Report Highlights: 

Japanese production of fluid milk is projected to fall again in 2014, though a modest recovery is anticipated in 2015. In 2014, Japan contracted significant additional volumes of imported butter and non-fat dry milk, more than doubling Japanese fiscal year 2014 current access commitments; U.S. suppliers were not price competitive. Imports of U.S. cheeses will set a new record in 2014, outstripping the 2013 record high by at least 30 percent.

Executive Summary: 

Japanese production of fluid milk is projected to fall again in 2014, though a modest recovery is anticipated in 2015. Dairy producers continue their steady exit from the industry without securing successors, resulting in fewer farms and lower fluid milk production. The Japanese dairy sector is diverting increasing volumes of milk to cream and cheese production at the expense of butter and non-fat dry milk (NFDM). This trend, coupled with reduced fluid milk production required the Government of Japan (GOJ) to conduct two rounds of additional imports of butter and NFDM (10,000 MT of each commodity) in addition to current access commitments in Japanese fiscal year (JFY) 2014. New Zealand was the primary beneficiary of these additional imports, capturing more than 70 percent of butter contracts and more than 60 percent of NFDM contracts. 

Imports of U.S. cheeses will set a new record in 2014 as price-competitive U.S. products ate into Oceania suppliers’ historically dominant position in filling the duty free tariff rate quota (TRQ) for natural cheese for blending. However, Russian import bans on European Union (EU) agricultural products have begun to push down global cheese prices, which could ultimately restore the status quo, bringing the meteoric rise in U.S. cheese imports back to Earth. 

2014 Situation Summary and Outlook 

Fluid Milk, Butter and NFDM: 

Fluid Milk Production to Decline Further in 2014 

Dairy production across Japan continued to face significant headwinds in 2014. The increasing age of farmers and the lack of successors to continue farming operations in the next generation (problems that are common across Japanese agriculture) were and will continue to be the most significant challenges for the dairy sector. The physical demands of dairying, low profitability relative to the size of required investment in facilities, equipment and machinery, as well as the increased input costs for feed, fuel and electricity were all contributing factors to the continued exit of dairy operators, especially small- and medium-sized dairy farms in 2014. Even in the core dairy production center of Hokkaido, where relatively larger scale operators produce over half of the national fluid milk output, dairy farm operators have been exiting out of production at an average rate of three percent per year in recent years. Elsewhere across Japan, where fluid milk production for drinking is fairly evenly dispersed, the average rate of exit has been five percent per year. 

At the beginning of calendar year 2014, there were a total of 18,600 dairy farms (down four percent from the previous year) raising a total of 1.395 million head of cows and heifers (nearly two percent lower from the previous year). In Hokkaido, the total number of milk cows at the beginning of 2014 was three percent lower from 2013, at 401,000 head, while the total number of milk cows across the rest of Japan was four percent lower. In the January – August period, national total fluid milk production fell by three percent to 4.956 million MT compared to 2013 (Hokkaido at 2.563 million MT and the rest of Japan at 2.393 million MT, both down three percent). Since the majority of fluid milk produced in Hokkaido is utilized for processing, this decrease has most acutely affected the production of processed dairy products. 

With no signs of improvement in Hokkaido’s fluid milk production for the rest of 2014, Post projects Japan’s 2014 national fluid milk production to be around 7.315 million MT (down by three percent from 2013), with milk for drinking at 3.915 million MT (down by two percent) and milk for processing at 3.350 million MT (down by four percent). 

