21 October 2010

10 minute read

2009

Annual and Semi

2008

Annual

Semi-Annual

2007

Annual

Semi-Annual

Due to Japan’s on-going economic recession, the food market continues to favor less expensive food items. This situation is expected to continue through 2011. Specifically, national dairy herd numbers are slowly trending down at 1 – 2 per cent on an annual basis. The continued exit of farms in other milk producing regions in Japan may result in trimming the national dairy herd in 2011 down by 1 per cent to 825,000 head (number of cows in milk – not including dry cows and heifers).

In 2011, however, the expected recovery in output per cow will likely hold Japan’s annual milk output at the same level as 2010n at 7.80 million MT. Regional output in Hokkaido, Japan’s major dairy state, is projected up by 1 - 2 per cent accounting, which will contribute to roughly 50 per cent of total fluid milk output and offset the reductions in other milk producing regions.

The projected utilization for fluid milk in 2011 is 4.08 million MT for drinking (down over 1 per cent from last year) and 3.65 million MT for processing (up 2 per cent). Similar to 2010, overall market demand for drinking milk, and the ingredient market for powdered milk products such as NFDM, whole milk powder, and prepared milk powder, will likely remain generally lethargic in 2011.

Minimum Access Purchase of Butter and NFDM Not Foreseen in JFY 2011

Post does not expect any increase in production of domestic butter (unchanged at 78,000 MT) and NFDM (unchanged at 160,000 MT) but does expect more fluid milk for domestic cheese manufacturing in 2011 in Hokkaido. Even then, the projected supply of butter and NFDM will be sufficient relative to the demands foreseen for both commodities with few imports, if any, expected.

Thus, GOJ’s purchases of dairy commodities for the JFY 2011 dairy minimum access TRQ is expected to be diversified (edible why, butter oil, and dairy spread) and purchases of NFDM or butter are unlikely to be considered unless unexpected shortages occur. The situation will likely leave year ending stock levels of both commodities relatively high; for butter at 35,000 MT and for NFDM at 69,000 MT, while keeping a modest downward pressure on market prices throughout the year.

The world market price for cheese, and particularly for imported cheese products, has been on the rise again in the latter half of 2010 erasing an exchange advantage due to the strong yen. Assuming market prices hold stable in 2011, post projects a modest growth in consumption for the 2011 cheese market, up by 5 per cent to 265,000 MT. Total imports are projected up by 2 per cent to 210,000 MT.

US cheeses have not followed this trend with the exception of rising prices; thus, it is uncertain if American cheese can keep the momentum created during the previous year and hold an annual entry level of 10,000 MT in Japan’s cheese market (See 2010 Cheese Section).

Meanwhile, MAFF has reportedly proposed creation of an enhanced cheese subsidy program for JFY 2011 amounting to JP Yen 8 billion for the next fiscal year budget in the 2011. This program, if approved, could have multiple effects on the Hokkaido dairy industry and change the distribution pattern of fluid milk processing in 2011. The goals of the subsidy are: 1) to substantially raise the use of competitively priced fluid milk available to processors and boost domestic cheese outputs (estimated at 55,000 MT, up by 15 per cent from last year); 2) fill the idle capacity of Hokkaido’s cheese plants (a max capacity of 70,000 MT a year); and 3) keep domestic cheese price competitive with imports.

Furthermore, the above mentioned program is said to envisage a discontinuation of the fluid milk subsidy payment for cream production. If realized, it would indirectly encourage an alternative use of domestic NFDM by cutting the current use of liquid concentrated skim milk, a cream by-product, for some low-priced processed drinking milk products, which have been selling well in the market.

2010 Market Situation Update and Outlook (Revised)

Post substantially revised the previous national milk output projection for 2010 downward upon incorporating reduced numbers for dairy cows in milk (830,000 head, down 2 per cent) at the beginning of the year and taking into account the effect of the heat wave this summer on the nation’s fluid milk production. The new output projection is 7.79 million MT, down 1.5 per cent from the previous year forecast.

Post’s preliminary utilization of fluid milk for the 2010 has also been revised and is now projected down by 3 per cent at 4.14 million MT for drinking and marginally up (less than 1 per cent) by 3.58 million MT for processing from last year.

For January to August 2010, a slight decline was seen in monthly outputs in Hokkaido, the region that accounts for nearly 50 per cent of national fluid milk production, while a continued decline (about 2- 3 per cent) persists in the output of other milk producing regions. Heat fatigue, sickness of cows, and losses were reported across the country due to extremely high temperatures prevailing through late September.

According with the situation outlined above, higher than usual volumes of fluid milk were shipped out from Hokkaido to major milk consuming regions this summer alleviating the deficit of milk supply for drinking use; thus, decreasing the availability of fluid milk in Hokkaido for processing butter and NFDM (See NFDM and Butter Section).

Modestly Lower NFDM Production Forecast in 2010

The increased fluid milk subsidy for expanded domestic cheese production in JFY 2010 is an added factor contributing to lower use of fluid milk for NFDM and butter this year (See Cheese Section). On a preliminary basis, NFDM and butter productions in 2010 are projected at 160,000 MT (down by 4 per cent) and 79,000 MT (down by 2 per cent) respectively from last year (both substantially lower than the previously forecast numbers).

Note: For JFY 2010, the subsidy level for fluid milk for processing use has been left unchanged from the last fiscal year at JP Yen 11.85/Kg. with the eligible volume quota of 185,000 MT lower than the previous year (See Table 2).

