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Japan Dairy and Products Semi-Annual Report 2011

30 May 2011

USDA Foreign Agricultural Service

As of May, it appears that the segments of the dairy sector affected by the March earthquake and tsunami in eastern Japan have largely recovered, and supplies have been restored to Tokyo and surrounding prefectures, according to the USDA Foreign Agricultural Service.

Brief Impact Assessment of the Eastern Japan Earthquake on the Dairy Sector

A huge earthquake in eastern Japan in March devastated the dairy sector in the region. However, on a preliminary basis the overall impact on the nation’s total supply of milk and dairy products appears to be limited. An assessment has been made on available data (second quarter household consumption and factory shipments of milk and dairy products) in order to assess the likely impact on an annual consumption basis.

The affected region includes the major milk producing prefectures, and the disaster initially resulted in an acute shortage of drinking milk in Tokyo and surrounding prefectures for the first month or so after the earthquake. Milk came back into the market relatively quickly, but yogurt supplies were severely affected by rolling electricity blackouts that were implemented throughout Japan. These rolling blackouts lasted through the second week of April. It took four to six weeks for the system supplying all of the region’s milk to become fully operational again after the emergency. The industry was able to quickly repair damaged farm facilities and milk factories, secure needed feed, fuel, and electricity, and arrange a means of transport to move raw milk and dairy products. In the meantime, it is worth noting that over 33,000 MT of fluid milk (JP Yen 3.3 billion worth of fluid milk) were reportedly destroyed or disposed of in the affected prefectures during the initial four weeks, due in part to the government’s temporary prohibition on fluid milk shipments produced in Fukushima and Ibaragi prefectures. Those prohibitions were the result of radiation detections in fluid milk (Note 1: The suspensions imposed on both Ibaragi and Fukushima prefectures were lifted by April 10 except for some localities in Fukushima still affected by radiation).

As of May, it appears that most supplies of milk and dairy products in Tokyo and surrounding prefectures have been restored to pre-earthquake status and dairy products are back in stock on retail shelves. However, there is concern that there will be a disruption in this summer’s electricity supply similar to the rolling blackouts that occurred in the early weeks of April, which could impact supplies again. Post notes that fluid milk for drinking shipped out from Hokkaido to other regions increased beginning in April to cover the temporary fluid milk shortage in the affected region. Increased shipments of fluid milk from Hokkaido, if continued through summer, could contribute to less availability of fluid milk for processing this year.

2011 Market Outlook for Fluid Milk, NFDM, Butter and Cheese (Revised)

National Fluid Milk Outputs to Decline Further and Supplies for Processing Use to be Limited in 2011

Japan’s domestic fluid milk production for the nation as a whole in 2011 is expected to be lower than the previous year and could remain slightly short of national demand for dairy commodities. The current situation seems to indicate a reduction in butter and NFDM production. Butter supply should be tight this year, leaving an opportunity for Japan to continue minimum access butter imports in JFY 2011 (See butter and NFDM section).

Post’s newly revised national fluid milk output projection for 2011 is 7.55 million MT, down by 2.2 per cent from 2010 and slightly lower than post’s previous projection. The projected utilization breakdown for fluid milk in 2011 is estimated at 4.03 million MT for drinking use, down by 3 per cent from last year and 3.45 million MT for processing use, down by 1.4 per cent.

Various factors attributed to the above revision. Especially worthy of note is the prolonged effect of the extremely hot weather on cow productivity last summer. Monthly production data indicates that average daily fluid milk output per cow has been lower nationwide since last August and was still persisting as of March 2011 (Note: average daily per cow output was 28.3 kilograms in 2010). Other factors contributing to the projected fall in national fluid milk output includes a continued decline in Japan’s dairy cow inventory (2011 national beginning livestock data has not been released), the continued exit of dairy farmers from the industry, and substantial increases in farm input costs due to high feed and fuel prices, resembling the situation in 2008.

