Economic 

Research 

Report 

Number 16

United States 

Department 

of Agriculture 

Economic 

Research 

Service 

Suchada Langley, Agapi Somwaru, 

and Mary Anne Normile

Electronic 

Report 

Trade Liberalization in 

International Dairy Markets

Estimated Impacts
www.ers.usda.gov

Want to learn more about trade liberalization in international 

dairy markets? Visit our website at www.ers.usda.gov.

You can also find additional information about ERS 

publications, databases, and other products at our website.

Visit Our Website To Learn More! 

National Agricultural Library 

Cataloging Record: 

The U.S. Department of Agriculture (USDA) prohibits discrimination in all its programs 

and activities on the basis of race, color, national origin, age, disability, and, where 

applicable, sex, marital status, familial status, parental status, religion, sexual 

orientation, genetic information, political beliefs, reprisal, or because all or a part of an 

individual's income is derived from any public assistance program. (Not all prohibited 

bases apply to all programs.) Persons with disabilities who require alternative means for 

communication of program information (Braille, large print, audiotape, etc.) should 

contact USDA's TARGET Center at (202) 720-2600 (voice and TDD). 

To file a complaint of discrimination write to USDA, Director, Office of Civil Rights, 1400 

Independence Avenue, S.W., Washington, D.C. 20250-9410 or call (800) 795-3272 

(voice) or (202) 720-6382 (TDD). USDA is an equal opportunity provider and employer. 

Langley, Suchada Vichitakul

 Trade liberalization in international dairy markets : estimated 

impacts. (Economic research report (United States. Dept. of 

Agriculture. Economic Research Service) ; no. 16)

 1. Dairy products industry. 

 2. Agriculture and state. 

 3. Free trade.

 I. Somwaru, Agapi. 

 II. Normile, Mary Anne.

 III. United States. Dept. of Agriculture. 

Economic Research Service.

HD9275.A2

Cover photo credit: Comstock.
Trade Liberalization in

International Dairy Markets

Estimated Impacts

Suchada Langley, Agapi Somwaru, 

and Mary Anne Normile

United States

Department

of Agriculture

www.ers.usda.gov

Electronic Report from the Economic Research Service

February 2006

Economic

Research

Report 

Number 16

Abstract

A partial-equilibrium, multiple-commodity, multiregion model of agricultural policy and trade is used to simulate the effects of changes in

domestic and trade policy on dairy production, consumption, prices, and

trade. Simulations using the ERS-Penn State Trade model analyze the

effects of separately and concurrently relaxing domestic income and price

supports, and import restrictions and export subsidies, with special attention to tariff-rate and milk production quotas. Modeling results indicate

that liberalization would reduce world dairy product supplies and increase

the value of dairy trade.

Keywords: Dairy markets, dairy policy, trade models, global liberalization. 

Acknowledgments

The authors would like to express sincere thanks to Don Blayney, Mary

Bohman, Neil Conklin, Richard Stillman, John Dunmore, and Barry Krissoff of the Economic Research Service; Art Coffing of the Foreign Agricultural Service; Howard McDowell of the Agricultural Marketing Service;

Richard Barichello of the University of British Columbia; Scott Brown of

FAPRI, University of Missouri; Pierre Charlebois of Agriculture Canada;

Ron Knutson of Texas A&M University; and an anonymous reviewer for

their valuable comments. Special thanks are extended to Jim Stout of ERS

for his help in resolving technical issues related to the ERS-Penn State

Trade model. Appreciation is also extended to the editor, Dale Simms, and

to Wynnice Pointer-Napper of ERS for their efforts in designing the report.
Contents

Preface . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .iii

Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .iv

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1

Dairy Policies and Key Issues Affecting Trade . . . . . . . . . . . . . . . . . . . . .2

Key Issues in Modeling Dairy Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . .4

ERS-Penn State Trade Model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7

Dairy Trade Liberalization Scenarios . . . . . . . . . . . . . . . . . . . . . . . . . . .10

Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .19

References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .20

Appendix A: Dairy Policies of Selected Countries . . . . . . . . . . . . . . . .23

Appendix B: Dairy Product Elasticities . . . . . . . . . . . . . . . . . . . . . . . . .25

ii

Trade Liberalization in International Dairy Markets / ERR16

Economic Research Service/USDA
Preface

This report is the first of two articles on international dairy markets. The

reports examine the forces that currently are shaping international dairy

markets and those that are anticipated to substantially affect the sector in the

next several years. These forces include changing consumer demand in

developing and developed economies; technological advances in production,

distribution, and marketing; product innovation; globalization; and the

possibility of fundamental dairy policy reform brought about through multilateral trade negotiations. The reports follow from ERS's earlier research on

the domestic dairy market, Economic Effects of U.S. Dairy Policy and Alternative Approaches to Milk Pricing. 

The first report, Trade Liberalization in International Dairy Markets: Estimated Impacts, presents an economic model-based examination of the

effects of global dairy policy reform on international dairy markets. A

partial-equilibrium, multiple-commodity, multiregion model of agricultural

policy and trade is used to simulate the effects of changes in domestic and

trade policy on dairy production, consumption, prices, and trade. 

The second report, U.S. Dairy at a Crossroad, presents a synthesis of

analyses on the major factors influencing global dairy markets. This report

provides a comprehensive picture of the international dairy market in the

post-Uruguay Round era, detailing trends in world dairy production and

trade, emerging trends in demand and technology, globalization and new

developments in foreign investment, and the interface of dairy policies and

trade. The effects of changes in dairy policy are placed in this broader

context, where the industry's ability to respond and adapt to changing

market environments provides a more comprehensive perspective on the

results of potential dairy policy reform. 

iii

Trade Liberalization in International Dairy Markets / ERR??

Economic Research Service/USDA
Summary

The ongoing debate over agricultural trade liberalization focuses on how

best to eliminate policy distortions that arise from price supports, producer

subsidies, import protection, and export subsidies. Price support measures

include government purchase programs, intervention purchasing and

storage, and supply management, including production quotas. This report

examines how international dairy markets might respond to policy changes

under various reform scenarios. Specific policy scenarios include reductions

in tariffs, markups, loan rates, intervention prices, export subsidies, and

expanding tariff-rate quota minimum access, as well as elimination of

production quotas and consumer subsidies. By examining policies separately, we can better understand each policy's economic impact and how

alternative reforms might affect world dairy markets.

What Is the Issue?

Despite policy reforms enacted as a result of the Uruguay Round Agreement

on Agriculture, global dairy markets remain among the most protected agricultural sectors. Dairy trade is characterized by “megatariffs” (tariffs usually

over 100 percent), tariff-rate quotas (tariff rate depends on the volume of

imports), and export subsidies. In addition, many countries provide tradedistorting income and price support to the dairy sector. As a result, much of

the world trade in dairy products is driven more by policy intervention than

by market factors.

Support to dairy producers makes up a large share of some countries' aggregate domestic support for all commodities (on average, since 1995, 100

percent for Australia, 84 percent for Canada, 55 percent for the United States,

and 12 percent for the EU). How might the removal of such support affect

countries' relative competitiveness in international dairy markets? Would

consumers worldwide pay more or less for milk and dairy products? And how

would the U.S. dairy industry fare in a more liberalized environment?

What Did We Find?

International dairy policy reform would result in lower global supplies of

milk and dairy products, higher world dairy prices, and higher value of

dairy trade. By eliminating policies that artificially increase returns to milk

production, the volume of global milk and dairy products declines. With less

production, global prices increase. The production decline is small, despite

large reductions in support prices and production-linked subsidies, because

the contracting effect of lower support is tempered by the expansionary

effect of eliminating production quotas in the EU and Canada. 

Production of dairy products generally moves in the same direction as milk

production in each country, with some exceptions. For example, while U.S.

production of raw milk, butter, nonfat dry milk, whole dry milk, and other

dairy products declines, cheese output expands slightly because the value of

milk in cheese production is higher than its value in the production of other

dairy products.

iv

Trade Liberalization in International Dairy Markets / ERR16

Economic Research Service/USDA
Dairy policy liberalization was found to affect countries differently:

• Countries with high levels of support and protection (e.g., Japan and

Korea) generally lose production value when support and protection 

are eliminated. 

• Countries producing dairy products at lower cost and those with low support and protection (e.g., Australia and New Zealand) gain the most from

trade liberalization, as their producers benefit from higher world market

prices and their exports grow. 

