Washington Insider-- Wednesday

Dairy Policy under TPP

Here's a quick monitor of Washington farm and trade policy issues from DTN's well-placed observer.

Income Tax Receipts as Percent of GDP Hit Highest Level Since Before Great Recession

Federal tax revenue from individual income tax receipts as a percentage of the U.S. economy hit its highest level in seven years during fiscal 2014, according to a new report by the congressional Joint Committee on Taxation.

Individual income tax receipts for fiscal 2014 were equal to 8.1% of gross domestic product, topping the long-term average of 7.8% of GDP since 1950 for the second straight year. On a nominal basis, the $1.395 trillion in individual income tax receipts collected in 2014 marked an all-time high.

Whether these numbers represent good news or bad news depends largely on one's political and fiscal philosophies. More revenue flowing into the Treasury is good news for those who would like to shrink the annual federal deficit, while it is bad news for those who believe the government already was extracting too much from the public. The new information clearly is an indication that the overall U.S. economy is improving enough to provide more people with more money.

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West Virginia Relaxes Standards for Aboveground Storage Tanks

In what appears to be a counterintuitive move, West Virginia Democratic Gov. Ray Tomblin has signed legislation that significantly scales back the state's inspection regime and standards for aboveground storage tank hazards. The stepped-up inspections and standards were put in place less than a year ago in response to a chemical tank spill that tainted the water supply of 300,000 residents, including many in the state capital of Charleston.

Under the new law, only tanks within 1,000 feet of a water supply or containing more than 50,000 gallons will be subject to inspection requirements. The previous law, enacted in 2014, would have covered all 48,000 aboveground tanks in the state's inventory. The new law cuts the number of storage tanks subject to state oversight by 75 percent.

The 2014 measure was triggered by an aboveground tank release of about 10,000 (not 50,000) gallons of 4-methylcyclohexane methanol into the Elk River upstream from a public water intake portal, prompting a "do not use tap water" order for nine West Virginia counties.

Since then, opponents have complained that it was a knee-jerk reaction with costly unintended consequences for business, a position that resonated with Republicans who are in charge of both houses of the West Virginia Legislature for the first time in 80 years.

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According to Bill Price, president of the West Virginia Environmental Council, a year ago, West Virginians were told that the chemical spill from an aboveground tank "was a wake-up call" for the state. Now, he says "the political leadership is back asleep."

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Washington Insider: Dairy Policy under TPP

One of the features of the Trans-Pacific Partnership negotiations is the fact that it promises to confront several really difficult protectionist policies that U.S. trading partners use — in Japan, for example, but also in Canada.

A recent report commissioned by the Canadian dairy industry highlights just how high some TPP policy hurdles may be for them.

Canadians have long been of two minds about trade policy. For example, the western provinces agreed in the Uruguay Round to end most of their transportation subsidies that were used to compete in international grain markets, but they retained most of their trade protections for eastern producers of dairy, poultry and eggs. These policies were deeply hated by U.S. producers who were largely blocked from these markets, and who now hope to regain market access with the help of TPP.

The new Canadian report focuses on changes expected under TPP and says these could be severe. They likely would require dairy farmers to export to survive, according to the Canadian newspaper, Globe and Mail.

A main feature of the current Canadian dairy regime is high tariffs that keep most imports out, the study says, and as a result Canada is largely prohibited from selling its dairy products to the rest of the world. Canadian negotiators have not signaled any give on its dairy policy via ongoing Trans-Pacific Partnership negotiations but the U.S. administration and U.S. farm-state lawmakers are pushing hard for change.

The industry briefing paper assessed industry prospects and notes that there is already something of a flood of imported “designer” dairy ingredients that are displacing Canadian milk in cheese and yogurt. This forces some producers to divert unwanted milk into animal feed or other lower-value uses.

The growing competitive pressure comes primarily from competition from imports of milk protein isolates, which come in duty free from the United States and Mexico, and have grown sharply since 2005.

Also, once the European free-trade deal is in place it will add to the flood. “If milk protein imports continue to grow, the industry will no longer be able to sustain itself,” the report said. There are limited ways to deal with this growing volume of expensive but “unwanted” domestic milk — either “displace” these cheaper imports; or, export more dairy products; or both the report says.

Then it suggests creating a new “world-price ingredient class” of milk –– priced competitively rather than artificially –– and thus give Canadian processors access to lower-cost domestic milk to boost new investment in exports of high-margin products.

Observers note, however, the likelihood of opposition to any such plan. Depending on how it is managed, they suggest it could be challenged in the World Trade Organization as an illegal subsidy.

So, there is work to do before the Canadian industry defines a legal and widely supported new policy. In the meantime, the Canadians are getting a lot of free advice. For example, Agriculture Secretary Tom Vilsack frequently makes pointed comments about Canada’s lack of significant changes to several of its policies, including dairy.

In addition, Rep. Collin Peterson, D-Minn., and ranking member of the House Ag Committee rarely passes up a chance to criticize Canadian dairy policies. He recently told the press that the North American Free Trade Agreements allows the Canadians to keep their supply management system and that made the Canadian producers a lot of money — more than similar operations make in the United States.

He also notes that the Canadians use tariffs to protect producers but are able to sell in the United States without tariffs. “So, the result of that has been, because the Canadian system can’t grow, and they’re making all this money in these co-ops, we now have the Canadian co-ops in Quebec owning — they’re No. 1 and 3 in ownership of dairy processing in the United States,” he said.

“That’s got to be fixed, or at least get on a path to be fixed, in this deal for me to support it. So that’s one of my main issues,” Peterson told the press regarding the TPP.

In this context, the Canadian industry reports that it faces “waning government support” for supply management and is approaching a crossroads beyond which the “existing policy framework is no longer sustainable.” At the same time, it calls for a policy environment which “levers” export potential within existing trade agreements and “… enables the marketing system to be operated with more milk and larger growth allowance.”

Likely it is the word “levers” that is crucial. If this involves deregulating only one part of the system, which then is even partly supported by protections on the rest, then that probably won’t wash with the TPP or the WTO. Clearly, this is a tough issue for Canada and everybody else in the TPP talks, and one that should be watched carefully by U.S. producers as it develops, Washington Insider believes.


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(GH/CZ)

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