Regular Drinking Milk Consumption to Remain Sluggish in 2011

Following previous year’s patterns, overall demand for drinking milk products in 2011 continues to remain sluggish, especially for regular milk, due to lethargic household and school consumption. Similar to last year, lower regular milk consumption is expected to be more than offset by increased consumption of non-regular drinking milk products such as processed milk, milk beverages, and fermented milk that will be supported by health conscious and low price consumption trends.

Domestic Butter and NFDM Productions Continue to Decline in 2011

At the level post is projecting for production of fluid milk for processing in Japan in 2011, domestic production of butter and NFDM is bound to decrease further since the same amount or more fluid milk will be used for cheese and cream production this year. Post’s newly revised projection on a year on year basis for domestic butter is around 70,000 MT for domestic down by 5 per cent, and NFDM down by 4 per cent to a total of 150,000 MT.

On the consumption front, the effects from the Eastern Japan Earthquake generally appear to have resulted in diminished monthly consumption and utilization of butter and NFDM in large part to the restrained consumption after the earthquake. On an annual basis, only a modest decline in total consumption for each commodity has been projected; for butter, down by 2 per cent from last year to 83,000 MT with the projected decline mostly attributed to lethargic sales anticipated for confectionaries and desserts. For NFDM, consumption is projected down by 1 per cent to 160,000 MT, assuming that there is a steady ingredient demand for use in processed milk and confectionaries holding from the previous year.

Projected demand and supply balances for butter and NFDM in 2011 will likely leave lower year ending stocks for each, estimated to be very tight for butter at 21,000 MT, even if minimum access imports are made for the period running from January through December (see the section below), and modestly lower for NFDM at 56,000 MT.

Prospects for Lower Butter Supplies Allow Japan to Continue Minimum Access Butter Imports in 2011

Reduced domestic butter outputs and low running stocks are expected to allow Japan’s total butter imports (minimum access and ordinary imports combined) for January through December 2011 to reach as high as 13,000 MT in order to avoid a short supply scenario.

Entering into 2011, GOJ (MAFF) has already announced a series of dairy minimum access commitments for importation of bulk butter for industrial use; 4,231 MT in January as a part of the dairy minimum access for the previous fiscal year of JFY 2010 (April 1, 2010 – March 31, 2011), 4,000 MT in February as a part of the first commitment on its shopping list for the present fiscal year JFY 2011 (April 1, 2011 – March 31, 2012). Additional butter imports may be made under minimum access commitments during the current fiscal year though the timing is unclear as of yet. The strong JP Yen against the USD dollar and reportedly higher international prices in major dairy producing countries may provide continued access opportunities for USD products this year.

Unlike butter, post does not foresee any serious NFDM shortage for this year. Although total NFDM supplies may be temporarily tight this summer, particularly for use in desserts/dairy based beverages, demand will likely be met by available domestic stocks. Meanwhile, Japan’s supply of condensed skim milk (a by-product of cream production and a NFDM substitute for ingredient use) is expected to hold steady in 2011, partially lessening the probability of a rapid depletion of NFDM stocks.

Dairy Policy Continues to Support Fluid Milk for Production of Domestic Dairy Products

The continued trend of higher prices prevailing in the international dairy market this year, combined with a prospective decline in domestic fluid milk outputs, will likely result in continued government subsidies to the dairy sector during this fiscal year with the major recipient being Hokkaido producers. Similar to last year, MAFF allocated a total budget of JP Yen 21.9 billion in JFY 2011 in direct subsidy payments for fluid milk to be utilized in the manufacture of designated dairy commodities (butter, NFDM, etc.). The level of payment for a kilo of fluid milk was raised from the previous year to JP Yen 11.95 and up to 1.85 million MT of the eligible fluid milk quota (See table 2).

Separate from the above, MAFF also arranged a partial subsidy payment this fiscal year to promote the increased use of fluid milk for cheese production (with an allocated budget for the program of 6.8 billion). For the last fiscal year 2010, Hokkaido alone used a total of 460,000 MT in fluid milk (up by 6 per cent from last year) for domestic natural cheese production. More fluid milk will likely be diverted for domestic cheese production this year. Meanwhile, a subsidy for partial fluid milk for cream production, which existed till the last fiscal year, has been terminated as of this fiscal year.