Facing Supply Shortages, Japan Imports Butter and NFDM In Addition to Current Access 

Despite the GOJ’s increased direct subsidy payment for fluid milk for processing use for JFY 2014 (The Japanese Fiscal Year is from April through March. JFY 2014 spans April 1, 2014 through March 31, 2015), the trend of monthly output declines that has persisted since mid-2013 continues to constrain the supply of fluid milk available for processing. Within this tight supply environment, the improved profit margins for cream and cheese production have diverted significant supplies away from the production of butter and NFDM. Nationally, the volume of fluid milk used for cream production over the January – August period was up four percent (to 875,758 MT), primarily for confectionary use and for value-added chilled cup desserts sold at national convenience store chain outlets. Total volume of fluid milk for cheese production was also up four percent over the same period (to 334,723 MT), supported by the growing popularity of Japanese domestic-brand natural cheeses for direct consumption. Industry sources report that non-fat concentrated liquid milk (the primary by-product of cream production) has been gradually replacing NFDM in various types of dairy-based products, including yogurt, milk beverages, and premium desserts in recent years. 

Accordingly, domestic production of butter and NFDM fell substantially in the January – August period, with production volumes down 15 percent for both commodities as a direct result of the increased production of cream and cheese. Falling production of butter and NFDM outputs have led to a steady drawing down of stocks, pushing monthly average wholesale prices for each commodity upwards, with the most recent monthly prices for both commodities climbing six percent over 2013 levels. At the end of August, butter stocks were down 32 percent to 16,600 MT (roughly equivalent to 2.5 – 2.7 months of average consumption) and NFDM stocks were down 26 percent to 35,500 MT (roughly equivalent to 2.3 – 2.5 months of average consumption). 

In order to stabilize the domestic market supply and demand situation for butter and NFDM, the Agriculture Livestock Industry Corporation (ALIC), the state trading entity affiliated with the Ministry of Agriculture Forestry and Fisheries, allocated the majority of its JFY 2014 current access commitments to butter and NFDM, importing 3,000 MT and 9,178 MT respectively. However, early on in JFY2014, it became apparent that the current access volumes would not be sufficient to compensate for the declining production of both commodities. In response to steady demand for and flagging production of butter and NFDM, ALIC announced two additional importations of butter and NFDM on top of the JFY 2014 current access commitments: 7,000 MT of butter in May, and then 3,000 MT of butter and 10,000 MT of NFDM in September. 

Note 1: JFY 2014 Current Access Imports – The United States captured the lion’s share (42 percent) of JFY 2014 current access butter tenders, supplying 1,250 MT out of a total of 3,000 MT. ALIC’s JFY 2014 current access tendering results show that Australia provided 29 percent, the Netherlands 15 percent, and Germany 14 percent of the butter volume contracted under current access imports. New Zealand dominated the JFY 2014 current access NFDM tenders, supplying 44 percent of the volume contracted, with Australia supplying 23 percent and the United States 16 percent (1,430 MT). 

JFY 2014 Additional imports – The United States was not price competitive with Oceania or EU suppliers on either the 10,000 MT of butter or the 10,000 MT of NFDM already tendered by ALIC in JFY 2014. New Zealand supplied 66 percent of the 7,000 MT of additional butter tenders announced in May, while the Netherlands supplied 27 percent and the United States 0.4 percent (or 25 MT). New Zealand supplied 91 percent of the 3,000 MT of additional butter tenders announced in September, while the Netherlands supplied 7 percent; the United States did not win any contracts. New Zealand provided 64 percent of the additional 10,000 MT of NFDM announced in September, while Australia supplied 23 percent; the United States did not win any contracts. The majority of the additional import volumes announced in September and tendered in October will be delivered in the first quarter of 2015. 

As overall fluid milk supplies for processing use in Hokkaido are likely to remain tight for the remainder of 2014, Post is revising projections for Japan’s total 2014 butter consumption down slightly to 71,000 MT. With substantially lower domestic butter production (projected down 12 percent to 60,000 MT) and with butter imports projected to reach 11,000 MT (current access and additional imports combined) in 2014, ending stocks should be roughly the same as carry-in stocks were at the beginning of 2014 at around 18,000 MT. 

