EU, US butter-oil prices threatens Indian dairy industry

["Ulhas Joglekar" <joglekarulhas@xxxxxxxxxxx>]

The Economic Times

 Tuesday, June 04, 2002

EU, US butter-oil prices threatens Indian dairy industry

PTI

NEW DELHI: A highly subsidised international trade in milk products covering
the European Union and the US can erode India's comparative advantage and
competitive strengths in the dairy sector.

Dairy industry feels urgent steps need to be undertaken to renegotiate the
bound rate of duty in WTO, for dairy products including butter oil to 75
from 40 per cent.

"There is a genuine threat to India's dairy industry from highly subsidised
and extremely unfair exports of milk products by the US and European Union.
This has resulted in prices falling to abysmal levels," Managing Director,
National Cooperative Dairy Federation, Ravi Shankar said.

He said world market prices for milk products, particularly butter,
butter-oil and skimmed milk dropped to their lowest levels after price falls
in Europe and the US.

Large imports of cheap butter oil bodes ill for the Indian industry,
production for which will become non-remunerative.

Shankar said if milk producers are made to receive a remunerative and viable
farm gate price of Rs 8.5 and Rs 11 per kg for cow and buffalo milk
respectively, they must be able to obtain a net realisation of at least Rs
90 per kg for ghee.

However, ghee prices will fall once butter oil is imported in large volumes
and sold locally at prices far below Rs 90 per kg. As a result milk
producers would be unable to fetch a viable farm gate price for milk.

In the past five years imports of butter oil into India has grown at an
alarmingly fast rate of 7.7 per cent annually, he added.

While the volume in imports of butter oil in absolute terms is not
significant, the trend has already had the effect of dampening the prices of
ghee due to large possible imports in future, Shankar said.

Imported butter oil can be used for adulteration with ghee and this impacts
the normal prices. Though customs duty on dairy products including butter
and butter oil has been increased to 40 per cent, it cannot be raised any
more due to WTO bindings.

At the current international price of butter and butter oil at $1150 and
$1375 per tonne, its estimated landed price based on various countries'
bound rate tariffs would be $2812-3402 a tonne (European Union), $2691-3357
(US), $9019-10,641 (Japan) compared to just $1550-1850 a tonne in India.

This is because quota-bound tariff for butter and butter-oil in these
countries is quite high at 134-144 per cent (US), 144-147 per cent(EU) and
298 per cent(Canada) and can erode India's competitive advantage.

Subsidies and refunds have now been raised several times in Europe and the
US and accelerated the falling trend in the world market prices.

Butter export subsidy by the European Union is at present at a five year
high and butter export refunds are now equivalent to 60 per cent of the EU
market price.

Between September 2001 and January 2002, a record 58,000 tonnes of butter
has gone into EU 'intervention' stores and export subsidies have ranged from
1500 Euros to 1750 Euros per tonne.

During 1998-2000, EU's export refunds for butter were 1700 Euro per tonne
and for skimmed milk powder 760-900 Euros a tonne. The US has also extended
its Dairy Export Incentive Programme (DEIP) through the current financial
year even as allocations under it for 2000-01 were 68,201 tonnes non-fat dry
milk and 21,097 tonnes butter fat.

The programme helps exporters meet prevailing world prices and develop
foreign markets.

Meanwhile, reform in EU's dairy policy which was originally planned to be
implemented in 2000-03 has ended up being postponed until 2004-08. At
present EU has far from fulfilled its obligations under the Marrakesh
agreement regarding reduction of export subsidies.

This makes it imperative for India to develop its own policy to facilitate
dairy development in the face of highly subsidised competition.

It has to negotiate for increasing WTO bound rate for the tariff line 0405
(which includes butter, butter oil, ghee and dairy spreads) to 75 per cent.

At present Indian tariff inclusive of special additional customs duty of
four per cent on the 0405 tariff line is 45.6 per cent.

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