Report Highlights:

Significant 'additional' imports of butter and non-fat dry milk should restore Japanese stocks to normal levels and prevent another high profile 'butter shortage' in 2015. Japanese dairy production continues to face considerable challenges going forward as farmers continue to exit the industry. Imports of EU natural cheeses skyrocketed in 2015, following liberalization of EU dairy production.

Executive Summary:

Improved weather conditions in 2015 have eased the impact of the continuing decline of Japan's national dairy herd on total milk production. Despite the steady exit of dairy farmers from the industry, Japanese fluid milk production is forecast to increase modestly in 2015 as output per cow showed marked improvement in the milder summer weather of 2015. On higher negotiated fluid milk prices and in response to national sentiment following 2014's perceived butter shortage, Japanese dairy product producers have significantly expanded butter and non-fat dry milk (NFDM) production in 2015 alongside Japan's so-called 'additional' imports of both commodities, restoring stock levels to more customary levels. Expansion of butter and NFDM production, however, appears to have come at the cost of lower Japanese production and greater imports of natural cheeses. The market share for suppliers of imported cheeses in 2015 and beyond could be greatly affected by the emergence of greater competition from EU suppliers, following the abolishment of the EU production quota system that had been in place for more than 30 years.

The outlook for Japanese milk production in 2016 could be negatively impacted if continued high feeder calf prices restrict the supply of replacement heifers. While the Japanese supply for butter and NFDM could be more stable in 2016 if dairy manufacturers sustain 2015 levels of production, the possibility of 'additional' dairy importation for either commodity cannot be ruled out.

Dairy, Milk, Fluid

2014

2015

2016

Market Begin Year

Jan 2014

Jan 2015

Jan 2016

Japan

USDA Official

New Post

USDA Official

New Post

USDA Official

New Post

Cows In Milk

773

773

775

750

0

745

Cows Milk Production

7315

7334

7350

7375

0

7340

Other Milk Production

0

0

0

0

0

0

Total Production

7315

7334

7350

7375

0

7340

Other Imports

0

0

0

0

0

0

Total Imports

0

0

0

0

0

0

Total Supply

7315

7334

7350

7375

0

7340

Other Exports

0

0

0

0

0

0

Total Exports

0

0

0

0

0

0

Fluid Use Dom. Consum.

3915

3911

3890

3920

0

3900

Factory Use Consum.

3350

3364

3410

3400

0

3385

Feed Use Dom. Consum.

50

59

50

55

0

55

Total Dom. Consumption

7315

7334

7350

7375

0

7340

Total Distribution

7315

7334

7350

7375

0

7340

(1000 HEAD) ,(1000 MT)

Dairy, Butter

2014

2015

2016

Market Begin Year

Jan 2014

Jan 2015

Jan 2016

Japan

USDA Official

New Post

USDA Official

New Post

USDA Official

New Post

Beginning Stocks

18

18

16

15

0

20

Production

60

61

60

64

0

63

Other Imports

11

11

15

16

0

12

Total Imports

11

11

15

16

0

12

Total Supply

89

90

91

95

0

95

Other Exports

0

0

0

0

0

0

Total Exports

0

0

0

0

0

0

Domestic Consumption

73

75

76

75

0

75

Total Use

73

75

76

75

0

75

Ending Stocks

16

15

15

20

0

20

Total Distribution

89

90

91

95

0

95

(1000 MT)

Dairy, Milk, Nonfat Dry

2014

2015

2016

Market Begin Year

Jan 2014

Jan 2015

Jan 2016

Japan

USDA Official

New Post

USDA Official

New Post

USDA Official

New Post

Beginning Stocks

40

40

32

35

0

50

Production

120

120

125

127

0

125

Other Imports

43

43

52

53

0

30

Total Imports

43

43

52

53

0

30

Total Supply

203

203

209

215

0

205

Other Exports

0

0

0

0

0

0

Total Exports

0

0

0

0

0

0

Human Dom. Consumption

146

144

150

140

0

140

Other Use, Losses

25

24

25

25

0

25

Total Dom. Consumption

171

168

175

165

0

165

Total Use

171

168

175

165

0

165

Ending Stocks

32

35

34

50

0

40

Total Distribution

203

203

209

215

0

205

(1000 MT)

