Detailed Information on the
Export Enhancement/Dairy Export Incentive Program Assessment

Implement outside evaluations of program effectiveness.

Develop a framework to determine the circumstances that would warrant future reactivation of the programs.

Measure: Key Market Development:Displacement of Subsidized Trade by Major Competitors(including the EU)

Explanation:Measure: An increase in the U.S. market share (in Metric Tons) for these key dairy products in Mexico reflect a displacement in trade by major competitors including the EU. Over time, the use of DEIP should show the U.S. increasing and/or maintaining market share compared to its major competitors.

Measure: Domestic Impact of DEIP

Explanation:DEIP Bonus Award should be < or = to the CCC cost of Dairy Program which is = Domestic dairy support price + storage and handling costs of dairy products taken into CCC inventory - CCC sales proceeds for dairy products sold. A successful use of DEIP means that the cost of the DEIP bonus award should be less than the cost of taking the dairy product into CCC inventory and storing it. (NOTE: If no bonus value awarded for the program in a given year, then this measure is not applicable). The measure is expressed as a percentage= (Avg Bonus/DEIP Breakeven Cost)

Measure: Program Efficiency

Explanation:The Salaries and Benefits for assigned FTEs working on DEIP/ Maximum Allowable GATT levels for DEIP in dollars indicate the minimum level (in percent) of resources needed to run the program even if no DEIP bonuses are issued.

Measure: Trade Policy Effect of DEIP

Explanation:U.S. GATT Maximum Allowable Level of DEIP subsidies in volume (Metric Tons) compared to the EU (original EU 15 countries) Maximum Allowable Level for its dairy export subsidies in Metric Tons. A positive trade policy effect occurs if this ratio is constant or declining because it suggests that the use, potential use or non-use below GATT maximum Allowable Limits of the DEIP program affects the EU response and its use of dairy export subsidies.

Measure: Key Market Development

Explanation:The U.S. market share, based on value, of Nonfat Dried Milk (NFDM), Cheese and Butterfat Exports to Mexico as compared to Mexico's Total NFDM, Butterfat and Cheese Imports. Over time, the use of DEIP in a key market such as Mexico should result in an increase and/or maintenance of U.S. market share for dairy products. U.S. exporters are expected to maintain and expand the dairy product market share in the absence or limited use of DEIP because of comparative advantage in the Mexican market.

Measure: Export Independence for the U.S. Dairy Market

Explanation:Volume of Dairy products exported commercially as a percentage of total dairy shipments (incl. DEIP) --If U.S. commercial dairy exports are sustained and/or increase in the absence of DEIP, then it can be said that a certain level of export independence has been achieved.

Is the program purpose clear?

Explanation: The Export Enhancement Program (EEP) and the Dairy Export Incentive Program (DEIP) have clear objectives: "The objectives of the program are to discourage unfair trade practices by other countries, to increase U.S. agricultural commodity exports, and to encourage other countries exporting agricultural commodities to undertake serious negotiations on agricultural trade." Another purpose subsequently applied to the DEIP is to develop international markets for U.S. dairy products generally.

Evidence: DEIP: Sec. 153, The Food Security Act of 1985, as amended. EEP: Sec. 301, Agricultural Trade Act of 1978, as amended. EEP/DEIP objectives: 7 CFR1494.10 International Market Development under DEIP: Sec. 148(d), Federal Agriculture Improvement and Reform Act of 1996 (P.L. 104-127, April 4, 1996).

Does the program address a specific and existing problem, interest, or need?

Explanation: Though there was some justification for the EEP program in the 1980's and early to mid 1990's, when the EU was undercutting our grain exports by using their own export subsidies, the need no longer exists. The U.S. has agreed to eliminate all export subsidies as part of the Doha Round of WTO negotiations. All of our export subsidies will be phased out, following a successful completion of the round.

Evidence: Annex A of the WTO Doha Round Framework Package.[http://www.wto.org/english/tratop_e/dda_e/dda_package_july04_e.htm]

Is the program designed so that it is not redundant or duplicative of any other Federal, state, local or private effort?

Explanation: Though the DEIP is the only U.S. federal agricultural export subsidy program devoted exclusively to subsidizing dairy product exports, the private sector National Milk Producers Federation has operated an export subsidy program called Cooperatives Working Together, (CWT) since 2003. CWT is voluntarily funded via a 5 cent per hundredweight (cwt) assessment on participating dairy producers. In addition to subsidizing exports the CWT program has also funded dairy farmer buy-out programs. The CWT program is not constrained by many of the requirements applied to the DEIP, such as transparency of price and subsidy payments, no displacement of commercial exports, or the targeting of EU markets. CWT subsidized exports are also not constrained by Uruguay Round restrictions on subsidized exports and have to date not been challenged by other WTO member countries. The EEP is the only broad agricultural export subsidy program, applied to a wide variety of non-dairy products, predominantly by volume, for grains.

Evidence: DEIP: Sec. 153, The Food Security Act of 1985, as amended. EEP: Sec. 301, Agricultural Trade Act of 1978, as amended. Website for CWT: http://www.cwt.coop/

Is the program design free of major flaws that would limit the program's effectiveness or efficiency?

Explanation: The programs started in 1985, when the U.S. and the EU were engaged in a "subsidy war" in which both countries battled to undercut each other's prices in export markets. The United States also sought to reduce its large grain stocks that had resulted from price supports that were above competitors' prices in world markets. U.S. gains in some markets were offset by losses to the EU in others. Over the decade, U.S. grain market share declined while EU market share increased dramatically. This would indicate that there a more effective way to achieve U.S. export growth through international trade agreements. Currently, the U.S. is leading the charge to eliminate all trade distorting agricultural support, cincluding EEP and DEIP.