• The effect on countries with moderate support and protection-like the

United States, the EU, and Canada-depends on the policy mix in each

country. The effect of domestic price declines on production in the EU

and Canada is offset by the expansionary effect of removing production

quotas. In the United States, the elimination of support contributes to a

decline in milk price and production. However, a continuation of 1-percent productivity growth in milk production per year would offset any

losses to U.S. milk producers. 

Liberalization of dairy policies changes countries' shares of the global

market. The EU, currently the world's largest exporter of dairy products,

sees its share of world butter and nonfat dry milk exports decline, but maintains its share of the cheese market. Like the United States, EU milk realizes

a higher return in production of cheese than butter and nonfat dry milk. New

Zealand's and Australia's shares of butter and nonfat dry milk exports rise,

but Australia's share of other dairy products falls. Argentina grows in all

markets except other dairy products. The United States maintains its position in most markets, gaining slightly in the nonfat dairy market. 

How Was the Study Conducted?

Scenario analyses were conducted using the ERS-Penn State Trade model,

a partial-equilibrium, multiple-commodity, multiregion model of agricultural policy and trade that simulates impacts of policy changes on world

markets and trade. The model has a detailed representation of the dairy

sector and of policies affecting production, consumption, and trade of milk

and dairy products. 

Specification of individual policy instruments in the model allowed the

impact of individual reforms to be examined separately and simultaneously

in order to evaluate which policy interventions most influence dairy prices

and trade. Two important policies for the dairy sector—tariff-rate quotas and

production quotas—are modeled explicitly. Liberalization of all agricultural

policies illustrates the effect on the dairy market of dairy-related commodities, such as feed grains and other livestock.

v

Trade Liberalization in International Dairy Markets / ERR16

Economic Research Service/USDA
International dairy markets are highly protected. Under the World Trade

Organization's Uruguay Round Agreement on Agriculture, members agreed

to reduce trade-distorting domestic support, import barriers, and export

subsidies. However, the Agriculture Agreement did not require members to

reduce domestic support to individual agricultural commodities. Many

members left dairy support largely untouched and reduced support to other

commodities. Under the Agriculture Agreement's market access provisions,

members agreed to replace nontariff barriers like quotas and prohibitive

levies with equivalent protection in the form of tariffs (a process called

“tariffication”), and to reduce those tariffs. But many members chose to

reduce tariffs by the minimal 15 percent, so that countries with the highest

protection before the Agriculture Agreement maintain high tariffs. A USDA

study found that, in most regions, tariffs on dairy products are well above

the average agricultural tariff and among the highest of all commodities

(Gibson et al., 2001). The Agriculture Agreement also required countries to

reduce agricultural quantities exported with subsidies and to reduce the

expenditures on those subsidies. Export subsidy disciplines were applied to

individual commodities, and so were more successful in reducing dairy

subsidies than were domestic support and market access disciplines. 

The ongoing debate on agricultural trade liberalization focuses on how to

establish a more market-oriented trading system through further reforms in

domestic support, market access, and export subsidies. This report examines

how international dairy markets might respond to policy changes under

various scenarios. Scenarios are constructed to isolate potential impacts of

individual domestic and trade policies and to examine their influence collectively. By examining the consequences of separate policies we can better

understand each policy's economic impact and how alternative trade reforms

affect world dairy markets. A partial-equilibrium, multiple-commodity,

multiregion model of agricultural policy and trade is used to simulate the

effects of changes in domestic and trade policy on dairy production,

consumption, prices, and trade. 

The scenario analyses do not consider other factors currently affecting dairy

markets such as the rapid economic growth in emerging markets, product

innovation, and restructuring in global dairy markets. The scenario analyses

are not intended to be a forecast or projection of future policy change. 

1

Trade Liberalization in International Dairy Markets / ERR16

Economic Research Service/USDA

Trade Liberalization in

International Dairy Markets:

Estimated Impacts

Suchada Langley, Agapi Somwaru, 

and Mary Anne Normile

Introduction
Dairy Policies and Key Issues 

Affecting Trade

The major dairy policies for most countries1 include income and price

support, import restrictions, and export subsidies. A few countries also use

consumer subsidies to dispose of surpluses or increase demand for dairy

products. Support to dairy producers makes up a large share of some countries' aggregate domestic support for all commodities (on average, since

1995, 100 percent for Australia, 84 percent for Canada, 55 percent for the

United States, and 12 percent for the EU). In the United States, income

support for dairy producers includes direct payments and, in the recent past,

ad hoc disaster assistance. Price support measures include government

purchase programs (U.S.), intervention purchasing and storage (EU), and

supply management through production or marketing quotas (EU and

Canada). (Appendix A provides an overview of the main dairy programs of

major countries). If further reductions in domestic support are negotiated in

the Doha Round, countries will likely be pressured to reduce support to the

dairy industry.

Most major dairy trading countries maintain tariff-rate quotas (TRQ) for

dairy products. TRQs were instituted to maintain and expand imports, as

they were designed either to keep the same level of import access as before

tariffication under the Agriculture Agreement (current access) or to ensure

that there was some increase in access after tariffication (minimum access),

or both. TRQs operate as two-tier tariffs that combine both tariffs and

quotas (Skully, 2001). A relatively low tariff applied to a fixed quantity of

imports is coupled with higher tariffs for imports above that quantity. With

minimum-access TRQs, access to previously protected dairy markets

expanded under the Agriculture Agreement. However, import access for

some countries fell below intended levels because fluid milk and some other

fresh dairy products generally were excluded from required minimumaccess levels. These excluded products account for sizable shares of total

consumption in some cases. 

Prior to and under the Agriculture Agreement, many of the dairy products

exported from the EU, other Western European countries, and Canada were

subsidized. The United States also exported most nonfat dry milk (NFDM)

and some cheese, whole-milk powder, and butter with subsidies through the

Dairy Export Incentive Program (DEIP). Even Australia and some Eastern

European countries, countries not usually associated with export subsidy

programs, have used export subsidies for dairy products. 

Although export subsidies were reduced under the Agriculture Agreement,

they continue to distort international dairy markets. Between 1995 and

2000, an estimated third to a half of cheese, butter, and dry milk exports

continued to be subsidized. 

Production or marketing quotas are used as a supply management tool in

Canada and the EU to control milk surplus and to limit government expenditures on dairy products. Because milk production quotas are usually used

in tandem with other policy instruments such as price support and import

restrictions, they also slow liberalization of world dairy policies. 

2

Trade Liberalization in International Dairy Markets / ERR16

Economic Research Service/USDA

1This study focuses on countries

that are important from the perspective

of dairy policy (European Union,

United States, Canada, Japan, and

South Korea) or major participants in

international dairy markets (Australia,

New Zealand, Argentina, and Brazil).
Some issues not explicitly addressed in the Agriculture Agreement, like

revenue pooling and domestic price differentials, also affect dairy product

markets. Revenue pooling allows revenue from higher priced domestic sales

to subsidize lower priced sales to export markets.2 Domestic price differentials that provide a price premium for fluid milk can depress consumption of

milk for fluid use and increase the supply of milk for nonfluid uses. This

leads to artificially low prices for manufactured dairy products, which

discourages imports and makes it easier to export. 

3

Trade Liberalization in International Dairy Markets / ERR16

Economic Research Service/USDA

2A WTO dispute panel found that

revenue pooling constituted an export

subsidy.
Key Issues in Modeling 

Dairy Policies

There are at least two challenges in modeling dairy trade policy: the

modeling of milk supply in the presence of milk production quotas and the

implementation of TRQs. With milk production quotas, modeling difficulties stem from the fact that countries implement quotas differently and there

may be insufficient data for quantitative analysis of supply response. TRQs,

implemented as two-tiered tariffs, introduce discontinuities that complicate

standard modeling techniques.

A production (or marketing) quota is a license to sell a limited quantity of

milk at the supported price. In countries like Canada, where milk quotas can

be bought and sold freely, the annual value of the quota rent is capitalized

into the value of dairy quotas. Quota rent is the discounted sum of the future

stream of net benefits to producers as a result of holding the quota. The key

question for modeling dairy policy reform is how a supply-managed dairy

sector would respond if milk production quotas were removed. Without

recent historical evidence of milk supply response in countries that operate

milk production quotas, such an assessment is difficult. Different countries

operate different milk production quota systems, which further complicates

modeling. One way of addressing the problem is to assume a position of the

supply curve and employ sensitivity analysis on the supply elasticity with

respect to the removal of production quotas.