Dairy, Cheese

2014

2015

2016

Market Begin Year

Jan 2014

Jan 2015

Jan 2016

Japan

USDA Official

New Post

USDA Official

New Post

USDA Official

New Post

Beginning Stocks

15

15

15

15

0

15

Production

50

46

50

42

0

42

Other Imports

232

232

245

245

0

250

Total Imports

232

232

245

245

0

250

Total Supply

297

293

310

302

0

307

Other Exports

0

0

0

0

0

0

Total Exports

0

0

0

0

0

0

Human Dom. Consumption

282

278

295

287

0

292

Other Use, Losses

0

0

0

0

0

0

Total Dom. Consumption

282

278

295

287

0

292

Total Use

282

278

295

287

0

292

Ending Stocks

15

15

15

15

0

15

Total Distribution

297

293

310

302

0

307

(1000 MT)

2015 Situation Summary and Outlook

Milk:

Milk Production to Recover Slightly in 2015

Despite the continued gradual decline in the total number of milk cows at the beginning of 2015 (down three percent to 750,000 head), Japanese national milk production is expected to bounce back slightly after two years of consecutive declines. According to market sources, in response to tight domestic milk supplies in 2013 and 2014, dairy product manufacturers raised the contract price offered to dairy cooperatives both for fluid use and for factory use through 2015 (see Note 1). In conjunction with milder summer weather and the increased availability of local forage, continued financial support from the central government, local governments and dairy cooperatives has pushed 2015 milk production higher to 4.974 million metric tons (MMT) through August 2015, up 0.4 percent compared to 2014.

As of February 1, 2015, there were a total of 17,700 dairy farms (down five percent from 2014) raising a total of 1.371 million head of cows and heifers (nearly two percent lower from 2014; milk cows down three percent to 750,100 head, dry cows down one percent to 119,600 head, and replacement heifers unchanged at 501,600 head). In Hokkaido, the total number of milk cows was three percent lower at 389,800 head, while the number of replacement heifers (less than two-years old) was two percent higher at 332,700 head, some of which are expected to be bred in 2015 and placed for milking in the late 2015 / early 2016. In the rest of Japan, the total number of milk cows was also three percent lower at 360,300 head, however the number of replacement heifers was four percent lower than 2014 at 168,900 head. These numbers point toward a possible stabilization of the Hokkaido dairy herd, even as the dairy industry continues to contract across the rest of Japan.

While the national dairy industry continues to struggle with the continued exit of older farmers leaving the industry without successors, financial incentives to modernize production facilities and equipment appear to be effectively expanding the average dairy farm size, as the number of head per farm since 2012 has grown by eight percent in Hokkaido and by thirteen percent in the rest of Japan. Dairy farmers looking to expand the scale of their operations often receive enough government financial support to cover half the cost of improvements, like the construction of new cow sheds or the purchase of modern equipment. As the number of dairy farms has dropped by more than 15 percent over the last four years (from 21,000 to 17,700), the trend towards fewer farms with more cattle per farm appears likely to continue into the foreseeable future.

Through August 2015, milk production in Hokkaido is up 1.2 percent to 2.593 MMT, while production in the rest of Japan is down 0.5 percent to 2.382 MMT. Since the majority of Hokkaido milk production is for factory use (a small portion of Hokkaido's total production is fluid use milk that is shipped outside of the prefecture), Hokkaido's recent production recovery has helped to increase the national supply of factory use milk in 2015. Through August, the volume of fluid use milk was up slightly (0.7 percent) to 2.611 MMT, supported by fairly solid consumption of fermented milk (including various yogurt products) and relatively stable consumption for regular white milk, fortified milk, and milk beverages. Meanwhile, the volume factory use milk remained unchanged at 2.325 MMT, as the contraction in production for factory use across the rest of Japan offset the rebound in Hokkaido's production, partially as a result of milder 2015 summer weather dragging on national ice cream production and consumption.

