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TRADE: EU Set to Milk East Africa With Subsidised Goods?

Analysis by Aileen Kwa

NAIROBI, Nov 15 2007 (IPS) - ‘‘Dairy farmers in Kenya are doing well now,’’ says Peter Wanyeki, as he flashes a big smile. ‘‘Before, when we went home to the village, you could never take enough money with you. Everybody was poor. But now the situation is different. The dairy farmers are rich because they are getting a very good price for their milk.’’

Peter now works in Nairobi, but he grew up on a dairy farm. ‘‘I want to go back to farming in five years. I think I can have 30 to 50 cows, get together with some other farmers and set up a processing centre. If we do that, we will do fine,’’ he says, clearly upbeat about the prospects for the industry.

The picture for dairy farmers is not uniformly attractive though. There are farmers in certain regions, such as those along the coast, who feel they have been marginalised by the government.

Nevertheless, on balance, with government support for the revitalisation of the dairy marketing board called the Kenyan Cooperative Creameries (KCC) in 2003, the sector has performed much better.

The question is, will Kenya’s dairy farmers survive if Kenya and the other countries in the east African region enter into an economic partnership agreement (EPA) with the European Union (EU)? The deadline for the talks is December 31 and even at this late stage, negotiations remain heavily bogged down by differences.

The EU envisions the EPA to be a reciprocal trade agreement. It plans to open 100 percent of its market duty free and quota free to its former colonies, including Kenya. In return, the EU is insisting that Kenya and its neighbours open 90 percent of their markets.

What will happen to the dairy industry? Will this lead to another deluge of EU milk powder into Kenya?

As a result of the World Bank’s structural adjustment programmes, the dairy sector was liberalised in 1992. Tariffs were lowered to 25 percent and the KCC, which had bought milk from farmers at set prices, was abolished. Private traders were allowed to operate in the sector.

Disaster struck as milk powder flooded the Kenyan market. The milk came from a variety of sources, including New Zealand, South Africa and Zimbabwe, but the EU was the predominant exporter.

Powdered milk imports rose from 48 tonnes in 1990 to 2,500 tonnes by the end of the decade. In fresh milk equivalent, this presented an increase from 400,000 litres to 21 million litres.

The local industry collapsed. Prices dropped way below production costs. Domestic production fell by nearly 70 percent, reaching a meagre 126,000 tonnes in 1998. Small dairy farmers – numbering some 600,000 people – were plunged into poverty.

In 2001, the government increased the tariff from 25 to 35 percent. However, even this was insufficient to stem another episode of import surge in 2001. Following much public debate, tariffs were raised to 60 percent in March 2002.

The revival of the KCC in 2003 was a major boon. Since then, locally produced and processed dairy products have increased substantially and have regained their majority share in the domestic market.

What will happen to the dairy sector if Kenya liberalises as per the EPA? This question is especially pertinent given that, despite the claims of ‘‘free market’’ competition, the EU subsidises its dairy sector to the tune of 2.5 billion euros a year.

Kenya is by no means the only country that has been badly affected by the export of artificially cheap European milk powder. In Jamaica, imported European milk powder devastated the sector. In the Dominican Republic, the fifth most important market for the EU, 10,000 farmers have been forced out of the sector in the last two decades.

In Sri Lanka, the seven-fold increase in milk imports from the late 1990s has consigned the local milk sector to permanent sluggishness. From Bangladesh to Nigeria and the Ivory Coast, artificially cheap European milk squeezes small producers out of their local market.

The last reform of the EU’s Common Agricultural Policy (CAP) in 2003 did little to correct the distortions in the dairy sector. The reform meant that export refunds in the milk sector are being scrapped and domestic prices are being brought in line with world prices.

However, EU farmers are now compensated through direct payments which have been labelled a new form of hidden export subsidisation.

It is projected that in France, the CAP reform is likely to push small French farmers out. Nevertheless, their production quotas will be taken over by the big producers and the quantity produced for 2007 is expected to be even higher than in 2003.

Kenya and its regional partners have asked the EU to reduce its domestic and export supports to agriculture in the context of the EPA negotiations. The EU has flatly refused to even discuss the issue, arguing that domestic supports are an ‘‘internal’’ issue.

This is untenable, given that the African market is being targeted as a major market for Europe’s subsidised milk products.

Between 1996 and 2003, even as EU dairy exports to the world market decreased by 0.44 percent, dairy exports to African, Caribbean and Pacific (ACP) countries grew by 32.8 percent. The ACP market accounts for about 14 percent of total EU dairy exports, and Africa absorbs the largest share.

If Kenya eliminates tariffs on milk in the EPA negotiations, Kenyan milk farmers will be plunged into their nightmare of the 1990s. Kenya may choose to protect milk tariffs in the EPA negotiations by classifying milk powder under the sensitive products list.

However, the EU is pushing Kenya and its partners to limit the sensitive product list for the region to a meagre 10 percent of all goods currently imported into their countries from Europe. If milk is protected, another sector in industry or agriculture will be sacrificed. Which one will it be?

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