Figure 1 illustrates the effects on the domestic market of eliminating a milk

production quota. At production level “quota,” a maximum level of milk

production (or milk sales) is set by the government. This implies the price to

the producer would be PS, with the shaded area “quota rent” representing

the value of the quotas to producers. With a removal of the quota, milk

production increases toward Qc and producer price received for milk

declines toward PC* as the quota rent falls to zero. If there are no other

4

Trade Liberalization in International Dairy Markets / ERR16

Economic Research Service/USDA

Figure 1

Effect of a milk production quota on the domestic market

Source: Economic Research Service, USDA.

Supply

Demand 

PS

Quota

PC

Qc 

PC*

Price

Quantity 
policies affecting the producer price (like a support price or tariff), the

corresponding price and quantity would be PC* and Qc. 

Figure 2 illustrates the difficulties in modeling tariff-rate quotas. The left

panel represents the domestic market for an importing country with domestic

price at Pa (autarky price). Excess demand and supply curves are on the right

panel. Levels of imports, where excess demand intersects excess supply,

depend on the slopes (elasticities) of excess demand and excess supply curves

as well as the location of excess supply curves. ES represents excess supply

with no tariff applied, ES1 with in-quota tariffs , and ES2 with over-quota

tariffs. Where the discontinuity occurs between ES1 and ES2 (the distance

“kg”), the TRQ quota level, Q, is binding. At the excess supply ES1, excess

demand ED, and TRQ quota Q, the equilibrium domestic price is Pd. This

condition is equivalent to a pure quota, where quota is set at Q. In reality, we

may not know precisely where the excess supply curve is located. 

TRQs pose modeling challenges because of the inequality conditions set by

tariff-rate quotas and the discontinuity of the level of excess supply. The

effective supply curve of exports to import markets under TRQs is discontinuous. Import quantity and tariff rates under a TRQ regime can be

captured in the form of an inequality and the use of the so-called complementarity condition. Under a complementarity condition, either an equation

is true or its complementary variable is at a boundary value (Dirkse and

Ferris, 1995, 1997, 1999). That is, if imports are greater than the quota, then

imports face the high tariff (complementary variable); if imports are less

than the quota, then the relevant tariff is the in-quota tariff. 

Further complicating analysis of TRQs is how they are implemented. Each

country implements them differently. For a variety of reasons, access quotas do

not guarantee that countries will import or quotas will be filled (Wainio et al.,

5

Trade Liberalization in International Dairy Markets / ERR16

Economic Research Service/USDA

Figure 2

Effects of a tariff-rate quota

Source: Morath, Todd and Ian Sheldon, “The Economics of Modeling Tariff-Rate Quotas,”

Figure 1, http://trade.aers.psu.edu/documentation.cfm

S

D

Pa

Pd

ES2

k

Q Quantity

Price

ES1

ES

g
1998). They are simply requirements that countries provide opportunities for

imports by reducing tariffs on a fixed quantity of product. In addition, tariff

bindings for TRQs are maximum tariffs—applied tariffs may be lower. Finally,

the assumption that products are homogeneous may be problematic for products like cheese, where product differentiation and niche markets play a big

role in consumption and trade.

Various studies analyze milk production quotas and TRQs differently. Comprehensive studies of world dairy trade liberalization are limited. Shaw and Love

(2001), using the Organization of Economic Cooperation and Development

(OECD)'s Aglink model, a partial-equilibrium dynamic supply-demand model

of world agriculture, examined the economic effects of increasing market

access and reducing export subsidies for dairy products and found that the

value of world dairy trade increased substantially. The model treats milk

production quotas exogenously. Relative to a 1999 baseline, the study estimates

that the value of world dairy trade rises by $1.8 billion under increased market

access, with the value of milk production rising in Australia, New Zealand, and

Argentina (7-9 percent over the base), and declining in the EU and the United

States (1.2-1.4 percent). With export subsidies reduced by half, the value of

milk production also increases in Australia, New Zealand, and Argentina;

declines in the EU; and remains constant in the United States.

Cox et al. (1999) used a hedonic spatial equilibrium analysis of dairy trade

liberalization for 21 world dairy regions, and found that full trade liberalization has sizable impacts on milk prices in Canada (-32 percent), the EU (-26

percent), Japan (-36 percent), Australia (22 percent), and New Zealand (51

percent). U.S. milk producers saw only small changes in milk prices (-0.4

percent) and production. Cox et al. estimate consumer surplus to be $10

billion higher under a free trade scenario. The study does not include reductions in domestic support in its liberalization scenario, nor does it model

other commodities. Milk production quotas are exogenous.

OECD Secretariat (2004), using its Aglink model, examined the effects of

simultaneously reducing or removing market price support policy measures

to assess the impact of dairy trade liberalization on production, consumption, trade, prices, and welfare. The study addressed the uncertainty

regarding the supply response in countries with quotas by conducting a

sensitivity analysis on the quota rent and supply elasticity assumptions.

OECD found that prices on world dairy markets increased significantly with

dairy trade liberalization—increases in the price of dairy products ranged

from 17 percent for whole-milk powder to 57 percent for butter—while

global milk production declined slightly (-0.2 percent). Trade expanded in

cheese (25 percent) and nonfat dry milk (5 percent), and contracted for

butter (-1.3 percent) and whole-milk powder (-3 percent). Trade liberalization resulted in production shifting to more efficient countries. Milk production fell in Japan (-19 percent), the EU (-7 percent), the United States (-5

percent), and Canada (-1 percent), and expanded in Australia and Argentina

(14 percent each) and New Zealand and Brazil (10 percent each).

A number of studies analyze the effects of dairy trade policy reforms on individual countries (Doyon and Novakovic (1996), Bouamra-Mechemache and

Requillart (2000), Van Bekkum et al. (2000), and Lariviere and Meilke (1999)). 

6

Trade Liberalization in International Dairy Markets / ERR16

Economic Research Service/USDA
ERS-Penn State Trade Model

This study uses the ERS-Penn State Trade model to examine the effects of

key policy changes and trade liberalization on international dairy markets.

The ERS-Penn State Trade model is an applied partial-equilibrium,

multiple-commodity, multiregion model of agricultural policy and trade

(Abler et al., 2001; Stout and Abler, 2004). It is a gross trade model that

accounts for exports and imports of each commodity in every identified

region. The model does not identify bilateral trade flows. 

The model includes 12 countries/regions--the United States, the European

Union (EU-15), Japan, Argentina, Australia, Brazil, Canada, China, Mexico,

New Zealand, South Korea, and the rest of the world (ROW). It has 35

commodities (rice, wheat, corn, other coarse grains, soybeans, sunseed,

rapeseed, peanuts, other oilseeds, cotton, sugar, soybean oil and meal,

sunseed oil and meal, rapeseed oil and meal, cottonseed oil and meal,

peanut oil and meal, tropical oils, other oilseed oil, beef and veal, pork,

poultry, raw milk, butter, cheese, nonfat dry milk, whole dry milk, fluid

milk, and other dairy products).3 All commodities are treated as tradeable

except raw and fluid milk.4

The model is a reduced-form model with production, consumption, and

other behavioral equations specified by constant-elasticity functions. All

countries in the model have a similar structure, with different parameters

and variable values in the behavioral equations. Imports and exports are

determined as residuals. 

The base year for dairy data is 2001. Base data for crops (area, yield,

production, consumption, stocks, and trade) are from the 2000 crop year and

are drawn from USDA and country sources, including the USDA production, supply, and demand (PS&D) database. Tariffs and TRQs are from the

Agricultural Market Access Database (AMAD) and Gibson et al. (2001).

Parameters in the model come from various sources, including the European

Simulation Model (ESIM) (Josling et al., 1998), ERS baseline model projections (USDA, ERS, 2005), the Food and Agricultural Policy Simulator

(FAPSIM) (Gadsen et al., 1982), OECD's Aglink model (Conforti and

Londero, 2001), and the SWOPSIM (Static World Policy Simulation) model

(USDA, ERS, 1991). Adjustments and restrictions are imposed on elasticities

to satisfy theoretical requirements such as symmetry and homogeneity in

output supply equations, food/consumer demand equations, feed demand equations, and harvested acreage equations. For detailed information on the model

structure, equations, sources, and methods, see Stout and Abler (2004).

