5 June 2010

8 minute read

In 2010, the FAS is expecting a fairly limited increase in the consumption of milk and dairy products in Japan. Further expansion is being hampered by the prolonged economic recession and stagnant population growth rates. The 2010 market situation described in the last annual report (JA 9058) remains applicable to the current situation. FAS is forecasting weak consumption for drinking milk, slow recovery in the dairy ingredient market, and soaring stocks of nonfat dry milk (NFDM) and butter.

This report provides an update on dairy subsidy policy under the new Democratic Party of Japan (DPJ) administration, and examines prospects for Japan’s current tariff rate quota (TRQ) commitments for JFY 2010 in lieu of the surplus in NFDM and butter supplies that are anticipated for this year. PS&D numbers for CY 2009 are adjusted based on the latest figures available.

GOJ Current System of Dairy Subsidies Remains in Tact for JFY 2010

The government of Japan (GOJ) is still discussing how to actualise the farm policy initiatives called for by the new administration. Finding feasible policy mechanisms to replace the current dairy subsidy programs remains elusive. In JFY 2001 GOJ changed a longstanding deficiency payment scheme for manufacturing milk to a direct payment scheme as a means of compensating farmers who sell their milk for processing. Hokkaido producers are the main beneficiaries of the subsidies. Policy experts are considering how effective a direct income payment would be for individual farmers under the new initiative versus that of the existing programme.

In short, GOJ has not worked out the details of the initiative and the existing dairy subsidy program for fluid milk for processing has been left in tact for JFY 2010 in order to avoid confusion among the growers. As shown in table 2, the subsidy payment level for fluid milk for processing is unchanged from the previous fiscal year at JP Yen 11.85 per kilo. The corresponding quota has been reduced slightly by 100,000 MT to 1.85 million MT over the last fiscal year in order to cope with the likely surplus of NFDM and butter with the intent of diverting extra fluid milk to cheese and other powdered milk production.

Japan's NFDM and Butter Stocks To Rise In 2010

Provisionally, FAS projects a slightly lower level for national fluid milk output in 2010 over the last year at 7.85 million MT since the industry is indicating there was a reduced number of milking cows at the beginning of the year in 2010 (national dairy herd statistics will be announced later). The utilisation breakdown for fluid milk in 2010 is projected at 4.125 million MT for drinking (down 3per cent from last year) and 3.65 million MT for processing (up 2per cent) reflecting product being diverted to processing with lower demand for drinking milk this year. With that prospect in mind, FAS raised this year’s projection for domestic NFDM and butter production to 170,000 MT (up 2 per cent from last year) and 85,000 MT (up 5 per cent) respectively.

As mentioned in the 2009 situation summary, sizable NFDM and butter stocks were carried over to 2010 even with the modest increase in use projected for the year. There are ample indications of a surplus in the above commodities, particularly NFDM, with reduced prices in recent months (See Table 9).

This price trend may help increase the dairy ingredient market somewhat toward the second half of the year, which in turn could result in a recovery in sales in the confectionary/dessert market; the sector hardest hit by the recession. The reported increase in household consumption of foods will help support sales of bread (bakery) and butter this year. Even then, considerably higher levels of year ending stocks are projected through this year, up by 22 per cent to 71,000 MT for NFDM and up by 33 per cent for butter to 40,000 MT, due to weaker demand and ample supplies for each commodity.

Japan Dairy Minimum Access Imports for JFY 2010 to Focus on Non Essential Commodities

Due to the surplus of NFDM and butter anticipated this year, Japan’s imports of these essential commodities under the current access TRQ for JFY 2010 are not expected until at least this fall (see Table 7-A, demonstrating the record quantities of butter imported in CY2008). Rather, there will likely be greater sales of less essential commodities under the TRQ (total milk equivalent of 137,000 MT) such as edible whey, dairy spread, and butter oil instead of butter and NFDM during the fiscal year JFY 2010 (April 2010 – March 2011).

Solid Import Recovery Forecast for Cheese in 2010

Reduced market prices for cheese, in line with substantially lower import prices, have positively contributed to Japan’s cheese consumption, bouncing back from the second half of 2009. Going into 2010, Japanese cheese imports have shown a solid recovery as the JP Yen remains strong against other currencies.

Solid household consumption and the resumed use of these lower priced imported products in the food service and confectionary industries are mainly attributable to this recovery. Assuming this trend will continue, FAS has raised Japan’s import forecast upward from the previous forecast and now projects 195,000 MT, an increase of 9 per cent from last year.

