UNIVERSITY PARK, Pa. -- Imports of milk protein concentrates, known as MPCs, have reduced consumption of domestically produced protein and contributed to a huge accumulation of nonfat dry milk by the U.S. government. That is the conclusion of Ken Bailey, associate professor of agricultural economics in Penn State's College of Agricultural Sciences, in a recent study published in the journal Agricultural and Resource Economics Review.

MPC is a protein product derived from milk using a new membrane technology called "ultra filtration," in which protein molecules are separated from water, lactose and minerals. The resulting dried protein is popular with processors of dairy foods such as ice cream and cheese, as well as with the rapidly growing nutritional foods industry.

"Dairy farmers across the country are upset that MPC imports are entering the country with few or no tariffs and are being used in cheese production," says Bailey. "Right now, imported MPCs are much cheaper than domestically produced nonfat dry milk. Surplus nonfat dry milk not consumed domestically is purchased by the USDA under the dairy price support program."

The U.S. Department of Agriculture has 1.15 billion pounds of nonfat dry milk in government storage, up 78 percent from a year ago. The surplus is expected to grow in 2003.

During the most recent World Trade Organization negotiations, the United States and other countries agreed to establish a system of tiered tariffs on dairy products. Within a certain quota amount, tariffs on dairy products are at one level. Beyond the quota amount, tariffs rise significantly. As a result, some imported dairy products, such as cheese and butter, have relatively high tariffs placed on them. MPCs, however, were not commercially available during the negotiations and therefore were not subjected to the same import controls. Bailey says some farmers consider this a trade loop-hole.

Bailey's study found that:

• MPC substitutes to some degree for domestically produced nonfat dry milk (dried skim milk). While it is not a one-for-one trade, domestic consumption of nonfat dry milk fell whenever imports of MPC increased. "That is the case this year," Bailey says. "MPC imports were up 27 percent in the first eight months of 2002 relative to the same period a year ago, and domestic consumption of nonfat dry milk was down 26 percent."
• MPC imports grew whenever the world price of nonfat dry milk fell below the U.S. domestic price, creating an economic advantage to importers. Currently world prices of nonfat dry milk are about 55 to 62 cents per pound, compared to the USDA support price of 90 cents per pound. This partially explains why MPC imports this year are so strong.
• Not all of the MPC imports are responsive to changes in global prices. Bailey estimates that about half the imports of MPC have nothing to do with fluctuations in global protein prices. He speculates that higher-value MPC imports, those with protein levels well above 40 percent, are insensitive to prices. "Food processors really want MPCs," Bailey explains. "Some are willing to pay top dollar because of its functional properties in their foods. These firms aren't shopping global markets for the best deals."

He says the real issue for dairy farmers is the lower-valued MPCs, those with protein levels comparable to the 40 percent protein content of domestically produced nonfat dry milk. Some of these lower-valued imports are mixed with other dairy ingredients such as dry whey and casein and come from places such as Canada and Europe. In fact, Bailey notes, the United States even imported MPCs in 2002 from countries such as the Dominican Republic, Estonia and India.

As their use in the production of cheese rises, MPCs could displace domestic nonfat dry milk, and even domestically produced fluid milk as ingredients, theoretically resulting in increased cheese production and lower cheese prices. While cheese production has risen in 2002, it is not clear from Bailey's study how much of this increase can be attributed to MPC imports. "Most of this year's cheese production increase is clearly due to higher levels of milk production," Bailey says.

He notes that there were a number of ways to deal with MPCs, although none of the "cures" are favorable. First, Congress could abolish the dairy price support program. That would significantly reduce MPC imports and eliminate government purchases of nonfat dry milk, and could jump-start an MPC industry in the United States.

Currently there is no U.S.-produced MPC. "The obvious downside to this idea is that U.S. dairy farmers would no longer have a floor under their milk prices," he says. "There's no telling how low milk prices would have fallen had there been no price support program."

Second, Congress could pass legislation to subject all MPC imports to the same tariffs as other dairy products. But Bailey says that could spark retaliation from our trading partners, particularly the European Union and Canada. "Given the U.S. farm bill and higher tariffs on steel and wood, retaliation against U.S. exports, especially farm exports, is a real concern," he says.

A more practical approach, Bailey argues, would be to tackle MPC imports as part of the current efforts to renegotiate a new global trade agreement. "That agreement should cover global trade in all dairy products, not just some," he says. "This would help put MPC imports on a par with other dairy products that enter our country.

At the same time, Bailey says Congress should consider whether the dairy price support program has effectively discouraged domestic production of MPC.

"If U.S. food manufacturers want high-quality MPC, they will find a way to purchase it. So why not make it here, in the United States, from domestic milk sources?" says Bailey.

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EDITORS: Contact Ken Bailey at 814-863-8649 or baileyk@psu.edu.

Contact: Gary Abdullah gxa2@psu.edu 814-863-2708 814-863-9877 fax #280