The core set of policies for all countries includes both specific and ad

valorem import and export taxes/subsidies, tariff-rate quotas (TRQs), and

producer and consumer subsidies (table 1). The U.S. component of the

model includes government purchase prices, tariffs and TRQs, and Milk

Income Loss Contract (MILC) payments. Compensation schemes for

Japan and South Korea that pay producers for declines in price relative to

a reference price are also included. The EU component includes intervention prices (which entail government purchases and export subsidies),

7

Trade Liberalization in International Dairy Markets / ERR16

Economic Research Service/USDA

3Constraints on dairy product

shares are imposed to preserve consistency of milk components.

4We adjust the core model by treating “other dairy products” as tradable.

Other dairy products, like ice cream,

yogurt, and whey, are traded, a more

realistic reflection of actual markets..

This assumption allows greater flexibility in product and trade flows. 
tariffs, compensatory payments, acreage set-asides, base area bounds

(which limit the area of grains and oilseeds that qualifies for payments),

and production quotas for raw milk and sugar.5 Milk production quotas for

Canada are also included.

The model can be used for comparative static analysis or for dynamic

analyses. We use the model as comparative static analysis with an adjustment path, implying a medium-term supply response. The analysis does not

account for shifts in supply functions over time, reflecting cost-reducing

technology adoption. No productivity growth is taken into account. This

point is crucial in interpreting the model results. For example, productivity

growth, if incorporated into the analysis, would show that a country with a

capital-intensive and technologically advanced dairy sector that is able to

compete in a nonsupported and nonprotected environment (such as the

United States) may do well under trade liberalization. 

We model two key policy issues—TRQs and production quotas—explicitly,

taking into consideration the discontinuities described in figures 1 and 2.

For both TRQs and EU/Canadian milk production subject to a production

quota, we make use of the complementarity condition as the relevant functions exhibit discontinuity. 

Model Limitations

Despite our attempts to deal with key policy issues in the model and to try

to replicate world dairy markets as closely as possible, the model has limitations. The ERS-Penn State Trade model uses 2000/2001 as a base period.

We have adjusted the base for some major policy changes, such as the

commodity provisions of the 2002 Farm Bill and China's accession to the

8

Trade Liberalization in International Dairy Markets / ERR16

Economic Research Service/USDA

5The model does not include limits on

countries' exports due to WTO export

subsidy commitments

Table 1

Dairy policies reformed in trade liberalization scenarios,

by country and product

Country Nonfat Whole Other dairy

Milk Butter Cheese dry milk dry milk products

US PS,PP T,TQ,X,PS T,TQ,X,PS T,TQ,X,PS T,TQ,X

EU PS,Q T,TQ,X,PS,C T,TQ,X T,TQ,X,PS T,TQ,X T,TQ,X

Japan PP T,TQ T T,TQ

Canada PS,Q T,TQ,X T,TQ,X T,TQ,X T,TQ,X T,TQ,X

Mexico T T,TQ T,TQ T,TQ

Brazil T T T T

Argentina T T TT

China T T

Australia T T,TQ T T

New Zealand T T T T

South Korea T T,TQ

Rest of world T T T T T

T = Tariffs

TQ = TRQs

X = Export subsidies

PS = Price support

PP = Producer payments

Q = Production/marketing quota

C = Consumer subsidies.

Source: Stout and Abler, 2004; ERS
WTO. Other recent policy changes, which may affect dairy markets, have

not been incorporated. This includes the expansion of the European Union

from EU-15 to EU-25 and the recent CAP reform. The EU dairy program

changes were not agreed to until 2003 and are being implemented in 2004-

07. The dairy reform reduced intervention prices for butter and nonfat dry

milk by 25 percent and 15 percent, and provide direct payments to dairy

producers to be phased in over the same time period.6

The analysis also does not include increases in demand driven by population

and income growth and post-2000 exchange rate movements. Rather, these

factors are considered as exogenous variables in the model. The decline in

the U.S. dollar relative to other currencies would suggest that the U.S. dairy

sector would be more competitive than the results reported in our scenarios. 

Finally, not every aspect of policy implementations can be modeled

precisely. Some simplifications are necessary in order to have a consistent

set of policy instruments in the model. For example, the model does not

include fluid milk domestic marketing programs.

9

Trade Liberalization in International Dairy Markets / ERR16

Economic Research Service/USDA

6The effects on the model results of

incorporating EU CAP reform can be

assessed qualitatively. Cutting intervention prices (thereby lowering producer raw milk prices) means that the

difference between the EU internal

price and the world market price is

smaller. With trade liberalization,

removing a smaller distortion yields

smaller impacts in terms of EU production, prices, and trade. With other

things equal, incorporating CAP

reform into the model would yield

smaller changes in world dairy prices

and trade and smaller impacts on dairy

producing and consuming countries.
Dairy Trade 

Liberalization Scenarios 

This report examines how international dairy markets might respond to

policy changes under various assumptions of policy reform. We analyze

five scenarios (table 2). The purpose of the first three scenarios is to illustrate the economic effects of individual policies. Scenarios 1-3 decompose policy impacts by eliminating each type of intervention separately.

In scenario 1, all restrictions on milk production (production quotas) are

removed; in scenario 2, all tariffs and TRQs are eliminated; and in

scenario 3, domestic support—price supports (intervention prices, loan

rates, other support prices, government purchases) and producer

payments—are eliminated. The attempt to measure the separate impact of

each policy is not meant to imply that it would be possible for a government to operate each of these policies in isolation. Scenario 4 removes all

dairy policies simultaneously for all countries/regions. Scenario 5 goes

one step further by removing all agricultural policies simultaneously to

illustrate the effects of cross-commodity policy on dairy markets. Key to

the results of this scenario is the competitiveness of countries' feed

sectors. The scenario analysis is not intended to be a forecast or projection of future policy change. 

10

Trade Liberalization in International Dairy Markets / ERR16

Economic Research Service/USDA

Table 2

Summary of policy instruments liberalized in each scenario

Scenario 1 Scenario 2 Scenario 3 Scenario 4 Scenario 5 

Quota abolition Tariffs and TRQs Domestic support Dairy-only All commodities

eliminated eliminated liberalization liberalized

Q No milk production Policy Policy unchanged No milk No milk 

quotas unchanged production quotas production quotas

T, TQ Policy unchanged Tariffs and Policy unchanged Tariffs and quota Tariffs and quota

tariff-rate quotas tariffs eliminated tariffs eliminated

eliminated

PS, PP Policy unchanged Policy Domestic price Domestic price Domestic price

unchanged support and producer support and support and 

payments eliminated producer payments producer payments

eliminated eliminated

X, C Policy unchanged Policy Policy unchanged No export and No export and

unchanged (export subsidies not consumer consumer 

required when price subsidies subsidies

support eliminated)

T = Tariffs.

TQ = TRQs.

X = Export subsidies.

PS = Price support.

PP = Producer payments.

Q = Production/marketing quota.

C = Consumer subsidies
Scenario Results

The findings of the five scenarios are discussed below and summarized in

tables 3-8. 

Scenario 1: Removal of Milk Production Quota 

Removing milk production quotas in Canada and the EU results in higher

milk production—0.1 percent higher in Canada and 4 percent higher in the

EU (table 3)—and lower producer prices for milk in both countries/regions.

Smaller milk production effects in Canada reflect the fact that Canada sets

its milk quota production near the estimated market demand and supply

levels for milk. Quotas are adjusted frequently as demand and supply

change. For the EU, higher milk production also means greater milk availability for dairy products. EU's net dairy exports for butter, cheese, nonfat

dry milk, and whole dry milk increase. With the increase in supply from the

EU, world prices of dairy products decline. As a result, net dairy exporters

such as Australia and New Zealand, who receive the world market price,

lose revenue as both milk price and production declines. The effect on the

U.S. dairy sector is relatively small, as the U.S. share of world dairy

markets is just 4 percent (in milk equivalents) (Dairy Australia, 2004). 

