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Addressing the dairy crisis – is US intervention buying a good thing for EU producers?

Today, the US raised its intervention support prices for some dairy products as a way of supporting the US farm price for milk. The support price for skimmed milk powder was increased by 15 percent and for cheddar cheese by 16 per cent for a limited 3-month period. Immediately milk prices on the Chicago Mercentile Exchange increased by 5 per cent, and it is estimated that the measure will add $243 million to US dairy farm incomes in the current year.

From a European perspective, this measure has ambiguous effects and may even be welcomed for its short-run effects. In the short run, the Commodity Credit Corporation will enter the market as an additional buyer, raising the floor price of milk. While only US milk products are eligible for support, as a major dairy exporter this action is going to help to strengthen world market prices, to the benefit also of EU producers.

In the long run, of course, the measure will keep more US dairy farms in production than would otherwise be the case. When dairy markets recover, the disposal of US stocks will dampen the upswing in dairy product prices, and there will be more US competition than would otherwise be the case.

Nonetheless, as a way of mitigating short-run price volatility on world markets, encouraging countries to engage in counter-cyclical stock-holding seems a sensible thing to do, provided of course that the stabilised price is not set above the long-run market equilibrium. The limited duration of the US measure is a positive sign in that regard. The difficulty is that this measure would be caught in the WTO Aggregate Measure of Support as an amber box subsidy, and the ability of countries to pursue amber box subsidies will be severely curtailed under proposed Doha Round disciplines.

Is this a case where ideology has triumphed over sense? Would it make sense to exempt intervention buying from WTO disciplines under appropriate circumstances? The EU experience with intervention gave stock purchases to support market prices a bad name, but this was in the context where markets were also highly protected by tariff barriers and the use of export subsidies. In the absence of trade barriers, intervention buying has positive spillover effects for producers in other countries. Could WTO rules be designed to encourage such good neighbour policies?

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