0A and consumption rises to OE. The impacts on the firms shown in part A are similar to those described in connection with Figure 3.1. Since domestic production of this cheese falls, the manufacturers need less milk and 00 drops to D’D’. Though the quantity of milk needed to produce dairy products actually demanded of domestic manufacturers falls, there will be no decline in the price of milk used for manufac- turing. The milk directed from the production of this particular cheese will be purchased in some form by the CCC to maintain the support price. Therefore, CCC purchases will increase by A’B’, the milk equi- valent of the milk diverted from the cheese manufacturers in part 8. Since there is no price impact, milk producers in part C are not affected and milk production does not change. The procedures by which the magnitude of the shifts shown in Figures 4.1 through 4.3 are estimated as described next. Methodology:Mathematical Development The Cheese Industry. The cheese industry of Figures 4.1 through 4.3 can be described by a demand equation, a supply equation and an equilibrium equation as follows: (1) Pc = a + b0D (2) Pc (3) 00 = 05 i QI c + dQS + e0I 48 where: Pc = Wholesale cheese price QD = Quantity of cheese demanded QS = Quantity of cheese supplied (domestic output plus normal imports) QI = Quantity of "new” cheese imports (import increase following quota expansion)1 These three equations can be solved simultaneously and the rela- tionship between a change in imports and a change in the wholesale cheese price can be expressed in terms of supply and demand elasticities and initial prices and quantities as follows: 3PC 3 _1 30 I s P_(€c + Incl) c where: Cc = Elasticity of supply for cheese “c = Price elasticity of demand for cheese The details of the computation are given in Appendix 0. There are numerous reports in the literature of attempts made to 2 estimate the price elasticity of demand for cheese. Brandow reported -o.7 for the 1955-57 period, Rojko3 found -.75 to -.9 between 1947 and 1QI = o initially. 2G. E. Brandow, Interrelations Among Demands for Farm Products and Implications for Control of Market Supply, Bulletin 680, Pennsyl- vania State University, August, 1961, p. 17. 3Anthony S. Rojko, The Demand and Price Structure for Dairy Pro- ducts, Technical Bulletin 1168, USDA, May, 1957, p. 105. 49 1954, and Burk1 estimated -.1 for the 1947-1967 period. More recently, 2 found an own price elasticity for cheese of -0.46. In George and King a study by Boehm and Babb3 the following short run retail price response estimates were reported: Process Cheese -1.81 Process Cheese Food4 -1.17 Process Cheese Spread4 - .49 American Natural Cheese -2.17 Total Natural Cheese - .85 Since there are no estimates of demand elasticities for each cheese type dealt with in this study, these previous, more aggregative estimates must be used. It will be shown later that a large part of the U.S. production of American and Swiss cheeses--types accounting for about 65 percent of domestic cheese output--is used for processing, though some is consumed as natural, table cheese. Italian and Edam and Gouda cheeses are mostly consumed in their natural form with blue cheese being used for processing as well as table consumption. This study uses two alternative price elasticities of demand based on Boehm and Babb's 1Marguerite C. Burk, Consumption of Dairy Products, An Analysis of Trends, Variability and Prospects, UniverSTty of Minnesota, Technical Bulletin 268, 1969. pp. 11-12. 2P. S. George and G. A. King, Consumer Demandrfior Food Commodi- ties in the United States with Projections to 1980, Giannini FEUndation Mbnograph No. 26, March, 1971, p. 47. 3William T. Boehm and Emerson M. Babb, Household Consumption of Storable Manufactured Dairerroducts, Purdue University, Station Bulle- tin No. 85, June, 1975, p. 4. 4Process cheese food is similar to process cheese, but with higher moisture and lower fat and protein contents. Process cheese spread has still higher moisture and still lower fat and protein contents and further ingredients may be added. 50 findings. For American and Swiss, -0.9 is considered most appropriate, while -0.5 is thought to be more descriptive of the likely résponse to price changes of the other cheese types. However, results based on both elasticity assumptions will be presented for each cheese type. Since the Boehm and Babb estimates relate to retail price, their figures for process cheese and total natural cheese are converted to a wholesale price basis using the following relationship : nw = nR(;§9 1 Where n is the price elasticity of demand and the subscripts w and R refer to wholesale and retail, respectively. The assumption of a con- stant marketing margin between the wholesale and retail demand curves should not detract from the level of accuracy required in this study. On the supply side, no work on price response in the cheese industry has been reported in the literature. However, it is assumed in this study that the industry price response is inelastic for several reasons. First, over the short time horizon of this study, it is unlikely that plants would make major changes in their production given their high investment in capital stock. Second, the price impacts of import quota increase will be downward, tending to make output response even more inelastic. Third, even if there were some tendency toward dismantling capital stock in the short run with a price decline, expectations of demand growth in the cheese market would work to offset this tendency. For these reasons, this analysis is carried out under 1William G. Tomek and Kenneth L. Robinson, Agricultural Product Prices (Ithaca, N.Y.: Cornell University Press, 1972), p. 45. 1‘9 th at BB CO be Dr 1110 P0 99 ml ”5 a i 1 ll 51 two alternative assumptions of inelastic cheese industry supply response: 0.3 and 0.7. The Milk Production Industry. Estimation of the effects of import increases on milk producers is somewhat more complicated than the procedure used for the cheese industry. The method used here is an adaptation of that used by Buxton and Fallert1 in a study reviewed earlier. As explained in Chapter II, grade A milk is produced under conditions making it apprOpriate for fluid use while grade 8 milk is to be used for manufacturing purposes only. The grade A milk going to satisfy fluid demand is called Class I and receives a higher price than that designated Class II--i.e., the grade 8 milk and the excess grade A milk not needed for fluid purposes which is used for manufacturing. Milk market orders establish minimum fluid, or Class I, prices by adding fixed differentials to the national manufacturing, or Class 11, price. Farmers receive a "blend," or "all-wholesale" price which is a weighted price reflecting the preportion of all milk used for fluid and manufacturing purposes. Thus, both the fluid and the all-wholesale price depend primarily on the manufacturing price and can be approxi- mated by adding a constant differential to the manufacturing price. In Figure 4.4, 00 is the demand for milk for manufacturing pur- poses at various manufacturing milk prices, Pm, and is the same 00 appearing in Figures 4.1 through 4.3. DF is the demand curve for fluid milk at alternative fluid prices, PF’ S is the aggregate supply of milk at various all-wholesale prices, Pw--the prices to which farmers respond. Assuming that the fluid and all-wholesale prices can be 1Buxton and Fallert, Impact of Dairy Product Imports. 52 Figure 4.4 Short-run Effects on Farm Milk Price of Increasing Cheese Imports --Prices Above Support*-- D D Q < D O \ D \ D LL 0. Q . ' / ’l/____. u. u. ‘2; o _—— —. mu- ' a E G. I L4. CL * Adapted from Buxton and Fallert, Impact of Dairy Product Imports. 53 approximated by adding constant differentials to the manufacturing price, DF and S are standardized to the manufacturing by price by . . S s shifting DF down to DF’ amount P - Pm, and S down to S , amount Pw-Pm. F SS, the supply of milk available for manufacturing purposes at various manufacturing milk prices is the $5 of Figures 4.1 through 4.3 and is determined by subtracting D; from $5. The intersection of SS and 00 determines the manufacturing price of milk and, by the above reasoning, the all wholesale and fluid prices as well. When greater quantities of cheese are imported, as for example in Figure 4.1, 00 shifts down as domestic manufacturers demand less milk to make the products needed to satisfy domestic consumption. This shift is shown in Figure 4.4 as ADD and the intersection of 0’0’ and SS now determines the new manufacturing milk price (down by APm) and equilibrium quantity (down by 00m). The change in Pw and PF can be found by adding the constant differentials. The milk industry as shown in Figure 4.4 can be described by the following four equations: (1) 0m = a + me + cC (2) OF = d + er (3) QS = f + ng (4) 0,, = 05 - 4,. where Qm = quantity of manufacturing milk demanded by domestic manufac- turers to meet demand for manufactured dairy products Pm a Price of manufacturing milk C = Domestic production of the relevant cheese QF = Quantity of fluid milk demanded 54 OS = Aggregate milk supplied Solving the four equations simultaneously yields a relationship between a change in the quantity of manufacturing milk demanded, as a result of an increase in cheese imports, and a change in the manufac- turing milk price which can be expressed in terms of supply and demand elasticities and initial prices and quantities as follows: BPm 1 an = . QS . QF . 0m 55 ‘p—m'+ '9}?! pg" lnml “F"; where: elasticity of the standardized aggregate domestic supply Eis curve “F elasticity of the standardized demand curve for fluid milk n elasticity of demand for manufacturing milk m The details of this computation are given in Appendix E. As in the case of the cheese industry analysis, two alternatives to each elasticity are used in the calculations leading to the results presented in the next chapter. Buxton and Fallert considered supply elasticity estimatesut could be influenced by certain changes in subsidization practices c3fiSUPP1iersiwhich might be permitted if alternative import policies vvere pursued. Mozzarella accounts for over one-half of the production <3f cheeses included in Table 5.6 and imports of this cheese could be eaffected by changes in the U.S. position on subsidies. Substantial ‘increases in these imports could have important impacts on the industry éand import alternatives affecting Mozzarella imports are analyzed later. SSince this is the only cheese with which the analysis deals, the l978 aand l979 projections of price and production are made for Mozzarella (anly. Production and price are assumed to rise eight percent and five {aercent per year respectively. Wisconsin, California and New York are 'the largest producers of Mozzarella. iImported Cheese In this section, the TSUS cheese import categories that cover c:heese types comparable to the six groupings of domestic cheese are (described and the projections of imports to l979 shown in Tables 5.1- 55.6 are explained. As in the previous section, much of the descriptive cjetail presented in the tables is not discussed in the text. Neverthe- 1 ess, this detail is necessary for understanding of the foreign supply 53 ituation and the requests for concessions being made of the U.S. in the f—‘lTNs, described in the next chapter. In most cases, the Presidential Proclamations establishing the Section 22 quotas specified shares to be filled by particular countries. \ 1The degree to which foreign cheeses under each quota category Compete with domestic types is discussed in the next section. _ 70 However, the regulations governing the import licensing program provide for adjustment of quota shares within the course of a year if it is determined that the originally designated country will be unable to fill its share for that year. Therefore, for each year shown in Tables 5.7-5.l7, some countries may have allocations which allow them to supply more than their Presidential Proclamation share while others have smaller allocations. The initially specified quota shares are used as a base to which each country's yearly supplies are compared. In cases where no country quota shares were established by Proclamation, the allocations for the first year in the table are used as a reference. Blue-Mold Cheese (Table 5.7). Denmark supplies the most of the cheese under this quota. USDA estimates that these imports are gener- ally of higher quality than domestic Blue-Mold cheese, with 80 percent going for table use and 20 percent for processing--the reverse propor- tions from those applying to use of domestic cheese. The imports may not, therefore, displace domestic Blue-Mold cheese on a pound for pound basis. Imports were down in l977 because of the year-end dock strike, and are projected in Table 5.l to return to more normal levels. American Cheese (Tables 5.8-5.l0). Imports in quota categories 950.08A, 950.088 and 950.100 are comparable to domestic American-type 1 cheese. Miller estimated in l97l that 80 percent of the imported Cheddar, quota 950.08A, and "practically all" of the imported Colby, the principle import under quota 950.088, is processed in direct com- petition with these domestically produced varieties. In addition, ‘ 1Miller, "Cheese Industry," p. 19. 