The magnitude of effect from removing production quotas depends on the

position of the supply curves and milk supply response elasticities in both

the EU and Canada. For example, with higher (lower) elasticities, removal

of the quota results in greater (lesser) milk production responses. Higher

supply response implies that the cost of adjusting milk production is low

and producers can easily increase milk production with the removal of the

quotas. We begin with the premise that the EU's cost of milk production is

high, supply response is limited, and the effect on prices of quota removal is

larger (-9 percent) than the effect on production (+4 percent). Therefore,

quota removal results in higher net trade levels (than the base year) with

larger price changes. If a larger supply elasticity is assumed, removing milk

11

Trade Liberalization in International Dairy Markets / ERR16

Economic Research Service/USDA

Table 3

Effects of eliminating milk production quota in EU, Canada 

Milk Milk

Country producer production Quantity imports/exports in key markets 

price World price dairy Exports Imports

Butter Cheese Nonfat Butter Cheese Nonfat Butter Cheese Nonfat

 Percent change

US -0.3 -7.0 -9.7 -4.0 -0.1 -19.0 -5.4

EU -8.7 -7.0 -9.7 -4.0 4.1 -22.0 14.5 5.4 -79.2 -79.4 -79.5

Japan -0.4 -7.0 -9.7 -4.0 -0.1 4.4 1.8

Canada -6.3 -7.0 -9.7 -4.0 0.1

Mexico -4.3 -7.0 -9.7 -4.0 -1.1

Brazil -5.5 -7.0 -9.7 -4.0 -1.4 7.1 176.0 2.3

Argentina -6.1 -7.0 -9.7 -4.0 -1.5 -16.7 -50.0 -11.1

Australia -6.4 -7.0 -9.7 -4.0 -1.6 -2.0 -4.9 -2.0 2.5

New Zealand -7.7 -7.0 -9.7 -4.0 -2.0 0.3 -7.1 0.6

South Korea -2.2 -7.0 -9.7 -4.0 -0.6 5.0

Rest of world -4.7 -7.0 -9.7 -4.0 -1.2 -4.0 -4.2 -1.3 12.6 14.5 14.9
production quotas in the EU could increase milk production more than in

the current scenario. With an increase in supply elasticity from 0.35 to 0.45,

milk production would be an estimated 20 percent higher. 

In Canada, milk production quotas are tradable and their value has been

incorporated into milk production decisionmaking. Milk quotas have created

a milk price premium (rent), and removing them would imply a lower

consumer milk price (6.3 percent lower from the base year) (table 3). We

have assumed that price support remains unchanged and that Canada adjusts

milk production quotas to maintain domestic balance in the dairy market.

Therefore, the effects on milk production of removing production quotas

would be smaller than in the EU. 

With all other policies remaining in place, higher milk production could

translate into either higher inventories or higher exports. Since the model

does not capture inventories, the simulation results show higher net exports

of dairy products, exports that are not restricted by limits on dairy exports

imposed by countries' WTO commitments (for this simulation). Consequently, increased production in the EU and Canada increases net exports of

dairy products. In reality, when EU support prices are above world market

prices, subsidies would be required to export dairy products, and the WTO

commitments of EU members would limit their ability to increase exports.

Export subsidy constraints would thus insulate the world market from much

of the impact of increased EU production. The increased production would

have to be consumed or accumulated as stocks in the EU. 

Scenario 2: Removal of Import Restrictions

In this scenario, all tariffs and tariff-rate quotes are eliminated. Average

tariffs on dairy products are particularly high in Japan (323 percent), Canada

(220 percent), the EU (85 percent), and Korea (72 percent), while the

average U.S. tariff on dairy products is 43 percent (Gibson et al., 2001).

Removal of tariffs, tariff-rate quotas, and other import restrictions lowers

milk producer prices in importing countries, ranging from 7 percent (Japan)

to 48 percent (Korea) (table 4). Milk production in Canada and the EU

declines by about 3 percent, and in the United States by about 6 percent, so

less milk would be available for dairy products (table 4), with higher world

prices. The average increase in price ranges from 13 percent for nonfat dry

milk to 67 percent for butter. In Australia and New Zealand, milk production increases by 7-8 percent and milk producer price by 33-34 percent

(table 4).

Scenario 3: Removal of Domestic Support 

In this scenario, price support (intervention prices, loan rates, government

purchases) and producer payments are eliminated.7 Production quotas are

sometimes used to limit governments' budgetary exposure related to price

support. However, the effects on milk production of removing production

quotas and price support are different and we try to distinguish the effects of

these policies by not removing production quotas in this scenario. 

12

Trade Liberalization in International Dairy Markets / ERR16

Economic Research Service/USDA

7Although production quotas are a

form of price support, as indicated in

the tables in Appendix B, we separate

production quotas from other domestic

support measures in order to evaluate

their effects on world dairy markets

separately from other policies.
For the countries that have price support programs (U.S. and EU), their

removal decreases milk production (table 5). Moreover, with less production, exports decline, reducing the need for export subsidies. Milk producer

prices decline by 0.2 percent in the United States and 3.1 percent in the EU.

With lower world dairy production and less available for export, world dairy

prices increase. Overall, the effects of removing price support are small

compared with the removal of import restraints and milk production quotas.

13

Trade Liberalization in International Dairy Markets / ERR16

Economic Research Service/USDA

Table 4

Effects of eliminating import restrictions1

Milk Milk

Country producer World price dairy products producer

price Butter Cheese Nonfat

Percent change

US -11.3 67.2 50.3 12.9 -5.6

EU -9.3 67.2 50.3 12.9 -3.2

Japan -7.4 67.2 50.3 12.9 -1.8

Canada -11.5 67.2 50.3 12.9 -2.9

Mexico 14.2 67.2 50.3 12.9 3.5

Brazil 4.3 67.2 50.3 12.9 1.1

Argentina 27.1 67.2 50.3 12.9 6.3

China 7.4 67.2 50.3 12.9 1.9

Australia 34.1 67.2 50.3 12.9 7.7

New Zealand 33.2 67.2 50.3 12.9 7.5

South Korea -47.6 67.2 50.3 12.9 -14.8

Rest of world 9.2 67.2 50.3 12.9 2.3

1 Tariffs, TRQs, import levies.

Table 5

Effects of eliminating milk price support

Milk Milk

Country producer Price of dairy products producer

price Butter Cheese Nonfat

Percent change

US -0.2 0.7 -0.2 -1.1 -0.1

EU -3.1 -2.5 -3.9 -2.7 -1.1

Japan 0.2 1.3 7.5 1.0 0.1

Canada 0.0 0.0 0.0 0.0 0.0

Mexico 0.8 0.8 0.3 0.1 0.2

Brazil 3.1 0.8 7.4 2.3 0.8

Argentina 1.5 0.9 1.7 2.5 0.4

China 0.5 2.2 0.1

Australia 3.7 1.0 7.4 2.6 0.9

New Zealand 3.2 1.0 8.6 2.6 0.8

South Korea 1.2 7.5 2.4 0.3

Rest of world 2.1 0.8 7.6 2.1 0.5
Scenarios 4 and 5: Global Trade Liberalization

All policy instruments are eliminated in scenarios 4 and 5, the difference

being that only dairy policies are liberalized under Scenario 4. For Scenario

5, all policy instruments related to trade for dairy products and other dairyrelated commodities, such as feed grains and other livestock, are liberalized. 

When all protection related to dairy production and trade is removed, world

dairy prices increase (table 6). The impact on world prices is slightly higher

when all commodities are liberalized than under dairy-only liberalization.

Dairy product prices increase from 13 percent for nonfat dry milk to 66

percent for butter in the dairy-only scenario, and from 14 to 68 percent in the

all-commodities scenario (table 6). Butter price increases the most in both

scenarios because it receives higher support prior to liberalization. The

results indicate that high support levels in subsidizing countries lead to

higher production of milk and dairy products than would occur without

support. When all support and protection is removed, milk and dairy product

production falls and trade declines, resulting in higher world dairy product

prices. The slightly higher world prices under full versus dairy-only liberalization are the result of lower feed grain prices in some countries that

currently support grain production. Lower feed grain prices would suggest

that allocation of the feeds among grain-consuming livestock might result in

a marginal decrease in dairy feeding, and thus a decrease in milk production.

With global dairy policy reform, the volume of dairy product trade declines but

products are traded at higher prices. The value of trade increases since there is

increased market access and demand for dairy products, although less milk and

dairy products are produced after liberalization. The volume of dairy product

trade (exports plus imports) declines by 660,000 tons (6 percent), with the

elimination of export subsidies. Still, dairy trade increases in value by $2.1

billion (11 percent) due to higher world prices in Scenario 4 and by nearly $3

billion in scenario 5, nearly 20 percent above the base (figs. 3 and 4). 

