1 November 2008

9 minute read

Report Highlights:

Japan’s fluid milk output in 2009 is projected slightly higher 8.01 million metric tons (MT) but returns on milk sold for processing will be more attractive than milk sold for beverage use. Dairy producers are among the livestock producers benefiting from massive government assistance to help offset higher feed costs. Japanese domestic cheese production will continue to expand in 2009 to a projected 60,000 MT, mainly due to the addition of several new cheese factories in the diary region of Hokkaido. U.S. cheese exports will grow modestly to surpass last year’s record 7,000MT. Short supplies of butter and possibly of NFDM in 2009 will continue. While U.S. butter was competitive in special import tenders earlier this year, 2009 sales of U.S. butter are expected to be lower. This report contains updated production, supply, and demand (PS&D) data for the Japanese dairy market.

2009 Outlook for Fluid Milk, NFDM, Butter and Cheese

Weak Economy to Slow Sales of High Value Products

Forecast weakness in the economy for 2009 is expected to have a mixed impact on Japan’s dairy market. As consumers tighten their belts, sales of relatively expensive food items such as cheese and premium brand desserts (ice cream) may be adversely affected. On the other hand, lower prices for dairy commodities internationally, combined with a strong yen against other major currencies could support imports of cheeses and ingredient dairy commodities such as non-fat dry milk (NFDM) and butter.

Melamine Tainted Baby Milk to Slash Imports of Frozen/ Processed Foods from China

Already very sensitive to food safety, Japanese consumers have been inundated with press reporting about melamine-tainted dairy products from China. In addition, in late September, Japan’s Ministry of Health Labor and Welfare (MHLW) issued an import inspection order requiring companies to test for possible melamine contamination in foods that use Chinese dairy ingredients. This is leading to a greater emphasis on country of origin in consumer marketing campaigns and is influencing purchasing decision by consumers and food ingredient buyers. Other safety incidents involving Chinese products earlier this year led to significant declines in Chinese vegetable and frozen food sales; however, the actual impact on the Japanese dairy market appears to have been limited due to the relatively small volumes of dairy products imported from China.

GOJ to Support Expanded Production of Fluid Milk for Processing in 2009

Japan’s highly managed dairy market did not respond deftly to the shift from a buyer’s to a seller’s market in 2008. Japanese policy had been geared toward surplus but in 2008 faced high international prices, a pronounced retail butter shortage, expanded processed cheese production, and rapidly depleted NFDM stocks. Policy incentives now again seem to favor production through increased subsidies, such as direct payment for fluid milk for processing and enhanced feed deficiency payments (see JA8041). Government support for fluid milk production for processing is expected to continue and will reinforce recent investments in Hokkaido (the main dairy production area) into both natural and process cheese production.

Japan’s national fluid milk output in 2009 is projected slightly higher 8.01 million metric tons (MT). Increased output in Hokkaido will continue to be offset by reduced output in other regions. Consumption of drinking milk in the country is expected to remain lackluster. However, the rate of production decline in other regions is expected to be fairly modest in 2009. The main reason for this is a 10% increase in the farm gate price for beverage milk that was agreed to by major dairies and farmer organizations. The increase will be effective March 2009 but the farm gate price for beverage use milk has already increased 3 – 4% since April 2008. The projected break down for fluid use in 2009 is 4.40 million MT for drinking (down by 1%) and 3.53 million MT for processing (up by 2%).

Supply of Milk for Processing to Remain Tight in 2009

At the projected levels of output, only limited increases in the production of butter (projected at 75,000 MT, up by 3%) and NFDM (projected at 175,000 MT, up by 3%) will take place. This is because a significant portion of the fluid milk produced in Hokkaido will be diverted to supply expanded cheese production facilities in 2009 (projected at 60,000 MT, up by 9%) and other commodities such as cream for confectionary use (projected 106,000 MT, unchanged). Thus, short supplies of butter and possibly of NFDM in 2009 will continue. .

Additional State Purchases of Butter and NFDM Expected in 2009

In response to tight butter and NFDM stocks, the Government may choose to allow dairy imports above the established WTO Tariff Rate Quota (TRQ). This would be done through the Agriculture & Livestock Industry Corporation (ALIC), a state trading corporation, and could total 1,500-2,000 MT for butter and 10,000 – 15,000 MT for NFDM. These purchases would be made on top of the Japan fiscal year (JFY April-March) 2009 minimum access imports of butter of about 8,600 MT. Additionally, trade sources suggest that Japan’s imports of prepared dairy powder products (for ingredient use) could rise in response to tight NFDM supplies. This may result in a slight decline in imports of NFDM.

