Market price support policies (aka as “subsidies”) in the agriculture sector are a classic example of what is meant by ‘beggar thy neighbour’. One country attempts to improve its own economic situation by intervening in the market on behalf of its producers, at the expense of suppliers in other countries. Yes – it may produce a short-term gain for producers in one country, but generates decidedly unpleasant consequences everywhere else, including broken crockery.

A recent report in a three-year economic modelling project just released by the Dairy Companies Association of New Zealand (DCANZ) affirms what many have long experienced and expected: that regardless of design, such interventionist policies, where governments seek to provide price stability to their farmers through purchasing or other mechanisms not only mask price signals and shift costs between domestic constituents but also have material spillover effects on international trade.  These policies do not support market rebalancing, they merely delay and distort it.

Holy cow!

Here’s how market price support works in theory. Governments buy dairy products at a fixed price when the market is low, store products (like butter or SMP – skim milk powder) and sell when the price recovers. Except it doesn’t always work like that. Silver headed readers may recall the EU’s “butter mountain” and “wine lake” of the 1980s, leading to massive, costly surpluses, product dumping on markets which led to price collapse, substantial wastage of perishable product and negative environmental impacts. Those with a more recent time-horizon may recall that the 2015-2018 European SMP intervention stocks overhung the market for an extended period.  Oh, and let’s not forget that the cost of this artificial support is paid for by taxpayers.

Why should I care?

Dairying is one of the most heavily protected sectors in the world and intervention is growing. New Zealand, however, is a major dairy exporter and has the lowest level of support of any producer.

Relatively small impacts on supply can and do have disproportionately large impacts on prices for our key products, particularly butter and skim milk powder (SMP), which are storable, have a reasonable shelf life, and can be readily traded. Governments that buy domestic product at a fixed price send a “keep going!” signal to domestic producers, only making things worse.  For example, in 2015/16 EU market intervention in the face of a dramatic jump in local production led to significantly lower global prices per kilo of milk solids. This hit New Zealand farmers hard, requiring them to take on more debt and being particularly difficult for young sharemilkers to ride out. National income was impacted and all Kiwis suffered.

Butter the devil you know

Understanding the problem is the first step in working out ways of countering negative impacts. Using the Global Dairy Distortions Model (GDDM) developed by economic consultancy SensePartners, DCANZ has taken a closer look at how subsidies and price intervention by governments flow through markets.

Dairy interventions can result in large volumes of one or two products being shifted, magnifying the impact for international trade and prices. In a thin and protected market, the ripple effects can be significant. One intervention can trigger a retaliatory response from others to protect their industry from a ‘shock’. Taking a “what if?” approach to modelling different potential scenarios and outcomes, a key takeaway from the research is that intervention only serves to export one country’s problem to others. 

As we have noted previously in relation to this project in August 2024, “what gets measured gets done”. As a result of the new model the New Zealand dairy industry can now make a robust, evidence-based contribution to international discussions focused on disciplining trade distorting practices, providing a clearer view of how farm support policies flow through into the global dairy market.  The evidence delivered by the model will help industry leaders and trade negotiators focus discussions on reform and a tightening of global trade rules. 

Reports from the GDDM project can be found at www.dcanz.com/gddm

This post was prepared by Glen Candy, Project Manager of the NZ International Business Forum.