Imports of Milk Protein Concentrates: Assessing the Consequences

Transcription

1 Staff Paper #343 November 14, 2001 Imports of Milk Protein Concentrates: Assessing the Consequences By Kenneth W. Bailey Department of Agricultural Economics and Rural Sociology College of Agricultural Sciences The Pennsylvania State University Armsby Building University Park, PA The Pennsylvania State University is committed to the policy that all persons shall have equal access to programs, facilities, admission, and employment without regard to personal characteristics not related to ability, performance, or qualifications as determined by University policy or by state or federal authorities. The Pennsylvania State University does not discriminate against any person because of age, ancestry, color, disability or handicap, national origin, race, religious creed, sex, sexual orientation, or veteran status. Direct all inquires regarding the nondiscrimination policy to the Affirmative Action Director, The Pennsylvania State University, 201 Willard Building, University Park, PA : Tel. (814) /V, (814) /TT.

2 Executive Summary Imports of Milk Protein Concentrate: Assessing the Consequences By Kenneth W. Bailey The purpose of this paper is as follows: 1) describe current trends in Milk Protein Concentrate (MPC) and casein imports, 2) quantify the protein content of these imports, and 3) hypothesize why these imports are increasing. This issue is very complex and requires a very detailed research methodology before any firm conclusions can be reached. Trends in MPC and Casein Imports There are two categories of casein and two categories of MPC imports under the Harmonized Tariff Schedule (HTS) codes. MPC imports under Chapter 4 grew 270 percent between 1996 and 2000, rising to million pounds in The top 10 importers in 2000 (ranked by value) include Oceania (New Zealand and Australia), the European Union, and Canada. Quantifying MPC Imports MPC imports in 2000 were equivalent to percent of U.S milk production. MPC imports in 2000, on a casein basis, were equivalent to percent of the casein contained in U.S. cheese production MPC imports in 2000 were also equivalent to percent of the casein contained in U.S. nonfat dry milk production Relationship Between MPC Imports and Domestic and World Prices The General Accounting Office cites two reasons for the growth in MPC imports (GAO, pg. 7) 1) the relationship between the U.S. and international prices of milk protein, especially nonfat dry milk, and 2) growth in the U.S. nutritional foods industry. This study found: Imports of Chapter 4 MPC rose when world prices fell significantly below the domestic price of nonfat dry milk. Alternatively, MPC imports began to decline in mid-2000 when world prices for nonfat dry milk rose towards U.S. domestic prices. There is an inverse relationship between imports of MPC and domestic commercial use of nonfat dry milk. Domestic use of nonfat dry milk fell from when MPC imports rose. Domestic use of nonfat dry milk began to rise in mid-2000 when MPC imports began to decline. Nonfat dry milk that is not consumed domestically is either purchased under the dairy price support program, or sold under the Dairy Export Incentive Program (DEIP). ii

3 Conclusions There is sufficient data to suggest the following: The level of MPC imports in recent years is significant relative to the amount of protein produced and consumed in the U.S. MPC imports appear to be growing when there is a widening gap between the domestic U.S. price of nonfat dry milk and the world price, and MPC imports are inversely correlated with domestic consumption of nonfat dry milk, and thus have an impact on the milk price support program. The analysis in this report suggests that the growth in MPC imports could have had some economic impact on the U.S. dairy industry. Thus further analysis is warranted that focuses on the impact of MPC imports on the domestic price of cheese and protein, the all-milk price, and the dairy price support program. An econometric model of the U.S. dairy industry will be required to complete this analysis. iii