A major component of tight milk supplies in recent years has been the longer than average stretches of hotter than average summer temperatures. In 2013 and 2014, such weather conditions led to greater stress on milk cows and higher incidence of mastitis, both of which reduced the output per milk cow. Those conditions also had a negative impact on the quality and availability of local forage production, which remains critical to the profitability of Japanese dairy farmers, whose feed costs have remained high as the Yen has weakened (relative to the U.S. Dollar) even as global grain prices have fallen from 2012 highs. Elevated summer temperatures in 2013 and 2014 did, however, contribute to greater levels of ice cream production and sales.

With an improvement in Hokkaido's fluid milk production, coupled with almost unchanged annual outputs from last year projected for the rest of Japan in 2015, Post projects Japan's 2015 national fluid milk production to recover slightly from the previous year to around 7.375 million MT, with milk for drinking marginally up at 3.920 million MT supported by solid consumption of fermented milk (various types of yogurt products) and milk for processing slightly up at 3.400 million MT from the previous year, mainly reflecting Hokkaido's output recovery.

Note 1: The national average pooled price (what a farmer receives) for a kilogram of milk (inclusive of consumption tax) increased five percent in 2014 (to 95.99 yen/kg.) and another four percent through August 2015 (to 98.30 yen/kg.). In general, the contract price for factory use milk (mostly produced in Hokkaido, which produces more than 52 percent of Japan's milk, but is home to only 4 percent of the population) is set lower than the contract price for fluid use milk, which is mostly produced closer to consumers across the rest of Japan. As a result of this price differential, the national government maintains a direct subsidy payment scheme for factory use milk utilized for the production of designated dairy products, such as butter, NFDM and domestic natural cheeses. Contract prices are typically negotiated several months before the beginning of the new calendar year and, barring extraordinary circumstances like a national disaster or a disease outbreak, extend for the length of the calendar year.

Butter and NFDM:

Demand and Supply for Butter and NFDM Roughly Balance Out in 2015

While the total volume of milk allocated to factory use through August 2015 was unchanged from the previous year at 2.325 MMT, the volume of factory use milk utilized for the production of designated dairy products, such as butter and NFDM, increased three percent to 1.134 MMT. Through August 2015, Japanese dairy processors have reduced the volumes of factory use milk allocated to the production of domestic natural cheeses by eight percent (to 319,874 MT) and fresh cream by less than one percent (to 870,375 MT), in order to divert more factory use milk to butter and NFDM. As a result, domestic production of butter has increased five percent (to 43,588 MT), and domestic production of NFDM has climbed by six percent (to 88,566). According to market sources, domestic dairy product manufacturers (buyers of milk) and major dairy cooperatives (sellers of milk) have collaborated to stabilize the supply of butter and NFDM in 2015 in response to intense public criticism (the result of the temporary disappearance of domestic butter from retail shelves in major cities around Japan in late 2014; see Note 2).

Butter

According to data from the state-owned Agriculture & Livestock Industries Corporation (ALIC), butter imports through August 2015 have totaled 5,830 MT, comprised of Japanese Fiscal Year (JFY) 2015 current access import volumes as well as a portion of the JFY 2014 'additional' imports that arrived between January 2015 and March 2015 (the final quarter of JFY 2014). Butter distributed in commerce over the same period was slightly lower than 2014 levels at 46,910 MT, reflecting lower overall household consumption of retail butter as well as lower consumption of desserts and confections. The sizeable imports, expanded production and lower consumption have led to the recovery of monthly ending butter stocks, which reached 20,000 MT by the end of August 2015, more than 20 percent higher than stocks held in August 2014.

Post estimates Japan's 2015 total butter imports to reach 15,000 - 16,000 MT, of which 12,800 MT (JFY 2015 current access volume as well as 'additional' imports) is scheduled to be imported by the end of October 2015, and most likely be distributed into commerce by the end of December 2015. A portion of the JFY 2014 'additional' import volume (2,700 MT out of 10,000 MT) was imported between January 2015 and March 2015, and was added to the 2015 total import estimate.