71 Table 5.7 Imports of Blue-Mold Cheese, l970-l977 (Quota 950.07) 1970 Quota Use RateC Countrya A11ocationb 1970 1971 1972 1973d 1974 1975 1976 1977 (percent) Denmark 4,694,434 96 91 91 83 100 89 90 72 Italy 221,022 44 36 53 38 50 50 42 30 France 10,305 76 57 75 77 51 99 97 116 Norway 78,430 83 65 73 28 35 26 19 13 Sweden 9,430 100 97 96 97 97 99 41 98 Argentina 3,300 0 0 0 0 0 100 0 0 TOTAL 5,016,999 93 88 89 80 96 86 87 69 Sources: USDA, NEWS, Various issues, l970-l977. USDA/FAS/DLP,"Import Controls Under Section 22 of the Agricul- tural Adjustment Act, As Amended", l978. USDA/FAS/DLP, "Summary of the Proposal of the European Communities on EC Cheese Exports to the United States", l978. Specified by the Presidential Proclamation establishing the quota. The establishing Presidential Proclamation did not specify quota shares. For Blue-Mold imports, these shares have been derived from import records on the basis of importations of eligible importers during the representative period l948-50. To illustrate how the abilities of eligible countries to supply blue-mold cheese has changed over the eight year period the l970 set of allocations is used as a base. Imports as a percentage of the I970 quota allocations. The quota was temporarily increased 2,508,500 pounds for the period April 25 through July 31, I973. The quota use rates apply to the countries' total allocations for the year. 72 Table 5.8 Imports of Cheddar Cheese, l970-l977 (Quota 950.08A) Quota Use Rateb Countrya Quota snarea 1970 1971 1972 1973C 1974d 1975 1976 1977 (lbsf) (percent) Licensed New Zealand 5,502,498 l00 98 98 99 99 99 85 lO8 Australia 1,696,150 98 99 98 100 100 107 105 138 Ireland 562,250 99 99 98 99 12 68 11 2 Canada 612,352 53 44 60 84 99 95 87 6 Sweden 130,850 83 100 96 88 74 0 0 0 othere 308,400 82 47 70 80 61 27 17 78 SUB-TOTAL 8,812,500 95 93 74 98 98 75 80 97 Unlicensedf Canada 1,225,000 100 100 100 100 100 72 42 55 TOTAL 10,037,500 97 94 95 98 93 92 76 92 Sources: See Table 5.7 a b d Specified by the Presidential Proclamation establishing the quota. Imports as a percentage of the quota share specified by the Presiden- tial Proclamation. The licensed and unlicensed quotas were temporarily increased 8,623,000 and 6l2,500 pounds respectively for the period April 25 through July 3l, l973. The quota use rates apply to the countries' total allocations for the year. The Cheddar quota was temporarily increased by l00 million pounds for the period January 3 through March 3l, l974. Entries were on an unlicensed, first-come, first-served basis and therefore those imports are included in the total quota use rate calculations but not in the individual country percentage figures. Austria, Belgium, Bulgaria, Denmark, Israel, Italy, Netherlands, Portugal, Switzerland, United Kingdom, and West Germany (aggregate). Quota allocated to Canada for natural Cheddar, aged 9 months or more. Administered by the U.S. Customs Service on a first-come, first- served basis. 73 Table 5.9 Imports of American-type Cheese, Other Than Cheddar, l970-l977 (Quota 950.08 8) Quota Use Rateb Countrya Quota snarea 1970 1971 1972 1973c 1974 1975 1976 1977 (1bS-1 (percent) New Zealand 3,360,000 98 99 98 100 99 110 108 104 Australia 1,680,000 99 99 97 100 99 130 119 141 Ireland 560,000 94 98 100 99 1 8 0 0 Sweden 125,000 100 100 98 91 99 0 0 0 Otherd 371,600 95 87 89 85 40 1 5 30 TOTAL 6,096,600 98 98 97 99 86 98 93 98 Sources: See Table 5.7 a Specified by the Presidential Proclamation establishing the quota. b Imports as a percentage of the quota share specified by the Presiden- tial Proclamation. ° The quota was temporarily increased 3,048,300 pounds for the period April 25 through July 31, 1973. The quota use rates apply to the countries' total allocations for the year. d Austria,8elgium, Bulgaria, Italy, Denmark, Israel, Netherlands, Portugal, Switzerland, United Kingdom, and West Germany (aggregate). 74 Table 5.l0 Imports of Other Cheese--Not Specifically Provided For, l970-l977 (Quota 950.l0 D) Quota Use Rateb Countrya Quota Shareb l97O l97l l972b l973c l974 I975 l976 l977 (lbs.) (percent) Austria l99.000 -- -- -- 96 l09 219 2l5 366 Belgium 469,000 97 2 95 l28 20 O O O Canada 2,670,000 -- -- -- 58 l7 8 2 202 Denmark l6.820,000 95 79 97 9l 108 41 32 l6 Finland l,239,000 94 82 l02 99 I24 88 ll4 ll5 France 2,882,000 ll 3 98 98 28 2 l l Iceland 649,000 86 99 ll6 lOO lOO 72 ll 154 Ireland l6l,000 93 81 34 32 lOO 67 l 30 Israel 145,000 -- -- -- 52 O 67 398 9l0 Netherlands 422,000 0 O 0 l 9 O O 0 New Zealand 7,556,000 98 39 99 l05 97 l43 240 296 Norway 356,000 83 75 7O 66 80 74 45 9 Poland 2,064,000 99 67 99 98 100 l25 ll9 l16 Portugal 227,000 0 O O O O O O 0 Sweden l,707,000 99 99 99 97 98 100 84 lO Switzerland 2l5,000 O O 0 ll 5 3 O 0 United Kingdom 496,000 94 78 38 80 67 O O 0 West Germany 2,l48,000 73 44 75 93 89 34 4 9 0therd 288,000 75 36 34 59 76 164 336 808 TOTAL 40,730,000 92 62 95 90 87 64 78 88 Sources: See Table 5.7 a Specified by the Presidential Proclamation establishing the quota. b On June 6, l972, the quota was expanded by Presidential Proclamation from 25,090,000 to 40,730,000 pounds and the country quota shares shown were specified. See footnote b, Table 5.l5, for an explanation of the quota change and the method by which quota use rates were obtained. The quota was temporarily increased by l7,496,000 pounds for the period April 25 through July 3l, l973. The quota use rates apply to the countries' total allocations for the year. d Allocated for importation from any other country. 75 New Zealand Cheshire, Danish block and certain other cheeses entering under quota 950.l00, Other-NSPF, are industrial-type cheeses, suitable for processing, and compete directly with domestic American-type cheese.1 European countries supplying cheese in the Other-NSPF quota have had to cut down their shipments as a result of the l975 agreement on subsidy limitation. The EC countries and Sweden were forced to give up subsidies on Cheddar and other American cheeses at the same time. Since l975, import licenses have been transferred away from many European 2 and in 1977 imports under these countries and given to other suppliers three categories have returned to near normal levels. Imports of American-type cheese are projected to continue at these I977 levels in Table 5.2. Edam and Gouda Cheese (Tables 5.ll and 5.l2). Edam and Gouda enters under quotas 950.09A and 950.098 and Netherlands is the princi- ple supplier. Imports were low in I977 because of the dock strike and, in Table 5.3, are projected to return nearer the more normal levels of I978 and 1979. Italian Cheese (Tables 5.l3 and 5.l4). Quotas 950.10 and 950.10A cover imports of hard Italian cheeses comparable with the domestic 1It is assumed that all imports under this quota compete with domestic American-type production though some other types of cheeses also enter. One important cheese, Mozzarella, falls in the Other-NSPF category but it is assumed that most of this cheese is priced above pricebreak and is not imported under the quota. Therefore, Mozzarella imports are included in figures shown in Table 5.18. 2New Zealand has been the principle beneficiary. 76 Table 5.ll Imports of Edam and Gouda Cheese, l970-I977 (Quota 950.09 A) 1970 Quota Use Ratec Countrya Allocationb I970 I97l I972 I973d I974 l975 l976 1977 (Ibsf) (percent) Netherlands 8,567,6I9 99 99 98 77 100 96 94 80 Denmark 249,735 84 69 74 35 42 45 BI 19 Argentina 259,042 lOO 62 94 24 5 89 l03 l06 Portugal l0,247 IOO 30 7O 67 52 26 49 I35 Norway 29,924 96 5I GI 35 29 32 I8 l8 Sweden 8I,495 100 90 86 lOO 95 85 78 83 Finland 2,335 loo 0 0 ll2 lIO Il6 230 220 TOTAL 9,200,400 98 97 97 75 93 94 92 79 Sources: See Table 5.7 a b Specified by the Presidential Proclamation establishing the quota. The establishing Presidential Proclamation did not specify quota shares. For Edam and Gouda imports, these shares have been derived from import records on the basis of importations of eligible impor- ters during the representative period l948-50. To illustrate how the abilities of eligible countries to supply Edam and Gouda cheese has changed over the eight year period, the I970 set of allocations is used as a base. Imports as a percentage of the I970 quota allocations. The quota was temporarily increase by 4,600,200 pounds for the period April 25 through July 3l, I973. The quota use rates apply to the countries' total allocations for the year. 77 Table 5.l2 Imports of Processed Edam and Gouda Cheese, I970-I977 (Quota 950.09 8) Quota Use Rateb Countrya Quota Share6 1970 1971 1972 1973C 1974 1975 1976 1977 ((lbs.) (percent) Denmark 1,714,000 81 28 5 2 20 0 3 0 Ireland 331,000 70 77 59 24 4 6 1 0 Netherlands 169,000 84 35 49 97 81 54 60 106 West Germany 513,000 76 86 73 190 80 30 42 0 Norway 368,000 72 73 92 87 82 86 86 12 Otherd 56,000 100 26 91 210 100 251 60 1477 TOTAL 3,151,000 78 48 36 55 40 23 23 33 Sources: See Table 5.7 a Specified by the Presidential Proclamation establishing the quota. b Imports as a percentage of the quota share specified by the Presiden- tial Proclamation. c The quota was temporarily increased by 1,575,500 pounds for the period April 25 through July 31, I973. The quota use rates apply to the countries' total allocations for the year. d Allocated for importation from any other country. 78 Table 5.13 Imports of Italian Cheese--In Original Loaves, 1970-1977 (Quota 950.10) 1970 Quota Use Ratec Countrya Allocationb 1970 1971 1972 1973d 1974 1975 1976 1977 (lbs.) (percent) Argentina 4,784,489 45 65 150 84 122 I41 169 140 Italy 6,715,611 69 61 45 42 43 48 46 42 TOTAL 11,500,100 59 63 88 62 76 86 97 83 Sources: See Table 5.7 a Specified by the Presidential Proclamation establishing the quota. b The establishing Presidential Proclamation did not specify quota shares. For Italian-IOL imports, these shares have been derived from import records on the basis of importations of eligible importers during the representative period 1948-50. To illustrate how the abi- lities of eligible countries to supply Italian-IOL has changed over the eight year period, the 1970 set of allocations is used as a base. Imports as a percentage of the 1970 quota allocations. The quota was temporarily increased 5,750,050 pounds for the period April 25 through July 31, 1973. The quota use rates apply to the countries' total allocations for the year. 79 Table 5.14 Imports of Italian Cheese--Not In Original Loaves, I970-1977 (Quota 950.10 A) Quota Use Rateb Countrya Quota Sharesa 1970 1971 1972 1973c 1974 1975 1976 1977 Argentina 1,347,000 46 68 97 79 87 95 71 97 Italy 104,500 11 3 8 6 12 12 7 6 Australia 13,700 98 0 40 5 0 0 0therd 28,800 41 8 33 12 0 0 0 0 TOTAL 1,494,000 44 62 89 72 79 86 65 88 Sources: See Table 5.7 a Specified by the Presidential Proclamation establishing the quota. b Imports as a percentage of the quota share specified by the Presiden- tial Proclamation. c The quota was temporarily increased by 747,000 pounds for the period April 25 through July 31, I973. The quota use rates apply to the countries' total allocations for the year. d Allocated for importation from any other country. 80 Italian types of Table 5.4. The cheeses from Argentina are cheaper than those from Italy and are more directly competitive with domestic Cheese. Cheese from Italy is produced by different methods, is more expensive than the U.S. product, and hence, is somewhat less competi- tive. In Table 5.4, the 1977 imports are projected to continue to 1979. Swiss Cheese (Tables 5.15 and 5.16). Quotas 950.108 and 950.10C cover imports of Swiss cheese. Imports under quota 950.108 are both processing and table cheese, the latter type being generally of higher quality than the domestic table cheese. Quota 950.10C covers processed Swiss, usually made from off-grade cheese. USDA considers these imports to be highly sensitive, being directly competitive with domestic Swiss and, to a lesser extent, with domestic American cheese used for process- ing. The EC, Austria, Sweden and Norway were required to eliminate restitutions on these cheeses in 1975 and Finland and Switzerland were required to exercise restraint in their subsidization. Imports declined somewhat initially but as a result of import license trans- ferring operations, imports have increased in the past two years and the 1977 imports are projected to continue in Table 5.5. All Other Cheese (Tables 5.17-5.19). Imports of one quota cheese, I 950.10E, the four categories of above pricebreak (APB) cheese and the non-quota cheeses are of the type considered in Table 5.6. The U.S. does not produce the Cheese covered in the Other-Low Fat quota category 1 system. See footnote a, Table 5.18 for a description of the pricebreak 81 Table 5.15 Imports of Swiss or Emmenthaler Cheese, 1970-l977 (Quota 950.10 8) Quota Use Rateb Countrya Quota Shareb 1970 1971 1972b 1973c 1974 1975 1976 1977 (lbs.) (percent) Austria 8,222,000 99 98 103 80 57 34 53 59 Finland 6,111,000 96 71 88 90 88 89 103 116 Norway 1,672,000 55 11 0 18 61 9 71 38 Israel 60,000 —- -- -- O O O O 32 Switzer1and 269,000 98 90 98 83 2 0 O 0 Denmark 3,396,000 69 7 59 81 15 1 9 West Germany 292,000 0 0 35 119 17 7 0 3 Nether1ands 210,000 -— —- -- 126 89 11 20 0 0therd 188,000 41 19 40 446 81 161 63 292 TOTAL 20,420,000 84 59 83 81 62 51 60 64 Sources: See Table 5.7 a Specified by the Presidential Proclamation establishing the quota. b On June 6, 1972, the quota was expanded by Presidential Proclamation from 4,271,000 to 20,420,000 pounds and the country quota shares shown were specified. The quota was increased in conjunction with the institution of the flexible pricebreak system whereby the price- break on this cheese, previously fixed at 47¢, was pegged at a level 7¢ above the CCC purchase price for Cheddar. For the last half of 1972, transitional non-licensed quotas were administered by the Bureau of Customs, and, effective January 1, 1973, the quota increases were incorporated into the USDA licensing system. For the years 1970 through 1972, quota use rates are based on the 1970 quota allo- cations; thereafter, they are based on the quota shares shown. The amount entering under the 1972 transitional quota is included in the total quota use rate calculation but not in the individual country percentage figures. The quota was temporarily increased by 10,210,000 pounds for the period April 25 through July 31, 1973. The quota use rates apply to the countries' total allocations for the year. d Allocated for importation from any other country. 82 Table 5.16 Imports of Gruyere--Process Cheese, 1970-l977 (Quota 950.10 C) Quota Use Rateb Countrya Quota Shareb 1970 1971 1972b 1973c 1974 1975 1976 1977 (1b5.) (percent) Austria 1,406,000 95 92 95 99 115 176 200 173 Finland 1,606,000 99 92 97 119 104 183 197 228 Switzerland 2,234,000 0 0 0 1 4 1 0 21 Denmark 3,435,000 51 47 39 45 34 1 2 1 West Germany 1,818,000 96 71 93 145 86 46 96 105 Ireland 210,000 -- -- -- 69 80 0 10 0 Norway 82,000 -- -- -- O O O 14 0 Portugal 275,000 -- -- -- 9O 4 189 96 306 0therd 176,000 66 63 7 16 6 0 3 0 TOTAL 11,242,000 94 82 59 62 56 61 72 83 Sources: See Table 5.7 a Specified by the Presidential Proclamation establishing the quota. b On June 6, 1972, the quota was expanded by Presidential Proclamation from 3,289,000 to 11,242,000 pounds and the country quota shares shown were Specified. See footnote 0, Table 5.15, for an explanation of the quota change and the method by which quota use rates were obtained. The quota was temporarily increased by 4,712,500 pounds for the period April 25 through July 31, I973. The quota use rates apply to the countries' total allocations for the year. d Allocated for importation from any other country. 