Evidence: USDA, ERS WTO Briefing Room on Export Subsidies. Bruce Gardner, NBER Working Paper #4747, "The Political Economy of U.S. Export Subsidies for Wheat." May, 1994.

Is the program design effectively targeted so that resources will address the program's purpose directly and will reach intended beneficiaries?

Explanation: Both the EEP and DEIP targeted nations that were significant recipients of EU subsidized exports. When active, competitive bidding, effectively an auction system for the available allocation, helps to ensure that the lowest possible DEIP bonus payments are awarded. An active awareness of domestic and international prices helps to ensure that bid export sales prices are realistic. For DEIP market development purposes, Mexicos proximity particularly to the rapidly expanding U.S. dairy areas of the West led to targeting this market for subsidized exports.

Evidence: EEP subsidies were applied to a wide variety of agricultural product exports but grains, especially wheat and wheat flour received approximately 75 percent of the total over the years. (Approximately two-thirds of U.S. wheat exports and nearly all U.S. barley exports benefited from EEP subsidies during the height of the program.) EU markets in North Africa and the Middle East were originally targeted, but when EU exports expanded into new markets, especially the Soviet Union and China, these and other countries were subsequently added to eligibility. U.S. wheat exports increased from 25 million tons in the 1985 crop year to 43.5 million tons in the 1989 crop year, as U.S. wheat and wheat flour exports increased their world market share from 29 percent to 42 percent of the total. Sources for above: 1987 and 1989 GAO reports. The entire DEIP cheese allocation and the bulk of the NDM during 2003/04, the most recent year the program was in operation, was sold to Mexican buyers. Summary of DEIP Bonus Awards, 1984-Date, By Country and Commodity DEIP Bonus Awards, Fiscal Years 1987-2004, By Commodity and Quantity Summary of EEP Awards, Fiscal Years 1985-2001, By Commodity and Quantity

Does the program have a limited number of specific long-term performance measures that focus on outcomes and meaningfully reflect the purpose of the program?

Explanation: The major goals of the EEP and DEIP are to increase U.S. agricultural exports by offsetting the subsidies of competitor exporters in order to bring about the eventual elimination of all trade-distorting programs through multilateral negotiations. We have two specific long term performance measures to assess progress towards meeting these goals. These measures are for DEIP, however, they serve as proxy measures for the EEP. The first long-term outcome measure, Export Independence of the U.S. Dairy Market, examines the change in volume of U.S. dairy products exported commercially to markets where our competitors have had a traditional market share and where they often make use of subsidies. By comparing the volume of U.S. dairy products exported commercially to overall dairy shipments, one can see whether U.S. commercial dairy exports are growing or sustained, both, during periods of DEIP use, and in the absence of DEIP. If growing and sustained over time, compared to our competitors, we are meeting the goal of increasing U.S. agricultural exports. The second long-term outcome measure examines the Trade Policy Effect of DEIP. This measure suggests a positive trade policy effect if the ratio of the U.S. GATT maximum allowable level of DEIP compared to the EU GATT maximum allowable level of dairy export subsidies decreases, or is constant, over time. This measure shows that the DEIP program affects the EU's response in use of dairy export subsidies and is helping to achieve the second long-term goal to eliminate eventually all trade-distorting programs through multilateral negotiations.

Evidence: See Performance Measures 1 & 2: Export Independence of the U.S. Dairy Market and Trade Policy Effect of DEIP, respectively. Data Source for Performance Measure 1: U.S. Production, Supply and Demand (P,S& D) Data from the Economic Research Service, USDA. The P, S& D data segregates the various export channels for the individual DEIP commodities and allows for the equitable measurement of a diversity of dairy products by calculating on a milk equivalent basis. Data Source for Measurement 2: WTO, Volume limits on exports for subsidized dairy products as set by the Uruguay Round.

Does the program have ambitious targets and timeframes for its long-term measures?

Explanation: Both long-term measures have ambitious targets and timeframes. The first measure examines the export independence of the U.S. dairy market, that is, whether the volume of U.S. commercial dairy exports as a share of overall U.S. dairy shipments increases, or is sustained, over time. In 1995, 50% of U.S. dairy shipments were commercial. Although there is significant variation in the level of U.S. dairy commercial exports year-to-year, the ambitious targets call for the U.S. commercial share to increase by one-half to 75% by 2010 with gradual increases leading up to the 75% share in 2006-2009. Such an increase would support the long-term goal to grow U.S. agricultural exports. For the second long-term measure, Trade Policy Effect of DEIP, the targets reflect the maximum allowable level of dairy subsidies for the U.S. and the EU as set by the GATT Uruguay Round. It is likely that the targets for future years could change based on Doha Development Round negotiations which call for the elimination of subsidies by 2013.

Evidence: See Performance Measures 1 & 2: Export Independence of the U.S. Dairy Market and Trade Policy Effect of DEIP, respectively. Data Source for Performance Measure 1: U.S. Production, Supply and Demand (P,S& D) Data from the Economic Research Service, USDA. The P, S& D data segregates the various export channels for the individual DEIP commodities and allows for the equitable measurement of a diversity of dairy products by calculating on a milk equivalent basis. The targets were established using a general trend approach. Data Source for Measurement 2: WTO, Volume limits on exports for subsidized dairy products as set by the Uruguay Round. The Uruguay Round Agreement on Agriculture established a six-year schedule for reducing volumes and expenditures for subsidized exports. Of the four defined dairy product categories slated for subsidy reduction in the U.S. schedule, the nonfat dry milk allocation declined from 108,227 tons to 68,201 tons, butterfat fell from 42,989 tons to 21,097 tons, cheese decreased from 3,829 tons to 3,030 tons and other dairy products (whole milk powder) declined from 12,456 tons to 34 tons. The final levels were achieved by the end of the 2000/01 July/June year and remain at these levels pending the outcome of further WTO negotiations.