Post is also revising downward projections for Japan’s total 2014 NFDM demand to 165,000 MT, with human consumption down four percent at 140,000 MT and feed consumption (mostly imported) up 14 percent at 25,000 MT. As Japan’s domestic production of NFDM is projected to fall significantly to 120,000 MT (down 12 percent), total NFDM imports in 2014 are projected to reach 37,000 MT, the highest level in more than 10 years, with 2,000 MT under the school lunch TRQ, 25,000 MT under the feed TRQ, and nearly 10,000 MT under current access and additional imports. NFDM ending stocks are expected to fall by 20 percent from the year beginning level to around 32,000 MT, some of which will be replenished by the additional 10,000 MT of NFDM to be delivered before April 2015. 

Cheese: 

Imports of U.S. Cheeses Will Set a New Record High in 2014 

After several years of significant growth led to record highs in 2012, total Japanese cheese consumption and imports slowed in 2013 and actually began to decline in 2014. Japan’s 2013 total cheese import and consumption levels were only marginally higher than 2012 levels, as higher global market prices for cheese tempered growth. Continued high import prices have rendered unattainable Post’s previous outlook for 2014, which projected new record highs for both total consumption and total imports. Japan’s total cheese imports for the January – August period fell four percent compared to the same period in 2013, as CIF import prices rose by an average of 12 percent to $5,170 USD per MT. [January – August year-on-year import changes by country: Australia, down 19 percent; New Zealand, down 10 percent; United States, up 71 percent; France, unchanged; Italy, unchanged; Denmark, unchanged; Germany, down 27 percent; and the Netherlands, down 18 percent.] 

Contrary to its previous optimistic outlook for Japan’s 2014 cheese market, Post now projects total consumption in 2014 to decline by two percent to 280,000 MT, and total imports to decline by three percent to 230,000 MT. Within this relatively downbeat overall import projection for 2014, Post projects that imports of U.S. cheeses will reach approximately 45,000 MT in 2014, up 50 percent from the previous year to a new record high. Over the January – August period, imports of U.S. cheese have climbed more than 80 percent from 2013 levels to over 40,000 MT, eclipsing the 2013 record volume of 31,189 MT by nearly 30 percent. Industry sources have attributed this impressive growth in the first eight months of 2014 to a widening price disparity between the United States and other suppliers of natural cheeses for shredding, which are used for pizzas as well as for toppings on bakery/chilled/frozen dishes sold in retail, convenience, and food service outlets. 

Furthermore, high price offers from Australia and New Zealand (the two dominant suppliers for Japan’s duty-free TRQ for raw material natural cheese), helped to push up the production costs for Japanese processed cheese manufacturers, resulting in higher consumer prices for Japanese processed cheeses since Spring 2014 (see Note 2). While Australia and New Zealand suppliers remain dominant in this segment of the market, the current pricing situation has created new opportunities for U.S. suppliers to make substantial inroads as a supplier under the duty-free TRQ. Imports from the United States under this TRQ were up 93 percent to 3,571 MT for the January – August period, while imports from Australia were down seven percent to 15,980 MT, and imports from New Zealand were up four percent at 14,707 MT. 

Note 2: For JFY 2014, Japan allocated 65,000 MT to the raw material natural cheese TRQ, which requires that imported natural cheeses are blended with domestic natural cheese to manufacture domestic processed cheese. This TRQ carries an in-quota duty of zero percent, compared with an average ad valorem duty of 20 – 29 percent for natural cheese for direct consumption. 

Broadly higher price offers from EU suppliers (Germany up 22 percent, the Netherlands up 19 percent, Denmark up 14 percent, Italy up 4 percent, and France down 1 percent) have been the primary driver behind a substantial contraction of Japan’s imports of European natural cheese for direct consumption, primarily impacting the retail as well as hotel and restaurant markets. Some importers and distributors have reportedly reduced portions to avoid retail price increases. 

