The dairy price support system will end after 1999, and the dairy industry currently has no replacement to deal with downside price risks after supports are gone. Exports could be one important replacement, says Bill Dobson, a professor in the Department of Agricultural and Applied Economics.
U.S. exports now account for about 2 percent to 3 percent of the nation”s dairy production – about equal to U.S. dairy imports. “Larger numbers of small and mid-size U.S. agribusinesses and cooperatives could export profitably rather than battle over market shares in domestic market segments that are often mature and fiercely competitive,” Dobson points out. “It”s difficult to get additional U.S. sales unless you take sales away from someone else.”
Would-be exporters face price competition and other obstacles, but those problems are manageable. There are export opportunities out there right now, and potential rewards for those willing to take export risks, according to Dobson. There are also penalties for latecomers to new export markets.
“Many individual firms in the U.S. dairy industry opt not to export, for reasons that can be readily understood. However, when viewed from the perspective of the industry as a whole, such decisions have sweeping implications,” he says. “The dairy industry seems to be betting that things will be OK without export expansion. This is a risky wager. It assumes that expanded dairy exports will not be needed to maintain milk prices at levels that are acceptable to U.S. dairy farmers.”
U.S. exporters face strong price competition from experienced exporters in other markets, including New Zealand and Australia, Dobson notes. There is also red tape, non-payment risks, and other problems for exporters. Still, the USDA”s Foreign Agricultural Service says small and mid-size U.S. agribusinesses and cooperatives overestimate the difficulty of exporting.
The Europeans face their own difficulties in export markets, thanks to government policies that are shrinking their exports, according to Dobson. Europeans have a very restrictive quota system, and are required by the General Agreement on Tariffs and Trade and the World Trade Organization to limit the amount of cheese they export with subsidies. They have relied on these subsidies to make their high-priced products competitive. Now, they can”t decide what to do, and they will continue to lose market share in world cheese markets.
New Zealand, Australia and Argentina are now taking advantage of this, and it”s also an opportunity for U.S. exporters. At some point, Europe will deregulate to gain market share; until then, U.S. exporters have an opportunity.
“Small and mid-sized firms and cooperatives represent a valuable addition to the exporting group because many are likely to be able to export differentiated niche products competitively,” Dobson says. “Such niche products, in some cases, will not be of interest to large exporting firms.”
So what needs to change in the United States to stimulate dairy exporting?
“The end of price supports will create incentives for exports,” Dobson says. “However, a ”better late than never” strategy may not be viable for U.S. firms that think that they may eventually get around to exporting,” he warns. For example, the New Zealand Dairy Board says the “first mover” advantage is 15 percent over second entrants to a market (third entrants break even and later entrants lose money). The 15-percent figure may be on the high side, but Dobson agrees it”s best to be the first to enter a market. “Don”t expect to get into exporting quickly,” he adds. “It often takes two to three years to make exports after a firm decides to export. The U.S. Dairy Export Council, FAS, and state agricultural departments can provide advice, assistance and trade leads, but the companies and cooperatives have to decide to get involved in exporting, by putting dollars on the line. We need to recognize that export markets represent profitable opportunities, but also risks.”
Dobson believes U.S. exporters should look for markets in Mexico, and maybe Brazil (although in Brazil we”ll have to deal with Argentine exports as that country expands its dairy industry, he says).
Financial turmoil in Asia has dried up some export possibilities. For example, the once-attractive Korean cheese market has shriveled to almost nothing. The Japanese cheese market is still reasonably strong, and other Asian markets will eventually recover, Dobson says. Canada is heavily tariff-protected, and subsidizes its exports. Canada won”t be feasible in the near term, though it might open up in a decade or so. Tariff barriers to European exports are also strong, he says.
Dobson served as visiting scholar at FAS from March 1998 through May 1998, and examined agricultural exporting issues while there. For a copy of his briefing paper, Why Most Small and Mid-sized Agribusinesses and Cooperatives Don”t Export – Implications for the U.S. Dairy Industry, contact Dobson at (608) 262-8965, firstname.lastname@example.org