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Dairy Trade: From a Component Perspective

August 2003

The United States expected that the last round of world trade negotiations, the Uruguay Round, would help increase US access to dairy markets around the world. While these trade rule changes may have helped expand US dairy trade into other countries, they have also allowed increased importation of dairy products into the United States. And over the past few years, a good amount of time has been spent measuring the impacts of the changes in trade rules on the US dairy industry.

These changes in trade rules have made the US a larger importer and exporter of dairy products. But measuring the impacts of dairy trade in an aggregate basis can be very difficult. Currently, USDA attempts to measure trade on a "milk equivalent" basis, converting products into pounds of milk on the basis of butterfat or skim milk. This type of measure has serious limitations, due to the wide variation in composition of dairy products, and the wide variation in component value, particularly among skim solids. There is no argument from anyone in the industry that milk proteins have far greater value than lactose, yet under the current methodology used by measure milk production, consumption, imports and exports, USDA lumps milk proteins together with lactose and minerals (other solids), as if they have essentially the same value.

USDA’s aggregate measure of skim solids is especially deceiving from the perspective of international trade, where the US has grown exports of lower value milk components such as whey proteins and lactose, but has had little growth of higher-value protein or butterfat exports. The opposite seems to hold true with milk imports, where butterfat and milk proteins are being imported in new products, often with out any significant tariff protection.

Dr. Ken Bailey, Associate Professor of Dairy Markets and Policy at Penn State, has recognized the problems with evaluating the impacts of dairy trade on a skim-solids basis. He recently developed a multiple-component based methodology to account for the impact of trade on the U.S. dairy industry. Bailey published his results in a recent Penn State Staff Paper, Impact of Dairy Imports on the U.S. Dairy Industry: A Component Analysis, released last month. In this paper, Bailey tracks the changes in imports, exports and domestic use of milk protein, butterfat, and other solids over the past 6 years.

Dr. Bailey’s methodology accounts for imports, exports and net trade for all dairy products based on the product composition for butterfat, protein, other solids, and moisture. This approach provides a more accurate means to assess the impact of trade on the U.S. dairy industry than using the current milk-equivalent conversions. The results also provide an interesting story on where US dairy trade has moved over the past six years.

Table 1 shows the trade balance for milk components from 1997-2002. All results are in millions of pounds Bailey’s research finds that the United States has increased exports of protein and other solids over the past six years, while exports of butterfat have actually declined slightly. Chart 1 provides a visual comparison of the US dairy trade balance for protein, butterfat and other solids. Overall, other solids exports show a large net surplus, ranging from 523 to 618 million pounds per year. The growth in other solids exports results from large exports of dry whey and lactose products. And while other solids imports have also grown over the past six years, exports of whey products have grown even faster, resulting in a 13% increase in the other solids "trade balance", in favor of the US. In 2002, Bailey estimates that the US exported products containing 623 million pounds more other solids than it imported, equal to about 6.8% of domestic other solids production.

However, Bailey finds that other solids is the only component category with a favorable trade balance. In 2002, the US imported products containing 426 million pounds of milk proteins, up 30% from 1997. The US exported 194 million pounds of milk protein, leaving a trade deficit of 232 million pounds – equal to about 4.3% of milk protein production in 2002.

Butterfat imports have increased over the past six years. Bailey estimates that US dairy imports during 1992 contained 275 million pounds of butterfat, 88% more than in 1997. 1997 marks the 6-year low, with 146 million pounds imported, while 296 million pounds of butterfat were imported in various products during 2001. It is not a coincidence that US butterfat imports have increased during a time when the gap between the US and world butter price has widened. Butterfat is imported in many forms, but butter and cheese comprise the majority of butterfat imports.

Overall, Bailey estimates the US exported 1,058 million pounds of milk solids, and imported 860 million. The net of these operations is 198 million pounds in the favor of the US. So based simply on total solids, the US are a net exporter of dairy ingredients.

But while total pounds of dairy ingredients imported is lower then than the amount exported, an estimate of the domestic producer value for these milk components tells a different story. The US does export more of the lower-value solids, but is a net importer of more expensive milk proteins and butterfat. NAJ looked at what the value of these ingredients would be, using Federal Order producer component prices for butterfat, protein and other solids. Prices for 1997-99 were estimated using the Federal Order component formulas adopted in January, 2000.

Chart 2 compares NAJ’s estimates of the trade value of milk components, based on producer component values in Federal Milk Marketing orders. The graph illustrates that while the trade surplus of other solids is significantly grater than the deficits in protein and butterfat, the US producer value of trade deficit in protein and fat are far greater than the surplus in other solids. NAJ estimates the annual trade deficits for the 1997-2002 period averaged over $430 million for protein and $228 million for butterfat, while the federal order producer value of the other-solids trade surplus averages about $48 million over the same period. Based on Federal Order component prices, the estimated net producer component "value" of our negative trade balance in milk component values averaged about $611 million over the past six years.

Table 2 provides a look at estimated producer component values based on US and world commodity prices and the Federal Order component price formulas. The price differences help explain the significant US trade deficit in milk protein and butterfat, while providing support for strong US net exports of other solids.

Over the past six years, the US producer protein value has averaged 49 cents higher than the world value, while the US butterfat price, has averaged over twice as high as the world price. These large protein and fat price differences between the US and world markets are due primarily to both US import protections and lower world product prices. World markets for most dairy products are impacted significantly by export subsidies. The one exception to the direct subsidies is the world whey products market. The other solids value for both the world and the US has averaged about the same price over this period of time, allowing the US to be very competitive in world markets for whey products. National All-Jersey policy supports decreased export subsidies, and tariff protection from subsidized imports as ways to help resolve the US trade deficits for milk protein and butterfat.

Dr. Kenneth Baileys full report, "Impact of Dairy Imports on the U.S. Dairy Industry: A Component Analysis," can be found at Dr. Bailey’s Penn State Dairy Outlook Web Site, http://dairyoutlook.aers.psu.edu, or by contacting National All-Jersey, Inc. at 614/322-4451.