Given the firm commitment to improve domestic butter production and the production data available through August 2015, Post projects Japan's total 2015 butter production to increase by five percent from 2014 to around 64,000 MT. Compounded by substantially high butter imports, increased domestic output in 2015 should ensure that Japan has sufficient supplies of butter to meet the 2015 total annual demand projection of 75,000 MT. Post has set the 2015 consumption estimate at roughly the same level as 2014, despite the slightly lower overall demand observed through August 2015, as Japanese butter consumption traditionally picks up towards the end of the calendar year. Post estimates that 2015 year ending stocks will be approximately 20,000 MT, 33 percent higher than the beginning of 2014.

Note 2: Nearly all of the butter available on Japanese retail shelves is produced by Japanese dairy companies. There is cyclical and sharp spike in retail demand for butter ahead of the winter holidays, when home bakers and pastry shops greatly increase their production of butter-heavy confections and cakes, such as the iconic 'Christmas Cake.' As Japanese production of butter and NFDM fell sharply in 2014, supplies of Japanese butter were largely allocated towards higher volume customers, including major bakeries and processed food companies, and away from smaller bakeries and retail shelves causing noticeably empty retail butter shelves in some grocery stores in November and December. This perceived shortfall created consumer consternation and widespread media coverage, despite indications that the shortages were largely concentrated in urban population centers rather than being a national phenomenon. Official data show that stocks of butter on hand at the end of November and December were sufficient to cover approximately two months of utilization.

Note 3:

1) JFY 2015 Current Access Butter Import Results (2,800 MT) – New Zealand continued to dominate the current access tenders, capturing 50 percent of the tendered volume, while the Netherlands and Germany claimed most of the remaining volume at 26 and 21 percent respectively. Higher priced U.S. butter offers were unable to secure any of the current access butter volume in JFY 2015.

2) JFY 2015 'Additional' Butter Import Resulted (10,000 MT) – New Zealand remained dominant in the tendering of 'additional' imports in June 2015, securing 76 percent of the tendered volume, again followed by the Netherlands and Germany at 9 and 7 percent respectively.

NFDM Substantially higher NFDM imports through August 2015 amounted to 19,100 MT (mostly comprised of the JFY 2015 current access since April 2015 combined with a portion of the JFY 2014 additional imports made through March 2015, but excluding those made under specific TRQs for school lunch programs and for animal feed). ALIC data showed that the ingredient demand for NFDM through August 2015 (mostly for institutional uses by dairy companies, bakeries, dessert/confectionary companies, food processors, and soft drink manufacturers) was down modestly from the same period in 2014 to 92,229 MT. Similar to butter, the above supply and demand situation helped to restore NFDM stocks, which had been drawn down in 2014, to 50,000 MT by the end of August 2015.

Post estimates Japan's 2015 total NFDM imports to amount to 53,000 MT, comprised of imports for school lunch programs (approximately 1,900 – 2,000 MT), for animal feed (24,000 – 25,000 MT), the JFY 2015 current access and 'additional' import volumes (15,000 MT), and a portion of the JFY 2014 'additional' imports (8,700 MT out of 10,000 MT) that were released into commerce between January 2015 and March 2015. Post projects Japan's total 2015 NFDM production to grow by six percent from 2014 to around 127,000 MT. With higher import levels and expanded production, Post forecasts sufficient supply on hand in the Japanese market to meet total annual demand for NFDM in 2015, projected at 165,000 MT (140, 000 MT for edible use, down modestly from 2014; 25,000 for animal feed, up modestly from 2014). As demand has slackened and supply volumes have grown, 2015 year ending stocks are estimated to reach 50,000 MT, up 43 percent over 2014.

Note 4:

1) JFY 2015 Current Access NFDM Import Results (10,000 MT) – Australia and New Zealand were the most successful bidders, securing 33 and 23 percent respectively. EU countries, including Belgium (17 percent) and Germany (9 percent), claimed most of the rest of the volume. Higher priced U.S. offers were unable to secure a significant share of the current access tenders.

2) JFY 2015 Additional NFDM Import Results (5,000 MT) – As with the current access tenders, New Zealand and Australia again captured significant shares, at 32 and 17 percent respectively, with Belgium at 21 percent and the United States at 17 percent rounding out the major suppliers.