The causes of the butter shortage are complex. In recent years, the government has discouraged NFDM output, which resulted in lower butter production and diverted milk to cream and cheese production. Prohibitively high duties on butter prevented traders from responding to an unexpected increase in demand. In July, in response to a well publicized shortage of butter, the Japanese government allowed special import tenders for up to 5,000 MT over and above normal (WTO) minimum access imports. In the first 2,500 MT tender, U.S. suppliers won the biggest share (969 MT or about $6.4 million). However, for 2009, lower prices, coupled with weak Euro relative to the yen, may favor EU suppliers and limit opportunities for U.S. butter.

A Small Bounce Back of Cheese Imports to Occur in 2009

Amid a weakening economy, value-priced cheeses may sell well in 2009. Cheese imports are projected up by 2% to 210,000 MT. A recovery in milk production in Australia and New Zealand, coupled with lower prices for cheeses, should help sales.

Australia and New Zealand are particularly strong suppliers of natural cheeses in the zero tariff quota categories (See note). In addition, a strong yen against the Euro and lower prices for EU cheeses may result in additional competition for American and Argentine cheese suppliers in 2009. EU cheeses for retail sale have strong support from consumers in terms of image and variety. Thus, Japanese imports of American cheeses in 2009 are projected to grow only slightly to be around 7,000 MT.

[Note: Japan provides different tariff treatment for cheeses based in part on use. Natural cheeses for direct consumption (the EU is particularly strong in this category) have average tariffs of between 20 – 30%. Processed cheeses have a higher 40% tariff. Separately, natural cheeses imported under the zero duty tariff rate quota (TRQ) must be blended with domestic cheese in the production of processed cheese. Australia and New Zealand have been especially competitive in this import category. Example: The Japanese firms Meiji, Morinaga and Snow Brand produce processed cheese slices for sandwiches. Last year, the Japanese government provided a zero duty TRQ for 66,700 MT under HS 040690.010 for this use.]

Domestic Cheese Production to Expand Further in 2009

Japanese domestic cheese production will continue to expand in 2009 to a projected 60,000 MT. The main reason for the growth is the addition of several new cheese factories in Hokkaido.

2008 Market Situation and Update for Milk, Butter, NFDM and Cheese

Cost Pressures Lead to Higher Prices in 2008

Japanese dairy producers, facing significantly higher feeds costs, have been forced to negotiate higher prices, which are being passed through to the consumer level. This has been supported by higher import prices. Price hikes ranging from 5% - 20% for milk and dairy products sold at the retail level have been common through the third quarter of 2008. Also, bulk ingredient wholesale prices of butter and NFDM have trended up reflecting tightened supplies (See table 8)

Subsidies Help to Raise Fluid Milk Outputs for Processing in Hokkaido

To cope with soaring international prices of dairy products and increased demand for processing milk for cheese production in Hokkaido, the Japanese government and dairy industry have taken several measures:

• In JFY 2008 (April 08 – March 09), the subsidy payment level for fluid milk for processing was increased (up by 1.0 yen to 11.55 yen per kg.). Also, the production quota was increased by 90,000 MT over the established level of 1.95 million MT (See table 2). In an unusual move by the government, the subsidy level was raised further by 0.30 yen to 11.85 yen per kg in the middle of the same fiscal year. It should be noted that beverage milk prices have not correspondingly increased and this is causing hardship for farmers outside of Hokkaido who are more dependent on beverage milk sales.
• In response to a shortage, the Japanese government imported and released 13,600 MT of butter during in 2008. This included fully committing the dairy minimum access for JFY 2008 to butter (8,600 MT). Then, the government decided to import and additional 5,000 MT through ALIC, a state trading corporation to ease the butter shortage.
• As international prices of feed grains soared in the first half of the year, users of formula mixed feeds suffered a number of price hikes. In response, this June Japan's Ministry of Agriculture, Forestry and Fisheries (MAFF) announced a 45 billion yen ($415 million) feed price stabilization subsidy. Japan is heavily dependent on imported feed, much of which comes from the United States (see JA8041).

Processing Milk in Short Supply

Japan’s national fluid milk output in 2008 is projected to marginally decrease to 7.99 million MT. Higher output in Hokkaido is expected to be offset by lower output in other regions. Of this total, 4.45 million MT is projected to be sold as beverage milk (down 2%) and 3.46 million MT for will be used for processing (up 2%). There will not be enough processing milk produced in 2008 to simultaneously boost cheese, butter and NFDM production. In fact, expanded domestic cheese production has caused reduced availability of fluid milk for domestic butter and NFDM. Based on Jan. – Aug. data, 2008 output is projected 3% lower to 73,000 MT for butter and 2% lower to 170,000 MT for NFDM (See table 4).

Surplus NFDM Wiped Out in 2008

Another market development in 2008 was that Japan’s surplus NFDM dissipated as the result of lower production and strong ingredient demand. High world market prices for diary commodities made domestic NFDM attractive to domestic users.

Japanese Cheese Imports Lower in 2008

High import prices, up by 40 – 50% on the average, were the major stumbling block to an expansion of cheese imports in 2008. Japanese total cheese imports in 2008 are projected to dip

Further Reading

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October 2008