83 Table 5.17 Imports of Other--Low Fata Cheese, 1971-1977b (Quota 950.10 E) Quota Use Ratec Countryd Quota Shared 1971 1972e 1973f 1974 1975 1976 1977 (lbs.) (percent) Denmark 6,680,000 48 118 105 122 92 52 37 United kingdom 791,000 32 32 97 48 20 6O 10 Ireland 756,500 30 45 0 0 0 0 0 Nest Germany 100,000 34 60 47 65 47 42 33 Poland 385,600 0 0 0 0 0 0 0 Australia 123,600 0 0 0 0 259 621 1478 Iceland 64,300 0 0 0 0 0 0 0 TOTAL 8,901,000 41 96 93 97 75 54 50 Sources: See Table 5.7 a b C Cheese containing 0.5 percent butterfat or less. Quota established January 1, 1971. Imports as a percentage of the quota share specified by the Presiden- tial Proclamation. Specified by the Presidential Proclamation establishing the quota. The pricebreak system under which this quota is administered was changed in 1972. See footnote b, Table 5.15 for an explanation. The quota for Low Fat Cheese was not increased in 1972, however. The quota was temporarily increased by 4,010,000 pounds for the period April 25 through July 31, 1973. The quota use rates apply to the countries' total allocations for the year. 84 Table 5.18 Imports of Cheese Above Pricebreaka, 1970-1977 Cheese 1910 1971 1972 1973 1974 1975 1976 177b (thousand pounds) Emmenthaler 22,762 21,809 30,366 24,725 51,158 36,279 48,499 45,494 Gruyere-- Process 10,800 8,937 9,882 5,703 9,018 5,322 6,741 5,881 Other--NSPF 22,631 18,812 31,820 21,241 35,853 26,155 34,405 31,940 Other-- d Low Fat -- -- -- -- -- -- -- Source: USDA/ESCS, Dairy Situation, July, 1978, p. 22. a Imports priced under the pricebreak are subject to quota restrictions (see Tables.5.10, 15-17). Imports priced above pricebreak are free from quota. Until June 6, 1972, the pricebreak was fixed at $.47 but after that date, the pricebreak was pegged at $.07 above the CCC Cheddar purchase price. Thus, the $.47 pricebreak was changed to $.62 on June 6, 1972; to $.69 on March 15, 1973; to $.72 on August 29, 1973; to $.78 on April 1, 1974; to $.84 on January 16, 1975; to $.86 on April 9, 1975; to $.92 on October 16, 1975; to $.98 on April 14, 1976; to $1.00 on October 19, 1976; to $1.05 on May 5, 1977; to $1.10 on April I, 1978; and to $1.13 on October 1, 1978. Preliminary. Figures on above pricebreak imports of Other--Low Fat cheese are not available. Imports are thought to be small. d The Other--Low Fat category was established January l, 1971. 85 Table 5.19 Imports of Non-Quota Cheeses, 1970-l977 Cheese 1970 1 71 1972 1973 1974 1975 1976 1977a -—_—_—_ -___' _-_—- '-___(thousand pounds) Pecorino 20,621 16,566 22,976 17,215 16,465 17,114 16,728 15,825 Roquefort 2,063 1,671 2,543 2,126 1,439 1,392 1,560 1,620 Gjetost 413 397 438 454 473 512 517 512 Bryndza 156 257 322 309 679 400 543 464 Gammelost/ Noekkelost 256 473 748 698 716 628 627 503 Goya 761 1,039 3 6 41 18 325 781 TOTAL 24,270 20,403 27,030 20,808 19,813 20,064 20,300 19,705 Source: USDA/ESCS, Dairy Situation, July, 1978, p. 22. a Preliminary. and USDA does not believe that quota expansion would have a significant impact on domestic programs. This study does not attempt to estimate the magnitude of such an impact. The APB cheeses are the same types as those covered by quotas 950.108-E but because they are priced above the pricebreak they are allowed to enter free of quota.1 The non-quota cheeses are not produced in the U.S. and these imports displace little domestic output. Information on these imports is provided mainly for completeness, since, except for the case Of Mozzarella, imported mainly in the Other- NSPF-APB category, this analysis does not look at the domestic effects likely to accompany their increase. 1The pricebreak system does not, however, provide a perfect method for separating higher priced, non-competitive imports from those which would compete with domestic cheese and some Cheeses entering in these groupings displace domestic production. 86 Summary This chapter has developed the information base which is used in estimating and evaluating the short run impacts of allowing more foreign- produced cheese to enter the U.S. The results of the analysis are presented and interpreted in Chapter VI. CHAPTER VI RESULTS AND INTERPRETATION The model described in Chapter IV and the information base deve- loped in Chapter V are used in this chapter to derive estimates of short run impacts of Section 22 dairy import quota increases and/or more liberal policies regarding subsidized imports. The chapter has three sections. In the first section, requests for dairy import policy liberalization which the U.S. has received in the MTNS are explained and the estimates of impacts derived from the model are presented. Likely cheese industry adjustments are also discussed in this section. Then the model is modified slightly in an effort to define more pre- cisely the impacts on domestic milk producers Of pursuing the import alternatives described in the first section. Finally, the sensitivity Of the model to parameter and projection alternatives is examined. Impacts Of Import Expansion Table 6.1 indicates the estimated impacts on the domestic cheese manufacturers, milk producers and CCC purchases of expanding imports by 100 million pounds Of milk equivalent in the form Of each cheese type. From this table, estimates Of impacts Of expanding imports Of any Of the types to any level can be derived by converting this milk equivalent to cheese using the conversion factors in Table 6.2 and multiplying by an appropriate factor. 87 88 Table 6.1 Short-run Impacts on United States Cheese Manufacturers, Milk Producers and Government Support Purchases of Increasing Imports in 1979 by 100 Million Pounds of Milk Equivalent in the Form of Various Cheese Typesa Supply Direction Price Elasticity of Demand for Elasticity of Cheese for Variable Cheese Change '0°5 '0‘9 Milk Prices Above Support Milk Price c/cwt Decline ProductionC mil.lbs " 1 . Blue-Mold Priced ¢/1b " 5 - Production mil.lbs " Americag Price ¢/lb " Production mil.lbs Edam/C ouda Priced ¢/1b " 7 Production mil.lbs 0 3 Italian ' Priced ¢/lb " 1 . Production mil.lbs “ Swiss " Priced ¢/1b " Production mil.lbs Mozzare la H Price ¢/lb " Production mil.lbs Milk Prices At Supporte Milk Priceb ¢/cwt " ProductionC mil.lbs " American Priced ¢/1b " Production mil.lbs Other C eese Price ¢/lb " Same as Same as Production mil.lbs Above Support Above Support CCC Purchases Af mil .1 bs Increase 100.0 100.0 89 mi1 . 1 bs Increase 38.0 25.0 00 ON NU‘I wxo N01 00 . 2 (0.05%) (0.01%) 5 4 7 (22.1%) .8 (7.5%) 4 5 00 NW NO NW \OO o—oN mm U'IH (0.4%) (0.1%) 34. 7%) 16.7%) 0"“) 5... (JUN 0001 OOH 0160 H0) N01 .050 (”N M 0100 kN 01‘ (”£0 (.00 DO #0 bk \lm h-D cow cow NO HN ( ( (. 6% (.13 (' % % (. 3 (. % \00 N01 NKO ' ' 58372 BQB‘Q 8728‘? OH vv vv vv AA ON CO OO 00 OO 89 Table 6.1 (Cont.) Supply Direction Price Elasticity Of Demand for Elasticity of Cheese for Variable' Cheese Change '0'5 "0’9 Milk Prices Above Support Milk Priceb ¢/cwt Decline 1.22 Productionc mil.lbs " 1 Blue-Mold Priced d/lb " 33. Production mil.lbs " 6. American Price ¢/lb " 0. Production mil.lbs " 5. Edam/Gouda Priced ¢/1b " 53. Production mil.lbs 0 7 5. Italian ’ Priced ¢/lb " 1 . Production mil.lbs " Swiss Priced ¢/lb " Production mil.lbs Mozzarella Priced C/lb " Production mil.lbs Milk Prices At Supporte Milk Priceb ¢/lb " Production mil.lbs " American Price ¢/lb " Production mil.lbs " Other Cheese Priced ¢/lb " Same as Same as Production mil.lbs " Above Support Above Support CCC Purchases Af mil.lbs Increase 100.0 100.0 89 mil.lbs Increase 59.0 44.0 50h (”N Nu vv MN 0001 MN 00 o 0 mm o o BQBQ BQBQ BQBQ NO 39342 cow COM 0001 \Ot—I vv vv vv B‘QB‘Q AA AA AA AA AA AA AA . . H b 0‘ \I \l O CO CO CO CO 90 aImpacts for each cheese type are calculated assuming the 100 million pounds of milk equivalent entered in the form of that particular cheese. Amounts of each cheese entering are: Blue 11.1 million pounds Italian 14.3 American 10.0 Swiss 12.5 Edam and Gouda 10.0 Mozzarella 14.3 bPercentage impact based on all-milk wholesale farm price. For each set Of elasticities, the price impact on milk is invariant with respect to the form in which the milk enters. Price impacts calculated based on the following elasticities: Elasticity Of aggregate milk supply 0.15 Price elasticity of demand for fluid milk 0.35 Price elasticity of demand for manufacutring milk 0.184 See Table 6.10 for the range of milk price impacts under different elasticity assumptions. cProduction impact refers to aggregate milk production. For each set of elasticities, the production impact is invariant with respect to the form in which the milk enters. dWholesale price for particular price on which the impact is based; see Table 5.1-5.6. eEstimated impacts are the same as the situation with milk prices above support for all variables except those noted. There would be no CCC support purchases if prices were above support and the import increases did not drive prices down to the support level. fIncrease in CCC purchases assuming imports are in the form of American cheese. 9Increase in CCC purchases assuming imports are in the form Of other (not American) cheese. 91 Table 6.2 Conversion Factorsa Cheese Type Factor (pounds) Blue-Mold 9 American 10 Edam and Gouda 10 Italian 7 Swiss Mozzarella 7 Source: Derived from the following: a. Conversion Factors and Weights and Measures for Agricul- tural Commodities and Their Products, U.S.D.A., May, 1952 (as revised). b. Cheese Varieties and Descriptions, Agriculture Handbook NO. 54, U.S.D.A., August, 1974. a Pounds of whole milk required to produce one pound of cheese. The milk price and production impact estimates in Table 6.1 are derived using the aggregate supply elasticity Of 0.15, fluid demand elasticity of -O.35, and manufacturing milk demand elasticity of -O.184. For each set of cheese demand and supply elasticities, the estimates of impacts on milk producers are identical; i.e., these estimates are invariant with respect to the form in which the increased imports enter. Buxton and Fallert1 in 1974 estimated a price depressing impact Of about one percent on the all-wholesale milk price of increasing imports by 500 million pounds of milk equivalent. It is estimated in this study that farm prices of milk would drop between one-quarter and 1Buxton and Fallert, Impact of Dairy Product Imports, p. 12. 92 one-half percent depending on the elasticity assumptions for cheese. If the increased imports are viewed as incrementing the supply of manu- facturing milk, as in Buxton and Fallert formulation, the farm price impact estimated here agrees with their study. However, the model used here is more realistic in that the import increase is in the form Of cheese and that farm level impacts depend on the supply and demand adjustments which occur in the domestic cheese market. Likely impacts on milk producers will be discussed further in the next section. In the remainder of this section, the estimates relevant to each cheese type are described in detail. In each case, requests made of the U.S. serve as the basis for the import alternatives analyzed. The EC prOposal for "concerted disciplines" on cheese applies to all of the import categories except the two American quotas. Under this plan, which is one component of the EC proposed international dairy agreement discussed in Chapter III, minimum import prices would be established for cheese entering the U.S. at levels designed to prevent injury tO the domestic milk and cheese industries and the U.S. would be obliged to adopt an injury test1 as a condition for levying countervailing duties. Superimposing such a system on the current quota framework could have impacts on above-pricebreak (APB) imports as well as on those restricted by the quotas (BPB and absolute quotas). Thus, the import alternatives for which impact estimates are given below, relate not only to quota expansion, but to changes in the U.S. policy on subsidized imports as well. 1See Chapter III. 93 Blue-Mold Cheese Imports. There have been no formal requests other than the EC request for "concerted disciplines" in the Blue-Mold quota category (950.07). Two import alternatives are analyzed: Alternative A. In the first alternative, it will be assumed that, instead of the 80 percent quota fill rate projected in Table 5.1 for 1979, the quota is 100 percent filled. For this to occur, it would be necessary to alter current import administration proCedures by, for example, changing the individual EC country shares of the quota into an aggregate EC quota, giving quota shares to countries not having them under the establishing Presidential Proclamation and/or allowing subsi- 1 Thus, under this alternative, about dized imports to fill the quota. 1 million pounds of cheese would enter above normal levels (25 percent above normal imports). Alternative B. In the second alternative, the quota is doubled to 10 million pounds and it is assumed that exporters take full advantage of the quota increase so that an additional 5 million pounds Of Blue-Mold cheese substitutable for domestic cheese enters the U.S. Allowing greater quantities of Blue-Mold to enter under either. alternative would be of considerable benefit to the EC. Denmark's allocation in 1977 was 97 percent Of the quota and that country would likely be able to supply additional quantities if permitted. Cheese production in Italy is not sufficient to meet internal demand and since 1The 1975 CVD waiver allowed the EC to continue subsidizing Blue- Mold exports to the U.S. but it was agreed that the subsidies were to remain at the same level relative to U.S. prices as they were at the time of the agreement. The agreement thus inhibits the EC'S freedom to subsidize at present. 94 1 it is unlikely that this production deficit is projected to increase, that country could supply increased quantities of cheese to the U.S. However, according to USDA, France regularly asks for an increased quota allocation and West Germany, not now entitled to a share, Offi- Cially asks for a quota share each year. Among the EC countries in the aggregate, the cheese production surplus is projected to grow and it is likely that additional quantities Of Blue-Mold could be supplied to the U.S. Table 6.3 Shows that if cheese exporters are allowed to completely fill the current quota (Alternative A), the model estimates that cheese prices would drop 1.5 to 3.0 percent in the short run. If milk prices are above support, farm prices would be expected to drop only slightly and if prices are at support, farm prices would not change but CCC purchases would rise by between 2.7 and 5.4 million pounds. Doubling the quota (Alternative 8) leads to much more drastic domestic repercus- sions as shown in the table. Since nearly 60 percent of domestic Blue-Mold cheese is made in Wisconsin and 4 of the 11 plants are located there, the most severe impacts of import expansion would likely be felt in that state. Plants that produce Blue-Mold cheese generally do not produce other cheese types because of problems associated with bacterial control and there- fore the affected plants would not likely be able to easily shift to production alternatives. If the quota is doubled, the model estimates that domestic production of Blue-Mold cheese could decline nearly 8 percent and prices could drop 15 percent. Revenue would fall considera- bly and plant closings would be conceivable, depending on the actual IOECD, Forecasts, p. 66. 