4 Imports of Milk Protein Concentrates: Assessing the Consequences By Ken Bailey 1,2 Penn State University November 14, 2001 Dairy farmers in the U.S. are angry about imports of Milk Protein Concentrates into the U.S. Milk Protein Concentrate, referred commonly as MPC, is essentially dried protein derived from milk using a new technology known as ultra filtration. MPC s are currently imported with very little trade restrictions. And, the volume coming into the U.S. is increasing significantly each year. The National Milk Producers Federation (NMPF), a trade association that represents the nations dairy cooperatives, estimates that imports of MPC and casein (an alternative proteinbased product) have reduced U.S. milk prices an average of 8.6 cents per cwt, lopping off $157 million per year in dairy farm income (NMPF 2001). National Milk is urging Congress to pass legislation to impose tariffs on imports of MPC and casein (S. 847 and H.R. 1786). Not everyone agrees that increasing imports of MPC have reduced dairy farm income. The International Dairy Foods Association (IDFA), a trade group that represents dairy processors, rejects these bills that would subject MPC and casein imports to higher tariffs. In a recent position paper, IDFA asserted that the high level of MPC imports is due to two things. First, there is a growing and unmet demand for MPC use in food manufacturing. Second, distortions under the dairy price support program make it relatively more profitable for U.S. processors to manufacture nonfat dry milk and sell it to the U.S. government rather than invest in new technology to produce MPC or casein. IDFA also assets that imports of MPC... are not substitutable with nonfat dry milk. These two positions illustrate the polar opinions of the impact of MPC imports on the U.S. dairy industry. Either it lowers domestic milk prices to U.S. dairy farmers and increases the cost of the dairy price support program, or it has no impact on the U.S. dairy industry. The purpose of this paper is as follows: 1) describe current trends in MPC and casein imports, 2) quantify the protein content of these imports, and 3) hypothesize why these imports are increasing. This issue is very complex and requires a very detailed research methodology before any firm conclusions can be reached. Instead, the data will be carefully analyzed in order to support a firm hypothesis. 1 The author is an Associate Professor of Agricultural Economics at Penn State University. You may reach the author at (814) or via baileyk@psu.edu. 2 The author would like to thank Angela Fonzi for help in collecting and processing the data required for this study. 1

5 Primer on MPC, Casein and Milk Components To understand the issues surrounding MPC, one must have a basic understanding about components in milk and dairy products. For a primer, I would suggest a text by Ramesh Chandan, Dairy-based Ingredients. He writes that one hundred pounds of raw milk contains about 12.6 pounds of milk solids and 87.4 pounds of water. The milk solids consist of 3.7 pounds of fat and 8.9 pounds of solids-not-fat. The latter is further broken down into milk protein (3.4 pounds), lactose, or milk sugar (4.8 pounds), and minerals (0.7 pounds). Milk protein consists of casein (2.8 pounds), which is used to make cheese, and whey protein (0.6 pounds), which is a by-product of cheese production. MPC is produced using a new technology called ultra filtration. This process uses a membrane with minute pores to retain larger molecules (such as protein) and allow smaller molecules to pass through (water, lactose and some minerals). MPC production begins with the separation of milk into skim and cream. The skim milk is then ultra filtered to remove most of the water, lactose and other solids. The resulting product, referred to as retentate, is mostly protein. This product is then either used in liquid form to make cheese, or is spray dried. Casein, another protein product, is produced by a chemical process (acid or enzyme) that precipitates out the casein portion of protein from skim milk. In other words, a chemical process is used to separate the casein in milk from the whey protein. Casein and MPC s are currently not produced in the United States. That s because the dairy price support program makes it more economical to produce nonfat dry milk rather than casein or MPC s from skim milk. Instead, the latter two products are imported from overseas. Trends in MPC and Casein Imports There are two categories of casein and two categories of MPC imports under the Harmonized Tariff Schedule (HTS) codes. Data from the Foreign Agriculture Service (FAS) of USDA reports that in the year 2000, million pounds of Chapter 4 MPC was imported into the United States under HTS This is a broad classification of MPC and includes any complete milk protein (casein plus lactalbumin) that is more than 40 percent milk protein by weight (see NMPF report). The 40 percent refers to the combination of casein plus whey protein. In addition, 26.3 million pounds of MPC were imported under Chapter 35 of the HTS in 2000 under HTS This definition is narrowed to include milk proteins that are at least 90 percent casein. In other words, it is defined by its casein content, not its milk protein content. In addition to MPC s, the U.S. also imports casein and caseinates. The latter refers to casein that has been treated with a suitable alkali to make it soluble in water. In 2000 the U.S. imported million pounds of casein (HTS ) and 75.4 million pounds of caseinates (HTS ). 2