The effects of dairy trade liberalization on the U.S. dairy sector are small

relative to sales ($60 billion in 2001). Raw milk price declines 11 percent

(from the base year) under dairy-only liberalization and 9 percent under allcommodity liberalization (table 7). Raw milk production declines about 6

percent under the dairy-only scenario and 7 percent under the allcommodity scenario. These estimated production changes are slightly

greater than most actual year-to-year changes in U.S milk production (fig.

5). Again, the liberalization scenarios do not account for technology changes

and productivity growth in the United States, which would likely offset

losses to U.S. milk producers. 

14

Trade Liberalization in International Dairy Markets / ERR16

Economic Research Service/USDA

Table 6

Changes in world market prices of dairy products

Dairy reform only All sectors liberalized

Percent change from base

Butter 66.4 68.2

Cheese 50.2 54.3

Nonfat dry milk 13.2 14.2

Whole dry milk 24.0 26.4
Australia and New Zealand—low-cost, nonsubsidized exporters—gain the

most from liberalization, with raw milk prices increasing by 33-37 percent

from their base and production expanding by 7-8 percent in both scenarios

(table 7). These countries' dairy sectors gain from the increases in world

dairy prices and from an expanding market for their exports as production

declines in other countries.

Milk prices decline in the EU by about 9 percent under the dairy-only

scenario and 7 percent under the all-commodity scenario (table 7). Milk

production falls by more in the all-commodity scenario, despite the smaller

reduction in the EU milk price. Lower feed grain prices in the EU have an

expansionary effect on the grain-consuming livestock sector at the expense

of the dairy sector. Again, with no recent history of milk supply response in

the EU (because of the 20-year history of milk production quotas),

15

Trade Liberalization in International Dairy Markets / ERR16

Economic Research Service/USDA

Figure 3

World dairy trade $2 billion higher after dairy trade liberalization

Percent change from base

World price World trade value World trade volume

Butter Cheese Non-fat dry

milk

Whole dry 

milk

Other dairy

products

-20

-10

0

10

20

30

40

50

60

70

Figure 4

World dairy trade nearly $3 billion higher after full liberalization

Percent change from base

World price World trade value World trade volume

Butter Cheese Non-fat dry

milk

Whole dry 

milk

Other dairy

products

-20

-10

0

10

20

30

40

50

60

70
researchers disagree on the magnitude of an EU supply elasticity, which, as

demonstrated earlier, can significantly influence the levels of dairy production (Appendix B). 

The largest effects on dairy markets are under all-commodity reform. Here,

world market prices of traded dairy products increase by slightly more than

in the dairy-only scenario (table 6). For many countries, declines in dairy

production are larger, or increases smaller, than in the dairy-only scenario

despite higher world dairy product prices. When all commodities are liberalized, dairy market impacts are influenced not only by changes in milk and

dairy product prices, but also by changes in the price of inputs (primarily

feed grains) and the prices of commodities that compete for production

inputs. For example, the feed cost for U.S. milk production rises more than

11 percent because of higher world grain prices. Consequently, the higher

costs for U.S. dairy farmers lead to a larger decline in milk production than

under dairy-only liberalization. 

16

Trade Liberalization in International Dairy Markets / ERR16

Economic Research Service/USDA

Table 7—Changes in milk price, production with trade liberalization

Country Dairy reform only All sectors liberalized 

Milk price Milk production Milk price Milk production

Percent change

US -11.4 -5.7 -8.8 -7.3

EU -9.4 -3.2 -6.6 -4.3

Japan -7.4 -1.8 -7.4 -3.1

Canada -11.5 -2.9 -8.5 -3.4

Mexico 14.2 3.5 20.7 3.9

Brazil 4.2 1.1 8.6 0.7

Argentina 27.1 6.3 31.1 5.5

China 7.3 1.8 10.2 1.9

Australia 34.1 7.7 37.3 7.3

New Zealand 33.2 7.5 35.9 7.4

South Korea -47.6 -14.8 -46.1 -14.9

Rest of world 9.2 2.3 8.4 2.8

Figure 5

U.S. milk production

0

10

20

30

40

50

60

70

80

90

1967 70 73 76 79 82 85 88 91 94 97 2000 03

1,000 metric tons

-6

-4

-2

0

2

4

6

8

Year-to-year percent change

U.S. milk production

Trend (U.S. milk production)

U.S. milk production

year-to-year change

(right axis)
Similarly, Canadian dairy producers face higher feed grain prices, and dairy

production declines relative to the dairy-only scenario, despite the quota

elimination. Feed grain price increases are small in Japan, but result in a

slightly higher decline in milk production as well. Australia's and New

Zealand's feed costs for milk rise minimally because their production

systems are forage-based.

The EU's support systems for grains and other livestock have opposite

effects on dairy production. In the base period, EU support and protection

for both grains and beef result in domestic market prices that are generally

higher than world market prices. As support and protection is cut for EU

grains, grain prices in the EU fall, and the EU cost of producing milk

declines by 7.5 percent. However, EU beef prices decline by 30 percent as

import barriers and domestic supports are eliminated. The EU dairy herd

supplies about two-thirds of the EU's beef production, so a decline in beef

price reduces the profitability of dairy production and results in a contraction of milk production (European Commission, 2004; Abler and Blandford,

2000). Hence, EU milk output falls by more when all commodities are liberalized, despite a smaller decline in milk price and lower input prices. This

result points out the advantage of a multi-commodity model that identifies

the interrelationships among various commodities in an across-the-board

trade liberalization scenario.

Liberalization of dairy policies results in a realignment of countries' shares of

the global dairy market. The EU, the world's largest exporter of dairy products

in the base period, sees its share of butter and nonfat dry milk (NFDM) trade

decline, but maintains its share of the cheese market (table 8). (EU milk supply

shifts from production of butter and NFDM to production of cheese.) New

Zealand's and Australia's shares of butter and NFDM exports rise, and

Argentina grows in all markets except other dairy products. The United States

generally maintains its trade position in most markets, and gains slightly in the

NFDM market. Higher world prices allow the United States to increase its

share of NFDM exports, particularly as the EU's share declines. 

17

Trade Liberalization in International Dairy Markets / ERR16

Economic Research Service/USDA

Table 8

Changes in dairy product export shares with dairy only policy reform1

Butter Nonfat dry milk Cheese Other dairy

Country Base Scenario Base Scenario Base Scenario Base Scenario

Percent change

US 0.8 0.8 11.8 12.2 2.8 2.2

EU 16.6 2.1 23.3 17.5 54.1 54.2 28.3 48.5

Japan 2.8 9.8

Canada 1.7 2.0 3.4 3.4 1.9 1.7

Mexico

Brazil

Argentina 1.3 2.3 2.4 2.8 2.3 3.9 27.3 16.3

China

Australia 22.9 27.5 24.7 27.3 17.0 17.6 41.6 25.2

New Zealand 53.1 61.0 19.9 21.5 18.8 18.9

South Korea

Rest of world 3.6 4.3 14.6 15.2 3.1 1.4 0.0 0.1

1 Changes in export shares of whole dry milk are insignificant.

Note: Blank cell indicates no significant share of commodity market.
Comparing global price changes across scenarios indicates that a total liberalization of all commodities accounted for the greatest change (fig. 6).

Much of the increase in world dairy prices results from eliminating import

restrictions, owing to their high levels in the base year. World prices of

butter increase by more than other dairy products due to the higher support

that butter received in the base year. 

18

Trade Liberalization in International Dairy Markets / ERR16

Economic Research Service/USDA

Figure 6

Global prices under trade liberalization

-20

0

20

40

60

80

Butter Cheese Non-fat dry milk

Percent change

Production quotas Dairy reform Imports restrictions Total reform
Conclusions 

The scenario analyses indicate the direction of changes in key economic

variables after simulating changes in dairy policy. Liberalization of world

dairy markets—eliminating price support, production quotas, import

barriers, and export subsidies—was found to reduce the volume of dairy

products traded globally as higher dairy product prices reduced demand.

Despite lower trade volumes, the value of dairy product trade increases due

to higher prices.

Trade liberalization was found to affect countries differently. Countries with

high levels of support and protection (e.g., Japan and Korea) generally lose

production value. Lower-cost countries and those with low support and

protection (e.g., Australia and New Zealand) gain the most from trade liberalization, as their producers benefit from higher world market prices and

their exports grow. The effect on countries with moderate support and

protection, like the United States, the EU, and Canada, depends on the

policy mix in each country. The effect of price declines on production in the

EU and Canada is offset by the removal of production quotas. Declines in

milk price lead to reductions in U.S. milk production. However, productivity

growth in milk production of 1 percent per year would offset any losses to

U.S. milk producers.

