30 May 2008

7 minute read

Report Highlights:

Butter will account for most if not all of the diary products imported under Japan’s WTO Minimum Access commitments and U.S. butter should be competitive. Increasing feed costs have led dairy producers and processors to pass along significant price increases to consumers. Japan’s imports of natural cheeses are expected to decline from last year’s record levels, due in large part to higher prices.

2008 Outlook for Fluid Milk, NFDM, Butter and Cheese

Retail Prices of Milk and Dairy Products to Trends up

Starting in the spring, major dairy manufactures in Japan announced 5 – 20% increases in retail prices of milk and dairy. The run up in international grain prices is having a large negative impact on the livestock sector, which is nearly wholly dependent on imported feed grains. After years of relative price stability, dairy producers and food retailers are increasingly passing higher input costs on to consumers. According to Ministry of Agriculture, Forestry, and Fisheries (MAFF) statistics, the average farm gate price of milk was about 80 yen per kg in 2007. Because imported dairy products have also become more expensive, diary price increases may lead to small reduction in consumption later in the year.

Fluid Milk Output to Recover in 2008

Japan’s national fluid milk output in CY 2008 is projected to reach 8.1 million metric tons (MMT), up 1% from last year. Farmers in Hokkaido, the major dairy region in Japan, started raising output last fall to meet strong demand for cream and butter. As reflected in high auction prices of pregnant heifers in recent months, the rebuilding of Japanese dairy herds has begun in response to increased subsidies and better market opportunities for fluid milk for processing. At the beginning of 2007, there were nearly 1.6 million dairy cows and heifers in Japan, of which 871,000 were producing. Hokkaido accounted 53% of the total dairy herd and 46% of cows in production. Thus, this year’s fluid milk production in Hokkaido is expected to more than offset a slight production decline forecast in other regions. The majority of fluid milk produced in Hokkaido will be used for processing.

Improving Market Prospects for Domestic Dairy Commodities to Generate Good Demand for Fluid Milk for Processing

Expanded cheese production capacities, continued butter shortages, improved market condition for non-fat dry milk (NFDM), and solid demand for cream have greatly improved market prospects for manufacturing-use milk. Demand for fluid milk in Japan for processing use this year which is projected to grow by 5% to 3.56 MMT. A large portion of this increase will be used by new cheese factories in Hokkaido, which began operations last fall. The rest of the increase will be used to produce other dairy commodities such as butter, cream and NFDM.

[Note: According to MAFF statistics, for CY 2007, out of 3.402 MMT of fluid milk used for processing, 1.037 MMT went to cream production, 0.388 MMT went to domestic natural cheese production, and the rest, approximately 1.95 MMT, for production of NFDM and butter].

Fluid (beverage) Milk Consumption Continues to Slump

One the other hand, continuing a trend, Japan’s beverage milk production in the first quarter of 2008 was down by 2%. For January and March, household consumption of regular milk fell two percent compared to the same period last year . Overall 2008 beverage milk consumption is expected to decline by 1.5% to 4.455 MMT.

Cheese Imports Expected to Lower/Domestic Cheese Production to Grow Substantially in 2008

Japan’ first quarter cheese imports this year were 9% lower (or 51,132 MT on customs clearance basis) compared to the same period last year. High international prices pushed average import prices up as much as 40% from last year, on average to US$ 4.78 from US$ 3.4. Due to high prices, Japan’s import demand for cheeses, is expected to slacken this year and is projected 7% down from last year’s record to 210,000 MT . The projected import decline will be most pronounced in the natural cheeses product category (that is, cheese for direct consumption, not processing) and will negatively affect traditional EU suppliers. Japan’s imports of U.S. cheeses in 2008 are projected down by 5% off of last year’s record to 6,500 MT.

Mainly due to increased production capacity in Hokkaido, Japan’s domestic natural cheese production in 2008 will expand substantially, up from 43,000 MT in 2007 to around 55,000 MT – 60,000 MT. In several years time, Japanese domestic natural cheese production is expected to more than double the level achieved in 2006 (40,000 MT) once newly added capacities in Hokkaido is fully on line. The market may even see minor Japanese cheese exports. New domestic cheese factories will face the ongoing challenge of securing a stable supply of fluid milk.

Butter Supply Tight despite Full Current Access Imports

Japanese butter demand has been relatively constant at around 90,000 MT. However, unexpectedly strong demand for butter (estimated at 92,000 MT in 2007, up 3% from last year) has tightened supplies and stocks have been running low for the past couple of years. In 2007, ending stocks were lower by 27% to an estimated 16,000 MT, barely enough to meet 1.7 months of demand.

To cope with this situation, the Japanese government raised this fiscal year’s subsidy for fluid milk for processing. Direct payments were raised by 9.5% (from 10.55 yen per kg. to 11.55 yen per kg.) for fluid milk used for butter and NFDM. As part of the government’s response to butter shortages, there is a net increase of 90,000 to the processing milk quota to 2.07 MMT for JFY 2008. This will increase butter production in 2008 by 9% to 82,000 MT. For Jan. – Mar. 2008, butter production was flat, but it is expected to grow in the second half of the year (See Table 4).

Despite this, Japan’s domestic butter supply could still fall short by as much as 10,000 – 12,000 MT this year. To fill the gap, similar to last year, GOJ plans to fully commit this fiscal year’s current access (CA) to buy imported butter, estimated at 8,000 MT. Thus, even with CA butter, there could be a 2,000 – 4,000 MT shortfall toward year’s end.

Japan purchased 11,000 MT of butter last calendar year, mostly under the CA. The Netherlands was the main supplier followed by Australia, and Germany (Table 7-3, 7-4). Amid high prices by EU suppliers, U.S. butter gained market share in the CA imports system for the first time and about 80 MT was imported. Imports of U.S. butter are reflected in the January – March trade data (Table 7-1, 7-2). U.S. butter should continue to make inroads in the CA category this year. In the event the butter shortage becomes acute, Japan may have to make advance purchases under the CA system, possibly counting imports against the next fiscal year’s commitments.

NFDM Surplus Wiped Out/Demand and Supply to Normalize in 2008

Market conditions for NFDM have improved. Surpluses have subsided and monthly stocks have been running at normal levels entering 2008. Wholesale prices of domestically produced NFDM have turned slightly upward since last fall (See Table 8). Over the past several years, Japanese dairy farmers have been cutting back fluid milk output to cope with reduced beverage milk consumption and weak ingredient demand for NFDM (Ref JA7067). This resulted in contradictory demand and supply conditions for each commodity (i.e., mounting NFDM surpluses and a butter shortage). Amid high international prices for NFDM, improved ingredient demand for dairy-based beverages, bakery, confectionary, and frozen desserts in 2007, took a toll on NFDM stocks, which are down by 41% to an estimated 38,000 MT for the start of 2008.

An anticipated increase in butter production this year will result higher domestic NFDM production, projected up by 13% to 195,000 MT. For Jan. – Mar., domestic NFDM production actually fell 2% (or 48,856 MT), but the April increase in the quota for processing milk should support additional production of NFDM for the remainder 2008. Combined with increased imports of NFDM, projected up by 11% to 40,000 MT (mostly feed use), total supply is expected to balance with ending stocks at or near last year’s level .

Further Reading

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