6 Imports of all four categories of casein, caseinates, and MPC have increased over the last several years (see Figure 1). This is particularly true for Chapter 4 MPC. NMPF reports that none of these product categories has a WTO tariff-rate quota, and all have very low tariff rates ($0.0037/kg for MPC s and caseinates, and zero for casein). Table 1 indicates that MPC imports under Chapter 4 grew 270 percent between 1996 and 2000, rising to million pounds in The top 10 importers in 2000 (ranked by value) include Oceania (New Zealand and Australia), the European Union, and Canada Jan-89 Jan-90 Jan-91 Mil Lbs Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Caseinates Chap 35 MPC Source: Foreign Agriculture Service, USDA. Casein Chap 4 MPC Figure 1. U.S. Imports of Milk Protein Concentrate (MPC), Casein and Caseinates Table 1. U.S. Imports of Chapter 4 Milk Protein Concentrate HTS Code Calendar Years Import Markets: Million Pounds New Zealand Australia Ireland Germany Netherlands Canada Hungary Switzerland France Denmark ROW Grand Total Source: Foreign Agricuture Service, USDA. Note: one metric ton is equivalent to pounds. 3

7 History of Dairy Import Policy The U.S. has had a long history of support for the domestic dairy industry. That support creates a problem, however, if the domestic price is raised above the world price. Without import barriers such as quotas or tariffs, domestic support programs would be very costly to the U.S. government. Section 22 of the Agricultural Adjustment Act as amended in 1935 contains import protection. It directs the Secretary of Agriculture to inform the President of the United States if foreign imports are rendering the dairy price support program ineffective, materially interfere with the operation of these programs, or adversely affect domestic production (Bailey, pg. 234). If the President agrees with the Secretary of Agriculture, then the President can direct the U.S. International Trade Commission (ITC) to conduct an investigation. Based on these finds, the President can impose additional fees or quotas on foreign imports of dairy products. Access to U.S. dairy markets by the international community has been historically curtained by the issuance of country and commodity specific licenses. These licenses allocate quotas for various dairy products among importers and users. A quota prevents imports beyond a certain level. These imports would also have a tariff associated with it. A tariff is simply a tax on the imported product. Dairy products historically affected by quotas and tariffs include various cheeses, butter and butter products, nonfat dry milk, and other dairy-based products. Casein has historically had no quota or tariff associated with it, mainly because use for many years was limited to industrial purposes. In 1981 the U.S. ITC instituted an investigation after receiving a request from then President Regan. The investigation was to determine whether imports of casein and lactalbumin 3 render or tend to render ineffective, or materially interfere with, the price-support program for milk..., or to reduce substantially the amount of products processed in the United States from domestic milk. The early 1980s was a time of rising inflation and escalating food costs. In particular, the wholesale price of dairy products was rising due to annual adjustments in the support price for milk. At the same time, imports of casein began to increase. Dairy farmers were concerned that these imports displaced domestically produced milk solids and raised the cost of operating the dairy price support program. USDA s Economics and Statistics Service issued a report in 1981 that analyzed the economics of casein imports. The report outlined three broad classifications of casein end use in the United States. The first category was for pet foods and industrial products. About 36 million pounds of casein was used in 1980 for this purpose. USDA hypothesized that casein used for this purpose substituted with soy-based proteins. The second category was for imitation cheese, coffee whitener, and most animal feed uses. About 68 million pounds of casein was used in 1980 for these purposes. Casein used for these purposes could easily substitute with domestic sources of milk solids. The third end use for casein was for medical 3 In the early 1980s whey protein was known commercially as lactalbumin. 4