Does the program have a limited number of specific annual performance measures that can demonstrate progress toward achieving the program's long-term goals?

Explanation: We have developed three annual performance measures for DEIP that demonstrate the effective application of the program in light of the ultimate program goal to eliminate export subsidies. The first annual measure, Performance Measure #3, supports the first long-term measure to increase U.S. agricultural exports. The measure examines the U.S.' ability to increase and/or maintain its market share for dairy products in a key market such as Mexico. If successful, U.S. dairy products should comprise a growing share of Mexicos dairy product imports. The second annual measure, Performance Measure #4, supports both long-term goals by examining the displacement effect of subsidized trade by major competitors. The use of DEIP over time should show the U.S. increasing and/or maintaining market share for dairy products as compared to major competitors, namely the EU, in a key market. If successful, the DEIP demonstrates that it can be an effective trade policy tool to counter EU subsidies and also help expand U.S. agricultural exports. The third annual performance measure, Performance Measure #5, compares the cost of DEIP bonus awards to the cost of acquiring dairy products in CCC inventory under the domestic dairy support program. It should be noted that global commodity markets are highly variable.

Evidence: Annual Measures: Performance Measure #3: Key Market Development: The U.S. Market Share, based on value of Nonfat dried milk, butterfat and cheese exports to Mexico as compared to Mexicos Total import value of these products. Data Source: World Trade Atlas Performance Measure #4: Displacement of Subsidized Trade by Major Competitors (EU). Data Source: World Atlas. Examines the quantity of U.S. nonfat dried milk (NDM), butterfat and cheese commercially exported to a key market as compared to its major competitors. Performance Measure #5: Domestic Impact of DEIP: The DEIP Bonus Award Amount as compared to the CCC cost of purchasing the dairy product, storing it and handling it less any revenue from the sales of these products. If cost effective, the bonus award should be less than or equal to the CCC inventory cost.

Does the program have baselines and ambitious targets for its annual measures?

Explanation: We have developed ambitious targets for the 3 annual performance measures established for DEIP. The three annual measures as described in 2.3 include a measure of the U.S.' ability to increase and/or maintain its market share for dairy products in a key market such as Mexico, the effect of DEIP to displace sales by competitors and a measure which ensures the use of DEIP is cost effective when compared to the cost of acquiring dairy products in CCC inventory through the domestic price support program. Longer term analytical tools such as trend analysis are used to measure quantitative progress and set targets. For the first annual measure (Performance Measure #3), a trend analysis indicates that the value of U.S. dairy product exports to Mexico as a proportion of total dairy imports by Mexico should increase to nearly 50%, a substantial rise from the 5-15% U.S. export value prevailing in 1995 and 1996. For the second annual measure (Performance Measure #4), the targets set call for the U.S. dairy market share in metric tons to reach 70% by 2010 (displacing sales by competitors), again a substantial rise from the 10-16% U.S. market share in 1996 and 1997. That this target is ambitious can also be seen by examining the average U.S. market share from 1996-2005 which stood at 32%. The targets for the third annual measure (Performance #5) projects that by 2010 the DEIP bonus awards will be approximately 30% of the CCC inventory cost to acquire, transport and store dairy products under the dairy price support program. While there are significant fluctuations both in CCC inventory costs and in DEIP bonus awards, clearly if the cost per ton under DEIP is lower than the CCC net cost to dispose of a ton of surplus dairy products, then the DEIP is the least cost alternative.

Evidence: Annual Measures: Performance Measure #3: Key Market Development: The U.S. Market Share, based on value of Nonfat dried milk, butterfat and cheese exports to Mexico as compared to Mexicos Total import value of these products. Data Source: World Trade Atlas. Future year targets set using a trend analysis. Performance Measure #4: Displacement of Subsidized Trade by Major Competitors (EU). Data Source: World Atlas. Examines the quantity of U.S. nonfat dried milk (NDM), butterfat and cheese commercially exported to a key market as compared to its major competitors. Future year targets set using a trend analysis. Performance Measure #5: Domestic Impact of DEIP: The DEIP Bonus Award Amount as compared to the CCC cost of purchasing the dairy product, storing it and handling it less any revenue from the sales of these products. If cost effective, the bonus award should be less than or equal to the CCC inventory cost. Future year targets set using a 3-year moving average.

Do all partners (including grantees, sub-grantees, contractors, cost-sharing partners, and other government partners) commit to and work toward the annual and/or long-term goals of the program?

Explanation: The stated goal through a series of Administrations has been and remains the elimination of agricultural export subsidies through multilateral trade negotiations. USDA and USTR have worked together to eliminate export subsidies through the World Trade Organization. This eventual goal is broadly supported by U.S. agricultural interests as leading to a level playing field in international trade. In the meantime, dairy producer groups advocate interim use of the DEIP as a means to retaliate against subsidized EU exports, help support U.S. dairy product prices and develop export markets for U.S. dairy products.