95 .mcczoa cowppwe m>ww x3 mmmmcucw macan_ .eopeaoe No.0ma moose ecoas_o .eeo_a>w=oo xp_ze .Egmm use co wa5 5o women «pummpogz1—pm umuumnoca co comma mmmucmocmao .ommuwcu .wmaogmcmz so xuou mgmppmm .muwca uopxuacu can» mmman .Apcmucma mmv mucaog co_p~ws «so an mmmmcucp mucoasmm eeaeoo Co Appomoaapw ooeca 1. a.m~ 1. m.o~ .1 ~.e~ 1. N.GH e map .P_e eoaaocoee momaeocsa ecaaazm uuu 1. o .1 o 1. o 1. o = ma_ ._Pe oecpooo eoeeoseoca CPA: .1 o 1. o 1. o 1. o . ezo\aoeoo ooeppooo ooeca ¥_wz scam Aw.mv ~.~ Am.mv N.H A~.~v m.~ Ao.mv m.“ e we. ._Pe deepooo eo_po=eoca amooeu Am.ev a.HH Ao.o~v ~.mH Ao.ofi ~.m~ Aa.efiv a.- = ap\moeoo aoe_.ooo oopca oaooeu oeamoeoez ecoaasm Ge moopca ¥F_z Afio.ov H.“ Aoo.oe “.3 Afio.ov m.a Aoo.ov o.e = we, .Ppe oew_ooe eoeeoaooca xp_z Amo.ov am.o Awo.ov -.o Amo.ov em.o Amo.ov mm.o = ozo\meeoo ooeWPooo oocca x__z etaa Am.mv H.N Am.me N.“ Ae.~v a.~ Ao.mv m.H . ma_ ._ce oeppooo eo_oo=eoca omooeu Am.mv e.HH Ao.ofiv ~.m~ Ao.ofi ~.m~ Aa.eflv a.- ARV a_\meeoo aoew_ooo oopca unease opaaopoez «coaaam m>on< modes; xpwz mm o>wumccmpp< usage" .1 o.m 1. u.~ 1. ¢.m 1. o.m ma_ .pps vmmomgucm mommgugaa acoaaam ago .1 o 1. o .1 o .1 o . ma_ ._we oeePooo eaveoaooca ¥__z 1. o 1. o 1. o 1. o e uzo\meeoo ooeeeooa ooeca 5,3: scam N.HV 3.0 AA.ov m.o Ae.fiv e.o Ao.HV e.o = we. ._ee oeepooe eopeoseaca omooeo m.Hv m.~ Ao.~v o.m Ao.~V o.m Ao.mv o.e . a_\aoeoo eoe_,ooo ooeca omooeu 5,655.63: 223% 2 68.2.. 3:: Aoo.ov m.~ Aoo.ov o.H hoo.ov o.~ Aoo.ov m.H e map .Pwe oew_ooo eopuoseoca x__z Afio.ov No.9 Afio.ov o.o Afio.ov HH.o Afio.ov so.o e ozo\meeoo ooeepooo aorta xp_z acme Am.fiv 3.0 A~.ov m.o Ao.~v e.o Ao.HV 3.0 = an. .__e oewpooo eopeosooca omaoeu Am.~v m.~ Ao.~v o.m Ao.~v o.m Ao.mv 0.3 Age ep\ueeoo accepooo oovca omooeu u.amo.oez acoaazm m>on< mmuwca xpwz m< o>_umcgmup< acoaem m.o m.o n.o m.o mums: apposm co 55351556,“ a.o- H m.o- aka“ cm mmmmgu upoz1m=pm eo mucous“ mcvmmmcucm mo mommzucza acoaasm ucwsccm>ow use memoauoca JPF: .mcmcauomeacmz mmmmgu upoz1mapm mmumum umu_=: any co muomae_ cac1acogm m.w mpamh 96 cost curves.1 The impacts on the domestic industry may be somewhat dampened if the imports are not directly substitutable for the domestic cheeses. As indicated earlier, imports of Blue-Mold cheese tend to be higher quality than the domestic product. American Cheese Imports. New Zealand has requested that its share of the Cheddar quota (950.08A) be increased from 5,502,498 to 12,100,000 pounds and that its share of the American quota (950.088) be increased from 3,360,000 to 7,100,000 pounds. The EC "concerted discipline" proposal does not apply to these import categories. Two import alternatives are analyzed: Alternative A. If the New Zealand requests are granted, imports Of American-type cheese could rise by 10.3 million pounds (20 percent). Impacts resulting from this increase are estimated under the first alternative. Alternative B. The U.S. may not be able, under interna- tional trading rules, to more than double New Zealand's quota share without increasing the shares of other countries as well. GATT article XIII requires that, when import restrictions are imposed, a distribution Of trade is assured that approximates the distribution that would exist in the absence of restrictions. Australia, for example, has consistently supplied its full quota share and would likely demand a larger share if New Zealand's request were granted. Therefore, under alternative 8 both quotas are doubled and an additional 16.1 million pounds Of American-type Cheese are assumed to enter. 1See Figure 4.1. 97 Increasing imports of American cheese in this way would be Of little benefit to the EC. Ireland, the EC country with the largest share, has not been able to supply much cheese since export subsidies were eliminated under the 1975 CVD waiver agreement. If the EC were permitted to, once again, subsidize exports of these cheeses, it would derive greater benefit but it has agreed tO effectively give up subsi- dies on American-type exports in the "concerted discpline" proposal. Sweden would also be able to export cheese to the U.S. if subsi- dization were allowed. That country has not shipped any American cheese to the U.S. since it was required to stop subsidizing in 1975. Table 6.4 shows the estimates of impacts under each alternative. Meeting New Zealand's requests (alternative A) would result in an estimated decline of less than one percent in cheese and milk prices with prices above support. If prices are at support, neither milk nor 1 but CCC purchases would necessarily cheese prices would be affected, rise by the full amount of the import increase, in milk equivalent terms. Doubling both quotas would cause greater impacts, as shown on the table. Under both alternatives, the greatest impacts are on CCC purchases. Nearly 60 percent of the American-type cheese production in 1977 was in Wisconsin and Minnesota. Wisconsin has over 50 percent of the plants but average plant production is well under the national average. Minnesota has entered the cheese industry more strongly in recent years and has, on the average, much larger plants than Wisconsin, using 2 newer technology. Lough attributes this to three factors. First, 1See Figure 4.2. 2Lough, The Cheese Industry, pp. 17-18. . .mvcson cowpkws H n: An mmmmcucw masons: .uwpnsoufiquu1cmuwcms< cmsuo wen cmuumgov mmo.omm can :=cm xpwzu .Ecc: we» no x_:s mo woven upmmm_o;z1ppm umuuwwoca :o ummmn mmmucwucmmu .mucmoa apnsmmmo cwmcoummz .mmmmsu cmuvwgu we mxuopn .np1oe :o mmu_.a Hopcmun .Aucmucwq omv mucaoa comp—we m.oH x; «mamcu:: mucousmm 98 I 8...: I 8:: I 8:: I 88. ._ 37:... 83685 338...... .888 ”.8 I o I o I o | c .. 37:... 828.. 8.588... .7... I o I o I o I o .. 5.53.8 68:68 8...... ._:z E... I o I o I o I o .. 37:... 818.. 8.588... 88.5 I o I o I o I o ._ 3:38... 8:68 8...... 885 6.83.9.3 3 «coaazm an moo_ea xpwz 88 8...: :88 72 :88 8mm :88 7:: ._ 37:... 8:68 8.82.8... .:2 78 3.: :88 8... :78 .8. :78 m8. ._ 833.86 68:68 8...... .7... E... 88 E :.8 8.. 3.8 7.. :8 7o ._ 37:... 8:68 8:88... 885 88 m... .88 7.. 8.8 7.. .88 7: 3.. 28.8 38:68 8...... 885 6.63.2.3 acoqaam m>on< mwuwca x_:z mm w>wuwccmup< axons: I 88. I 88: I 88: I 88: .. 37:... 88885 338...... 88...: ”.8 I o I o I o I o _. 37:... 8:68 8.538... ._:z I o I o I o I o .. 8.83.8 68:68 8.2.. .:..z E... I o I o I o I o ._ 37:... 8:68 8.588.... 885 I o I o | o I o ._ 3:3..8 38:68 8.2.. 88.5 6.63.2... .883 2 5.8.... .5. 8.8 82 :88 8o :88 8:: :88 8... ._ 37:... 8:68 8.588... .2... 8.8 8... :88 em... :78 e8. :88 8... .. .838 8.8.. 8...... .:..z E: :.8 m... :.8 8: .88 7e :.8 8m .. 37:... 8.7.8 8.882.. 885 :8 8o :8 e... 3.8 a... .88 7o :8 3:3..8 38:68 8...... 885 2637...: ugoaaam m>og< mmuwcm xpwz m< m>macccour< uLoQEH 7.. 8.. 7o 8.. 3...... :88 8 3.6.53: 8... _ 88 888 8.. 3.8.53: 8...... mum: :: wmmmsu quh1cmuwcms< mo mucoas_ mcwmomcucm we mommguczm ucoaasm ucwsccw>ow vac mcmuauoca xpwz .mcwczuummacmz mmmmsu maxh1cmo_cme< mmumum umupca men so mavens: czc1ucozm e.m opach 99 Minnesota was one of the centers of the cooperative merger and consoli- dation movement Of the late sixties and early seventies. Second, because butter plants had already consolidated to some degree in Minne- sota, the procurement and transportation systems already established made it easier to build the large cheese plants. Third, demand for fluid milk in Wisconsin has been increasing, drawing milk away from cheese production in that state, increasing the Opportunities for Minnesota cheese producers. The larger, more efficient, plants, primarily Operated by regional cooperatives, have greater production flexibility and it is estimated by Manchester1 that 15 percent of the current cheese capacity could be converted to butter-powder production with a minimum loss Of time and expense. Thus, though the impacts estimated in Table 6.4 seem small, the smaller plants such as those in Wisconsin would likely be the first affected and increased imports could give further impetus to plant merger and consolidation and accen- tuate the decline in the proportion of Cheese produced in states where small plants predominate. Lough2 found in his survey of the cheese industry that though three-quarters of the plants producing American Cheese manufacture that cheese variety only, it is also produced in plants in which the main cheese type is Swiss or Italian. When American is produced with either Of these cheese types, it only accounts for about five percent Of plant output. Thus, these plants have greater flexibility than the single variety plants and if the American cheese industry were adversely impacted by import increases, these plants might be expected to shift 1Manchester, Dairy Price Policy, p. 7. 2 Lough, The Cheese Industry, p. 29. 100 resources out of American production more readily than the single variety plants. Edam and Gouda Cheese Imports. The EC "concerted disciplines" request is the only request relevant to the two Edam and Gouda import categories. Again, two import alternatives are analyzed: Alternative A. In the first alternative, it is assumed that by agreeing to the "concerted disciplines,“ the.U.S. will permit subsidization practices that will allow both Edam and Gouda quotas (950.09A, 950.098) to be completely filled. Thus, an additional 3.4 million pounds of cheese (38 percent) is assumed to enter in 1979 above the projection in Table 5.3. Alternative 8. Though such a quota increase would be extreme, it is assumed in alternative 8, that both quotas are doubled and whatever subsidization practices necessary for filling the quotas are allowed. Thus, imports are assumed to rise by 12.4 million pounds. Most of the benefits received by exporters under each alternative would accrue to the EC if EC countries were to retain their present quota shares. The Netherlands currently has a 93 percent share of the Edam and Gouda quota (950.09A) and Denmark holds a 3 percent share. USDA indicates that Belgium, currently an ineligible supplier, would also like a share of the quota. Denmark holds a 54 percent Share of the processed Edam and Gouda quota (950.098) and West Germany, Ireland and Netherlands have 16, 11 and 5 percent shares respectively. The 1975 CVD waiver has required the EC to maintain its export subsidies on these cheeses at the 1975 levels relative to U.S. cheese prices and 101 this restriction has likely hurt EC exports though not as much as sub- sidy limitation on other categories. The processed Edam and Gouda quota has been less than 50 percent filled in most recent years and in 1977 Denmark, Ireland and West Germany were unable tO supply any Of their quota shares. It is assumed under both alternatives that subsi- dization would permit fuller use of this quota. Table 6.5 shows the impact estimates for each alternative. If the present quotas are filled by allowing more liberal export subsidiza- tion practices, cheese prices could fall as much as 17.7 percent and domestic production could drop 13.2 percent. Doubling the quotas could result in very severe impacts on the cheese industry; production is estimated to drOp nearly 50 percent in the most extreme case. Milk prices are estimated to fall only slightly under each alternative. CCC purchases are estimated to rise by as much as 20.0 and 72.0 million pounds of milk equivalent in alternatives A and B respectively. Only two plants, operated by the same firm, produce this cheese domestically. The firm produces other types Of cheese as well and it is likely that if the Edam and Gouda industry experienced serious adverse impacts, resources would be diverted to the production Of other cheese. Given the slow demand growth for Edam and Gouda, a substantial increase in imports, such as occurs under alternative 8, could result in a permanent disinvestment in domestic cheese manufacturing capacity. Whereas manufacturers Of cheese for which increasing demand is projected might expect that after a short run production cut-back, demand growth would permit production to start increasing again, Edam and Gouda manu- facturers may not have the same Optimistic long run view. 102 he emmmmgecw wagons: .mecaee :e__P:E e.~: .ea.3=ae .aeaoe ace 2.8: 8656666.. .aeaoe 8:6 seem. moo.omm.eea :=ee x~_ze .o .=:ew we» so x—:E we muwce epemepe;31—pe emuownoce no women mmmucmuceau .xce> zez .mmeegecmz Le xoee mcmppem .mu_:= .ep1e .mumce seem ueficeu eese mmmge . ucwucee wmv meceee :ewppws e.m An wmemcucw masons: 11 0.3m 11 o.Hm .11 o.~n 11 o.ee = me_._:E commence: memececee aceemem uuo .11 o 11 o 11 o 11. o = wep.~_s . w::_umo cemuueeece x::: 11 o .11 o 11. o 11 o = “IO\mu=ee uecwpeoo woven xpmz scam Ao.emv e.m Ae.omv H.m AH.wev N.~ Am.o e.e = map._:E mew—ewe :e_uu=eece emwmzu A~.va ~.m< Am.mev e.me Ao.~ev e.me Am.e «.mm = e_\mp:me emc_—umo mewce mmeezu mpwmmpecz aceeeem u< mmuwce x_:z Amo.ov N.o~ “Ho.ov ~.HH Amo.ov o.- Aflo. H.NH e mn_.—_E mcppumo cepuuaeece xpwz AoH.ov ~H.: Aeo.ov ee.o AmH.ov me.: Ame. em.o = azu\mu:eu omcwpeeo meme; xpwz scum Ao.emv e.m Ao.omv :.m A:.wev «.5 Am.o 0.3 = mg:.::5 ocrpumo cepuuaeece mmeecu AN.~mv ~.me Am.~ev m.me Am.~ev e.me Am.e e.wm ARV e~\mucme ee:_~emo mews; mmmwnu epemmpecz uceeeem w>ee< mauve; x::: mm m>voecceup< uceesm 11. o.mH 11. o.m 11 o.o~ .11 o.m: a ma:.::5 eememce:_ memmzecze acoeesm uuu 11. o .11 o 11 o 11. o = meP.F_E mew—ewe compueeece ¥p_z 11 o 11 o 11 o .11 o = p3u\mu:me uecwpume muwce xpwz Econ Am.ov m.: Am.mv m.o AN.mHV o.N Am.wv m.: e wep.p_s wcvpumo cewuueeece emewgu Am.mv m.m: Aw.HHv H.wH Am.::v :.m: AN.NHV H.NN = ep\mucee emcwpuon euwce omemgu mFemmpecz uceeezm u< meewce xpwz. Aoo.ov e.m Aoo.ov e.m AHo.ov m.m Aoo. w.e e mnF._:E . wc._eeo ce_ae:eece xpmz Amo.ov Hm.o Amo.ov m:.o Aeo.ov He.o Ame. Rm.o e azu\mucmu omcwpemo mews; xpwz Esme Aa.mv m.: Au.mv m.o A~.m: o.~ Am. m.: e meF.FPE mappeoo ce_au:eece ommenu Aw.mv m.m: Am.:HV H.m: Am.::v :.m: An.