8 and pharmaceutical products. About 24 million pounds of casein were used in 1980 for this purpose. Since special characteristics of casein were identified for these purposes, no substitution with domestic sources of skim solids was assumed. The USDA study examined the imposition of either a 50 percent tariff on casein imports, or a quota equal to 50 percent of the amount imported during a representative period. A complete curtailment of casein imports was not legally possible under then existing trade agreements. The USDA study estimated that application of a 50 percent ad valorem tariff would add $0.60 to the 1980 price of casein of $1.20 per pound. The tariff could cause some shift in casein imports to whey proteins and other soy-based products, but would not result in any change in demand for domestic milk solids. While the tariff would have no impact on CCC purchases under the dairy price support program, consumer expenditures would increase by about $50 million due to the higher cost of casein. The impact of a quota would be to reduce casein imports to just 76 million pounds using as a base period. The domestic price of imported casein would rise in relation to the price of nonfat dry milk (on a protein basis). There would be some substitution of casein with soy-based products and domestic skim solids. As a result, CCC purchases of nonfat dry milk would decline by $9.3 million. Consumer expenditures under this scenario would rise by almost $115 million due to an increase in casein prices from $1.20 per pound under the baseline to $2.65 under a 50 percent quota. In their report to the President, the ITC found that casein and lactalbumin imports were not in such quantities as to render ineffective or materially interfere with the price support program. According to the ITC, the principal objectives of the program are being met, although admittedly at considerable cost to the Government. They also noted that 1) dairy farm income had increased in recent years, 2) casein imports in 1981 appeared to be down, 3) any estimate of displacement between domestic skim solids and imports of casein involved a large measure of conjecture and 4) USDA in its submissions to the ITC declined to recommend any level of import restriction as a remedy. In fact, it appears the ITC report was critical of the USDA study. In conclusion, the ITC noted that the increasing cost of the dairy price support program was impacted very minimally by casein imports. Instead, they noted that the higher cost is more associated with the level at which milk is being supported. As a result, casein imports until today are unaffected by import restrictions such as quotas or prohibitive tariffs. The United States revised their trade policies in light of the agreement under the Uruguay Round of the GATT, or General Agreement on Tariffs and Trade. This agreement committed the U.S. to converting our Section 22 import quotas to tariff equivalents, which were to be lowered over time. Under the agreement, tariff rates were to be reduced by 15% in equal annual installments over 6 years beginning in The tariffs for major traded products were: o non-fat dry milk Base tariff of cents/kg reduced to 86.5 cents/kg o butter Base tariff of cents/kg reduced to cents/kg o cheese Base tariff of cents/kg reduced to cents/kg 5

9 The new scheme converted existing dairy import quotas to a new tariff-rate quota program. This system established a two-tier program with one tariff for imports within a quota (currently referred to as licensed imports) and another much higher tariff for over-quota imports (called higher-tiered imports). It was the base tariffs on within-quota import levels established in 1995 that were reduced over time. An example may help to illustrate this program better. Butter is imported into the United States under two broad categories. One category is called licensed imports. USDA assigns each country a quota within which they can import butter into the U.S. under a low tariff rate. For 2001, the licensed import tariff rate for butter for most countries is 12.3 cents per kilogram, or $ per pound. The other category is for high-tier imports. Under this category, unrestricted imports of butter are allowed into the United States, however they are subject to a relatively high tariff rate. For 2001 the high-tier tariff rate is $1.541 per kilogram, or $ per pound. Due to relatively high domestic prices for butter and low world prices, U.S. imports of butter increased significantly in This despite the presence of high tariff rates for over-quota butter. For the months of January through August 2001, licensed butter imports (those subject to the lower tariff rate) totaled 13.1 million pounds. That compares to butter imports of 12.2 million pounds during the same period a year ago. Higher-tier butter imports, those above the quota, were 24.3 million pounds during January through August, up from 94,000 pounds the same period a year ago. Butter prices fell significantly in the fourth quarter of The Grade AA price of butter in Chicago fell from a high of $2.21 per pound in early September to $ by early November. This price decline was due to mounting domestic butter stocks, reduced U.S. commercial disappearance, and increasing cream supplies by the fall of Butter imports also likely played a small role in reducing domestic U.S. wholesale butter prices. Thus international markets and dairy import policies are beginning to have some affect on the domestic U.S. dairy industry. In the case of butter, increased imports in 1998 and 2001 acted to curb runaway butter prices that significantly reduced domestic consumption. Of all dairy products, butter is perhaps the most elastic product at retail. That means consumption is adversely affected by rising wholesale and retail prices. In fact, one can hypothesize that excessive increases in domestic prices for butter (over $2 per pound at wholesale) for any extended period of time could act to damage future demand for butter. Domestic butter users would attempt to find alternatives to domestic supplies such as margarine, combinations of butter and margarine, or imports of butter. Protein Use in the United States The question that will be addressed in this report is whether increased imports of MPC have had any significant impact on the U.S. dairy industry. We begin with a hypothesis, relating MPC imports to farm-gate milk prices. After stating this hypothesis, we ll investigate data that may or may not support this hypothesis. The increasing imports of MCS and casein raise some interesting questions. How easily do they substitute with domestically produced sources of protein. And, how do the quantities of 6

