KEY POINTS:
European export subsidies are stirring fears of a trade war with echoes of the 1930s protectionism that sparked the Great Depression.
The European Union this week re-introduces so called "export refunds" for butter, cheese, whole and skimmed milk powder that had been suspended since June 2007.
Federated Farmers economics and commerce spokesperson Philip York said the move by the EU could create tit-for-tat actions on both sides of the Atlantic. In an agricultural trade war New Zealand would be a big loser.
"People need to be reminded that the 1929 sharemarket crash didn't directly create the Great Depression but politicians did," York said.
"Protectionist legislation, like America's infamous Smoot-Hawley Tariff Act of 1930, became a template for protectionism copied around the world.
"Maybe we need to send all Euro MPs and their eurocrats some history books."
New Zealand removed its tariffs and subsidies in the 1980s.
Fonterra managing director GlobalTrade Kelvin Wickham said farmers in the US were lobbying for more support even before the EU made its move.
"And action like this by the EU just gives the US farm lobby more ammunition to support their case for why the US authorities should also support US farmers," Wickham said.
"They have some subsidised export schemes available to them which they're not using at the moment. The danger here is that this will be an excuse to utilise them."
The EU would decide the volume, the value and the period for the subsidy every two weeks, Wickham said.
"That basically creates uncertainty," he said. "In a market environment like this if you have more uncertainty and you have a competitor who can access unknown subsidies I don't see how that helps stabilise the world market."
The ANZ commodity price index for dairy products peaked in November 2007 but has since fallen by about half, while the average price for whole milk powder in Fonterra's online auction is down 54 per cent since July.
Fonterra said the EU subsidy could depress dairy commodity prices and slow the recovery.
The dairy giant has dropped its forecast payout to farmers this season from an opening expectation of $7 per kg of milksolids to $6 and had already warned another cut was likely.
Based on last season's collection of 1.19 billion kg of milksolids the reduced forecast could already have cost farmers $1.2 billion.
Fonterra planned to announce any change to the payout after the next board meeting on January 27.
EU Agriculture Commissioner Mariann Fischer Boel said the commission could also buy more produce than expected when it started intervention buying in March, while private storage for butter had been re-introduced in November, effective on January 1.
"I have spoken to many producers during my travels to different [EU] member states and their anxiety is clear. Now it is time for the European Union to help," Fischer Boel said.
"I truly believe the measures I am proposing ... will go a long way to stabilising the dairy market."
The EU said the export refunds would conform with the Union's rights and obligations under the World Trade Organisation.
Trade Minister Tim Groser said global trade collapsed during the 1930s as countries took up protectionism.
"The finance ministers have done their job [in the current global crisis] but you'd have to ask yourself are the trade ministers stepping up to the mark," Groser said.
The EU subsidy would be damaging for New Zealand but unknown details including the level and duration meant it was not possible to estimate a cost.
"Of course we are focused, and properly so, on the direct implications for New Zealand but I am damn sure there is a much bigger picture at stake here, that's the line I'll be pursuing."
Barriers grow
* The European Union is restarting export refunds for dairy produce.
* Farmers in the US are also lobbying for more support.
* The EU subsidy is raising fears of a transatlantic tit-for-tat trade war.
* Protectionism helped turn the 1930s recession into the Great Depression.