Slow Recovery for Cheese Consumption and Imports Anticipated in 2011

With the persisting deflationary trend the Japanese cheese market is expected to remain relatively strong as it recovers from the slump experienced in 2008 through 2009. However, post anticipates the pace of recovery this year may slow from the level of growth achieved last year. Restrained consumption after the earthquake and continued high prices in Oceania, EU and the United States should contribute to the slow down this year; thus, total consumption, is projected up by only one percent to 250,000 MT and total imports are also projected up by only 1 per cent, which was estimated in previous outlook projections.

Similar to last year, the market is expected to support continued solid sales of certain European and American products in 2011 assuming the Japanese Yen continues to hold its strength against the Euro and USD dollar. For January through March, Japan’s cheese imports in the natural cheese category were 49,910 MT, down by 1 per cent and for the processed cheese category up by 4 per cent to 2, 098 MT. In the same period, American cheese (mostly shredded) experienced robust growth, up 62 per cent from last year to 5,014 MT. It is uncertain, however if USD cheese will be able to sustain robust growth though post anticipates American cheese will likely clear the record established last year, up modestly to reach the 14,000 MT level in 2011. Meanwhile, with high prices and the relatively strong currency situation, post expects imports of Oceania products to be flat or lower than last year. Imports of European cheeses, with continued price hikes, could also be curtailed this year.

Products falling under the zero tariff quotas may be an area with relatively good growth prospects; GOJ has allocated 65,900 MT for JFY 2011, an increase of 3500 MT from the last fiscal year supported by a prevailing consumption trend in favor of less expensive processed cheese products produced domestically. Imported natural cheeses under the above quota are blended with domestic natural cheeses as raw materials.

Limited availability of fluid milk for processing use is anticipated this year and may effectively curve this year’s growth prospects for domestic natural cheese production as well; projected now at 50,000 MT, up by a modest 4 per cent from the previous year. The situation suggests that the newly built cheese factories in Hokkaido will continue to be underutilized from their potential annual production capacity of 70,000 MT.

2010 Market Situation Summary (Revised)

Post’s previous dairy PS&D numbers for CY 2010 (Jan. – Dec.) were adjusted based on MAFF’s preliminary production, stock, and import data publicized in recent months. In brief, there was higher than projected consumption and use of butter and NFDM with lower than projected output in 2010 that resulted in much lower year end stocks for each commodity. On the other hand, despite high international prices, Japan’s cheese consumption remained solid throughout the year, which came in slightly under post’s previous projections for increased consumption and imports. A strong yen resulted in competitive American cheese prices in 2010 and was a record breaking year for the United States with annual imports spiking nearly 100 per cent from the previous year, beating post’s forecast in the last annual report.

Extreme Summer Temperatures Negatively Affected Nation’s Fluid Milk Output

Japan’s national fluid milk outputs in 2010 totaled 7.72 million MT, 2.4 per cent lower than the actual output last year. The above decline is mainly attributed to a reduced number of milk cows at the beginning of the year (829,700 head, down by 2 per cent from the previous year beginning stock) in addition to the impact of a hot summer. Due to the extremely hot weather prevailing nationwide, daily fluid milk output per cow began decreasing in August and continued through the remainder of the year. Regionally, Hokkaido’s output was down by 1 per cent (or at 3.90 million MT), which is 50 per cent of national output. Output in other milk producing prefectures was also down by 4 per cent from the previous year. Fluid milk utilization breakdowns in 2010 were: for drinking milk, down by 2.7 per cent from the previous year at 4.15 million MT and for processing, down by 2.0 per cent at 3.50 million MT.

NFDM and Butter Production Fell/Fresh Cream and Cheese Production Rose in 2010

Japan’s annual domestic production of NFDM and butter respectively fell in 2010 from the previous year; for NFDM, down by 7 per cent to 155,625 MT and for butter, also down by 9 per cent to 73,621 MT as more fluid milk was available for processing and allocated for fresh cream and cheese production (See table 3 and 4).

