	Introduction

U.S. dairy farmers are facing low returns in 2009 following a sharp decline in milk prices since late 2008 and continuation of relatively high feed costs that have adversely affected their businesses. Organizations representing dairy farmers are seeking assistance to deal with the situation. Among the requests has been the reactivation of the Dairy Export Incentive Program (DEIP). Reauthorized under the 2008 farm bill ( P.L. 110-246 ), DEIP can be used to subsidize U.S. dairy exports under certain conditions. Under DEIP, the U.S. Department of Agriculture (USDA) makes cash payments, on a bid basis, to entities that export U.S. dairy products. While the principal objective of the program is to develop export markets where the United States competes with other exporters who subsidize their products, DEIP can also increase the U.S. farm price of milk if enough dairy products are removed from the domestic market. DEIP has not been active since 2004 because, until late in 2008, market conditions were relatively strong and U.S. negotiators have been pursuing the elimination of all agricultural export subsidies as a trade policy objective. USDA is considering reactivating DEIP and is in the process of consulting with other agencies, including the U.S. Trade Representative's office. WTO Dairy Export Subsidy Limits

The United States' ability to provide export subsidies under DEIP is constrained by World Trade Organization (WTO) annual limits on quantities and budgetary outlays that can be provided as export subsidies. The allowable quantities and budgetary outlays for agricultural export subsidies, including dairy export subsidies, were negotiated as part of the WTO Uruguay Round Agreement on Agriculture. The potential for market impact, therefore, depends on how much milk (or in this case milk-equivalent via product exports) is removed relative to the total market (i.e., total U.S. milk production). When converted to a milk-equivalent basis, the maximum quantity of subsidized U.S. exports allowed under WTO limits is about 1 to 2 billion cwt. of annual U.S. milk production in 2008, or between 0.5% and 1% of total U.S. production. Given that the calculated quantity is a small share of total U.S. milk production, DEIP-assisted exports would be expected to have a relatively small effect on U.S. milk prices and income for U.S. dairy farmers. However, there have been few evaluations of DEIP to assess its effectiveness in achieving these aims. OMB does point out, however, that DEIP was successful in offsetting EU export subsidies for dairy products to Mexico, which permitted the United States to develop and sustain a market for U.S. dairy product exports there. The United States and other WTO member countries reached agreement at a WTO ministerial meeting (Hong Kong 2005) to eliminate export subsidies by 2013. Making good on this commitment is contingent on reaching a comprehensive agreement in WTO Doha Round negotiations, which are currently stalled. The 2005 WTO proposal would require the elimination of DEIP, a much smaller export subsidy program than EEP. In the absence of a comprehensive Doha Round agreement on agriculture that eliminates export subsidies, the United States would be acting within its WTO rights and obligations if it decided to restart DEIP. On the other hand, long-standing U.S. opposition to export subsidies, especially to EU export subsidies, the opposition of trading partners like New Zealand and the Cairns Group, and the contingent agreement in the Doha Round to eliminate export subsidies could all be factors in a U.S. decision of whether to reactivate DEIP.
U.S. dairy farmers are facing low returns in 2009 following a sharp decline in milk prices since late 2008 and continuation of relatively high feed costs that have adversely affected their businesses. Organizations representing dairy farmers are seeking assistance to deal with the situation. Among the requests has been the reactivation of the Dairy Export Incentive Program (DEIP). The principal objective of the program is to develop export markets where the United States competes with exporters who subsidize their products, but DEIP could also increase the U.S. price of milk if enough dairy products are removed from the domestic market. The U.S. Department of Agriculture (USDA) is considering reactivating DEIP and is in the process of consulting with other agencies, including the U.S. Trade Representative's office.
Reauthorized through 2012 under the 2008 farm bill (P.L. 110-246), DEIP can be used to subsidize U.S. dairy product exports under certain conditions. Under DEIP, USDA makes cash payments, on a bid basis, to entities that export U.S. dairy products. DEIP has not been active since 2004 because, until late in 2008, market conditions were relatively strong and U.S. trade negotiators have been pursuing the elimination of all agricultural export subsidies as a trade policy objective.
The United States' ability to provide export subsidies under DEIP is constrained by World Trade Organization (WTO) limits on quantities and budgetary outlays that can be provided as export subsidies. The allowable quantities and budgetary outlays for agricultural export subsidies, including dairy export subsidies, were negotiated as part of the WTO Uruguay Round Agreement on Agriculture.
The potential for impact on farm milk prices and dairy farmer income depends on how much milk (or in this case milk-equivalent via dairy product exports) is removed relative to the total market. When converted to a milk-equivalent basis, the maximum quantity of subsidized U.S. exports allowed under WTO limits is between 0.5% and 1.0% of total U.S. production. Given that the calculated quantity is a small share of total U.S. milk production, DEIP-assisted exports would be expected to have a relatively small effect on U.S. milk prices and income for U.S. dairy farmers.
There have been few evaluations of DEIP to assess its effectiveness in achieving its aims, including increasing U.S. market share in targeted overseas markets. A 2006 Office of Management and Budget assessment determined that DEIP was only a moderately effective program, although it pointed out that DEIP was successful in offsetting European Union export subsidies for dairy products to Mexico, which permitted the United States to develop and sustain a market for U.S. dairy product exports there.
The United States and other WTO member countries reached agreement in 2005 to eliminate export subsidies by 2013. Making good on this commitment is contingent on reaching a comprehensive agreement in WTO Doha Round negotiations, which are currently stalled. The 2005 WTO proposal would require the elimination of DEIP, but in the absence of a comprehensive Doha Round agreement on agriculture that eliminates export subsidies, the United States would be acting within its WTO rights and obligations if it decided to restart DEIP. On the other hand, long-standing U.S. opposition to export subsidies, especially to EU export subsidies, the opposition of trading partners like New Zealand and the Cairns Group, and the contingent agreement in the Doha Round to eliminate export subsidies could all be factors in a U.S. decision of whether to reactivate DEIP.