Cheese:

Competition Heats Up in Growing Japanese Market for Imported Cheese

Japan's total cheese imports are projected to rebound in 2015, growing by more than five percent on significantly reduced price offers from major suppliers, increased competitiveness of EU suppliers, and lower Japanese production levels. Facing comparatively higher price offers for Oceania natural cheese in 2014, Japanese buyers drove imports of U.S. cheeses up nearly 70 percent in 2014 to a record level of over 50,000 MT (see Note 5). However, as Oceania dairy prices have fallen sharply and the U.S. dollar remains relatively strong, imports from Australia and New Zealand have regained some lost market share, while imports from the United States have fallen by 23 percent through August 2015. However, the biggest change to the Japanese market for imported cheese in 2015 has been the rapid growth of EU supplies of natural cheese, which have helped to drive imports of EU origin cheeses up 50 percent through August 2015. Through August 2015, Japan's total cheese imports have grown eight percent to 164,832 MT, recovering from lower 2014 import levels as expanded imports from the EU and Oceania have more than offset lower import volumes from the United States.

The EU milk supply picture has changed dramatically since the abolishment of the EU milk quota system in April 2015. Average prices for cheese across the EU in 2015 have fallen from between 5 and 40 percent (compared with 2014 prices) as supplies have risen sharply in countries like Ireland, Germany and the Netherlands that have achieved greater economies of scale and modernized production. Coupled with the extension of Russian bans on imports of EU dairy products, the global supply picture has been dramatically altered by considerable volumes of exportable dairy supplies from the EU (see Note 6).

Large volumes of lower priced EU natural cheeses have already found their way to Japan and other Asian markets, displacing supplies from Oceania and North America. According to sources, the rapid growth in 2015 of imports from EU countries (including Denmark, the Netherlands, and Germany) has created increasingly tough price competition for U.S. suppliers, especially in the shredded cheese market segment. This competition has only grown tougher as Australian and New Zealand suppliers have reportedly lowered price offers to remain competitive in the Japanese market. The downward trend in price offers for EU origin cheeses has also affected Japanese imports for EU natural cheese for direct consumption, which have bounced back in 2015 after contracting in 2013 and 2014.

However, the Japanese duty free quota for imported natural cheeses to be blended with Japanese natural cheeses to manufacture processed cheese in Japan has provided new opportunities for U.S. suppliers. As imports from the United States have jumped more than 40 percent to 5,078 MT, imports from Australia and New Zealand have fallen 33 percent to 10,776 MT and 7 percent to 13,724 MT respectively. However, EU suppliers have begun to make inroads in this segment as well, as Japanese importers have been drawn to increasingly price competitive products from Germany, Denmark and Ireland.

Note 5: Japan's total cheese imports in 2014 were down moderately to 231,946 MT, largely due to reduced imports from Oceania and the EU, which were more than offset by impressive growth in imports from the United States. Total imports from major suppliers were as follows: Australia down 16 percent to 79,444 MT (34 percent market share) with average CIF price up eight percent to US $4,444 per MT; New Zealand down 13 percent to 55,459 MT (24 percent market share) with average CIF price up 18 percent to US $4,738 per MT; United States up 68 percent to 51,003 MT (22 percent market share) with average CIF price unchanged at US $4,797; and EU down four percent to 41,941 MT (18 percent share) with average CIF up 14 percent to US $8,142.

Oceania has historically supplied natural cheeses to be blended with domestic natural cheeses for the manufacture of processed cheese in Japan under the zero tariff quota, while the United States has primarily supplied natural cheese to be shredded upon importation. EU countries have historically dominated the market for natural cheeses for direct consumption.

Note 6: Initially enacted in August 2014 for a period of one year, Russian bans on imports of food and agricultural products from the EU, the United States, and others were extended through to August 2016.

As the market situation described above is forecast to continue through the end of 2015, Post projects Japan's total cheese consumption in 2015 to recover modestly, up three percent to 287,000 MT, which will be supplied by increased imports, projected up six percent to 245,000 MT, mostly from EU and Oceania. As described in the fluid milk section, Japan's total domestic cheese production is projected to fall by nine percent at 42,000 MT affected by reduced milk for factory use for cheese production in Hokkaido this year.

