17 July 2006 EU butter bans are more than technical – Opinion editorial by Keith Woodford

The problems leading to the current ban on New Zealand butter sales to Europe have been widely described as technical. This is a misrepresentation. The reality is that the rulings from the European Court of Justice mean that significant changes will be required to the way the butter trade into Europe is managed. This is going to affect the net returns that New Zealand receives.

No-one is arguing against New Zealand’s right to export butter to the EU. We have an annual quota of 76,667 tonnes. This is enshrined and is not going to decline. If it were taken away from us then the WTO would almost certainly rule against the EU and in favour of New Zealand.

However, what the European Court has ruled against is the way that Fonterra acts as an apparent monopolist in managing this trade. Specifically, it has said that the EU regulations that have been allowing this to happen are flawed and must be changed.

In the days since the Court rulings of 11 July, the media attention has been on the Court’s first ruling. That ruling relates to the need for import licences for NZ butter to be procurable in all EU countries and not just in Britain. This is indeed a technical matter which the bureaucrats should be able to sort out, although it may take weeks and possibly months before it happens.

The real sting is in the second ruling which says that the way Fonterra manages the trade, and has been allowed to do so under the regulations, is discriminatory against European butter importers. It is saying that Fonterra is operating as both a monopolist exporter and monopolist importer. It cannot stop Fonterra’s dominance of the export side of the business. The exporting arrangements are laid out in New Zealand’s Dairy Industry Restructuring Act of 2001 and associated regulations. But the European Court is saying very clearly, that given this export monopoly, Fonterra cannot be allowed to also act as a monopoly importer in relation to the quota butter.

The reason this is important is that whoever imports the butter into Europe is able to earn ‘quota profits’. These arise from the difference in the world price at which the butter is exported from New Zealand and the much higher EU price at which it can then be sold. Until now, Fonterra, and before that the NZ Dairy Board, was able to capture all of these profits. The size varies from year to year depending on the relationship between the world price, which is volatile, and the higher EU price, which is quite stable. It also depends on the value of the NZ dollar. My estimate is that in a typical year it is worth about $70 million per year to Fonterra after allowing for tariffs that still have to be paid.

In effect, the Court is saying that European butter traders are entitled to a slice of this action.

In the past this has been a nice little income earner for us. We have been getting benefits because of inflated EU prices and our preferential access into this market.

The European Commission has been caught between a rock and a hard place. On the one hand it has to take account of the Court rulings. On the other hand it has to abide by WTO rules. It also has to take account of an ongoing court case in the Frankfurt Administrative Court between the German firm Egenberger GbnH and the German Federal Office for Agriculture and Food. Last week’s rulings of the European Court were a direct consequence of matters being referred from the Frankfurt Court for resolution at higher level. If the Commission were now to allow trade to continue under current regulations, which have been ruled invalid by the Court, then Egenberger GbnH may well be entitled to punitive damages from either the German Government or the EU Commission.

The European Court of Justice was also asked to rule on whether the current system was against WTO rules, in relation to quota monopolists. The Court indicated that it considered Fonterra was operating outside WTO rules but said that it was unnecessary for it to make a ruling on that given that the regulations were already invalid under EU law.

Over the next few days everyone involved will be trying to find a way forward. The EU bureaucrats will almost certainly be feeling very uncomfortable. They certainly don’t need this with their summer holidays coming up. They will be trying to find a solution that will get the Kiwis off their backs, which is consistent with the court rulings, and which minimises legal risks to themselves from European butter traders.

To get agreement there is a strong likelihood that Fonterra will have to agree to sell butter to European importers as well as selling it to their own European subsidiary. Working out the mechanisms is going to be tricky. It seems likely that New Zealand will lose some of its quota profits.

Keith Woodford, Professor of Farm Management and Agribusiness, Lincoln University, Canterbury, New Zealand