Low farm milk prices and declining dairy farm incomes in 2009 renewed congressional interest in imposing new import barriers on milk protein concentrates (MPCs), which generally include casein, the main protein found in milk, and caseinates, a soluble form of casein. MPCs are derived from raw milk and are used in a variety of food products, animal feed, and industrial products. Currently, U.S. imports of MPCs have limited or no trade restrictions while many other dairy product imports are restricted by tariff-rate quotas. Advocates of stricter import controls on MPCs say they would prevent the unlimited importation of milk protein, which would encourage the use of domestically produced protein and raise milk prices for dairy farmers. Opponents respond that the prospective move would increase their costs and result in higher retail food prices. Major foreign suppliers of MPCs to the U.S. market would likely seek compensation under World Trade Organization (WTO) rules for new U.S. restrictions on MPC imports. Products that contain protein concentrates include infant formula, processed cheese products, imitation cheese, cultured products, frozen desserts, and specialty sports and medical nutrition products. Imports of MPCs and Casein

During most of the last decade, total U.S. imports of MPCs and casein/caseinates have hovered around 150,000 metric tons or less ( Figure 1 ). Import Barriers

		Section 22 Quotas and TRQs

Until 1995, imports of almost all dairy products (butter, cheese, dry milk) were subject to section 22 import quotas. Section 22 of the Agricultural Adjustment Act of 1933 (7 U.S.C. Dairy products that were not covered by section 22 quotas included casein, caseinates, whey, and soft-ripened cow's milk cheese (e.g., brie). The 1995 WTO Uruguay Round Agreement on Agriculture converted section 22 quotas (including dairy product quotas) into tariff rate quotas (TRQs). Since MPCs and casein imports had not been restricted under section 22, they were not subject to TRQs, nor were they subject to licensing requirements. New Legislative Import Restrictions Proposed

The Milk Import Tariff Equity Act ( S. 1542 ) was introduced on July 30, 2009, to limit imports of MPCs, casein, and caseinates. A companion bill was introduced in the House ( H.R. 3674 ) on September 29, 2009, with slight differences in aggregate quantities of permitted MPCs under the new tariff designations. S. 1542 would introduce two separate TRQs. The first would be for MPCs classified under HTS subheading 0404.90.10 for imports with a protein concentration of 40% to 90%. More than half the annual trade in MPCs and casein/caseinates would be affected by the new, higher duties. Trade Policy Implications

Enactment of the proposed legislation likely would entail the United States' entering into compensation negotiations with WTO member countries that are major suppliers of MPCs to the U.S. market. Based on these formulas and recent trade data, the aggregate amount of compensation for which the United States might be liable could be an estimated $500 million. USDA purchased surplus dairy products from October 2008 to October 2009, primarily nonfat dry milk, with the pace slowing considerably in late summer 2009. This leaves open the question whether imposing TRQs on MPCs and caseins/caseinates would have affected farm prices. Dairy product prices have since moved above support levels. To the extent product prices remain above purchase prices in the DPPSP, the magnitude of the impact on farm milk prices would depend on: (a) the amount of product not imported because of the TRQ, and (b) how this quantity (in milk equivalent) relates to overall U.S. milk production.
Low farm milk prices and declining dairy sector income in 2009 renewed congressional interest in imposing new import barriers on milk protein concentrates (MPCs), which generally include casein, the main protein found in milk, and caseinates, a soluble form of casein. To limit U.S. imports of MPCs, the Milk Import Tariff Equity Act was introduced in the Senate (S. 1542) on July 30, 2009, and in the House (H.R. 3674) on September 29, 2009. Advocates of stricter import controls on MPCs say they would prevent the unlimited importation of milk protein, which would encourage the use of domestically produced protein and raise milk prices for dairy farmers. Opponents, including dairy product manufacturers, respond that the prospective move would increase their costs and result in higher retail food prices. MPCs are used in a variety of food products (e.g., infant formula, processed cheese products, and specialty sports and medical nutrition products), animal feed, and industrial products.
Currently, U.S. imports of MPCs are assessed very low or no tariffs while many other dairy product imports are restricted by tariff-rate quotas (TRQs), which impose low import duties on quantities inside a quota while quantities above the quota are charged higher duty rates. During most of the last decade, total imports of MPCs have hovered around 150,000 metric tons or less. Imports fill a gap in limited domestic production.
Until 1995, imports of almost all dairy products (butter, cheese, and dry milk) were subject to import quotas, which were established under Section 22 of the Agricultural Adjustment Act of 1933 to prevent imports from interfering with USDA domestic support programs. Dairy products that were not covered by section 22 quotas included casein, caseinates, whey, and soft-ripened cow's milk cheese (e.g., brie). The 1995 Uruguay Round Agreement on Agriculture converted section 22 quotas (including dairy product quotas) into TRQs. Since MPCs and casein imports had not been restricted under section 22, they were not subject to TRQs.
The proposed bills in the 111th Congress, which are similar to previously introduced legislation, would establish two separate TRQs for (1) MPCs with a protein concentration of 40% to 90%, and (2) the combined imports of three products: milk protein concentrate (90% protein), casein, and caseinates. Based on recent trade data, more than half the annual trade in MPCs and casein/caseinates would be affected by the new, higher duties.
Under World Trade Organization (WTO) rules for any new U.S. restrictions on imports, enactment of the proposed legislation likely would entail the United States' entering into compensation negotiations with WTO member countries that are major suppliers of MPCs to the U.S. market. The amount of compensation for which the United States might be liable would be on based on WTO formulas, recent trade data, and bilateral negotiations with principal suppliers.
Farm-level impacts of new TRQs depend on whether dairy product prices are below or above federal price support levels. If below, farm milk prices would likely not be affected because they would already be supported above market-clearing levels, and trade restrictions would simply limit government purchases of dairy products under the price support program. If above, farm prices would likely increase to the extent that product is withheld from the market. Based on recent trade data, this quantity is estimated to represent about 0.7% of U.S. milk production. The pace of USDA dairy product purchases slowed considerably in late summer 2009, leaving open the question of whether imposing TRQs on MPCs would have affected farm prices at that time. Market prices for dairy products have since moved above support levels.