Following the pattern of the previous year, Japan’s import recovery will accommodate more products from the EU, mostly for direct consumption. Products from Oceania are expected to do well in 2010 (for the zero tariff TRQ category – natural cheeses to be blended with domestic cheeses and manufactured into processed cheese products), but these imports may be tempered somewhat by limited production and higher brought on as a result of drought conditions. FAS has made a modest upward projection from last year for US cheese in 2010 to 7,000 MT assuming a continuation of competitive prices for product from the EU and South American countries continues. Domestic cheese production is also forecast to increase modestly up 4 per cent to 47,000 MT, supported by the increasing availability of lower priced fluid milk this year, coupled with the government’s initiative to promote domestic cheeses under a subsidy program (GOJ implements a subsidy scheme similar to that of the payment made for fluid milk for processing).

2009 Market Situation Summary (Revised)

FAS does not anticipate any significant changes for the 2009 projection in the last annual report (JA 9058). A weaker consumption scenario due to the economic recession was in place throughout 2009.

Economic Recession Limited Overall Milk and Dairy Product Consumption in 2009

Japanese national fluid milk output in 2009 fell slightly below the level of the previous year, down by 1 per cent to 7.91 million MT, mainly a reflection of the reduced number of milking cows at the beginning of year.

Utilisation of fluid milk in 2009 was 4.264 million MT for drinking (down 4 per cent from last year) and 3.57 million MT for processing (up 3 per cent). Drinking milk consumption stagnated in 2009 as more fluid milk was diverted to processed products (See Table 3 and Table 4) with NFDM at 167,000 MT (up 6 per cent from last year) and butter at 81,000 MT (up 13 per cent).

Sizable NFDM and Butter Stocks Left at the Year End

The above situation resulted in a slight expansion of NFDM and butter supplies at the beginning of the year. However, demand for dairy products was weaker than anticipated, particularly in the confectionary and food service sector due to the recessionary economy. In contrast, Japanese consumers were eating more at home, which helped to increase consumption of butter, cheese, and bread for toast and sandwiches in 2009 (See Table 1). NFDM and butter stocks began to build with year end stocks at 58,300 MT and 29,600 MT respectively. Stocks of these products were carried over to the next year (See Table 5) resulting in a decrease in the average wholesale price for each commodity on a monthly basis (See Table 9).

Diversified Imports Fill JFY 2009 Minimum Access Commitment

Based on a short supply projection for NFDM for the period prior to March 2009 (still in JFY 2008), GOJ committed a large portion of JFY 2009 dairy access (milk equivalent of 137,000 MT) to NFDM beginning as early as January 2009 (See JA 9058). These purchases ended up as carryover stocks at the year end. Following is the list of the dairy commodities Japan committed to purchase in JFY 2009 (April 2009 – March 2010): 7, 856 MT of NFDM; 8,441 MT of Edible Whey; 1,668 MT of butter; 505 MT of dairy spread; 116 MT of butter oil. [Note: The conversion coefficients used to calculate milk equivalent volumes for the following commodities are: NFDM (6.48), whey powder (6.84), butter (12.34), dairy spread (12.34), and butter oil (15.05)]

Cheese Imports Bounce in Late 2009

Japanese cheese imports bounced modestly during the second half of 2009 partially offsetting the decline in the first half. Lower prices for EU and Oceania products, coupled with strong JP yen, have led to increased sales in the retail sector. Annual imports totaled 184,424 MT, down by 1 per cent from last year with the average CIF price down 18 per cent at US 4.41 dollars. Australia and New Zealand together accounted for roughly 70 per cent of total imports in 2010, followed by the EU with imports from Germany, Denmark, and Italy showing a solid recovery; especially during the second half. US cheese totaled 6,885 MT, down by 6 per cent from the previous year. The import price of US cheese remained relatively high at US 7.71 dollars despite a foreign exchange advantage (See 8-A and 8-B).

FAS left previous estimates for domestic cheese production in 2009 unchanged at 45,000 MT, down by 4 per cent (official estimates to be announced later). Despite increased processing capacity in Hokkaido, domestic cheese consumption is estimated to have fallen by 4 per cent from last year to 45,000 MT due partly to competition from lower priced imports (See JA 9085).

Further Reading

Further Reading

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