Evidence: The United States is ready to eliminate all tariffs, subsidies and other barriers to free flow of goods and services as other nations do the same. Statement by President Bush of September, 14, 2005. U.S. Proposal for Bold Reform in Global Agriculture Trade, Doha Development Agenda Policy Brief, Office of the United States Trade Representative, October 2005. Support by U.S. food and agricultural sector for U.S. objectives in Doha Round negotiations, including elimination of export subsidies, cited in American Agriculture Supports U.S. Agriculture Proposal, website of the Office of the United States Trade Representative, December 2005. For the specific position of the U.S. dairy industry, various references can be cited, one being a letter dated April 1, 2005, from Jerry Kozak, President and CEO of the National Milk Producers Federation (dairy cooperatives) to Secretary Johanns. In the letter, Mr. Kozak wrote: The U.S. dairy industry is strongly advocating the full and fast elimination of export subsidies in the WTO. Further into the letter, Mr. Kozak also wrote: Despite this tremendous inequity (in volumes of subsidized exports permitted to the EU and the U.S. resulting from the Uruguay Round) while the EU is still employing export subsidies to help move these immense quantities of their dairy products into the world market, it is senseless for the U.S. to unilaterally disarm by not using DEIP fully. Source: www.nmfp.org.

Are independent evaluations of sufficient scope and quality conducted on a regular basis or as needed to support program improvements and evaluate effectiveness and relevance to the problem, interest, or need?

Explanation: The EEP, and to a lesser extent the DEIP, have been the subject of a number of academic, GAO and other studies and evaluations over the years. However, due to the EEPs inactivity and the Uruguay Round constraints imposed upon the DEIP, conducting these independent reviews has been of less interest in recent years and thus they have not been conducted on a regular basis.

Evidence: Export subsidies efficiency in supporting farmers, unilateral disarmament and bargaining chips: cited by Paarlberg. The cost-effectiveness and budget neutrality aspects of the DEIP, particularly as opposed to surplus purchase and storage of dairy products by the CCC, was demonstrated in Babcock Institute Discussion Paper No. 99-1, University of Wisconsin, written by W.D. Dobson. The DEIP's benefits as a market development tool for U.S. dairy products were argued in a June 1, 2000, letter to Richard Fritz, General Sales Manager from Tom Suber, President of the U.S. Dairy Export Council (USDEC) which proposed making Mexico and the European Union eligible for DEIP-subsidized cheese. An April 17, 2002, Fact Sheet issued by USDEC similarly proposed adding Japan to eligibility for DEIP cheese. USDA EEP Assessment, May 15, 1989. Price boosting effects of domestic policies cited in The Dubious Success of Export Subsidies for Wheat, Cletus Coughlin and Kenneth Carraro, Federal Reserve Bank of St. Louis, Nov-Dec 1988. Distortions to counter distortions: cited in Agricultural Export Subsidies as a Tool of Trade Strategy: Before and After the Federal Agricultural Improvement and Reform Act of 1996 Howard D. Leathers, AJAE, February 2001. OIG Report No. 07001-1-Ch, "Foreign Agricultural Service: Dairy Export Incentive Program," May 2000. GAO/NSIAD-99-198R Agricultural Export Subsidies, June 18, 1999.

Are Budget requests explicitly tied to accomplishment of the annual and long-term performance goals, and are the resource needs presented in a complete and transparent manner in the program's budget?

Explanation: The DEIP levels in the budget are based on the expected level of bonuses in light of the CCC Baseline Assumptions regarding supply, demand and prices. The EEP levels in the CCC baseline budget is included to preserve funding in case future use is warranted and does not reflect recent program activity.

Evidence: FY 2007 President's Budget, released 02/06/06. http://www.usda.gov/agency/obpa/Budget-Summary/2007/FY07budsum.pdf. $35 million is included for DEIP in the CCC Baseline. The $28 million EEP figure reflects that no recent program activity has occurred but preserves funding in case of eventual future use. Uruguay Round Agreement on Agriculture. http://www.wto.org/english/docs_e/legal_e/ursum_e.htm#aAgreement www.ers.usda.gov/Briefing/WTO/agree.htm Summary of DEIP Bonus Awards, 1984-Date, By Country and Commodity DEIP Bonus Awards, Fiscal Years 1987-2004, By Commodity and Quantity. Summary of EEP Awards, Fiscal Years 1985-2001, By Commodity and Quantity.

Has the program taken meaningful steps to correct its strategic planning deficiencies?

Explanation: Strategic planning deficiencies have not been identified for the USDA export bonus programs. With the exception of a single export sale of barley and a rather brief period of activation for poultry, the EEP has not been utilized since the Uruguay Round Agreement came into effect in 1995. Arguably, the EEP served its function as a coercive negotiating tactic in UR negotiations and has not been needed since then. Long-term and annual performance goals and target values have now been established for the DEIP (and these are considered proxies for EEP). These goals and measures, shown in the attached measures section of this PART, stem from program analysis routinely performed in operation of the DEIP. The principal source of strategic planning tension for the DEIP lies in the apparent legislative mandate to operate the program regardless of commercial need (cited in Section 1.4 Evidence Data) and the recent and ongoing reality that no subsidy is needed for export sales of U.S. dairy products. This is juxtaposed against the statutory requirement that the program be operated in a manner not to displace commercial export sales of dairy products. Activating the DEIP when it is not needed would: add pressure to U.S. domestic dairy product prices, undercut prevailing international dairy prices and potentially displace commercial U.S. dairy exports. Consequently, USDA has chosen to refrain from activating the DEIP since the beginning of the July-June 2004/05 year.

