Domestic dairy policies and international market adjustment in a simplified model of world dairy products trade

Abstract

A simplified multilateral trade model for dairy products is reported that contains five major regions—Australia, the European Community, New Zealand, the United States, and an aggregate rest of world—and that describes and measures the interactions between national dairy policies and their effects on quantities traded and prices in world markets. The model contains 35 equations estimating, in milk-equivalent terms, the supply of milk for manufacturing, the demand for milk products, domestic intervention and farm prices, stockholding behavior, and net trade in milk products. The world price is based on the reconciliation of net trade flows from the five regions. Two policy experiments are run in which unilateral changes are made in the policy response functions explaining the setting of the domestic intervention prices in the European Community and in the United States. The results suggest that the world price is quite sensitive to changes in domestic policies. The liberalization of dairy policies in the European Community and in the United States would reduce the need for policy intervention in all other countries.