The Administered Price System that Made New Zealand the “Saudi Arabia of Milk”

Abstract

The return of the dairy wars with New Zealand’s challenge to Canada’s management of its quota commitments under the Comprehensive and Progressive Agreement on Trans-Pacific Trade (CPTPP) following a similar challenge by the United States under the Canada-US-Mexico Agreement (CUSMA) recalls the challenges to Canada’s dairy supply management programs by New Zealand and the United States in the early 2000s. While the specifics of the legal cases are different, the fact that countries engaged in industrial policies in dairy find themselves litigating to pry open markets invite attention to their own policies. In this note, I look at New Zealand’s industrial policies that made it the “Saudi Arabia of milk” by scaling up production in an unscalable industry and becoming an export powerhouse in an industry facing increasing costs. I emphasize how counter-intuitive this strategy was from an international trade policy perspective and unpack the administered price system for New Zealand’s primary dairy production that made it possible.

Keywords: dairy, industrial policy, monopsony, economies of scale, Fonterra, New Zealand, international trade, trade disputes, Canada, CPTPP

JEL Classification: F13, F14, Q17