10 these imports compare with the quantity of protein used in the U.S. production of dairy products? In 2000 U.S. dairy farmers produced billion pounds of milk, which contained about 4.7 billion pounds of casein. 4 Casein protein in domestic milk is used to produce cheese and nonfat dry milk, as well as many other dairy products. The U.S. produced 3.6 billion pounds of American cheese in 2000, 4.6 billion pounds of other cheeses, and 736 million pounds of cottage cheese. The U.S. also produced 1.45 billion pounds of nonfat dry milk in Since domestically produced cheese contains roughly percent casein and nonfat dry milk contains about 29.6 percent casein, one could estimate that U.S. processors consumed about 2 billion pounds of casein in cheese production and 429 million pounds in nonfat dry milk production. 5 Thus, the equivalent of just over half of all the casein contained in domestically produced milk in 2000 was used to produce cheese and nonfat dry milk. This illustration provides the reader with some idea regarding how much protein is currently produced and consumed in the U.S. dairy industry. Under current Food and Drug Administration (FDA) regulations for standards of identity, imported casein (more specifically ultra filtered milk produced outside the cheese plant) cannot be used to produce standardized cheese such as Cheddar, Colby, cottage cheese, Mozzarella, etc. The General Accounting office listed 72 standards of identity for cheeses that cannot use dried ultra filtered milk, or MPC s, produced outside the cheese plant (see Appendix I, GAO report). In other words, under current FDA regulations, a cheese product cannot bear the label Colby Cheese if it was made from imported MPC. The exception to this, however, is that non standard cheeses such as feta cheese and pizza cheese, can use MPC. There is also some question as to whether MPC can be used in the starter cultures for standardized cheeses. Currently there is no data on how imported MPC is used. That said, it is likely that imported protein, whether MPC or casein, has some degree of substitution with domestically produced protein in the form of raw milk and nonfat dry milk. Technically speaking, casein, caseinates, MPC s and nonfat dry milk can all be used to produce cheese. Nonfat dry milk is regularly used to standardize the cheese vat and substitutes to some degree for the solids in raw milk. And, the FDA has approved a pilot program to use liquid ultra filtered milk from New Mexico to produce cheese. Despite the technical ability of MPC and casein to be used in the cheese vat, there is some question regarding how much these imported products actually substitute for domestically produced skim solids. Some casein is used for industrial non-food purposes. The General Accounting Office notes that some MPC is used in the U.S. nutritional foods industry, which has grown rapidly the last few years. In fact, specialized MPC products containing percent protein are used to make sport, adult and hospital nutrition products (GAO, pg. 8). Other MPC products with 90 percent protein contain very little lactose or milk sugar, and have highly specified uses. Thus some portion of MPC and casein imports likely do not substitute with domestically produced skim solids. 4 Domestically produced milk contains roughly 3.4 percent protein, of which 82.4 percent is casein protein. 5 See Appendix B of Chandan. 7

