DEIP Update, July 2004: Program Silent as Fiscal Year Opens

July 1 marked a quiet beginning to a new fiscal year for the U.S. Department of Agriculture's (USDA) Dairy Export Incentive Program (DEIP). In previous years, USDA typically released some information in early July about the program tonnage limits, initial allocations and some direction about its management strategy for the coming DEIP year. At press time, no such announcement has been issued for the 2005 fiscal year.

Current dairy market conditions may explain the calm. May and June 2004 posted some of the highest U.S. farm milk prices in history due to a tightening of the national milk supply earlier this year. Consequently, there is little immediate call for using DEIP to remove product from the U.S. supply. In addition, these higher prices raise the cost of DEIP, since the program pays exporters a bonus as compensation for additional procurement and shipping costs associated with sending certain U.S. dairy products to foreign shores.

Recent futures and cash market prices for dairy products have retreated from late spring highs, but supply and demand relationships may preclude DEIP intervention in the market until later this fall.

Some of this year's program details are expected to be the same as last year. Since the program's tonnage amounts are limited by U.S. agreements within the World Trade Organization (WTO), it is likely that USDA will authorize the program's tonnage amounts to be identical to those limits: about 150 million pounds of nonfat dry milk (NFDM), 6.7 million pounds of cheese and 46.5 million pounds of butterfat. These full amounts have been authorized each year since 2000, so every expectation is that the coming year will continue that trend.

DEIP is a multi-step process where tonnage is initially authorized, then allocated, then invited for bids. After USDA reviews the bids, an award is made, and the product is exported. In recent years, DEIP has been utilized to the full WTO limits for both cheese and NFDM. In the past couple of years, butterfat has been a contentious issue in DEIP. Tonnage has been allocated, but only a portion ultimately invited for bids and exported. In those cases, USDA had been concerned about the effect subsidized butter exports would have on the domestic butter market. Given this history and current butter futures prices, it is unlikely that butterfat will be exported under DEIP this year.

Differences also arise in the timing and the authorized amounts of all dairy products that USDA allocates and invites for bonus bids. Currently, world prices for NFDM are higher than the U.S. price, rendering DEIP unnecessary. Since the cheese tonnage limit for DEIP is such a small portion of total U.S. production (less than 0.08%), cheese can be moved almost any time. However, USDA may wait to engage DEIP until farm milk prices drop back to more traditional levels.

Posted July 12, 2004