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New Zealand Dairy Board Criticism Sometimes Off-Base, UW Analyst Says

Critics charge that the New Zealand Dairy Board distorts trade, hurts U.S. milk producers, and uses its monopoly exporting status to disadvantage its competitors. However, a University of Wisconsin-Madison professor says that many of these complaints are based on questionable assertions regarding the board and its practices.

“Critics of the New Zealand Dairy Board should be careful of what they wish for,” said William Dobson, an agricultural economist at UW-Madison”s College of Agricultural and Life Sciences. “Pressures to eliminate the New Zealand Dairy Board may cause new organizations to emerge that would be even more efficient and aggressive than the New Zealand Dairy Board.”

Complaints regarding the New Zealand Dairy Board stem from its status as a state trading enterprise. STEs are governmental and non-governmental enterprises, including marketing boards, that may have an exclusive privilege to import or export a particular product or commodity.

European and U.S. industry groups and government agencies have accused STEs, and in particular the New Zealand Dairy Board, of unfair trading practices. Therefore, the United States has requested that the New Zealand Dairy Board and other STEs, such as the Canadian Dairy Commission and Mexico”s monopoly dairy importer, CONASUPO, be required under World Trade Organization negotiations scheduled to begin in 1999 to issue marketing and pricing reports that would divulge more about their procedures.

“There are pressures for STEs to become more transparent, but just like any business the STEs are not going to want to report their pricing and marketing practices,” said Dobson.

According to Dobson, the name “monopoly” conjures up the notion that the New Zealand Dairy Board would be able to distort trade. However, Europeans are the dominant force in international dairy markets and distort trade to a greater extent than the New Zealand Dairy Board.

U.S. competitors have accused the New Zealand Dairy board of cross-subsidization – using profits gained in one market to subsidize sales in another market. Cross-subsidization can cause trade distortions. However, it seems that the New Zealand Dairy Board is not cross-subsidizing, but instead is using its reserves to enter new markets.

“There is no evidence of actual cross-subsidization by the New Zealand Dairy Board,” said Dobson. “The Board apparently uses its reserves to defray startup costs associated with entering new markets.”

The New Zealand Dairy Board is also accused of price discrimination. According to Dobson, this stems largely from New Zealand taking advantage of a situation that exists in the U.S. tariff rate quota system from the Uruguay Round GATT agreement. Under the tariff rate quota system, the New Zealand Dairy Board can gain a larger quota rent when U.S. prices are higher than world prices by exporting to its wholly owned subsidiary in the U.S., Western Dairy Products, Inc.

“By acting as both exporter and importer, the New Zealand Dairy Board can more fully gain the difference between world prices and higher U.S. cheese prices,” Dobson said.

The situation could be solved by removing the provision that allows the New Zealand Dairy Board to export to its own subsidiary in the United States. However, such a change would likely be resisted by the New Zealanders at the World Trade Organization negotiations.

Concerns voiced by U.S. firms and others probably will get proposals aimed at limiting the practices of the New Zealand Dairy Board and other STEs on the 1999 World Trade Organization agenda, Dobson said. However, no fundamental changes in structure are likely to be forced on the New Zealand Dairy Board as long as it retains the support of New Zealand”s dairy farmers and dairy processing cooperatives.

Dobson”s study was supported by the Babcock Institute, a collaborative effort by the College of Agricultural and Life Sciences, the School of Veterinary Medicine, and the University of Wisconsin-Extension. The Babcock Institute provides information exchange between the Wisconsin dairy industry and dairy producers worldwide.