Reportedly the hot weather (frequently exceeding 35 degrees C) drove demand and increased sales of some milk based drinks (milk beverages, fermented milk products) and ice desserts this year that use NFDM. Interestingly, during these extremely high temperatures it did not substantially boost consumption of ice cream (See Tables 3 and 4) but rather resulted in higher consumption of sports/soft drinks/ice products.

Given the above, Japan’s total NFDM use (mostly domestic product) in 2010 is projected only moderately up from the previous year at 155,000 MT, up by 2 per cent, but not increased enough to counter the gradual building of stocks (estimated year ending stocks of 66,000 MT, up 14 per cent from the year beginning) and prices lower than the previous year (See Tables 5 and 9).

Post does not anticipate imports of NFDM by Japan under the dairy minimum access TRQ during this fiscal year and the situation is expected to leave relatively large NFDM stock at year end, estimated at 66,000 MT, up 14 per cent from the beginning of the year. The strong yen, on the other hand, has allowed imports for feed use to recover, which are projected to be 27,000 MT.

Note: Following the last year’s pattern, production of processed drinking milk products showed double digit growth (up 15 per cent) during January to August this year with strong sales in the market sustained during that period. Many processed milk products (for drinking) have been utilizing condensed skim milk with a base derived from cream production, thus an increase in sales of this product category has not necessarily led to increased NFDM consumption in Japan.

Butter:

For the first eight months of 2010, butter consumption has been outpacing the last year mainly due to solid household consumption and improved bakery sales (See table 1). The above trend will likely hold through the remainder of the year. On a purely demand and supply basis monthly data seems to indicate that domestic butter supplies may become somewhat tight toward the end of the year, a peak sales season, with the extra demands anticipated from the confectionary and hotel/food service sectors.

Post did not previously anticipate butter imports under the minimum access quota for JFY 2011. However, there may be a chance this year for Japan to import under the quota in order to assure sufficient supplies are available in addition to ordinary imports in the peak season. Monthly butter stocks have been on a gradual decline (See Table 5). At the present point in time, it is not clear at what point purchasing decision/announcements will be made, but there are two possibilities, in the fiscal year third quarter (October to December, 2010) or the fiscal year last quarter (January – March, 2011).

By the end of September, Japan had committed the JFY 2010 dairy MA TRQ to import edible whey (3,278 MT), butter oil (909 MT), and dairy spread (595 MT) with a milk equivalent volume totaling about 43,450 MT out of the fixed 137,000 MT.

If butter commitments are filled, total butter imports may reach the 7,000 MT level (ordinary imports: 2,000 MT; minimum access imports: 5,000 MT estimated by post), leaving higher year end stocks estimated at 35,000 MT from the beginning of the year (See Table 7-A and 7-B).

As of yet there is not commitment through the end of March next year (additional whey may be a possibility).

Solid Cheese Consumption to Raise Imports in 2010

The Japanese cheese market has had a solid consumption recovery this year supported by strong household consumption and increased food service utilization. Therefore, the explanation found in the last semiannual report still holds valid except for post’s import projection for American cheese, which has turned out to be substantially under our new estimate of 11,000 MT, up 60 per cent from last year.

Accordingly, PS&D numbers were revised to reflect the positive situation and outlook for Japan’s 2010 cheese market [Total consumption, up by 10 per cent to 253,000 MT; Imports, up by 11 per cent to 205,000 MT; and Domestic Production, up by 7 per cent to 48,000 MT.]

The overall market price decline, combined with the strong yen has been a major factor in pushing total imports higher than was previously forecast. The weakened Euro has contributed to a good recovery in European cheeses for direct consumption and has effectively offset the resumed price rise that began this year in the EU. Meanwhile, the high prices for cheese in Australia and New Zealand appear to have reduced the competitiveness of their products and curtailed their growth in 2010. That said, NZ and the EU are still the major stakeholders for the zero tariff TRQ (62,400 MT for JFY 2010) for natural cheeses (to be blended with domestic natural cheeses to manufacture processed cheese).

For January to August 2010, Japanese cheese imports were up 11 per cent from last year to 130,815 MT due to marginally lower average CIF prices for the period @ US$ 4.56Kg (See Table 8-A and 8-B). It is noteworthy that American cheese experienced a significant import price decline (down 20 per cent at US$ 5.64/Kg.) for the first eight months of this year, which seems to have led to an unexpected spike in Japan’s imports this year, up by 89 per cent to 8,359 MT. According to USDEC Tokyo, increased uses for both natural and processed American cheeses by the Japanese food service/bakery industry, and bulk products, for shredding/slicing were mainly attributable to this year’s growth. It is unclear whether American cheese will be able to keep up the same pace for the rest of the year with reports of upward price trends in the United States at CME. Annual imports of American cheese are forecast to easily exceed 10,000 MT level for the first time in recorded history possibly reaching the 11,000 MT level if the current pace is kept.

Initially, reduced import prices and relatively high prices for fluid milk for processing are thought to have made imported cheeses more competitive and have resulted in a reduction in the pace of growth in domestic cheese production, which has resulted in recent years in the creation of idle manufacturing capacity for newly built cheese plants in Hokkaido (the total annual production capacity in Hokkaido is said to be around 70,000 MT).

The GOJ subsidy program to expand the use of fluid milk for cheese and cream production (JFY 2010 Reported Budget Allocation: JP Yen 5.8 billion, 25 yen/Kg for cheese and 12 Yen/Kg to be paid to farmers) in addition to an incentive payment program for the use of fluid milk for value added cheese products (JFY 2010 Reported Allocation: JP Yen 2.9 billion, 20 yen/Kg to be paid to farmers) appears to have effectively countered the above mentioned price disadvantage with imported products this year. Fluid milk utilized for cheese production in Hokkaido this year has increased due to the above programs.