DEIP Update, July 2005: Program Takes Cue from Seinfeld

After 12 months of virtual inactivity, the U.S. Department of Agriculture's (USDA) Dairy Export Incentive Program (DEIP) is closing the books on the program's 2005 fiscal year, which ended June 30, 2005. DEIP is designed to open foreign markets to U.S nonfat dry milk (NFDM), cheese and butter by compensating U.S. exporters for costs associated with procuring and delivering product to an overseas port. However, the only DEIP activity generated this past year was when USDA officially opened FY05 by announcing the program's product allocation limits. During the year, USDA did not request bids or award bonuses, so no DEIP-related dairy products were exported. In a way, this year's inactivity can be related to the popular television show Seinfeld, which was self-described as being "about nothing".

In the case of NFDM, the reason is very simple: DEIP's compensation has not been necessary to entice U.S. dairy exports. Milk production shortfalls in other parts of the world and trade-favorable exchange rate movements have greatly increased the demand for U.S. NFDM abroad. U.S. exports of NFDM have increased 155% since July 1, 2004, when the DEIP fiscal year began. In fact, the total quantity of NFDM exports is eight times greater than the allowed quantity under DEIP. At the same time, government stocks of NFDM have been almost completely disposed, meaning total demand (all uses, domestic or export) has surpassed production. Clearly, the program was not necessary to encourage sales.

Strong world market prices are a major factor in the surge in dairy export quantities. The average price of U.S. NFDM exports from July 2004-April 2005 (latest data available) is up 19% from the same period in the prior year.

The circumstances for cheese and butter are slightly different, though still illustrate why DEIP was not needed in 2004-05. Cheese volume is up 4% without DEIP (although it must be noted the total DEIP allowance for cheese is relatively small, at 3,030 metric tons). The average price of U.S. cheese exports is also up 7% versus a year ago. Domestically, the price of cheese — National Ag Statistics Service (NASS) monthly average, using 38% moisture for barrels — averaged $1.5502, or 26 cents higher from July 2004 through June 2005 than it averaged over the whole five-year period from 1999-2003.

Likewise, butter prices were higher this past year than historically. The NASS butter price was 39 cents higher, at $1.6314, over the DEIP year than the 1999-2003 average. Over this past year the average price of U.S. exported butter has increased 40%, to nearly $2.00 per pound. Butter exports are down over the past DEIP period, but often the domestic butter supply precludes DEIP movements of butter in a given year. With the recent increase in the domestic butter price at the Chicago Mercantile Exchange — at press time, up 25 cents since June 13 — it is hard to imagine where the price would have gone if DEIP had sent 45 million pounds (the allowed DEIP allocation for the fiscal year) overseas.

Given that DEIP expenditures have not been necessary to promote exports and that dairy product prices are relatively strong, it is easy to understand why USDA wisely did "nothing" with the program in FY2005. The U.S. government is currently in a budget deficit and saving the $82 million allocated for the program is simply fiscal responsibility.

Posted July 5, 2005