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The milky way to 'income support'

P K Vasudeva

India's dairy industry has strongly criticised the recently-passed US Farm Bill 2002 which, it says, would depress international prices of dairy products further, enhance subsidies and protection levels, and encourage inefficient milk producers in advanced countries.

The bill - officially titled the Farm Security and Rural Investment Act - provides for the continuation of the existing Milk Price Support Programme. Under this, the US Department of Agriculture's Commodity Credit Corporation is committed to buy unlimited quantities of butter, cheese and non-fat dry milk (skimmed milk powder) from dairy plants at prices that enable them to pay a minimum support price for the milk supplied by farmers.

The support price has, in turn, been fixed at $ 9.90 per hundredweight for milk containing 3.67 per cent fat, with the CCC's purchase prices for dairy products being set at levels "sufficient to enable plants of average efficiency to pay producers a price that is not less than the rate of price support for milk."

A hundredweight equals 45.36 kg and one kg of cow milk is equivalent to 0.973 litres. This translates into an assured milk price of around Rs 11 per litre at current exchange rates.

Compare this to the Rs 9.40 to Rs 9.50 per litre that organised dairies are paying to farmers here for cow milk. Significantly, under the Clinton administration's Federal Farm Act of 1996, the MPSP was to have been eliminated from January 1, 2000.

The 1996 Act had even established an incrementally downward movement in the support price from $ 10.35 per hundredweight in 1996 to $ 9.90 per hundredweight in 1999, after which the programme was to be discontinued.

The Farm Bill 2002 has gone even further by re-authorising the MPSP from June 1, 2002 to December 31, 2007. "What was supposed to have ended under the Farm Bill of 1996 has been given a six-year lease of life by the Farm Bill of 2002," said B M Vyas, managing director, Gujarat Cooperative Milk Marketing Federation.

But that's not all. The Farm Bill has also provided for a National Dairy Market Loss Payments (NDMLP) scheme, which sets a "target price" of $ 16.94 per hundredweight or Rs 18.81 per litre of milk.

If prices of Class I milk (milk for beverage use) go below this level in Boston, then dairy farmers all over the US will be given direct payments covering 45 per cent of the difference between the higher target price and the lower market price.

An individual producer is eligible to receive these payments for a total quantity of up to 2.4 million pounds (1.9 million kg) of milk marketed by him during the year.

Taking into account an average price of $ 15.02 per hundredweight - Rs 16.68 per litre - received by American dairy farmers in 2001, the NDMLP which takes retrospective effect from December 1, 2001 to September 30, 2005 translates into direct payments of $ 20,736 per farmer per year or over Rs 1 million of "additional" income.

By contrast, a dairy farmer in Punjab maintaining a herd of four or five crossbred cows, each yielding 3,500 kg over a 300-day lactation period, does not earn even a "gross" annual income of Rs 150,000.

"There is a absolutely no basis for guaranteeing such high levels of milk prices, that too for producers who are said to be more efficient than our farmers," said Deepak Jain, director, Dynamix Dairy Industries Ltd.

According to him, the continuation of the price support programme, along with the new counter-cyclical direct payments scheme against a target price, will provoke the European Union to follow suit and provide higher levels of support to its dairy farmers.

"All these will only increase subsidies and further distort world trade in dairy products, making it harder for our industry to compete," Jain added.

In the context of the US Farm Bill and its obligations to the World Trade Organisation, even as the US concedes that it adopts trade-distorting policies, it has defended them by claiming that its agricultural products subsidy is less than that of other countries.

"Today, the situation is different," the US Dairy Association said. Trade obligations play a large role in the way countries support their farmers. The start of a new round following the Doha Development Agenda has brought into sharp focus the trade-distorting policies of developed countries like the EU, Japan and the US, the agency conceded.

Developed countries account for virtually all domestic support and export subsidies, which distort agricultural markets worldwide. But US subsidies on agricultural products are less than that of other countries, the USDA claims.

For instance, the US domestic support ceiling is $ 19.1 billion, compared to the EU ceiling of about $ 60 billion and Japan's ceiling with respect to trade-distorting policies of $ 30 billion.

As far as market access goes, US tariffs on agricultural imports average a modest 12 per cent, compared to more than 60 per cent for all WTO members, more than 50 per cent for Japan, and more than 30 per cent for the EU and the Cairns group of 17 agricultural exporting nations.

Under commitments to which all member countries, including the US, adhere, policies that seriously distort trade were differentiated from those with minimal trade effects. The two respective categories were labelled "amber box" and "green box".

For amber box policies, countries are not able to exceed the level of support to which they have agreed as measured by their Aggregate Measure of Support. The AMS essentially totals, commodity by commodity, a country's support measures linked to price of production.

The WTO amber box ceiling for the US is $ 19.1 billion. With the enactment of the FSRIA in 2002, domestic spending levels appear high.

However, they are not higher than what has been provided to US farmers over the past few years when one adds appropriations and the total of ad hoc programmes authorised in various acts to annual farm production costs.

During 2000-01, India's milk output was estimated at 81.43 million tonnes, making it the world's number one producer. Compared to this, the US produced nearly 75 mt of milk in 2001.

But the differences arise in the scale of operations. India's 81 mt-plus milk production comes from a milch herd of around 100 million comprising 60 million cows and 40 million buffaloes and 70 million dairy farmers.

Contrast this to the US, where the milch animal population (entirely cows) was assessed at 9.11 million in 2001, with the number of dairy farmers being a mere 0.11 million!

The contrast is also reflected in the operations of the GCMMF vis-à-vis the Dairy Farmers of America, Inc - the largest dairy farmer-owned marketing cooperative in the US. During 2000-01, GCMMF's milk unions procured 1.67 mt of milk from its 2.16 million farmer-members, of whom probably only half consisted of regular, day-to-day suppliers.

As against this, the DFA marketed and processed 45.6 billion pounds or 20.7 mt of milk from its 25,499 members in 2001.

For those sceptical of the role of co-operatives, consider this. The DFA handled close to 28 per cent of the milk produced in the US last year. Its sales stood at $7.9 billion, compared to the GCMMF's annual turnover of around Rs 25 billion or $ 500 million. The average price paid by the DFA to its producers in 2001 was $ 15.22 per hundredweight or Rs 16.90 per litre, which was much higher than the Rs 9.50 to Rs 10 per litre received by GCMMF farmers.

So even as it complains of unequal treatment, it is also true that India and other developing countries will have to formulate a strategy to increase the output of milk by importing stud bulls for better cow breeds and controlling the population of low-yield milch animals. Only then can it remain competitive.

Criticising the developed nations for maintaining double standards, T K Bhaumik, senior advisor, policy, CII, said "The bill, which is likely to increase agricultural subsidies to the US farmers by $ 73 billion over 10 years, is providing subsidies to farmers in the guise of 'income support', a WTO-compatible clause." Such loopholes must be plugged in the Agreement on Agriculture.

The developing countries must challenge the "income support" provisions of Article 13.5 of the Agreement on Agriculture in the Dispute Settlement Body of the WTO and lobby for the deletion of this clause.

The writer is chairman of the Institute of Development Studies and Training, Chandigarh.

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