11 Hypothesized Link between MPC Imports and Farm-gate Milk Prices It is hypothesized in this report that some MPC and casein imports are directly substitutable with domestically produced protein in the form of raw milk and nonfat dry milk. The exact quantity, however, is not known. This hypothesis states that some MPC and casein are used to produce cheese in the United States when those sources are cheaper than domestic protein. Cheaper prices for protein could expand domestic production of cheese, resulting in a decline in cheese prices. In addition, excess production of nonfat dry milk could occur under this scenario. The USDA would then purchase some of the excess nonfat dry milk under the dairy price support program. This would occur if domestic prices for nonfat dry milk were near the support price level. Thus the link between farm-gate milk prices and imports of MPC becomes clear. If cheese and nonfat dry milk prices fall due to increased imports of MPC and casein, class prices under federal milk marketing orders would decline. That in turn would lower farm-gate milk prices. The exception to this could be the domestic price of nonfat dry milk. It is currently supported at $0.90 per pound. Thus domestic prices for nonfat dry milk are not likely to fall below the support price. However, if the government continues to purchase surplus quantities of nonfat dry milk, this could pressure the USDA to further lower the CCC purchase price. 6 Thus one could hypothesize a link between MPC and casein imports, the dairy price support program, and farm-gate milk prices. Quantifying Imports of MPC and Casein on a Protein Equivalent Basis How does one go about quantifying the volume of MPC and casein imported into the United States each year? Is the volume of MPC imports significant or not? Its true that imports of Chapter 4 MPC have grown significantly on a percentage basis. The trouble is, no one really knows what to compare this volume to in order to grasp the implications for the U.S. dairy industry. One method that is commonly used is to compute the milk-equivalent of MPC imports. This allows the reader to visualize the quantity of MPC s on a milk basis. It was stated earlier that billion pounds of milk were produced in 2000 that contained 4.7 billion pounds of casein protein. A milk-equivalent conversion factor on a casein basis would provide a multiplier that one could use to convert pounds of casein back into pounds of raw milk. Given that raw milk contains 2.8 percent casein protein, the inverse of this figure (35.7) would imply that one pound of pure casein should represent 35.7 pounds of raw milk. If one estimates that total imports of MPC s in 2000 represented million pounds of casein protein (to be discussed later in this report), this should represent billion pounds of milk on a casein-equivalent basis. Thus MPC imports in 2000, using this logic, are equivalent to percent of U.S. milk production. That is significant! There is just one problem with this math: it doesn t reflect any of the non-casein milk components! MPC imports do not contain the same amount of whey protein, lactose, 6 The CCC purchase price of nonfat dry milk was reduced by the USDA from $ per pound to $0.90 per pound on May 31, Part of the justification for lowering the support price for nonfat dry milk was that the USDA had amassed a years worth of domestic consumption as of April

12 minerals and butterfat that is normally contained in milk. It s like saying the sale of spark plugs in the U.S. is somehow equivalent to the sale of so many cars. One category of product may have little to do with the other. Thus milk equivalent conversion, while intuitively appealing to some, is a fairly weak method of analyzing MPC imports. A better way is to convert MPC and casein imports into pounds of casein protein. That figure could then be compared to many things, including the casein protein content of U.S. production of milk, cheese and nonfat dry milk. For the rest of this analysis we will ignore casein and caseinate imports and focus entirely on MPC imports. That s because it is still unknown how much of these imports are used for industrial, food (non-dairy), and dairy purposes. This also simplifies the analysis. We begin with imports of MPC under Chapter 4 of the HTS. This category has the greatest percentage increase in imports over time. It is also the most complex to analyze. That s because it represents all imported milk proteins that are at least 40 percent protein by weight. The General Accounting Office study listed a number of dry milk protein concentrate products that ranged from MPC 42 (42 percent protein, 45.5 percent lactose), to MPC 90 (86.7 percent protein, 1.0 percent lactose). The trouble is, no one knows how much protein, particularly casein protein, is represented in Chapter 4 MPC. It is assumed in this study that MPC with lower protein levels were imported into the U.S. from Europe and Canada, and higher protein level products were imported from New Zealand, Australia and perhaps Ireland. This was confirmed by industry sources, as well as by computation of the unit value of imports of MPC by country (see Table 2). Clearly higher unit values for MPC imports should be associated with higher levels of protein. The data suggest that imports of Chapter 4 MPC from New Zealand, Australia and Ireland have an above-average price for MPC. Thus one can make a very crude approximation that imports of MPC from these three countries contains percent protein, and MPC imports from the other countries contain percent protein. Casein protein thus represents 82.4 percent of those figures, ranging from 53 to 67 million pounds in 2000 (see Table 3). 7 Table 3 also provides the casein protein in Chapter 35 MPC imports. MPC imported under this category is defined as containing 90 percent casein protein. Combining both Chapter 4 and Chapter 35 MPC s, one can summarize that the pounds of casein protein from these two sources ranged from million pounds in Now, is that a lot or a little? Casein protein imported in Chapter 4 and 35 MPC can be compared to the casein protein used in domestic cheese and nonfat dry milk production to answer this question. In 2000, this study estimates that MPC imports on a casein basis were equivalent to percent of the casein contained in U.S. cheese production, and percent of the casein contained in U.S. nonfat dry milk production. 8 7 It is possible that higher levels of MPC protein (MPC 85 and MPC 90) may reflect a lower percentage of whey protein to milk protein than the lower MPC proteins (i.e. MPC 42). 8 Recall that 2.05 billion pounds of casein was used in U.S. cheese and cottage cheese production in 2000, and million pounds of casein was used in U.S. production of nonfat dry milk in