“ H.N~ ARV e_\mucmu emcmpuoo more; ammoce opemmpegz pceeeam m>ee< mmuwce xpwz e< e>wumccoup< acceEH ~.o m.o ~.o m.o mews: ».emmm .6 a..o..ma.m e.o1 m.o1 ecosmn we Aupuwpmepu we:ce mum: :: mmmmzu mesew ecu seem we muceeEH mcwmewcucu we memesecse uceeesm acesecw>ew ecu .mcmuzeece xpwz .mcmceuuewecez omoocu meeeo ecu Seem mwueum eeuwcz on» :o mpeeesm csc1ucegm m.o upeeh 103 Italian Cheese Imports. Argentina has requested a 50 percent tariff cut and complete quota liberalization of both Italian import categories. In addition, the EC has proposed "concerted disciplines" in the Italian-IOL category. Two alternatives are analyzed: Alternative A. It is assumed that through "concerted disciplines" or a quota increase all Of the imports permitted under the current quotas, do, in fact, enter. Table 5.4 projects that the quotas will be 85 percent filled under normal conditions so this alter- native would result in an additional two million pounds (18 percent) of cheese entering the U.S. Alternative B. In the second alternative, it is assumed that the quotas are doubled and, through subsidization, suppliers are able to ship the full amount of the increase to the U.S. Thus, an additional 13 million pounds of cheese would enter. Italy, the only EC country to have a share of either quota, has difficulty filling its current allocation. If the quotas were expanded, however, and other EC countries were designated as eligible suppliers, considerable benefits could accrue to the EC. The USDA indicates that Belgium, in particular, would like to ship Italian cheese to the U.S. Argentina is the largest supplier currently, shipping 74 percent Of the total 1977 imports, and would likely be able to take advantage of increased export Opportunities. Estimates of domestic impacts are given in Table 6.6. It is estimated that cheese prices would drop about 17 percent under alterna- tive A and between 4.5 and 9.0 percent under alternative 8. The model 104 .meeaoe eo....e m: an omaocoe. mecoee. .eo.3=oe ..e_z-ca..a.. ..e:-ee..a.:. .=eo ...ze .Ecew one so xpws we women epemepesz1—pe eeueenece :e eemee emeuceeceee .xce> zez .emeezecmz ce xeee mcmppem .Ae: ece mewce ep1mmv wpceeww1eeepe>ece .eemce pepxeecu eese mmege .Auceecee mHv meeeee eewppwe N An mmeececw muceesue 11. e.mm 1| H.m~ 11 N.mm 11 m.em = me_._ws eemeeceeH memeeecee “Lemmem Que 11. o 11 o .11 o .11 o = mep._we ecwpeeo cereeeeece xpwz 11 o 11. o 11. o 11 o = u:e\mucee eecw~ewo ee_ce xpwz acme Ae.mv ~.m Am.HV m.m Am.ev e.~ Am.~v a.e e meF.F:E e:__eeo eewaeeeeee emewco Am.ev m.n Ao.ev m.o: Ao.ev m.oH Ao.mv w.mH = e_\mucee eeempeeo mewce emeezu epemepegz ecoaasm e< moo:c. ...z AHo.ov m.e: A:o.ov ~.w Amo.ov m.m: Afio.ov m.~: = me—.F:s ecwpeee :ewpeeeeee x~_z Auo.ov mm.o Ave.ov we.o Ao:.ov o:.: Aeo.ov ou.o = u3e\mpcee eeewpeeo meme; xpwz acme Ae.mv ~.m Am.Hv m.m Am.ev 0.: Am.mv m.e e map._we ecwpeeo cepueeeece emeezu Am.ev m.“ Ao.ev m.oH Ho.ev m.o: Ao.mv w.m: Axv e—\mu:ee necwpeeo mews; emeezu epemepezz uceeeem e>ee< meewce xpwz em e>wpeccmup< eceeem .11 m.o 11 m.m 11 e.w .11 e.m ; wep._:s eememceee memeeecee uceeeem Que 11 o 11 o 11 o 11. o = me~.FwE eewpeeo eewueeeeee x—w: 11 o .11 o 11 o 11 o = e3u\meeee eeewpeoo eewce xpwz seem Am.ov m.o Am.ov m.o Am.ov N.: Ae.ov w.o = me_.Pwe ee:_eeo eewueeeece emeesu Am.ov N.: Am.ov e.: Am.ov e.: Ae.:v e.~ = ep\me:ee eecwpeeo eewce emeegu epemepeez ecoaezm e< moo... ...z Aoo.ov m.~ Aoo.ov m.: Aoo.ov :.m Aoo.ov :.N = wep.wwe eewpeeo eewueeeece xpwz Aflo.ov m:.o AHo.ov mo.o Amo.ov 5:.0 A:o.ov ::.c = uze\me:ee eecwpeeo ee_ce xpwz acme Am.ov m.o Am.ov m.o An.ov N.H Ae.ov w.o : wep._ws eewpewo ee_ue=eeee emeezu An.ov ~.: Ao.ov e.: Am.ov e.: Ae.:v e.m ARV e_\meeme eeewpeeo eewce emeecu epemepecz ugeeeem e>ee< mmewce x—wz 111 e< e>wueeceu~< ugeeE: u.o m.o ~.o m.o meme: ».amwm .5 :..o.ema.e m.o- m.o- ceases we e:e_emepm eewce aka: :: emeegu :ewpee~ we meceesfi mewmeeceefl we memesecee eceeeem acescce>ee ece .memeeeece xpwz .mceeeueeweeez emmesu sew—ea: meaeum eeuwee use no mueeesm eec1ucesm m.o mpeeh 105 predicts that milk prices would fall less than one percent under each alternative. If prices were at support when the imports enter, CCC purchases would be estimated to rise between 3.5 and 8.4 million pounds and between 23.1 and 53.2 million pounds under alternatives A and 8 respectively. Wisconsin is the leading manufacturer of the hard Italian cheeses included in this category but New York, Illinois, Pennsylvania and California are also important producers. Plants producing this type of cheese are, on the average, smaller than those producing the other cheeses considered here. In 1977, average plant output was between one and two million pounds, whereas the average American cheese plant, for 1 points out that adapta- example, produced 3.8 million pounds. Lough tion of automated technology has been slower in the Italian cheese industry because the cheesemakers are able to retain greater individua- lity and distinctiveness in their cheese than is possible in some other types. Though the small plant size and relatively lower capital inten- sity of production may make the domestic producers more susceptible to injury from imports, particularly from the Cheaper Argentine cheeses, many plants also produce Mozzarella and thus have some flexibility of Operation. Mozzarella is included in the Other-NSPF import category and would not enter in greater quantities if either Italian quota were increased. Severe impacts in the hard Italian industry may prompt manufacturers to shift permanently to Mozzarella, a cheese for which continued demand growth is projected. Demand for the hard Cheeses is rising, tOO, and if manufacturers are able to weather the short run IIhid., p. 25. 106 set-backs estimated in Table 6.6, longer run market conditions would likely be conducive to a continuation of the past industry growth trend. Swiss Cheese Imports. The EC has proposed "concerted displines" in the two Swiss import categories, Emmenthaler and Gruyere-process. By allowing subsidized imports to enter the domestic market, the U.S. would be making a significant concession, not only to the EC but to the other European countries whose subsidization practices have been restrained since the 1975 CVD waiver agreement.1 Except for West Germany in the case Of Gruyere-process cheese, the EC countries have not been able to supply much Swiss cheese to the U.S. since 1975. Fin- land and a few other countries have actually been able to supply more 2 because of differential relative impacts Of than in pre-waiver years the CVD action, but generally the European countries have been hurt by the ruling. Again, two alternative import actions are analyzed: Alternative A. If, through subsidization, exporting countries were able to supply all the Cheese currently allowed to enter under the two quotas, imports would rise by about 9.3 million pounds. This assumes that the subsidies are not allowed for above pricebreak cheeses and that the APB imports do not change. Actually, APB imports could drop if the cheeses were subsidized to a level at which they could enter under quota. It is also possible that they could rise if, 1See Chapter V. 2See Tables 5.15 and 5.16. 107 because Of difficulties involved in controlling subsidized mports, exports of these cheeses were subsidized as well. Thus, alternative A analyzes the case in which imports rise by 9.3 million pounds (13 percent) over normal levels. Alternative B. AS in the case Of the other cheeses, the second alternative estimates the impacts Of doubling the quota when conditions are such that the full amount of the increase enters the U.S. The additional 31.7 million pounds that enters under alternative 8 can be seen in this case as resulting from increasing the quota or from extending subsidization privileges to APB imports. If the Emmen- thaler quota were increased, more industrial-type cheese would enter whereas if APB subsidization were allowed, additional table quality Cheese would also be imported. Both 8P8 and APB Gruyere-process are processed Swiss cheese. Table 6.7 shows the estimated impacts of the two alternatives. If subsidized imports were allowed to fill the quota it is estimated that cheese prices would fall between 2.0 and 4.1 percent. With prices at support, CCC support purchases of milk in some form are estimated to rise over 40 million pounds. Doubling the quota could result in cheese and milk price declines Of 13.9 percent and 3 cents/cwt. respectively and increased CCC purchases of as much as 148.0 million pounds. Since industrial Swiss can compete directly with American cheese in manufacturing processed cheese, a price decline in the Swiss indus- try would have important implications for the domestic American cheese producers. The model assumes cross price elasticities of zero among the cheese categories considered and the estimates do not include these 108 .m eeee =e.wm&fi e .empeeee ecu Ammeeece1m.e»=.w ecu ceFeneeeEEmv uo..omm eee mo..omm eueee a. .peo.a>.=eo ...ze .Ecew age so xpws we ee..e mFMme—egz1ppe eeueenece ce eemee emeueee.eeu .ewmeeemwz .emeezecez .e xeee m.e—_em .Amep oo.1owv mxeepe < eee.m mmwzm .eewce pepxee.u eese mmege . aceecme MHV meeeee :ewppwe m.m an emem.e:w muceeEHm w..m an emeeLecw muweee. 11. N.... .11 ~.me 11. e.we. 11 “.mm . 53....2 eomao.oe. 355836.38 ..oaa=m eee 11. e 11 o .11 e 11 o = 53....5 oe..ooe eo..o=eo.. ...z 11 e 11 o e 11 e = .zo\m.eoo ooe..oeo do... ...2 e... .3... m.m. .e.m. 3.. .e.m. m.e. .e.m. a... = we....5 oe..ooe ea.eo=eo.. omooee .a.e. m.m .m.m. ~.m. .m.m. ~.m. .m.m.. 3.3. = 3.\u.eoo 36:..563 do... omooee 6.855.633 ..oa.=m e< moo... ...z .mo.e. ...e .No.e. w.mm .mo.o. «.mm .me.e. e.mm = 63....5 oe..ooe co..o=eo.a .._z ..N.e. om.: .N..o. .m.. ..:.e. eo.m ....o. mo.. = .zo\m.eoo oee..ooe do... ...z a... .e... m.m. .m.m. 5.. .e.e. m.m. .e.m. m... = m3....e oe..ooe eo..o=eo.a eaooee .m.e. 3.8 .m.a. ~.m. .m.m. N.m. .m.m.. 3.3. .R. 3.\m.eoo 36:..ooe do... omeoee o.aao.oez uLeeeem e>ee< meow.e xpwz em e>wpec.eu_< u.ees. 11 e.Nm 11. e.m. 11 :.me 11 0.x: = 53....5 eomao.oe. 655.36.33 e.oaa=m eee .11 e .11 e .11 o .11 o = 53....5 oe..oee eo..o=eo.e ...z .11 o o 11. o 11. o e u3e\mucee eeewpemo euwce xpwz age. .3... ..e ..... m.~ .e.:. 3.. .0... m.m = 53....e we..ooe eo.eo=eo.. omooee .o.N. 8.: .m.~. 3.: .e.~. ¢.m ...e. e.m . 3.\meeoo eoe..ooe we... omooee 6.6.6.6.: ..oea=m e< moo... ...z ..o.o. m.~. ..o.o. a.e ..e.o. :.e. ..e.o. 3.0. = 53....e o...ooe eo..o=ea.. ...z .ee.o. we.o .mo.e. em.e .eo.e me.e Ame.o. .m.e = .zo\m.eoo oue..oee do... ...2 5.6. .3... ..e ..... m.: .e.: e.m .3... m.m = 33....5 oe..ooo ea..o=eo.a omooee .e.~. 8.: .e.N. 3.: .w.~. 3.. ...e. m.m .3. 3.\m.eoo 36:..6oe do... damage o.amo.o.3 uceeeem e>ee< mee_.e xpwz m< ewwuecceuw< eeeesw ..e m.o ..e m.o we.e= x.mm=m .6 a..o..aa.e m.e- _ m.e- ceases we auwemumepm eewce owe. cw emeecu mmwzm we mu.eee. me:mee.ee. we memeze.ee aceeeem u:eE=.e>ea eee .m.eeeee.e xpwz .m.m.=ueewecez emmecu mmwzm meueum eeuwc: use so mueees. cec1e.o;m w.e epeew 109 effects. However, in part B of Figure 4.1, the demand curve for Swiss would likely shift to the right as more Swiss was used for processed cheese, displacing some American-type. Thus, the estimated adverse price impacts on the Swiss manufacturers could be dampened to some extent. At the same time, however, the demand curve for American could shift downward causing a price decline in the American cheese industry, if prices were above the CCC purchase level. If this happens, the E81 domestic demand curve for manufacturing milk would still fall and : farmers would experience some adverse price impacts. Illinois, Wisconsin and Ohio produced the most Swiss cheese in 1977, accounting for 60 percent of total output. Lough1 points out :3 that because Swiss is difficult to make, requiring special equipment and skilled cheesemakers, most Swiss plants concentrate their resources on the production of this cheese only. If another type Of cheese is made, it is usually of American-type and accounts fOr a small part Of total plant output. Thus, some plant flexibility exists to cope with the kinds Of industry adjustments which the impact estimates and the above discussion indicate might be necessary. Other-NSPF Imports. As pointed out in Chapter V, imports in the Other-NSPF BPB quota category compete with domestic American cheese while APB imports compete with other cheese types, such as Mozzarella and certain high quality table cheeses which are produced in the U.S., for example, Camembert or Brie. Over half Of the U.S. production of cheeses which compete with imports entering in the APB category is Mozzarella. Therefore, increasing the quota (BPB) or allowing the 1Lough, The Cheese Industry, p. 29. 110 current quota to be filled with subsidized imports would impact adversely on the domestic American cheese industry, though it is also conceivable that more Mozzarella would enter below pricebreak. Allow- ing greatersubsidizationIof APB imports would possibly affect Mozza- rella manufacturers and plants producing the various varieties of specialized table cheeses. There have been two requests for U.S. concessions on this import F‘ category. New Zealand has asked that its share of the quota be increased from 7,556,000 to 46.5 million pounds and the EC has proposed "concerted disciplines." Four import alternatives are evaluated. ,. Alternative A. Assuming that allowing imports under quota to be subsidized would result in the quota being completely filled, alternative A analyzes the effects of permitting 5 million more pounds (10 percent more than normal) to enter. All of this increase is assumed to be competitive with domestic American cheese. Alternative 8. If New Zealand's request were granted, an additional 24 million pounds of New Zealand Cheshire, which competes directly with domestic American cheese, could enter the U.S. Though the New Zealand quota Share established by the Presidential Proclamation is 7,556,000 million pounds, country-Of-origin adjustments Since the CVD waiver agreement have resulted in that country's share rising to 22,603,652 pounds in 1977. The import projection in 1979 in Table 5.10 assumes implicitly that the 1977 quota allocations remain unchanged and therefore, meeting New Zealand's request could expand imports of American-type cheese by 24 million pounds (47 percent). 1 Many of these imports are already being subsidized. 111 Alternative C. As indicated earlier with reference to the New Zealand request for an expanded share of the two American quotas, it might not be possible for the U.S. to grant an increase in one country's quota share without granting a similar increase to all coun- tries. Thus, if under GATT Article XIII, the U.S. had to increase the quota six-fold as a consequence of meeting the New Zealand request, imports under quota would be permitted to rise by 204 million pounds. me 'H’-.' The impacts of increasing American-type cheese imports by this amount are analyzed under alternative C. Alternative 0. If greater subsidization were allowed, additional quantities of Mozzarella could enter, possibly at a price under the pricebreak. Alternative 0 assumes that the additional five million pounds of quota cheese entering under a more liberal subsidiza- tion policy are Mozzarella instead of American as assumed in alternative A. Mozzarella does not hold up well in long distance shipping so New Zealand would not be a supplier. The increased imports would likely come instead from Canada, Israel or a European exporter. No attempt is made to estimate the impacts of import increases on domestic manufacturers of the cheese which competes with the hun- dreds of other cheese types entering in this import category. The estimates of impacts under each alternative are shown in Table 6.8. The model estimates that if subsidized imports were allowed to fill the quota, American cheese and milk prices would decline less than one-half percent and with prices at support, CCC purchases would rise 50 million pounds. If New Zealand's request for a larger quota share were granted, American cheese prices could drop as much as l.4 r-‘m 112 0000 H.Hm¢: om.