Evidence: The primary objective for the DEIP is to counter the unfair trade practices of competing exporters, especially the export subsidies of the EU, by targeting DEIP exports to the countries that are the most promising as commercial markets for the U.S. dairy industry. These objectives came together in Mexico, where the EU's market share, once overwhelming due to export subsidies, has shown steady decline while the U.S. market share has demonstrated steady growth. In 2003/04, the last year the DEIP was operated, the entire cheese allocation and the great majority of the nonfat dry milk exported under the program was shipped to Mexico. As shown previously, Mexico is a natural market for the fast-growing dairy industry in the western U.S., which has taken advantage of the market opportunities presented by the NAFTA and reduced competition from subsidizing exporters such as the EU due to Uruguay Round provisions to significantly expand sales even in the absence of the DEIP in recent years. U.S. dairy product exports to Mexico more than doubled in the first half of the current decade to more than $500 million in 2005, almost all of which was on an entirely commercial, subsidy-free basis. The importance of Mexico as a U.S. dairy product market was underlined by a March 30, 2006, News Release by the National Milk Producers Federation announcing that Mexico had been added to the list of countries eligible to receive cheese and butterfat under its Cooperatives Working Together (CWT) program. With the overall expansion of U.S. dairy product exports, to a record $1.7 billion in 2005, DEIP-promoted export market development has also relieved pressure to purchase surplus dairy products as part of the U.S. domestic dairy price support program. In FY2005, no DEIP-subsidized exports were approved and the CCC, for the first time since 1949, made no purchases of surplus dairy products. Market oriented reforms in recent years, both on a domestic and international basis, clearly played roles in these phenomena, but DEIP-supported exports in previous years contributed to the greater export market orientation of the U.S. dairy industry. Sources: U.S. Trade data and USDA/AMS/Dairy Market News reports Summary of DEIP Bonus Awards, 1984-Date, By Country and Commodity DEIP Bonus Awards, Fiscal Years 1987-2004, By Commodity and Quantity Summary of EEP Awards, Fiscal Years 1985-2001, By Commodity and Quantity.

Does the agency regularly collect timely and credible performance information, including information from key program partners, and use it to manage the program and improve performance?

Explanation: Domestic and international price, trade, supply and demand data for eligible dairy products is regularly collected in management of the DEIP as it was when the EEP was active. This information is critical in evaluating price and bonus requests that are submitted with DEIP bids. By being aware of current prices, both domestic and international, and the supply/demand forces underlying them, DEIP bids can be most effectively scrutinized to determine whether the proposed price is in line with current market conditions and whether the requested bonus accurately reflects the difference between U.S. and world market prices. Frequently, bids are rejected due to excessive bonus requests, particularly under the auction system that takes place when a DEIP volume tranche is announced. The current price and bonus conditions are also evaluated in cases where a DEIP contract is subject to amendment due to a variety of market conditions.

Evidence: Published information is used wherever available, including that from USDAs Agricultural Marketing Service, Economic Research Service and World Board as well as European sources such as Agra Europe and the British Milk Development Council. Reports submitted on a regular basis by FAS overseas posts are used, particularly the monthly reports from posts in The Hague and Paris on EU market conditions. More informal information supplied by trade and producer groups is also invaluable in evaluating current market conditions. AMS international prices: http://www.ams.usda.gov/dairy/mncs/INTER.HTM http://www.agra-net.com/portal/puboptions.jsp?Option=menu&pubId=ag002 http://www.mdcdatum.org.uk/index.htm http://www.clal.it/en/index.php?PHPSESSID=62061f077383d955c80f943e8397c2f7 websitehttp://europa.eu.int/comm/agriculture/markets/milk/index_en.htm

Are Federal managers and program partners (including grantees, sub-grantees, contractors, cost-sharing partners, and other government partners) held accountable for cost, schedule and performance results?

Explanation: DEIP bonus awards are minimized by carefully monitoring price information from a variety of sources. For most of the past two years, this data indicated that no bonus payments have been necessary due to significant volumes of commercial, nonsubsidized U.S. dairy product exports. This reduced program costs to zero, matching the zero cost of the EEP in recent years. Employee Performance Standards & Elements call for "applications for program participation... and export subsidies" to be "reviewed and processed by the prescribed deadline" and for "Invitations for Offers to be posted correctly and accurately on the FAS web site within a timely manner." In the case of DEIP bid evaluation, which takes place in the Dairy, Livestock and Poultry (DLP) Division of the Commodity and Marketing Programs area of FAS, Performance Elements of the DEIP/Dairy Analyst include "closely monitors domestic and international dairy and poultry markets and analyses impact of competitor countries' pricing and export policies to provide an accurate assessment of current and expected market conditions" particularly for the "impact of DEIP and EEP on the domestic and international markets." To do these, the DEIP/Dairy Analyst also will "participate in regular inter-departmental meetings conducted by the World Agricultural Outlook Board to provide information on DEIP use and the international market situation."

Evidence: USDA personnel charged with management of the DEIP have accountability standards included in their Performance Elements and Standards. In the FAS Operations Division, these include requirements such as "Maintains close working relationship with the export trade, U.S. and Foreign embassy personnel, Agency personnel, other U.S. government Agencies, and all interested parties regarding operational procedures and policy positions concerning the DEIP....." For the DEIP/Dairy Analyst in DLP, Performance Standards say that: "All cost and market factors necessary to properly evaluate bids are kept current, drawing upon industry, government, and other sources of information as appropriate. By so doing, the incumbent ensures that DEIP and EEP bonuses are maintained at essentially the lowest level feasible to allow DEIP and EEP-subsidized exports to take place."

Are funds (Federal and partners') obligated in a timely manner, spent for the intended purpose and accurately reported?

Explanation: Program regulations require that payment documents be submitted within 30 calendar days of date of export and provide that CCC will endeavor to make bonus payments within 10 business days of the determination that the documents are in order. A May 2000 review by OIG concluded that "FAS operates the program in compliance with regulations, controls were adequate, and that bonus payments were proper." These are mandatory programs. Their funds are obligated consistently with the overall program plan. If unobligated funds remain at the end of the year,they are a result of world price conditions. Procedures exist for reporting actual expenditures, comparing them against the intended use. Funds are always spent as intended.