19

Trade Liberalization in International Dairy Markets / ERR16

Economic Research Service/USDA
References

Abler, David, and David Blandford. 2000. “Dairy and Milk Supply Equations

for WTO Model,” ERS Penn State Trade Modeling Project-Model

Documentation, http://trade.aers.psu.edu/documentation.cfm, June 6.

Abler, David, David Blandford, Mary Bohman, Praveen Dixit, and Jim

Stout. 2001. Development and Initial Results from the ERS/Penn State

WTO Model. Paper presented at the International Agricultural Trade

Research Consortium, Washington, DC, May 18-20.

Billups S.C., S.P. Dirkse, and M.C. Ferris. 1997. “A comparison of large

scale mixed complementarity problem solvers,” Computational

Optimization and Applications, 7:3-25. 

Bouamra-Mechemache, Zohra, and Vincent Requillart. 2000. “Analysis of

EU Dairy Policy Reform,” European Review of Agricultural Economics,

vol. 27, n. 4. 

Chavas, J.P., T.L. Cox, and E. Jesse. 1998. “Spatial Allocation and the

Shadow Pricing of Product Characteristics,” Agricultural Economics 18.

Conforti, P., and P. Londero. 2001. AGLINK: The OECD Partial

Equilibrium Model, INEA (National Institute of Agricultural Economics),

Working Paper No. 8, Rome.

Consortium INRA-Wageningen University. 2003. “Study on the impact of

future options for the milk quota system and the common market organization for milk and milk products.” http://europa.eu.int/comm/agriculture/publi/reports/milkquota/inrawag_en.pdf

Cox, Thomas L., Jonathan R. Coleman, Jean-Paul Chavas, and Yong Zhu.

1999. “An Economic Analysis of the Effects on the World Dairy Sector

of Extending Uruguay Round Agreement to 2005,” Canadian Journal of

Agricultural Economics 47.

Dairy Australia. 2004. Australian Dairy Industry in Focus. 

Dirkse, S.P., and M.C. Ferris. 1999. “Modeling and solution environments

for MPEC: GAMS \& MATLAB,” in M. Fukushima and L. Qi (eds.),

Reformulation: Nonsmooth, Piecewise Smooth, Semismooth and

Smoothing Methods, Kluwer Academic Publishers, Budapest, Hungary.

Dirkse, S.P., and M.C. Ferris. 1997. “Crash techniques for large-scale complementarity problems,” in M.C. Ferris and J.S. Pang, (eds.),

Complementarity and Variational Problems: State of the Art, SIAM

Publications, Philadelphia, PA

Dirkse, S.P., and M.C. Ferris. 1995. “The PATH solver: A non-monotone

stabilization scheme for mixed complementarity problems,” Optimization

Methods and Software 5:123-156. 

Doyon, Maurice A., and Andrew M. Novakovic. 1996. Trade Liberalization

and the U.S. and Canadian Dairy Industries. Extension Bulletin 96-14,

Department of Agricultural, Resource, and Management Economics,

Cornell University.

20

Trade Liberalization in International Dairy Markets / ERR16

Economic Research Service/USDA
Effland, Anne, Mary Anne Normile, Edwin Young, and John Dyck. 2002.

“Commodities Policies of the U.S., EU, & Japan, How Similar?”

Agricultural Outlook, U.S. Dept. Agr., Econ. Res. Serv., Dec.

European Commission, Directorate-General for Agriculture. 2004. “The

Meat Sector in the European Union: Fact Sheet.”

http://europa.eu.int/comm/agriculture/publi/fact/meat/2004_en.pdf 

Ferris, M.C., S.P. Dirkse, and A. Meeraus. 2006. “Mathematical programs

with equilibrium constraints: Automatic reformulation and solution via

constrained optimization,” in T.J. Kehoe, T.N. Srinivasan, and J.Whalley,

(eds.), Frontiers in Applied General Equilibrium Modeling. Cambridge

University Press, Cambridge, MA. 

Fulginiti, L., and R. Perrin. 1993. “The theory and measurement of producer

response under quotas,” Review of Economics and Statistics 75.

Gadson, Kenneth E., J. Michael Price, and Larry E. Salathe. 1982. “The

Food and Agricultural Policy Simulator (FAPSIM).” ERS/NED Staff

Report AGES-820506, U.S. Dept. Agri., Econ. Res. Serv.

Gibson, Paul, John Wainio, Daniel Whitley, and Mary Bohman. 2001.

Profiles of Tariffs in Global Agricultural Markets, AER-796, U.S. Dept.

Agr., Econ. Res. Serv., Jan.

Josling, T., D. Kelch, P. Liapis, and S. Tangermann. 1998. Agriculture and

European Union Enlargement, TB-1865, U.S. Dept. Agr., Econ. Res.

Serv.

Lariviere, S., and K.D. Meilke. 1999. “An Assessment of Partial Dairy

Trade Liberalization on the U.S., EU-15 and Canada,” Canadian Journal

of Agricultural Economics, Vol. 47, No. 5.

Organization for Economic Cooperation and Development (OECD). 2004.

An Analysis of Dairy Policy Reforms and International Dairy Trade

Liberalization: Analysis of Intenational Dairy Trade Liberalization,

COM/AGR/TD/WP(2004)20/FINAL.

Shaw, Ian, and Graham Love. 2001. Impacts of Liberalising World Trade in

Dairy Products, ABARE Research Report 01.4, Canberra.

Skully, David W. 2001. Economics of Tariff-Rate Quota Administration. TB1893, U.S. Dept. Agr., Econ. Res. Serv.

Stout, James, and David Abler. 2004. ERS/Penn State Trade Model

Documentation, http://trade.aers.psu.edu/pdf/ERS_Penn_State_

Trade_Model_Documentation.pdf, updated Oct. 2004.

U.S. Department of Agriculture, Economic Research Service. 2005.

Agricultural Baseline Projections briefing room,

www.ers.usda.gov/Briefing/Baseline.

U.S. Department of Agriculture, Economic Research Service. 1992. SWOPSIM Database, ERS data product,

www.ers.usda.gov/data/sdp/view.asp?f=trade/92011/.

21

Trade Liberalization in International Dairy Markets / ERR16

Economic Research Service/USDA
U.S. Department of Agriculture, Economic Research Service. “WTO Tariff

Levels,” WTO Agricultural Trade Policy Commitments Database,

www.ers.usda.gov/db/wto/WtoTariff_database/.

Van Bekkum, Onno Frank, and Jerker Nilsson. 2000. “Liberalization of

International Dairy Markets and the Structural Reform of European Dairy

Cooperatives.” Paper presented to the Agribusiness Forum of the

International Food and Agribusiness Management Association (IAMA),

Chicago, IL, June 24-28.

Wainio, John, Gene Hasha, and David Skully. 1998. “Market Access

Issues,” Agriculture in the WTO, U.S. Dept. Agr., Econ. Res. Serv., WRS98-4, Dec. http://usda.mannlib.cornell.edu/reports/erssor/

international/wrs-bb/1998/wto/wrs98-4.pdf.

World Trade Organization. 2004. Doha Work Programme: Decision Adopted

by the General Council on 1 August 2004. WT/L/579, Aug. 2.

Zhu, Yong, Tom Cox, and Jean-Paul Chavas. 1998. A Spatial Equilibrium

Analysis of Trade Liberalization and the U.S. Dairy Sector. Final Report

for the NRI grant # 94-37400-0966, Department of Agricultural and

Applied Economics, University of Wisconsin-Madison,

http://aae.wisc.edu/globalMt/nri-gatt/index.html.