¢~ RN: 4.0Nfi AH. ev ~.m RN. NHV o.ov~ II GOOD I = map._ws = uzo\mp:wu = map.pwe ARV ap\mpcmo : map._wE = mnF.FwE : HZU\WHCQU : map.FwE = n—\mucmu = ma_.F_s = H30\mu:wu = ma_._ws Afiv n_\mu=ma = mnF.FwE : map.pws : azu\mu:mu : mnF.FFE = np\mu=au = map._ms : HZU\wu:mu = mn_._we Rev ap\mu=au mzwpumo composuoca xpwz omcwpumo wows; x—wz Egan mam—owe :owuuzuoga mmwmgu um=_Puoo woven mmwmgu m_mmm_o;3 “Lonasm m>oa< mmuwga xpwz u m>_pmcgmup< axons” mommmgucm mmmm;ugza ucoaasm uuu mcwpuwo composuogm xpwz mmcwpumo women x~_z Egan mcw_umo =o_pu:uoca mmmmcu vocmpumo women mmwmzu mpmmmpozz ucoaaam p< waa_ca x__z mcwpumo cowuuzuocm x_wz mm:w_umo mowed xpwz Egan mcwpumo cowuuzwoga mmmmsu mcwpumo mowed ammogu mpmmmpogz ucoaanm m>on< mmuwgm mez um m>wpmccmu—< ugan~ wmmmmcucm mmmmzucza peonaam ouu mcwpumo cowuuauoca xp_z mmcwpumo muwga xpwz Egan wcwpumo co_uu:uocm mmmmzu uocmpumo mow»; mmmmgu oPmmmpocz pcoaaam u< mauve; xp_z m:w_umo copuuauogm xpwz mmcwpumo woven xFVz Esau ocvpumo cowuuzoocm mmmmsu mcmpumo more; mmmmnu mpmmm—osz agonasm m>on< mauve; x_wz o< m>muwcgmu~< “Loaem u c m.o 5.0 m.o- Afinmmw mo awropumm_u m. o- census we xupupummpm muFLa maze: mum“ :P damz- mmmmnu cacao mo wagons“ mcpmmmcucm mo mwmczucaa ucoanzm ucwacgm>oo new .mgmoauogq xppz mcmgsuumwacoz mammcu appwgm-oz mmcoczuuomzcaz mmmmzo :mupcws< mmumum umpvca co mpumnsa :3; ugosm m. o opacp ll3 .ewm eeemwz .mmeegewe: we xeee mweppmm .epwewe-ez .eewwe pewxeewu eese mmmee .meeeee cewpwws m an mmeeweew emmmge ewpege-ez we mageeewp .meeeee eeww—ws com an emeeweew memese meme emewwme< we muweeswe .meceee :ewppwe em An mmeegeew ememse max» :euwwes< we mpweeewm .ecapm>w=em ¥_wzw .Ewew use :e waE we eewge «Fame—es: ppe eeuemnewe ee venue emepeeewmee .mucwee apeeemme :wmceemwz .emmege geeeesu we mxeewe .ep1ee we meewge uepweue .Auceegee emv meeeee cewppws m an mmeeguew emmmzu max» ceewwws< we muweeEHu e mm>wue=wmu_e ugeeswe o1< me>weeeweuwm eceeEHe .11 ¢.m~ .11 e.e 11. m.e~ 11. m.m~ = mew.Pws wammmeece manageeaa ecoeezm eee .11 e .11 e .11 e .11 e = maP.Pws mcwpeae coweuaeoca x_wz 11. o 11. o .1! e .11 o = uze\mueme eeewpueo mews; xpwz anew e.ew ~.~ A~.ee N.“ Am.ev a.~ Am.ee a.“ . map._ws acwpuae coweeseoea mmaage m.e e.e Aw.ev e.e Aw.ev e.e Ae.Hv N." . np\me=ae amcwwume ouwga amaaze apamapogz . “Loggsm e< mmuwcg xpwz e.ev e.m hee.ee ~.m “He.ee e.w wee.ev m.¢ = map.__e a=w_uae coweuseoca xwwz e.eW ~m.e ”Ne.ov wfi.e. wee.ow ~¢.e eme.ew w~.e = e26\me=au maewpuae auwta ewe: stud ¢.e ~.~ M~.ew ~.H Am.e m.~ Am.e m.~ . mew._we acwpuae coweuzeoca mmaage m.ev e.e w.e e.e Aw.ev e.e Ae.HV N.“ Awe a_\m»=me naewpume aewta amaage a_mma_o;3 . aceeeem e>ee< meewge gwwz o m>wueegmuw< eweeEH .11 e.e¢em 11. e.e¢e~ .1. e.e¢em .1. e.eee~ . we.._ws wamaatu=H mamwgecaa utoagsm eee 11. e 11. e 11. e 11. e . mgP.Pwe acwpuae cowee=UOLa xpwz .11 e .11 e .11 e .11 e . er\me=au ma=w_uae «awe; epwz stem .11 e 11. e 11. e .11 e . map.pws m=w_uae coweuaeoca ammage .11 e .11 e .11 e .11 e Awe ep\me=me ea=w_ume aewca mmamge a_mmapo;3 utoaaam u< mauwta xwwz w.e m.e 1w.e m.e mewee areaem we muwewumewm m.e- w1 m.e- eeeEmo we Newewumepm eewwe A.u:ouv m.c mpne» 114 percent and if prices were at support, CCC purchases would go up by 240 million pounds. In the extreme case in which the U.S. not only is assumed to increase New Zealand's share six-fold but the whole quota as well, severe impacts on the industry are estimated. Milk and American cheese prices are estimated to fall as much as l2.2 and 2.2 percent respectively in this instance. CCC would have to buy over two billion pounds of milk in some form to maintain prices at support. If a more liberal U.S. policy or export subsidization practices of suppliers were adopted and an additional five million pounds of Mozzarella entered the U.S., it is estimated that Mozzarella cheese prices could fall by one percent. If prices were at support, CCC purchases would rise between 8.4 and 20.3 million pounds. Structural characteristics of the American cheese manufacturers relevant to industry adjustment were discussed previously. The largest producers of Mozzarella and, therefore, those likely to suffer many of the adverse effects of increased imports are Wisconsin, California and New York. Average plant production in California is by far the greatest--ll.2 million pounds annually compared to 4.4 million and 3.8 million in New York and Wisconsin respectively and perhaps the larger, more efficient plants could better adapt to adverse price impacts, though as Lough1 points out, the larger plants have to draw milk from farther away. Thus, higher assembly costs offset, to some extent, the cost advantages which larger size and newer technology give them. Many Mozzarella plants also produce other Italian-types and therefore, some flexibility exists at the plant level to adjust production in response to lower Mozzarella prices. If demand for Mozzarella continues 1Lough, The Cheese Industry, p. 22. 115 to rise as rapidly as in the past, short term adverse impacts resulting from import increases would likely be offset in the long run, providing the imports are regulated by quota. If imports of subsidized above pricebreak Mozzarella continued to expand, the industry could experi- ence permanent setbacks. At the moment, however, domestic Mozzarella is priced below the pricebreak and is thus largely protected from import competition. If domestic production costs rise above the price- break, subsidized APB imports could compete. Other-NSPF imports from EC countries have dropped sharply since 1 and Denmark in particular has the CVD waiver agreement was reached been severely affected by the ruling. New Zealand has been the princi- ple beneficiary of import license transferring operations as it's allo- cation has trebled. Therefore, a concession by the U.S. on this category which would allow the EC countries to, at least, regain use of their quota allocations would be of great value to the EC. Impacts of Import Expansion on Milk Producers In the last section, it was pointed out that for each set of assumed demand and supply elasticities for cheese, the impacts on milk producers are estimated to be identical, irrespective of the form of the imports. However, it is unlikely that manufacturers of these different cheese types would respond in the same way to increased imports of their respective cheeses. Therefore, the form in which the increased imports enter likely has an important bearing on farm level impacts. 1See Table 5.10. 116 To illustrate this, the cheese types are ranked ordinally in this section according to short run supply elasticities which are specified based on an analysis of relevant characteristics of the manu- facturers. As noted previously, there are no estimates of supply elasticities of these cheese types reported in the literature but a qualitative evaluation of industry characteristics can provide a basis for a relative ordering. at. Table 6.9 indicates this ordering and the farm level impacts which the model estimates would occur if an additional l00 million pounds of milk were allowed to enter in the form of the various cheese types. The adverse impacts are greater with more elastic supply elas- é} ticities. American cheese is ranked the most inelastic because the govern- ment is willing to buy unlimited quantities at the designated purchase price and future prices can therefore be projected with somewhat greater certainty. American cheese is not as storeable as other cheeses and this contributes to its relative supply inelasticity. Most Blue- Mold plants are single product plants and with no production alterna- tives and a relatively unstoreable product, supply of this cheese type can be expected to be inelastic. The Swiss cheese manufacturers have some flexibility to shift to American production and they can store their cheese for over two years. The hard Italian cheeses can be stored even longer than Swiss and these plants are able, in many cases, to shift to American or Mozzarella. Edam and Gouda is produced by only one firm which produces other types of cheese as well. Given the stag- nant domestic demand for this cheese and the other intra-firm production possibilities, it is estimated that the firm would react quickly to an ll7 .H.o eweew .e eueepeew eeme .H.e epaww .e eeoceoow mam a .aceeeem e>eee ea ea eesemme ewe meewce .H.o epeew .e eueeueew eeme wee.ee m.eH Ame.ev H.- = mn_._we ue=w_aee coweeaeoca ¥_wz Ame.ev Hm.e AHH.eV -.~ = eze\me=eu necwpeeo eewca xpwz w. meeew eee Seem Age.ev m.e~ Awe.ev ¢.o~ mn_.wws ee=w_eeo coweeaeoce epwz Awe.ev Ne.e AeH.ev NH.H = eze\me=ee necw_eee eewca xwwz e. cawpaee Ree.ov m.mfl Ame.ee w.eH = map..ws eeewpeee =o_ee=eoce xpwz Awe.ev cw.e Ame.ev mo.~ . e;a\me=eu neewpuee mewce x_w= m. mmwzm Aee.e m.HH Aeo.ee e.eH . mn_._ws ue=w_uee coweeze0ta x__z flee.o me.e Ame.ev No.e = eze\me=ee necwpuee eewca ewe: e. eswm wee.ov e.a Age.ev H.¢H = mn_.__s eecwwuee coeeuseOLQ xwwz Amo.oe mm.e Awe.ev ew.o Axe e26\me=eu ne=w_aee eewca x_wz m. :eewwee< m.o- m.o- emeegu Lew mews: eezw emeezu emeecu Lew eeeseo we auwewumepu eewwe xuwewumepw apeeem emeexw emeesu meewce> we Ewew esp :w acepe>weeu xwwz we meeeee :ewppwz ooH we mwmfi cw mugeeem acwmeeceem we mgeeeeewe xpwz meueem eeuwe: ce meeeeew e=w1ecezm m.o ewneh 118 adverse price impact. Therefore, it is estimated that this cheese has the most elastic short term supply. Over the range of elasticities shown in Table 6.9, the farm level impacts do not vary much in absolute or percentage terms. Neverthe- 1 which does not less, an analysis like that of Buxton and Fallert consider the form in which the increased dairy imports enter, is ignor- ing an important determinant of the impacts. whereas Buxton and Fallert conclude that milk prices would dr0p about 1 percent if imports were increased by 500 million pounds of milk equivalent, estimates derived from Table 6.9 indicate that if this increase came in the form of cheese, milk prices would be expected to drop only between 0.35 and 0.55 percent.2 Furthermore, if the imports of American cheese were increased by an amount corresponding to this much milk, the farm milk price would drop 3.9¢/cwt., whereas if the increase entered as Edam and 2 Thus, the impacts Gouda cheese, the farm price would drop 6.l¢/cwt. depend not only on the form in which the increased milk equivalent enters but this analysis indicates that because of differing character- istics of domestic cheese manufacturers, the cheese variety is also relevant. An aggregate analysis of this sort cannot indicate how farmers in particular localities would be affected by increased imports of cheese. A relatively insignificant estimated reduction in national cheese output in Tables 6.1, and 6.3-6.8, and the small milk price impact estimates of Tables 6.l and 6.9, mask the disasterous situation which a particular diary farmer could face if the local cheese plant 1Buxton and Fallert, Impact of Dairy Product Imports. 2Demand elasticity = -o.5. 119 getting his milk were to go out of business. Some inferences can be made from this analysis of likely regional impacts. Lough1 reported that, in his survey of cheese plants in 1973, 76.3 percent of the milk used to manufacture American cheese and 65.7 percent of the milk used in total cheese production came directly from individual producers, with the rest coming from producer cooperatives or other plants or receiving stations. Since, as a rule, the milk used in cheese manufacture moves a much shorter distance to the plant than that used for fluid purposes,2 it can be inferred that producers in the immediate vicinity of the cheese plants would be the most directly affected by increased cheese imports. The states which lead in the production of the individual cheese types have been indicated earlier, but it can generally be expected that farmers in the big cheese producing states like Wisconsin (38 percent of l977 cheese production), Minnesota (l2 percent), New York (8 percent), Iowa (5 percent), and California (4 percent) would be apt to suffer the most. Lough3 points out that milk producers are generally "price takers" and cheese manufacturers set the milk price based on their returns. Lower national cheese prices could mean lower returns to the milk pro- ducer, particularly if there existed no alternative outlet for his milk. The price received by an individual grade B milk producer for his manufacturing milk could even fall below the designated support price because of the imperfect nature of the price support system. The blend 1Lough, The Cheese Industry, p. 20. 21bid., p. 19. 31bid. 120 price received by the grade A producer in the impacted area would also be affected by a lower manufacturing price. As Tables 2.2 and 2.3 show, milk prices received by farmers, production costs and net incomes vary considerably among regions of the U.S. In areas like the north central states where a large share of the milk is used for manufacturing generally and cheese-making specifically, and where much grade 8 milk is produced, prices received by farmers E‘ are already below the national average. Increased cheese imports would likely have a greater adverse price impact in these regions than in areas like the southern Atlantic states where a larger part of the milk production goes to Class I uses. Lower incomes could prompt ,7 farmers to more seriously consider alternatives to dairy farming. Effects of Changing the Model Parameters and Projections Arguments could be made for altering certain of the exogenously determined parameters and projections used in the model. If modifica- tions were made, the magnitudes of the endogenously determined impact estimates would change. In Tables 6.l, and 6.3-6.9 sensitivity of the estimates to alternative demand and supply elasticities for cheese is indicated. Table 6.l0 shows the extent to which elasticity assumptions affect the estimates of milk price impacts, if imports increase by l00 million pounds of milk equivalent. Table 6.10 can be compared with Table 6.l since the former indicates the sensitivity to elasticity assumptions of the milk price impact estimates for each set of cheese elasticities used in the latter. It can be seen from Table 6.l0 that, as expected, increasing the aggregate supply, manufacturing milk demand or fluid milk demand elasticities reduces the impact estimates. lZl Table 6.10 Sensitivity of Model Estimates of Milk Price Impacts to Alternative Elasticity Assumptions - Imports of Cheese Increase by 100 Million Pounds of Milk Equivalent in 1979a Elasticity of Price Elasticity Price Elasticity of Demand for Aggregate Milk of Demand for Manufacturing Milk (nun) Supply (:5 ) Fluid Milk (n F) -0.184 -0.fc6entS/-&t1)84 -0.46 (ec- .3, nc- .5) (ec- .3, nc- .9) 0.15 -0.35 0.78 0.56 0.52 0.37 -0.5 68 0.50 0.45 0.33 0.25 -0.35 0.63 0.48 0.41 0.31 -0.5 0.56 0.43 0.37 0.29 (8c= 7. "c: .5) (5c: -7. ”c: -9) 0.15 -0.35 1.22 0.87 0.91 0.65 -0.5 1.05 0.78 0.78 0.58 0.25 -0.35 0.97 0.74 0.73 0.55 -0.5 0.87 0.67 0.65 0.50 L1? aMilk prices above support. 