2016 Outlook:

Milk, Butter and NFDM:

2016 Milk Output Could Fall If Beef Demand Restricts Milk Cow Supply; Butter and NFDM Appear More Stable on Higher Year Beginning Stocks

Strong demand and high prices in the Japanese beef market could reverse the modest recovery in Japan's national milk production projected for 2015. With a limited supply of feeder calves (affecting Wagyu breeds as well as F-1 cross-breeds and Holstein steers) for cattle feeding operations, feed calf market prices have climbed to unprecedented highs in 2014 and 2015. As a result, dairy operations have expanded use of Wagyu semen to produce F-1 offspring, rather than Holsteins, further restricting the supply of replacement Holstein heifers for future dairy production. The Artificial Insemination Association of Japan (AIAJ) has recorded Wagyu semen utilization increases of three percentage points (to 20 percent) in Hokkaido and of nearly 50 percent (to over 40 percent) in the reset of Japan in 2015. Increased demand for Wagyu feeder calves is also driving increased transfer of purebred Wagyu embryos to impregnate Holtsein cows. Despite the considerably higher cost of embryo transfer relative to artificial insemination with Wagyu semen, the higher price for purebred Wagyu feeder calves (relative to the price for F-1 cross-breed feeder calves) can make embryo transfer a profitable enterprise.

As dairy operations face increasingly high prices for replacement heifers to sustain (let alone expand) current output, the rate of exit from the dairy industry (especially small and medium scale operations outside of Hokkaido) may accelerate, resulting in greater liquidation of the dairy cow herd. As a result, Post projects the total number of milk cows raised at the beginning of 2016 to be 7.45 million head, slightly less than at the beginning of 2015. Even if the per cow output in 2016 is sustained at 2015 levels, Post projects that Japan's total milk output in 2016 will be moderately lower at around 7.340 million MT, as marginally lower output in Hokkaido is compounded by modest declines in other milk producing regions.

Post projects that milk for fluid use will fall slightly to 3.90 million MT in 2016, in line with a slower, but still gradually declining trend in overall fluid use consumption. Post forecasts moderately higher yogurt and milk beverage consumption more than offset by lower regular milk and processed milk consumption. Post also projects that milk for factory use will also fall slightly to 3.385 million MT due to lower projected output in Hokkaido, which accounts for nearly 90 percent of the national factory use milk production.

At the projected volumes of total milk for factory use in 2016, Post anticipates that stiff competition will persist within Hokkaido for the allocation of milk across factory uses (like butter/NFDM, cream and cheese) as well as with shipments from Hokkaido to the rest of Japan to fill the supply deficit for fluid use milk. Accordingly, Post projects that Japan's production of butter and NFDM in 2016 will be down slightly down from 2015 projected levels to 63,000 MT and 125,000 MT respectively.

With the projected recovery of butter and NFDM stocks in 2015, Post does not procject tightness in the supply of either commodity heading into 2016. As such, ALIC would not face immediate pressure to import current access butter or NFDM in order to stabilize the supply and demand for either commodity. However, assuming that market demand for butter in 2016 remains at the 2015 level, Post estimates that Japan would still need to import between 10,000 and 12,000 MT of butter to maintain stock levels around 20,000 MT; imports of that magnitude would likely necessitate further 'additional' butter imports in 2016. Assuming that market demand for NFDM remains at roughly equal to 2015 levels, Post estimates total NFDM imports in 2016 of 30,000 MT (25,000 MT for animal feed; 2,000 MT for school lunch programs; plus approximately 2,000 MT by ALIC either through current access or 'additional' imports). Based on that estimate, 2016 year ending stocks of NFDM would fall to 40,000 MT from the estimated year beginning level of 50,000 MT.

Cheese 2016 Outlook:

Moderate Consumption and Import Growth Forecast in 2016

Post projects that Japanese cheese consumption in 2016 will sustain moderate growth, rising two percent to 292,000 MT. With Japanese cheese production forecast to be flat, supply growth will be driven by imports, which are projected to rise two percent to 250,000 MT. U.S. cheeses will continue to face stiff competition from Oceania and EU-origin products. The dynamics of EU dairy production in 2016 are forecast to be a determinative factor of imported cheese market share in Japan.