Evidence: 7CFR Section 1494.701. OIG Report No. 07001-1-Ch, "Foreign Agricultural Service: Dairy Export Incentive Program"

Does the program have procedures (e.g. competitive sourcing/cost comparisons, IT improvements, appropriate incentives) to measure and achieve efficiencies and cost effectiveness in program execution?

Explanation: Because DEIP per unit bonus payments are substantially below the support price levels established under the dairy price support program, the DEIP is most cost-efficient in avoiding or at least minimizing surplus CCC uncommitted inventory accumulations. The highest level of efficiency is achieved when no DEIP bonus payments are needed and no surplus stocks are accumulated due to domestic and/or international market clearing prices. With DEIP availability strictly limited by Uruguay Round constraints on subsidized exports (68,201 tons of nonfat dry milk, 21,097 tons of butterfat, 3,030 tons of cheese and 34 tons of 'other' dairy products) DEIP management has evolved into an auction system where DEIP participants are forced to compete for the limited quantities by reducing their bonus (subsidy) requests to the lowest possible level needed to achieve bid acceptance. Through this auction system, overall DEIP expenditures are reduced to a minimum, achieving significant budgetary savings.

Evidence: The current CCC support purchase price for nonfat dry milk (NDM) (no CCC support purchases for either cheese or butter have been necessary in recent years) is $.80/pound or approximately $1,763 per metric ton. Current domestic and international market prices are above this level, thus no CCC price support purchases have been necessary and no storage or disposal costs incurred. DEIP also saves taxpayers money, given the fact that DEIP exports would have almost certainly wound up as CCC stocks. Source: U.S. Dairy Programs and World Trade Policy Issues Hal Harris, Clemson University

Does the program collaborate and coordinate effectively with related programs?

Explanation: For the DEIP, the principal related program is the legislatively mandated dairy price support program. DEIP bonus award estimates are projections developed by the Dairy InterAgency Commodity Estimates Committee (ICEC) operating under the auspices of USDA's World Agricultural Outlook Board. The annual baseline estimates for DEIP in the CCC Budget reflect ICEC assumptions. In addition to estimating domestic and international dairy product prices and DEIP bonus levels, forecasts of surplus dairy product accumulations, if any, are built into decisions on whether to activate the DEIP.

Evidence: Monthly situation and outlook meetings by USDA's World Agricultural Outlook Board. FY 2007 President's Budget CCC baseline assumptions for dairy programs including DEIP.

Does the program use strong financial management practices?

Explanation: The most recent OIG audit of the Commodity Credit Corporation found four material weaknesses in internal controls. However, when active, competitive bidding, or the auction system for the available allocation, helps to ensure that the lowest possible DEIP bonus payments are awarded. An active awareness of domestic and international prices helps to ensure that bid export sales prices are realistic. Strong financial management and oversight of the DEIP is provided by the Financial Management Division of the Farm Service Agency, specifically including audits conducted on the Commodity Credit Corporation. A May 2000 review by OIG concluded that "FAS operates the program in compliance with regulations, controls were adequate, and that bonus payments were proper."

Evidence: USDA OIG Audit 06401-20-FM Source: Dairy, Livestock and Poultry Division, FAS. USDA OIG Report No. 07001-1-Ch, "Foreign Agricultural Service: Dairy Export Incentive Program." CCC Annual Financial Audit: www.fsa.usda.gov/ccc/ccc_reports.htm

Has the program taken meaningful steps to address its management deficiencies?

Explanation: Recent reviews of the program have not found significant management deficiencies, certainly relative to the EEP, which has been inactive for a number of years, or the DEIP, that last approved bids more than two years ago. In earlier years, there were some problems with nonperformance on EEP and DEIP contracts due to changed market conditions between the time of bid acceptance and date of shipment. Notices were issued stating such changes do not constitute sufficient conditions to nullify a contract between the EEP/DEIP exporter and the CCC, although the exporter could be allowed to ship to a new buyer on the original contract terms if the original buyer cancelled its order.

Evidence: USDAs OIG undertook a comprehensive independent review of the DEIP. The program was lauded for its operational structure which clearly delineates responsibilities and separates decisions on approval, bonus awards, evidence of export and payment by discrete USDA offices. These measures ensure a high degree of program integrity and ensure fiduciary responsibility by USDA. OIG Report No. 07001-1-Ch, "Foreign Agricultural Service: Dairy Export Incentive Program" In a series of Notices to Program Participants, USDA modified the DEIP bid amendment process to provide greater flexibility to exporters, maximize the export of allocations by reallocating cancelled tonnage, and otherwise to minimize program cancellations. Sources: Notices to Program Participants for EEP/DEIP Nos. 0134-99, 0229-01, and 0210-02.

Has the program demonstrated adequate progress in achieving its long-term performance goals?