13 Given the assumption that casein in MPC can be technically substituted for raw milk and/or nonfat dry milk in the production of cheese, one can conclude that imports of MPC in 2000 were significant. Table 2. Unit Value by Country Source of Chapter 4 Milk Protein Concentrate Imports HTS Code Calendar Years Unit value imports: Dollars Per Pound New Zealand Australia Ireland Germany Netherlands NA Canada Hungary Switzerland NA NA NA France NA Denmark ROW Average unit value Source: Foreign Agricuture Service, USDA. Note: one metric ton is equivalent to pounds. Table 3. Casein Equivalent of Milk Protein Concentrate Imports Calendar Years Million Pounds Chapter 4 MPC Imports: milk protein equivalent--high milk protein equivalent--low casein equivalent--high casein equivalent--low Chapter 35 MPC Imports: casein equivalent Total casein equivalent imports of MPC's: HIGH LOW Assumptions: MPC imports from Oceania and Ireland contain 85 percent (HIGH) to 65 percent (LOW) protein. Imports from the rest of the world contains 45 percent (HIGH) to 40 percent (LOW) protein. Also, the ratio of casein protein to total protein in MPC is 82.4 percent. 10

14 Why Have MPC Imports Grown? The General Accounting Office cites two reasons for the growth in MPC imports (GAO, pg. 7). One is the relationship between the U.S. and international prices of milk protein, especially nonfat dry milk. The second is the growth in the U.S. nutritional foods industry. Figure 2 illustrates the relationship between the domestic and world prices for nonfat dry milk. The domestic price of nonfat dry milk (Western) has historically been determined largely by the U.S. dairy price support program (CCC purchase price for nonfat dry milk). The CCC purchase price for nonfat dry milk gradually fell from $1.066 per pound in 1996 to $1.01 in 1999 and early Effective May 31, 2001, the USDA reduced the support price of nonfat dry milk to $0.90 per pound. The world price for nonfat dry milk during this time period was much more volatile. Both the EU and Oceania prices fell from just under $1.00 per pound in January 1996 to a low of $0.54 per pound in July Thereafter it rose to $1.00 per pound in the fall of Imports of Chapter 4 MPC clearly rose when world prices fell significantly below the domestic price of nonfat dry milk. Alternatively, MPC imports began to decline in mid-2000 when world prices for nonfat dry milk rose towards U.S. domestic prices. Figure 3 illustrates the relationship between the domestic market for nonfat dry milk and imports of both Chapter 4 and 35 MPC imports. In order to make the comparison between these two markets valid, domestic removals and commercial disappearance of nonfat dry milk, as well as imports of MPC, were converted to casein equivalents. Then, a 3-month moving average of the monthly data was computed. (Quarterly data in this case is viewed as more robust than monthly data). The data in Figure 3 clearly shows an inverse relationship between imports of MPC and domestic commercial use of nonfat dry milk. Nonfat dry milk that is not consumed is either purchased under the dairy price support program, or sold under the Dairy Export Incentive Program (DEIP). Both of these programs combined are equal to net removals. What is particularly interesting in both Figures 2 and 3 is that when world prices for nonfat dry milk rose to domestic U.S. prices, MPC imports fell. At the same time, demand for domestically produced nonfat dry milk rose and commercial disappearance increased. Now one could make the argument that some of the reduction in MPC imports and increase in commercial disappearance of nonfat dry milk is due to the reduction in the CCC purchase price for nonfat dry milk in the spring of However, a careful observation of the data reveals that this trend began to occur in July 2000, almost a year ahead of the USDA s butter/powder tilt. 11