22

Trade Liberalization in International Dairy Markets / ERR16

Economic Research Service/USDA
23

Trade Liberalization in International Dairy Markets / ERR16

Economic Research Service/USDA

United States

Domestic support Trade policies

Export

Export Income support Price support Other Market access competition

Commodity Production market Direct and Disaster Government Marketing Import Tariffs Export 

share countercyclical aid purchases orders quotas subsidies

payments (TRQs)

1,000

 metric tons

Milk 77,002 19.6 X X X

Butter 615 0.4 X X X X

Cheese 3,906 4.7 X X X X

Nonfat dry milk 712 12.3 X X X X

Whole dry milk 21 na X X

Other dairy products X X

European Union

Domestic support Trade policies

Export

Price support Other Market access competition

Commodity Production Market Supply Other Consumer Import Export 

share management Intervention storage subsidies Tariffs quotas subsidies

aid (TRQs)

1,000

 metric tons

Milk 115,130 29.3 X X

Butter 1,792 28.4 X X X X X X

Cheese 5,470 41.0 X X X X

Nonfat dry milk 1,070 15.7 X X X X X X

Whole dry milk 800 34.4 X X X

Other dairy products XX X

Canada

Domestic support Trade policies

Import Export

support Price support Market access competition

Commodity Production Export

market

share 

Disaster Supply Support Import Export 

aid management price Tariffs quotas subsidies

(TRQs)

1,000

 metric tons

Milk 7,964 2.0 X X X

Butter 76 2.3 X X X X

Cheese 335 1.5 X X X

Nonfat dry milk 81 4.8 X X X X

Whole dry milk na na X X

Other dairy products XXX

1

1

1

1 World production share.

na = Not available.

Source: USDA PSD 2002 data.

1 World production share.

na = Not available.

Source: USDA PSD 2002 data.

1 World production share.

Source: USDA PSD 2002 data.

Appendix A—Dairy Policies of Selected Countries
Appendix A—Dairy Policies of Selected Countries, continued 

24

Trade Liberalization in International Dairy Markets / ERR16

Economic Research Service/USDA

Australia/New Zealand

Domestic support Trade policies

Market share

Australia/

New Zealand

Import support Market access

Commodity Production Producer

payments

Tariffs Import quotas

(TRQs)

1,000 

metric tons

Milk 11,608 /13,925 3 /3.51

Butter 164 /370 16.7 /45.8 X X

Cheese 413 /312 19.6 /24.9 X X

Nonfat dry milk 261 /255 22.6 /24.2

Whole dry milk 239 /540 14.9 /36.7

Other dairy products 

Japan

Domestic support Trade policies

Import

support Price support Other Market access

Commodity Production Import

market 

share

Producer

payments

Production

quotas

Consumer

subsidies

Import

quotas

(TRQs)

Tariffs

1,000

 metric tons

Milk 8,385 2.1 X 1 X 1 X

Butter 88 0.5 X X

Cheese 34 18.3 X X

Nonfat dry milk 180 4.3 X X

Whole dry milk na X X

Other dairy products 

1 Only for milk for the purpose of manufacturing butter and milk powder, not for drinking milk.

na = Not available.

Source: USDA PSD 2002 data.

1 World production share.

Source: USDA PSD 2002 data.
Country Butter Nonfat dry milk Cheese Fluid milk Whole dry milk Other dairy products

United States

Butter 1.66 1.69 -1.52 -1.50 -0.03 -0.30

Nonfat dry milk 1.66 1.69 -1.52 -1.50 -0.03 -0.30

Cheese -0.32 -0.33 2.47 -1.50 -0.03 -0.30

Fluid milk -0.32 -0.33 -1.52 2.49 -0.03 -0.30

Whole dry milk -0.32 -0.33 -1.52 -1.50 3.69 -0.30

Other dairy products -0.32 -0.33 -1.52 -1.50 -0.03 3.69

European Union

Butter 0.40 0.52 -0.51 -0.32 -0.09 0.00

Nonfat dry milk 0.40 0.52 -0.51 -0.32 -0.09 0.00

Cheese -0.18 -0.23 0.82 -0.32 -0.09 0.00

Fluid milk -0.18 -0.23 -0.51 1.01 -0.09 0.00

Whole dry milk -0.18 -0.23 -0.51 -0.32 1.24 0.00

Other dairy products -0.18 -0.23 -0.51 -0.32 -0.09 1.33

Japan

Butter 0.40 0.63 -0.04 -0.78 -0.20

Nonfat dry milk 0.40 0.63 -0.04 -0.78 -0.20

Cheese -0.12 -0.18 1.29 -0.78 -0.20

Fluid milk -0.12 -0.18 -0.04 0.55 -0.20

Whole dry milk -0.12 -0.18 -0.04 -0.78 1.13

Other dairy products

Canada

Butter 0.35 0.67 -0.43 -0.46 0.00 -0.14

Nonfat dry milk 0.35 0.67 -0.43 -0.46 0.00 -0.14

Cheese -0.10 -0.20 0.90 -0.46 0.00 -0.14

Fluid milk -0.10 -0.20 -0.43 0.87 0.00 -0.14

Whole dry milk -0.10 -0.20 -0.43 -0.46 1.33 -0.14

Other dairy products -0.10 -0.20 -0.43 -0.46 0.00 1.19

Mexico

Butter 0.44 0.84 -0.16 -0.55 -0.57

Nonfat dry milk 0.44 0.84 -0.16 -0.55 -0.57

Cheese -0.02 -0.03 1.17 -0.55 -0.57

Fluid milk -0.02 -0.03 -0.16 0.78 -0.57

Whole dry milk

Other dairy products -0.02 -0.03 -0.16 -0.55 0.76

Brazil

Butter 0.42 0.81 -0.21 -0.79 -0.11 -0.13

Nonfat dry milk 0.42 0.81 -0.21 -0.79 -0.11 -0.13

Cheese -0.03 -0.06 1.12 -0.79 -0.11 -0.13

Fluid milk -0.03 -0.06 -0.21 0.54 -0.11 -0.13

Whole dry milk -0.03 -0.06 -0.21 -0.79 1.22 -0.13

Other dairy products -0.03 -0.06 -0.21 -0.79 -0.11 1.20

Argentina

Butter 0.41 0.78 -0.46 -0.31 -0.22 -0.19

Nonfat dry milk 0.41 0.78 -0.46 -0.31 -0.22 -0.19

Cheese -0.05 -0.10 0.87 -0.31 -0.22 -0.19

Fluid milk -0.05 -0.10 -0.46 1.02 -0.22 -0.19

Whole dry milk -0.05 -0.10 -0.46 -0.31 1.11 -0.19

Other dairy products -0.05 -0.10 -0.46 -0.31 -0.22 1.14

25

Trade Liberalization in International Dairy Markets / ERR16

Economic Research Service/USDA

Appendix B—Dairy Product Elasticities
26

Trade Liberalization in International Dairy Markets / ERR16

Economic Research Service/USDA

Appendix B—Dairy Product Elasticities, continued 

Country Butter Nonfat dry milk Cheese Fluid milk Whole dry milk Other dairy products

China

Butter

Nonfat dry milk

Cheese

Fluid milk 0.86 -0.49 -0.37

Whole dry milk -0.47 0.84 -0.37

Other dairy products -0.47 -0.49 0.96

Australia

Butter 0.30 0.57 -0.33 -0.26 -0.13 -0.14

Nonfat dry milk 0.30 0.57 -0.33 -0.26 -0.13 -0.14

Cheese -0.16 -0.30 1.00 -0.26 -0.13 -0.14

Fluid milk -0.16 -0.30 -0.33 1.07 -0.13 -0.14

Whole dry milk -0.16 -0.30 -0.33 -0.26 1.20 -0.14

Other dairy products -0.16 -0.30 -0.33 -0.26 -0.13 1.19

New Zealand

Butter 0.20 0.39 -0.21 -0.04 -0.30 -0.04

Nonfat dry milk 0.20 0.39 -0.21 -0.04 -0.30 -0.04

Cheese -0.26 -0.49 1.12 -0.04 -0.30 -0.04

Fluid milk -0.26 -0.49 -0.21 1.29 -0.30 -0.04

Whole dry milk -0.26 -0.49 -0.21 -0.04 1.03 -0.04

Other dairy products -0.26 -0.49 -0.21 -0.04 -0.30 1.29

South Korea

Butter

Nonfat dry milk

Cheese 1.28 -0.92 -0.36

Fluid milk -0.05 0.41 -0.36

Whole dry milk

Other dairy products -0.05 -0.92 0.97

Rest of world

Butter 0.26 0.64 -0.08 -0.55 -0.02 -0.25

Nonfat dry milk 0.26 0.64 -0.08 -0.55 -0.02 -0.25

Cheese -0.13 -0.31 1.25 -0.55 -0.02 -0.25

Fluid milk -0.13 -0.31 -0.08 0.78 -0.02 -0.25

Whole dry milk -0.13 -0.31 -0.08 -0.55 1.31 -0.25

Other dairy products -0.13 -0.31 -0.08 -0.55 -0.02 1.08

Source: Stout and Abler. ERS/Penn State Trade Model Documentation, table 18.