On the other hand, total consumption/use for NFDM and butter for the year was much better than forecast earlier; for NFDM (excluding feed use), up by 7 per cent to 162,000 MT and for butter, up by 15 per cent to 85,000 MT, which left lower than forecast year end stocks; for NFDM estimated down by 2 per cent to 57,000 MT (representing approximately 4.4 months of ingredient use) and for butter, estimated down by 30 per cent to 21,000 MT (representing approximately three months of consumption/use) for each from the beginning of the year.

Note that GOJ allocated 1.85 million MT of the raw milk subsidy quota for processing use to manufacture designated dairy commodities such as NFDM and butter for JFY 2010 (See table 2). However, actual use of the above quota reportedly fell short by about 50,000 MT of the given quota at the end of March (See Table 2).

Japan’s total butter imports for the calendar year were 2,032 MT, which included 1,668 MT of minimum access butter committed in March 2010 as a part of the 2009 dairy minimum access quota. Total NFDM imports in 2010 were fairly minimal reaching 30,184 MT, mostly for feed use (See table 6 and 7). At the same time, Japan’s dairy manufacturers have raised output of domestic cheese (up by 7 per cent from last year to an estimated 48,000 MT), fresh cream for confectionaries/desserts (up by 2 per cent to 107,441 MT) and condensed skim milk (a by-product of fresh cream, there is no data available but it is most likely up by the same percentage as fresh cream) for use in some processed drinking milk/desserts such as premium ice cream products to meet relatively solid market demand for each product (See table 4).

Note: GOJ/MAFF allocated JP Yen 6.6 billion for JFY 2010 to subsidize fluid milk for domestic cheese production aiming at boosting outputs in cheese factories built in Hokkaido in recent years that remain underutilized.

GOJ to Fill JFY 2010 Minimum Access Obligation by 4 Quarter Announcement for Butter Imports

With an aim of bringing into balance the supply and demand situation, in January 2011 (the 4th quarter of JFY 2010), GOJ announced it would use the remainder of its JFY 2010 dairy minimum access commitments to import 4,231 MT of bulk butter for industrial use (reflected in post’s PS&D 2011 calendar year import projection).

GOJ fully met its obligations for JFY 2010 with the list of products purchased as follows: Total milk equivalent of 137,202 MT; Edible Whey: 7,258 MT, Dairy Spread: 1,565 MT, Butter Oil: 1,065.9 MT and Butter: 4,231 MT [Country Breakdowns for the current access butter imports were: New Zealand: 2,156 MT, United States: 1,302 MT, Netherlands: 575 MT, Germany: 154 MT, and France: 44 MT].

Cheese Consumption and Imports Higher in 2010 on Solid Demand

In 2010, Japan’s total cheese consumption was estimated to have reached 247,000 MT, up by 8 per cent from the previous year supported by the strong JP yen with imports reaching a total of 199,080 MT, also up by 8 per cent from the previous year. Although the average C&F price was up by 7 per cent from last year to US Dollar 4,712 the strong yen partially offset higher international cheese prices.

Import growth for Australia (up 1 per cent) and New Zealand (up 5 per cent) were curtailed by the unfavorable currency exchange rate against the US dollar and JP Yen, and high local prices. European cheeses showed a strong comeback in 2010 (See Table 8) supported by a relatively weak Euro against JP yen from Germany (up 10 per cent), France (up 14 per cent), and The Netherlands (up 17 per cent).

American cheese achieved outstanding success in 2010 with imports up by 99 per cent to a total of 13,672 MT on an annual basis. The corresponding share of the total advanced by three percentage points to 7 per cent, matching the previous record established in 2008. The reasons for the sudden advancement of USD cheese in the Japanese market can be attributed to; successful USDEC promotions over the years, Japanese importer/end user strategy of diversifying supply sources, and lower USD cheese prices supported by the strong yen in 2010. The average C&F price for US cheeses was USD 5,549, down by 22 per cent from the previous year, making USD products more affordable and price competitive.

May 2011

Further Reading

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