122 Table 6.ll summarizes, qualitatively, the types of changes in the endogenously determined model estimates that would result from changing the projections and the conversion factors as well as the elas- ticity parameters. In some cases, because a factor enters the model calculations more than once, possibly with different weights, its influence on one estimate may be negated or reversed in the computation of another estimate. f Table 6.ll suggests that changes in milk price or production 1 caused by altering parameters in the milk industry have no effect on estimates of impacts on the cheese industry. In Chapter IV, it was pointed out in connection with Figure 4.l that changes in milk price L would feed back to the cheese industry through impacts on the cost curves of the cheese plants. For example, if milk prices dropped, these cost curves would drop and the supply curve for domestically produced cheese--and by implication the total supply curve--would shift outward. This would cause an even greater impact on the cheese price and further repercussions on the milk and cheese industries would result. The magnitude of these feedback effects is not estimated in the model, however. Summary Alternative policies with respect to cheese imports have been analyzed in this chapter with the help of the comparative static model described in Chapter IV. The policy alternatives evaluated were speci- fied based on requests which the U.S. has received in the MTNs for more liberal import policies. Estimates of impacts on the price and produc- tion of milk and cheese, as well as those on the support purchases of the CCC, have been derived for each policy option. It has been shown .mme— ee eweez mugeesw ewes» we peewe>w=ee emeece ecu eeewm eueewume ueeesw eewge emeece es» emeeweee eweez weueew :ewmwe>eee esp mcwmeewecw .H.m eweew cwme meweu peepe>w=ee xwws cw ece memeeweew aweeew eeszw .eeueewwe en we: twee: eweswume ueeeEw eaeueeewee en» .eewwesw mw mpweesw eemeeweew wH .ecwweee eweez eweswume ueeesw emeueeeeee es» .eewweew mw :ewuueeece ewumeEee eemeegeew wHe .muweeEH weELez + :ewpeeeewe ewameseo u :ewuesemeeue .memeewecw zuwewume—e eceeee esp we eewe> epewemeeE eweez :ewauenege we eeueEewee es» mewmeeweeoe peewwe ez Huz HemeegeeH ”H Hemeeweee He Heuez H 3:: e2 MezW we: Hd H H: H .588 esteéoe ez EH: ez ez H :5 ez $5 ez 8.5 2822: EH NZ 3 e2 2: e :5 e2 :5 ez 1232328 22 ez $5 ”.2 2: H. as ez :5 e2 3:85 :52 22 8 “2 2: e2 He HH :5 ez :5 e2 1.23:8; 5858 SH: 1 no 2: H. 2: H. 2: a He 0 8.3.8.53; 22.8 eH H: H E HH HHV H H: H 33.58: :85 mmmmnu e2 e2 “2 HE a 2: HH em: .ewzeowtéoé 5:; 22 e2 e2 ez 2: HH 2: e 8.: 23:18:38; 5:; 2.: NZ ez ez He ez He 9 5:082 5:; 382mg 22 ez ez m2 3 H H: H 8.5 VHS: 8:368:52 32 m2 ez e2 2: a He ez 8.5 5:; 28223;: SH: mz ez e2 2: a H3 9 88:38:82-3.852: H588 mz ez ez He H. 2: HH 6255.858: 22.8 mz ez ez $5 ez 2: H. 3.653: :83 5:; mmmmzuwza uuu :owuuzvowa wuta wmmmzu cameo-50.5 mute v2.22 8% v.2: HmzePHew me meueewumm ueemEH Hemeueeeceev eueweme< ecu mpeeww< Heewueewege we LeueEeLee mcwzewwew ecu mewmeeweeH Heeez ewueum e>wueceeseu ecu cw wee: meewueenege ece mgeuesewee es» emewmeegeeH we meaeEwumw ueeeEH eecwscepeo zwmeecemeeeu ecu ee muuewwu HH.m epoch 124 that the form taken by the import increase is an important determinant of the farm level impacts. This study estimates that, if form is considered, import increases would cause smaller impacts on milk prices and production than were estimated by Buxton and Fallert.1 Whereas Buxton and Fallert predicted that a 500 million pound milk equivalent increase in imports would cause about a 1 percent decline in the farm milk price, it has been estimated here that milk prices would ”3‘ drop between 0.35 and 0.55 percent depending on the type of cheese imported in greater quantity and the adjustments in the cheese industry. Impacts on the cheese manufacturers are estimated to be quite severe in some cases. :3 In the discussion of dynamic effects and industry characteristics not accounted for in the model, it was pointed out that though the estimates derived from the model are useful indicators of aggregate impacts, it is necessary to look beyond these figures to determine the area and production units most directly influenced. It was indicated that dairy farmers in areas where income is most heavily dependent on the price of manufacturing milk, i.e, the grade B production and low Class I utilization areas, would likely be the most damaged by expan- sion of cheese imports, though prices received by all U.S. dairy farmers could conceivably be affected as long as milk prices are based on the manufacturing price. In the final chapter, further implications which these results have for resolving the policy dilemma faced by decision-makers are discussed. 1Buxton and Fallert, Impact of Dairy Product Imports. CHAPTER VII POLICY IMPLICATIONS AND CONCLUSIONS Many of the implications of these results for policymakers have 5‘ u r... already been discussed. However, in this chapter, the impact estimates and their interpretation, presented in Chapter VI, are put in perspec- tive with a discussion of other aspects of the dairy import question. .Ej “ The first section suggests additional factors for policymakers to con- 53 sider with respect to the adjustment which affected segments of the economy could be expected to undergo in response to a dairy import policy change. Then, some possible benefits of policy change are indi- cated to provide a counterpoint to the cost estimates which this study has developed. In the third section, some characteristics of the policymaking process itself are highlighted and the value-laden nature of the decision is discussed. The chapter concludes with an overview of the study. Further Aspects of Domestic Adjustment The Cheese Industry. It has been indicated earlier that cheese demand has been growing rapidly and is projected to continue to grow. This factor would tend, in the long run, to ameliorate the situation which the analysis predicts would be faced by the cheese and milk industries in the wake of import expansion, as reference to Figure 4.l makes clear. In the figure, if the demand curve for cheese, 0, shifts l25 126 out in the longer run, the cheese price would rise, thus offsetting some of the price depressing effect caused by the import increase. If imports are not allowed to increase further, domestic cheese production would have incentive to expand, and the demand curve for manufacturing milk, 00, would move outward resulting in a higher farm price of milk. The depressed prices initially may cause the demand curve to shift out- ward more quickly than otherwise and allow domestic producers to recoup |‘* their short run losses sooner. This demand growth rate and the result- ing effects discussed above would vary according to cheese type. These effects would be different if, for example, subsidies were allowed on above pricebreak cheese and the import increase was not ‘13- limited. In this case, the imports, AE in Figure 4.l, could increase further to limit the price rise discussed above, to negate it or, if enough imports entered, even to further accentuate the price drop. The corresponding effects on the milk producers can be traced through on the figure. If continuing growth in cheese demand appears likely to offset the adverse impacts estimated by the model in the longer run, the tem- porary setbacks faced domestically could be alleviated through the provision of short term import relief as provided for under Title II of the Trade Act of 1974. Lough1 indicated that his sample cheese plants employed between five and l02 people. These jobs could be in jeopardy if industry production and income dropped as estimated in Chapter VI. A crude way of putting an upper bound on the monetary cost of this assistance would be to assume that the government would make up the 1Lough, The Cheese Industny, p. l6. 127 difference between industry income expected and income realized after import expansion. For example, from Table 4.l it can be estimated that if l4.3 million more pounds of hard Italian cheese1 were permitted to enter, the industry income would be between $420 and $960 thousand less in l979 than that expected under the current import regime. If demand grew, the government would need to provide less in l980 and the ensuing years until it was determined that the relief was no longer 5 required. . The Milk Production Industry. As noted in Chapter VI, increased cheese imports would likely affect most severely dairy farmers within close proximity to the impacted cheese plants, those producing grade 8 milk and those whose milk is used largely for manufacturing purposes and hence receive a price weighted heavily by the manufacturing milk price. Adverse price impacts could give impetus to several trends in the milk industry. The trend toward fewer dairy farms, particularly fewer small dairy farms, could be accentuated. Cummins2 indicates that grade B farms are, on the average, smaller than grade A farms and since about half of the U.S. grade 8 production is in Wisconsin and Minnesota, states producing 50 percent of the domestic cheese, these farms could be among the most affected by increased cheese imports. Related to these effects is the impact that import expansion could have on the need to devise another way of pricing milk in the U.S. 1l00 million pounds of milk equivalent. ZDavid E. Cummins, Comparison of Production Costs for Grade A and Grade B Milk, USDA/ESCS, January, T978, p. 3. 128 Manchester1 notes that currently only 20 percent of the milk produced in the U.S. is grade B and that conversion from grade B to grade A is occurring at a rapid rate. He indicates that in l976, 54 percent of Minnesota milk and 35 percent of Wisconsin milk was grade B, down from 85 percent and 58 percent respectively in l965. A number of reasons are cited for this trend including stricter health standards for grade 8 milk, higher grade A prices and the move to bulk tank assembly by dairy 5‘ plants. Since the manufacturing milk price of Minnesota—Wisconsin is used as a reference in pricing all milk nationally,2 if grade B produc- tion ceases, one class of milk, grade A, would be used for all products, fluid and manufactured. Some contend3 that because of the decline in t' the number of manufacturing milk producers, the M-W price series is becoming less representative of dairy industry conditions, and, there- fore, less appropriate as a basis for establishing minimum Class I prices. If increased cheese imports further stimulate the decline of manufacturing milk production and/or the shift to grade A production, a different system of pricing milk in the U.S. may have to be found even sooner. The "Flanigan” and Atlantic Council reports reviewed in Chapter IV4 suggest that the economic adjustments that would be required of the 1Manchester, Dairy Price Policy, p. 9. 2See Chapter II. 3Glynn McBride and Robert D. Boynton, Class I Milk Pricing in Federal Order Markets: The Minnesota-Wisconsin Series and Alternative Pricing Formulae, Agricultural Experiment Station Report No. 334, Michigan State University, November, l977, p. 4. 4Council on International Economic Policy, Agricultural Trade. Johnson and Schnittker, U.S. Agriculture. 129 U.S. dairy industry to accommodate dairy product imports equal to 10 percent of U.S. consumption would be small, particularly when analyzed over a ten-year period. In l977, l.7 percent of U.S. consumption of dairy products was imported in the form of cheese and other products. If the model developed in this study is used to analyze the impacts of 1 it is estimated that importing l0 percent of U.S. consumption in l979, in the short run, milk prices would drop between 6 and l4 cents per F" cwt. (0.5 to l.3 percent). It is not possible, using this model, to estimate the impacts or adjustments over a ten-year period as the above studies attempt to do, but the immediate impacts would appear to be significant. If milk producer income in l979 were about the same as t the USDA estimates for l978 shown in Table 2.2, a positive net income per cwt. in at least two production regions could turn negative. Currently, the price support is at 80 percent of parity and legislation requires that it remain at that level until October 1, l979 at which time it may be dropped to 75 percent. The level of support has an important bearing on the domestic impacts of an import increase. A lower support would increase the likelihood that the industry would have to bear a greater burden of adjustment than a support set at a higher level. In the latter case, the CCC would absorb more of the impact through greater support purchases. These effects are illustrated in Figures 4.l-4.3. Strong milk prices currently, relatively low feed costs and the fact that l979 is not an election year make the roll- back to 75 percent of parity conceivable, though market conditions could change before October l. Almost certainly, if prices are depressed 1It is assumed, by using the model, that the imports are all in the form of cheese. 