15 $/lb Million Pounds Jan-96 Jul-96 Jan-97 Jul-97 Jan-98 Jul-98 Jan-99 EU FOB US Western US Support Price Chapt 4 MPC Jul-99 Jan-00 Jul-00 Jan-01 Jul Figure 2. U.S. and World Prices for Nonfat Dry Milk vs. Milk Protein Concentrate Imports Mil Lbs Jan-96 Jul-96 Jan-97 Jul-97 Jan-98 Jul-98 Jan-99 Jul-99 Jan-00 Jul-00 Jan-01 Jul-01 NFDM Net Removals NFDM Use MPC Imports Note: uses a 3-month moving average. Casein equivalent of Chapter 4 imports = quantity of imports X X Casein equivalent of Chapter 35 imports = quantity of imports X Figure 3. Nonfat Dry Milk Use and MPC Imports: Casein Equivalent Basis 12

16 Conclusions This study illustrates some of the complexities involved in analyzing the impacts of MPC imports on the U.S. dairy industry. Firm conclusions cannot be reached here because of a lack of data on 1) the protein content of MPC imports, and 2) how MPC imports were used in the U.S. dairy industry. That said, there is sufficient data to suggest the following: 1) the level of MPC imports in recent years is significant relative to the amount of protein produced and consumed in the U.S., 2) MPC imports appear to be growing when there is a widening gap between the domestic U.S. price of nonfat dry milk and the world price, and 3) MPC imports are inversely correlated with domestic consumption of nonfat dry milk, and thus have an impact on the milk price support program. The analysis in this report suggests that the growth in MPC imports could have had some economic impact on the U.S. dairy industry. Thus further analysis is warranted that focuses on the impact of MPC imports on the domestic price of cheese and protein, the all-milk price, and the dairy price support program. An econometric model of the U.S. dairy industry will be required in order to complete this analysis. 13

17 References Bailey, Kenneth Marketing and Pricing of Milk and Dairy Products in the United States. Ames: Iowa State University Press. Chandan, Ramesh Dairy-based Ingredients. St. Paul: Eagan Press. International Dairy Foods Association Oppose Increasing Tariffs on Imports of Casein and Milk Protein Concentrates. IDFA Position Paper. June URL: National Milk Producers Federation Milk Protein Imports: Impact on U.S. Dairy Producers. NMPF Report, April. URL: National Milk Producers Federation The Impact of Imported Milk Protein Concentrates on U.S. Dairy Producers. Issue 3 September 10. URL: USDA, Agriculture Marketing Services. Dairy Market Statistics, annual summary, various reports. USDA, Economics and Statistics Service U.S. Casein and Lactalbumin Imports: An Economic and Policy Perspective. ESS Staff Report Number AGESS June USDA, Foreign Agriculture Service. FAS website for dairy imports by HTS code: U.S. General Accounting Office Dairy Products: Imports, Domestic Production, and Regulation of Ultra-filtered Milk. GAO March URL: U.S. International Trade Commission Casein, Mixtures in Chief Value of Casein, and Lactalbumin. Report to the President on Investigation No Under Section 22 of the Agriculture Adjustment Act. USITC Publication January