U.S. COALITION FOR NUTRITIONAL INGREDIENTS

July 29, 2002

NO NEW FOOD TAX-KEEP EXPORT MARKETS OPEN OPPOSE S 847

Dear Senator:

Why boost prices on baby foods, breakfast foods, high protein bars, cheese products, several medical products and dietary supplements and threaten nearly two-thirds of a billion dollars in dairy product exports? That is what will happen if S. 847 passes, and why we oppose it so strongly. Once you examine the facts, we are certain you will agree.

This bill would erect new trade barriers to milk protein concentrate (MPC) and casein US companies need for many modern food, medical, cosmetic, animal feed, and industrial purposes. MPC and casein are technologically sophisticated ingredients produced by separating and concentrating various milk components. They are tailored to meet manufacturers' requirements to select the particular combination of components that best perform the function they need or desire in their products. For example, the technology allows the removal of lactose from milk so manufacturers can produce lactose-free, high-protein products. In contrast, nonfat dry milk (NFDM) contains lactose, as well as whey proteins, both of which impede its functional contribution to many foods.

Although the technology is available in the US, there is no domestic source of MPC and casein. S. 847 will disrupt US manufacturers' access to these vital ingredients, leading to higher consumer costs and the loss of substantial export earnings - without benefiting American dairy farmers, contrary to the proponents' claims.

We represent a coalition including associations, taxpayer/consumer groups and companies and their employees who use MPC and casein in the products they manufacture for the use of millions of Americans, all of whom will unnecessarily pay more for those products - if they are still available -- if this bill is passed. Before you act on it, we urge you to examine all the facts, taking a careful look at the faulty claims made by the bill's advocates.

KEEP DAIRY EXPORT MARKETS OPEN

First, this bill will backfire on the hard work we have done, in cooperation with US dairy farmers, to open export opportunities for US dairy products. As a result, the US enjoys a positive balance of trade in dairy products compared to imports of MPC and casein. This bill's new barrier to commerce in MPC and casein would likely provoke retaliation in the form of loss of access to these markets and heightened competition, threatening two-thirds of a billion dollars in US dairy exports.

US manufacturers export enormous quantities of concentrated non-fat milk components - whey proteins, lactose, and other specialty products. On a pounds of nonfat solids equivalency basis, US exports of these concentrated nonfat dairy products are 2 ½ times the amount of imports.¹ During 2001, imports of MPC casein and caseinates, the contested imports, were valued at $323 million and U.S. exports of all comparable nonfat dairy products amounted to $473 million, nearly 50% greater than the contested imports. Risking retaliation and intensified competition doesn't make good business sense.

The US exports about fifteen percent of its production of NFDM. Sixty percent of the lactose domestic processors make is sold overseas; only two percent is imported. Whey protein concentrate exports are fifteen percent of domestic production. Taken together, US imports 2.3% of its total nonfat solid milk product demand, including MPC and casein, while exporting 5.7% of domestically produced nonfat milk solids.

The bill would impose a new, complex tariff-rate quota (TRQ) on these imported MPC and casein products, in violation of our World Trade Organization (WTO) commitments. This would entitle supplying countries - under the WTO - to restrict their borders to an equal amount of US trade; in fact, the bill itself recognizes that likelihood. There is little doubt supplying countries would target US dairy exports to the extent possible for retaliation, negating years of market development dairy farmers and processors have invested in boosting overseas' sales. We think it makes little policy sense, and no economic sense, to increase costs to US consumers and at the same time undercut US exporters by ending free access to a vital product not even produced in this country.

THE FACTS ON SUBSTITUTABLITY

Second, proponents of S. 847 misleadingly suggest that US manufacturers can substitute nonfat dry milk (NFDM) for MPC. The truth is that MPC and casein and NFDM are not interchangeable; they are different products, with distinct characteristics, and unique applications.

True, they all come from milk, but after being processed, each has unique characteristics. The quality, consistency, concentration, functionality, and density of the protein in MPC and casein are the reason manufacturers turn to them, and are the primary distinguishing factors from NFDM. The protein content of NFDM averages around thirty-four percent, and varies depending on the protein content of the skim milk from which it was made. In contrast, MPC has a consistent and precise protein level. Based on the buyer's specifications, that level begins at forty percent and can go to over ninety percent. Additionally, the manufacturing process can remove lactose from MPC, which is highly desirable for many products. MPC and casein are simply not the same products as NFDM. Casein is widely recognized in the food manufacturing industry for its bonding properties, which is essential in the production of some products and improves the manufacture of others.