Explanation: As discussed in 2.1, the major goals of the EEP and DEIP are: 1) to increase U.S. agricultural exports by offsetting the subsidies of competitor exporters; and 2) to bring about the eventual elimination of all trade-distorting programs through multilateral negotiations. We have two specific long-term performance measures to assess progress towards meeting these goals. These measures are for DEIP, however, they serve as proxy measures for the EEP. The first long-term outcome measure, Export Independence of the U.S. Dairy Market, examines the change in volume of U.S. dairy products exported commercially to markets where our competitors have traditional market share and where they often make use of subsidies. The second long-term outcome measure examines the Trade Policy Effect of DEIP. This measure demonstrates that DEIP affects the EU's response in its use of dairy export subsidies and is helping to achieve the second long-term goal to eliminate eventually all trade-distorting programs through multilateral negotiations. Where the DEIP is concerned, the first long-term goal of expanding commercial exports has been achieved. DEIP allowed U.S. exporters to penetrate global dairy product markets, and to complement their product lines with other, non-DEIP subsidized dairy products. Historical data for the first long-term performance measure, which assesses Export Independence for the U.S. Dairy Market, demonstrates that the U.S. has been successful in increasing its commercial exports over time with the help of DEIP. In 1995, U.S. commercial exports as a share of total U.S. dairy shipments was 50%. While this share varies from year to year, the upward trend is very clear and in the last year for which actual data is available, U.S. dairy commercial shipments were 93% of total U.S. dairy shipments. To bring about the eventual elimination of all trade-distorting programs through multilateral negotiations, the second long-term outcome measure suggests a positive trade policy effect of DEIP. Historical data shows that the ratio of the U.S. GATT maximum allowable level of DEIP compared to the EU GATT maximum allowable level of dairy export subsidies has decreased over time. In 1995, this ratio stood at just over 12% and has steadily declined to just over 9%. This measure shows that the DEIP program affects the EU's response in use of dairy export subsidies and is helping to achieve the second long term goal to eliminate eventually all trade-distorting programs through multilateral negotiations.

Evidence: See Performance Measures 1 & 2: Export Independence of the U.S. Dairy Market and Trade Policy Effect of DEIP, respectively. Data Source for Performance Measure 1: U.S. Production, Supply and Demand (P,S& D) Data from the Economic Research Service, USDA. The P, S& D data segregates the various export channels for the individual DEIP commodities and allows for the equitable measurement of a diversity of dairy products by calculating on a milk equivalent basis. Data Source for Measurement 2: WTO, Volume limits on exports for subsidized dairy products as set by the Uruguay Round.

Does the program (including program partners) achieve its annual performance goals?

Explanation: Review of historical data for the 3 annual performance measures shows that DEIP is achieving its annual performance goals. The three annual measures described in 2.3 include a measure of the U.S.' ability to increase and/or maintain its market share for dairy products in a key market such as Mexico, a second annual measure of displacement of EU sales and a third measure which ensures the use of DEIP is cost effective when compared to the cost of acquiring dairy products in CCC inventory through the domestic price support program. A trend analysis for the first annual performance measure shows that the U.S. dairy exports to Mexico as a proportion of Mexicos dairy imports have increased over time. For the three years from 1995-1997, the average U.S. market share for dairy products in Mexico was about 18%; by the last 3 years for which actual data is available, 2003-2005, the average U.S. share had grown to 52%. In terms of value, U.S. dairy exports to Mexico doubled to $500 million between 2001 and 2005. In terms of displacing competitors, the second annual performance measure also shows that the U.S. has been successful. Examining the market share in Mexico indicates the U.S. has grown its market share (in metric tons) from 10-16% in 1996 and 1997 to nearly 51% by 2005. Finally, the measure of DEIPs impact on the domestic dairy program shows that the program has been run in a cost effective manner from 1995 (when data was available), and every year since. The DEIP bonus awards have proven to be less costly than the cost of taking surplus dairy products in CCC inventory through the domestic dairy price support program.

Evidence: Annual Measures: Performance Measure #3: Key Market Development: The U.S. Market Share, based on value of Nonfat dried milk, butterfat and cheese exports to Mexico as compared to Mexicos Total import value of these products. Data Source: World Trade Atlas. Performance Measure #4: Displacement of Subsidized Trade by Major Competitors (EU). Data Source: World Atlas. Examines the quantity of U.S. nonfat dried milk (NDM), butterfat and cheese commercially exported to a key market as compared to its major competitors. Performance Measure #5: Domestic Impact of DEIP: The DEIP Bonus Award Amount as compared to the CCC cost of purchasing the dairy product, storing it and handling it less any revenue from the sales of these products. If cost effective, the bonus award should be less than or equal to the CCC inventory cost.

Does the program demonstrate improved efficiencies or cost effectiveness in achieving program goals each year?

Explanation: Short of achieving our trade liberalization goals, the programs demonstrate improved efficiencies and cost effectiveness in achieving goals each year. Because DEIP per unit bonus payments are substantially below the support price levels established under the dairy price support program, the DEIP is most cost-efficient in avoiding or at least minimizing surplus CCC uncommitted inventory accumulations. The highest level of efficiency is achieved when no DEIP bonus payments are needed and no surplus stocks are accumulated due to domestic and/or international market clearing prices. DEIP management has also evolved into an auction system where DEIP participants are forced to compete for the limited quantities by reducing their bonus (subsidy) requests to the lowest possible level needed to achieve bid acceptance. Through this auction system, overall DEIP expenditures are reduced to a minimum, achieving significant budgetary savings. In a May 2000 audit of the DEIP, OIG concluded that "except for controls over security deposit checks, the Foreign Agricultural Service (FAS) was operating the program in compliance with regulations, that controls were adequate, and that bonus payments were proper."

Evidence: Summary of DEIP Bonus Awards, 1984-Date, By Country and Commodity DEIP Bonus Awards, Fiscal Years 1987-2004, By Commodity and Quantity. Summary of EEP Awards, Fiscal Years 1985-2001, By Commodity and Quantity. CCC expenditure and receipt data for the dairy price support programs inventory operations. OIG Report No. 07001-1-Ch, "Foreign Agricultural Service: Dairy Export Incentive Program"

Does the performance of this program compare favorably to other programs, including government, private, etc., with similar purpose and goals?