130 substantially by import expansion, pressure to maintain the 80 percent level will be strong. Importers. Importer behavior has been assumed implicitly in the model. It is predicted that importers would be anxious for the oppor- tunity to import more cheese, that they have the capacity to handle the increase and that they allow prices to drop as the static model sug- gests. Because many of the importers are also cheese manufacturers, 1 they may not be willing to import the full quantities which are per- mitted by the policy alternatives analyzed and hence would not actively seek the additional import licenses that would be available. Further, they may be unwilling to allow prices to drop as predicted since with inelastic cheese demand, higher prices would yield greater revenues. Schmid says, ”Many of the current policy models are incomplete because they begin with an assumed conduct and inquire of performance."1 The caution here is that by formulating more liberal import policies and then analyzing the effects of import expansion, the conduct of importers, as well as that of their suppliers, is assumed. Benefits of Policy Change Though this research is directed at a particular policy issue, the problem is not analyzed in its entirety. The costs of a policy change have been estimated but possible benefits, some of which are indicated below, have not been evaluated. Consequently, policy pre- scriptions cannot be made based solely on the results of this study, 1A. Allan Schmid, "Analytical Institutional Economics: Challeng- ing Problems in the Economics of Resources for a New Environment,II American Journal of Agricultural Economics, Vol. 54 (December, l972), p.2894. 131 but these cost estimates should be of use to decisionmakers who have careful analyses of the likely benefits at their disposal as well. Though it is difficult to tie a U.S. concession on dairy policy to a particular reciprocal action of a trading partner, this conces- sion could be of such importance to the EC and others that chances for a beneficial quid pro quo would be substantially enhanced. The U.S. is particularly interested in EC trade concessions on beef, tobacco, nuts, F” rice, canned fruits and joices, citrus, grapes, raisins and prunes-- items worth over $700 million to the U.S. in export trade with the EC t in l977. The U.S. is also anxious to resist any weakening of the free access to EC markets now enjoyed by soybeans and cotton. In discussions a? aimed at establishing a new international wheat agreement, the U.S. would like to convince the EC to abandon its proposal for a rigid maximum and minimum price structure within which trade would flow and agree instead to a more flexible system with greater reliance on the market. The U.S. would also like the EC to agree to greater restraint on the subsidization of wheat, dairy products and other items. Differ- ences also exist on safeguards--the EC favors immediate action against imports causing damage to a domestic industry while the U.S. suggests that negotiations should precede protective action. In addition to the advantages, political or economic, which the U.S. might derive from possible concessions on the above, and other, matters being discussed in the MTNs, an easing of dairy import restric- tions could be of considerable benefit to cheese consumers. If the wholesale price impacts predicted by this analysis show up at the retail level, these benefits could be substantial depending on the degree of policy liberalization. Since cheese purchases constitute such 132 a small part of total consumption expenditures, the contribution to the easing of inflationary pressures would likely be small. Nevertheless, more and cheaper cheeses entering the U.S. should result in consumers having a greater choice in the market and additional possibilities for adding variety to their diets. Poligymaking Process Within the constraints imposed on them by the international and domestic realities, U.S. negotiators must decide whether to liberalize dairy import policy. If they decide to liberalize, they must decide which import categories to change and by how much to change them. The decision finally taken on dairy import policy will reflect the views not only of the USDA and its advisory committees but also those of the other departments of the executive branch which take part in the policy formulation and review process, the President and the Congress. Many parts of government have a vested interest in dairy import policy because of its effect on their clientele or the manner in which it impinges on their areas of jurisdiction. But, as noted by Stucker et al., "Such widespread involvement in food policymaking has created difficulties both in developing consistent policies and in identifying who is responsible for them."1 Hillman, discussing the policymaking process with particular reference to decisions regarding non-tariff barriers in the Tokyo Round, further notes that, ". . . there is a real danger in (administrators') progressive withdrawals from direct and 1T. A. Stucker, J. 8. Penn and R. D. Knutson, “Agricultural-Food Policymaking: Process and Participants," Agricultural-Food Poligy Review. ERS AFPR-l, USDA/ERS, January, 1977, p. l0. 133 1 He also suggests that, detailed public criticism and responsibility." “Concentration of policymaking power among administrators puts a pre- mium upon organized pressures from directly interested groups and lessens the consideration likely to be given to the general public interest, particularly unorganized consumer interest."2 Even though the domestic decision process is a complicated one and it is difficult to assign responsibility for the outcome, ". . . the "3 is well known by strategic position of certain administrators . . . those representing the interests of the dairy industry in Washington. Since the adverse impacts of policy change on the dairy industry are easier to predict and would be more direct while the benefits to the U.S. are more difficult to estimate and would likely be dispersed among many sectors of the economy, pressure from the dairy groups to maintain the status quo is strong and not likely to be offset by other interest groups. Machlup writes, ". . . To pretend knowledge of the acceptable trade-offs between social goals is the heroic assumption of welfare "4 Those deciding on dairy import policy are ". "5 economics . . . definitely in normative territory. and their final decision will 1Jimmye S. Hillman, "Non-tariff Barriers: Major Problem in Agri- cultural Trade," American Journal of Agricultural Economics, Vol. 60 (August, 1978), p. 493. 2 Ibid. 31bid., p. 492. 4Fritz Machlup, "Positive and Normative Economics," in Economic Means and Social Ends, Robert Heilbroner, ed. (Englewood Cliffs, N.J.: Prentice-HaTl, 1969): p. 120. 5 Ibid., p. 128. 134 imply that they feel they have adequate knowledge of the trade-offs involved. Using the terminology in Johnson;l they must pass judge— ment on the "goodness" and "badness" of the expected impacts of policy change, some of which are estimated in this study. They must prescribe a policy action which they feel is "right" and reject alternatives which they feel are "wrong." If no course of action is deemed good, they must try to minimize losses and choose the policy which they view 5‘ as being the least bad. They must decide if estimates such as those derived by this study should be used in their decision process to indicate "goods,“ "bads" and their magnitudes, and they must weigh the 1 possible "goods" against the possible "bads" and present sacrifices er (benefits) against future benefits (sacrifices). All participants in the policymaking process must deal in these normative terms but the burden is heaviest on those in ". . . strategic position(s) . . ."2 Overview of the Study The aim of this study is to contribute to the knowledge required by policymakers who must decide, in the face of international pressure, whether to offer a more liberal U.S. dairy import policy in exchange for certain concessions from trading partners. It borders on being "3 "problem-solving research yet because not all aspects of the problem have been analyzed and no prescriptions are made, it should more 1Glenn L. Johnson, "Philosophic Foundations of Agricultural Econo- mics Thought," in A Survey of Agricultural Economics Literature, Lee R. Martin, ed. (Minneapolis: University of Minnesota Press, forthcoming). 2 Hillman, "Non-tariff Barriers," p. 492. 3Johnson, "Philosophic Foundations." 135 correctly be called "relevant disciplinary”1 research. The study has focused on estimating the adverse impacts likely to be felt in the dairy industry if the U.S. were to open its markets to greater cheese imports, as requested by the EC and others. The impact estimates are derived from a comparative static model linking the cheese industry, which would bear the adjustment burden of import expansion directly, with the milk producers, who would be subject I F to secondary impacts. Chapters 11 and III of this thesis have des- cribed the status quo domestically and internationally. The next two chapters have developed the model appropriate for estimating short run domestic effects of a policy change and the final two chapters have 5 presented an evaluation of the results. This study differs from previous work in at least two important respects. First, the actual policy alternatives being debated by policymakers are analyzed with the help of the model. Consequently, it is hoped that the results will be of greater use than those of stu- dies which have analyzed broad and/or more extreme shifts in import policy. Second, because this research recognizes that the manner of adjustment in the cheese industry would determine the types and extent of farm level impacts, the estimates derived here differ from previous work. In the model formulation, the cheese industry and the government support program absorb some of the adverse impacts of the import expan- sion and, therefore, the magnitudes of the impacts on milk producers are generally estimated to be somewhat less than suggested elsewhere. Ibid. 136 It is important that the macro-level estimates derived from the model do not give a false impression of the mildness or severity of possible impacts and therefore this study has indicated some of the likely micro-level effects, which the model is incapable of predicting. It has been shown that the impacts could vary substantially among regions, cheese plants and farms according to the location and charac- teristics of the particular types of production units and the policy f alternatives considered. Finally, it should be re-emphasized that this study analyzes only part of the problem. Policy recommendations cannot, therefore, be ( based on the results of this research alone and more information is 9 required. However, it can be said that for a decision to be taken to change dairy import policy, recognizing that the dairy industry could be affected as this study estimates, important value judgements must be made and responsibility for the decision must be accepted. It is the job of the public policymaker to bear these burdens and it is hoped that the deliberations leading to a final decision will proceed with due consideration being given to the issues raised by this study. APPENDICES APPENDIX A .eHmH .HN HHee< eemeeHec Howo— we ae< eewueeuewe eesemeeu use eese—eeweo< egw xe eeueeees me eHecem meueem eeuwes .xcumewew ecu .eewawguez .eceuweewcm< ee eeuuwfieeu e2» Lew mumu\> ./ / / / r / , , / 0319 .zmflw Huuzzom 137 .m .e .wmo— >_:¢ .mz< .—pm .02 :wue——:m —eu_umwueum .wwmp Lew xLE==em —eec:< .mewumwueum uexwez Levee x—wz _eweeew .eceeweuwem< we Heesugeeec .m.= .mwe— .w aeeecee Hmweego weweeew Lees: meee< eeweexge: x—wz .. ..~d: ail... il... 3...... . _ "muzDOm 138 A_ APPENDIX C (DDCODQU) OZODQV) mcewuewuemez eve: Eweuewwfiez e5 we €65 :eBercemgo m‘mwezeeme wzeZeKDeeme mmewwee mzewmee meeHwHw¥0h 139 APPENDIX D Short—run Price Effects in the United States Cheese Industry of ChanginguCheese'Imports (l) PC = a + b0D Pc = Price of cheese (2) PC = c + d0S + e0I QD = Quantity demanded (3) 0D = QS + QI Q = Quantity supplied domestically (includes normal imports) P-a (4) From (l): 00 = Cb QI = Quantity imported (new imports) Substitute this into (3), solve for 05: Pc ' a = QS + QI b PC — a (5) OS - b - 01 Substitute (5) into (2), solve for Pc in terms of 01: PC - a Pc = C + d( b ' 01) + eQI dPc da Pc = C I “6"' TT“ dQI + eoI dP c- 92 Pc‘T’C’ b'dQI+eQI ch - ch = bc - da — bdQI + beQI bdQ beQ (6) P _ bc _ da _ I + I Differentiate (6) with respect to 01: 101 = o initially. 140 _. w .0 141 :P_c__0 o- bd+ bezbe-bd_b(e-d) 30 7 b - d b - d b - d d I b(1 - 59 (7) 352 = e ' d 80I l-g— In equations (1) - (3); b = Sgg; Demand elasticity = nc =-§§Q '-;E D c D \ dPC . .. dQS PC d =-86—; Domestic supply elast1c1ty = ec g'dP— ' 6—- s c s dPC d0I PC e = ; Import supply elasticity = e = ' 30; I 'HP; '0; Therefore (7) may be expressed as: .1-.."_c-.1_.f_c_ Pc - Pc fljl QI 5c Qs=€I'QI cc Qs BQI ]_°:C_:, ]_nC'QD 1 _ Ec Qs ec ' Qs _L Kc. nc QD Then, assuming eI is w] and 0D = QS initially: fl. -1 . -1 301 —-—€C'QS-————”C'QD 3515 +1111) PC Pc Pc c c 1Because of export subsidization. APPENDIX E Short-run Price Effects in the United States Milk Production Industry of Chapging Manufacturing Milk Demand as a Result of Expanded Cheese Imports (1) Qm = a + me + cC Qm = Quantity of manufacturing milk demanded (2) QF = d + er Pm = Price of manufacturing milk C = Domestic cheese production (3) 05 = f + ng QF = Quantity of fluid milk demanded (4) Qm = 05 - QF QS = Aggregate milk supplied Substitute (2) and (3) into (4): (5) Q = f + ng - d - eP m m Substitute (5) into (1) and solve for Pm: f + ng - d - er a + me + cC ng - er - me = a + cC + d - f + Pm(g - e - p) = a cC + d - f _ a + cC + d - f (6) Pm ’ ‘19 - e - b1 Differentiate (6) with respect to C: 8P m _ c (7) '50— - g - e - b 142 __3_'a‘_". ,. 143 In equations (1) — (3): dQ b= m Egr— m c.3912 dC .._3_ dP 1} dQS 9 "3p‘ and: L din Pm i ”m =-35— ‘-6— = Elasticity of demand for manufacturing milk m m dQF Pm h =-——— -—— = Elasticity of the standardized demand for fluid F dP Q . m F milk dQS Pm . es = EP— -6— = Elasticity of the standardized aggregate domestic m 5 supply Therefore (7) may be expressed as: .HJE = C 3C 0 Q . S . F m e —-+ln1 —-+|n|'-- S Pm F Pm m Pm Or: fife. 1 mm om BIBLIOGRAPHY BIBLIOGRAPHY "Australia's Dairy Exports to Decline," Foreign Agriculture, USDA/FAS, February 27, l978, p. l5. Boehm, William T. and Babb, Emerson M. Household Consumption of Stora- ble Manufactured Dairy Products, Station Bulletin No. 85, Depart- ment of Agricultural Economics, Agricultural Experiment Station, Purdue University, June, l975. Brandow, G. E. Interrelations AmongrDemands for Farm Products and Implications for Control of Market Supply, Bdlletin 680, Pennsyl- vania State University, August, l96l. Burk, Marguerite C. Consumption of Dairy Products: An Analysis of Trends, Variability and Prospects, Technical Bulletin 268, Univer- sity of Minnesota, 1969. Buxton, Boyd M. and Fallert, Richard. Impact of Dairy Product Imports on U. S. Milk Price, Staff Paper P74-21, Department of Agricul- tural and Applied Economics, University of Minnesota, October, l974. ‘ Buxton, Boyd M. and Frick, George E. 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