Toothpicks and two-by-fours both come from trees, but no one would suggest that they are interchangeable, that users can readily substitute one for the other. That is, however, the claim advocates of the bill make about the unique properties of MPC and casein compared to NFDM.

NO NEW FOOD TAX

Third, US companies may still be able to buy MPC and casein if this bill were enacted, as its advocates' note. However, that is only half the story: The rest of the story is that these ingredients will cost about fifty percent more if the bill is enacted, causing enormous price hikes consumers will ultimately bear, to no apparent advantage to US dairy farmers. Advocates assume this higher price would be paid, either for imports or domestically produced NFDM. In fact, there are other sources of non-dairy proteins that may become more price competitive, losing this market for dairy, period.

Remember, no one in the US produces these products, the imports that are supplying critical food processing and other needs are not competing with any US dairy-made product. In fact, US dairy farmers stand to lose, significantly. If these barriers were to be erected, countries would surely act to restrict US dairy exports or to intensify competition, jeopardizing a lucrative outlet for US farmers.

THE LOOPHOLE MYTH

Fourth, the MPC and casein US manufacturers use in their food and medicinal products enter the US in full compliance with our trade laws, not through some loophole or subterfuge as the bill's proponents imply. During the last WTO round of trade negotiations, no one, including S. 847's proponents, even questioned the classification of these products.

These are not products domestically produced that NFDM can replace. As such, their current treatment under US customs law is appropriate. Rather than closing a non-existent loophole, this legislation would throw up a barrier to an ingredient upon which US manufacturers and their customers rely.

FIX THE DAIRY PRICE SUPPORT PROGRAM

Finally, we agree with the bill's proponents that enormous government purchases of NFDM are not in the best interests of dairy farmers, nor the industry which relies upon a healthy dairy-producing sector. They are certainly not in the best interest of US taxpayers. However, the answer does not lie in further distorting the US dairy market by imposing a new tax on MPC and casein containing products and eliminating overseas markets for our dairy product, such as whey proteins and lactose - the certain effects of this misguided legislation.

The answer lies with reforming the underlying dairy price support program that presently provides an inescapable incentive for US producers to make NFDM for sale directly into USDA's stockpiles, with no regard for market conditions, including the growing demand for more specialized dairy products, such as MPC and casein. A new report from the International Trade Commission succinctly spells out this problem and its effects: "US butter and powder producers [realize] greater returns from drying their skim milk into nonfat dry milk and selling it to the government intervention agency, the C[ommodity] C[redit] C[orporation], than from processing it into casein and MPC. Therefore, domestic supplies of casein [are] furnished from imports."

We understand the complexity of this problem, made regrettably more difficult to sort through by the rhetoric and ill-founded claims from the bill's supporters. But in the end, the key elements that have so aroused our opposition and which we urge you to keep in mind are simple:

• The bill is not about protecting any US industry; no one in the US produces MPC and casein.
• MPC and casein and other milk-derived products, such as NFDM are not interchangeable; they are different, unique products with unique uses.
• The bill would add substantial costs to ingredients used in several foods, medical products, cosmetics, animal feeds, and industrial products.
• Its enactment could inevitably cut US dairy exports by more than $600 million annually, with devastating results on the income of US dairy farmers and to those companies and organizations that have worked long and hard to develop export markets for such domestically produced whey proteins and lactose.
• MPC and casein do not enter the US through a loophole in US trade laws; but this legislation would create a giant impediment to the free flow of commerce.
• There are distortions in the US dairy market, particularly the NFDM market as a result of current US dairy price support policies, but creating another distortion, as this bill would do, is not the right answer.
• We believe the answer lies in dealing with those underlying problems in existing US policy, not attempting to mask them with this misdirected, and potentially extremely costly and harmful, legislation.

On behalf of the following associations, taxpayer/consumer groups, and the US companies and employees we appreciate your consideration of our views and your opposition to S. 847

Sincerely-