Explanation: The EEP and DEIP are the only U.S. Government-operated agricultural export subsidy programs. The European Union also operates a much larger export refund (subsidy) program covering a wide range of agricultural products. Between 1985 and 1994, which spans the Uruguay Round negotiation period, the EU spent over $100 billion in agricultural export subsidies while the U.S. spent about $10 billion in an effort to compete with the EU's subsidized prices for agricultural exports. The EU has concluded that subsidizing the export of surplus dairy commodities is a more cost-effective means of dealing with them than by purchasing, storing and disposing of them at a loss on its domestic market. A September 2004 European Court of Auditors Report states that "Maximizing exports is not an objective. The Commission focuses its market management on achieving stability on the internal market at a price level which avoids products going into the more expensive intervention system. Export refunds are one of the tools to achieve this objective." In the U.S., the private sector National Milk Producers Federation since 2003 has operated an export subsidy program called Cooperatives Working Together, CWT) which is voluntarily funded via a 5 cent per hundredweight (cwt) assessment on participating dairy producers. In addition to subsidizing exports the CWT program has also funded dairy farmer buy-out programs. The CWT program is not constrained by many of the requirements applied to the DEIP, such as transparency of price and subsidy payments, no displacement of commercial exports, or the targeting of EU markets. CWT subsidized exports are also not constrained by Uruguay Round restrictions on subsidized exports and have to date not been challenged by other WTO member countries.

Evidence: (Reference: Commitment by the European Union and the United States to Reduce Agricultural Export Subsidies, U.S. General Accounting Office, June 1999). Since 1995 the disparity in spending on export subsidies between the EU and the U.S. has widened as the EEP has been essentially shut down and DEIP spending has declined in accordance with Uruguay Round mandates while the EU has continued to subsidize its exports at a more robust pace. USDAs proper operation of the DEIP program was acknowledged by OIG (OIG Report No. 07001-1-Ch, Foreign Agricultural Service: Dairy Export Incentive Program, May 2000). In contrast, the EUs export restitution system was criticized in Special Report No. 3/2004 issued by the European Court of Auditors released in September 2004. The Report found that irregular payments totaled 3.1 billion euros in total Common Agricultural Policy (CAP) spending between 1971 and 2002. Of this, 25 percent, approximately 775 million euros, was found to have occurred in the CAPs export refund program. An example cited in the Report showed that in 1992, skimmed-milk powder from intervention stocks in Germany that was supposed to have been exported with benefit of export refunds, in fact, never left the EU. The irregular payment of export refunds amounted to 24.9 million euros to a German company and 18.6 million euros to a Belgian company. Despite a request by the EU Commission in February 1993, Germany did not issue recovery orders until August 1995. In August 1996, an offer was made to pay 5.1 million euros (the value of the available assets of the exporting Germany company), but this offer was rejected by the Commission in April 1997. By December 1999, the assets had diminished to 1.5 million euros and none of the original refund amount, totaling 43.5 million had been recovered. On February 24, 2006, the CWT program announced the sale of 77 tons of Cheddar cheese to Japan. As with all previous such sales, no information on the sale price or CWT subsidy was provided, or why it was felt necessary to subsidize this sale to a country that purchased over $106 million in U.S. dairy products in 2005. Since its inception in 2003 CWT subsidies have supported the sale of 4,993 tons of cheese and 590 tons of butter to 16 countries.

Do independent evaluations of sufficient scope and quality indicate that the program is effective and achieving results?

Explanation: As demonstrated by trade data, the DEIP may be more successful as a more sustained market development tool. Industry sources like Jim Tillison, Executive Director of the Alliance of Western Milk Producers, stated in a recent radio broadcast that using DEIP to export milk powder "would be the preferred way to go..." in comparison with CCC surplus purchases. In references cited earlier, the EEP was evaluated and it was determined not to have brought about enduring increases in U.S. agricultural exports. In effect, the criteria of additionality was questioned as it was charged that EEP-supported exports largely displaced ordinary commercial shipments that would otherwise have taken place. Because of its targeted nature, the EEP was effective in moving U.S. commodities into markets dominated by EU exports of agricultural commodities. But, the EU often was successful in challenging U.S. market share in markets where the U.S. was previously dominant. Other U.S. domestic agricultural policy changes and reduced EU export subsidy volumes as a result of the Uruguay Round contributed to a reduced need for the EEP.

Evidence: The GAO's 1989 Status Report on the EEP found that between 1985 and 1989 U.S. wheat exports increased from 25 million tons to 43.5 million tons and the U.S. share of global wheat trade expanded from 29 percent to 42 percent. It may be inferred from this that the EEP has an immediate positive impact on U.S. wheat exports but it was uncertain whether this could be sustained as the EEP was phased down. On the other hand, trade data on dairy product exports tend to support the position that U.S. dairy product exports have risen to new, sustainably higher strata, reaching record levels in 2005 even in the absence of the DEIP. The DEIP, by encouraging the U.S. dairy sector to seriously explore international markets for the first time, the NAFTA, by opening new opportunities in Mexico, and the Uruguay Round, by reducing unfair competition from subsidizing exporters such as the EU, all played a role in the marked export success story for the U.S. dairy industry. Furthermore, the DEIP was efficiently as well as effectively operated, as demonstrated by the OIG's 2000 Report which found the program to be in compliance with regulations, with adequate controls and bonus payments properly calculated. As noted above, that Doha Round negotiations, in the absence of the EEP, have led to the agreement to eliminate entirely agricultural export subsidies by 2013 while Uruguay Round negotiations succeeded in achieving only a 21 percent volume reduction in subsidized exports at a time when the EEP was in maximum use would tend to refute the argument that U.S. export subsidy programs were necessary to bring the EU to these ends. Tillison comment from transcript of "Dairyline" January 7, 2006, radio/internet broadcast