2015 Outlook: 

Fluid Milk, Butter and NFDM: 

There are signs of a tentative recovery for Hokkaido fluid milk production in 2015. One national dairy industry association expects slightly more milk cows (including first-bred heifers), increased availability of good quality, locally grown forage and feed crops, and continued support from central and local governments as well as local dairy cooperatives to help keep dairy farmers in business through direct and indirect subsidies (see Note 3). 

Note 3: MAFF is encouraging farmers to retain milking cows for a longer period of time, increasing from the current practice of 3-4 years to an average of 5-6 years. To help the national dairy herd increase fluid milk output, some local governments and dairy cooperatives have reportedly begun providing farmers with financial incentives and additional subsidies for the acquisition of cows, first-bred heifers, and automated equipment, as well as helping to defray increased feed costs. 

Assuming a modest recovery in Hokkaido’s output and assuming that the national total number of milk cows at the beginning of 2015 is sustained at the 2014 level (around 775,000 head), Post projects that Japan’s total fluid milk output in 2015 will be roughly flat at around 7.320 million MT, as improvement in Hokkaido is offset by moderate declines in other milk producing regions. Post projects that 2015 fluid milk utilization for drinking will fall slightly to 3.88 million MT, in line with a gradual declining trend in drinking milk consumption. Post projects that fluid milk utilization for processing will rise slightly to 3.39 million MT, supported by anticipated output recovery in Hokkaido. 

As described in the 2014 Situation and Summary Section, ALIC will import an additional 3,000 MT of butter and 10,000 MT of NFDM in early 2015 on top of the current access commitments for JFY 2014. If these volumes are sufficient to replenish depleted carry-in stocks for each commodity, and if Hokkaido’s fluid milk output recovery is realized in 2015, then the tight supply situation for fluid milk for processing could be alleviated. Under those conditions, Post projects that Japan’s 2015 domestic butter and NFDM production will rise to 65,000 MT and 130,000 MT respectively. 

At those production levels, Post anticipates that total imports of butter will reach 8,000 MT (comprised of JFY 2015 current access volume in addition to the 3,000 MT of additional butter imports announced in September 2014 and scheduled to arrive in the first quarter of calendar year 2015) and total imports of NFDM will reach 42,000 MT (comprised of JFY 2015 current access volume, the 10,000 MT of additional NFDM imports announced in September 2014 and scheduled to arrive in the first quarter of calendar year 2015, as well as the TRQs for the school lunch program (2,000 MT, projected unchanged) and animal feed (25,000 MT, also projected unchanged)). At the projected levels of total butter and NFDM supply for 2015 (including both domestic production and imports), Post does not currently forecast additional imports above the JFY 2015 current access volumes, which are expected to be allocated primarily to butter and NFDM. 

Cheese: 

According to industry sources, Russia’s August 2014 imposition of one-year food import bans (against the EU, Norway, the United States, Canada, and Australia, among others) marked a signal development in the global market for natural cheese, alleviating price pressures that had been building throughout 2014. Inclusion of EU cheeses in the Russian import bans has resulted in a temporary global supply surplus of natural cheese, easing price pressures for both EU- and Oceania-sourced products. Factoring in the improved forecasts for Japanese fluid milk output and cheese production in 2015, industry sources indicate that Japanese imports of EU and Oceania cheeses are likely to begin to recover in 2015, if not in the fourth quarter of 2014. Under those conditions, Post anticipates that imports of U.S. cheeses are likely to face stronger competition in 2015, which may limit the prospects for continued expansion into the Japanese market. 

In addition, the actual medium- and long-term effects of the April 2014 Japanese consumption tax increase (from five percent to eight percent) on Japanese cheese consumption have not yet been fully analyzed. Judging from the household cheese consumption data for the January – August period, which showed relatively flat consumption despite increased prices, demand growth for cheese in Japan appears fairly solid. 

Post projects Japan’s total cheese import and consumption in 2015 to recover moderately over 2014 levels, reaching 235,000 MT and 285,000 MT respectively