Japan’s Prime Minister Shinzo Abe is reportedly being pressured by the nation’s farmers to use one of his bargaining chips to exclude all or most of Japan’s dairy trade policies from negotiations on the Trans-Pacific Partnership Free Trade Agreement (TPP-FTA). Japan provides the majority of its total milk needs, fluid consumption and processed products, by protecting the market with high tariffs and tariff rate quotas and using production restrictions and subsidies. Major milk exporters in the TPP talks, the U.S., Australia and New Zealand, will be pushing hard for substantial additional market access.

Japan is a long way from actually entering the TPP negotiations. It has to talk to the 11 current participants and receive approval from each to join the talks. The U.S. has issues like autos that require some consultations first. Some participants have stated final approval may happen as early as April, but that seems too quick for the U.S. When Canada and Mexico joined the negotiations, the U.S. followed a provision of the now expired Trade Promotion Authority by giving Congress 90 days notice on entering into talks.

According to the U.S. Agricultural Attaché in Japan, the country has 20,000 dairy farms, about 0.8 million cows producing 16.7 billion pounds of milk per year, about 21,000 pounds per cow. For comparison, the U.S. has 9.2 million cows producing 200.0 billion pounds of milk per year, 21,700 pounds per cow. Fluid consumption accounts for 53.0 percent of production, processing 46.2 percent and feed use 0.8 percent. The Japan Dairy Council, a public service corporation, runs a ‘voluntary’ supply management program for fluid milk production that allocates output to prefecture associations who allocate volumes to local associations. A separate ‘voluntary’ quota system is used for manufacturing milk, except milk for cream and cheese which are covered by other programs. The purpose of the production quota programs is to restrict supply to increase market prices and make government subsidy payments directly to producers.

 

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The Japanese fluid fresh market is largely separate from the world market because fluid milk is not easily moved long distances. Most dairy product imports are subject to a tariff rate quota (TRQ), with bound tariff rates set by the Uruguay Round Agreement on Agriculture. Two large TRQs cover multiple products, including a 137,202 ton TRQ for the Agriculture and Livestock Industries Corporation, a state trading enterprise. In-quota tariff rates are zero to 35 percent with the highest rates for high sugar items. Some over-quota tariff rates are reasonable at 25 percent ad valorem equivalent, while others are over 100 percent. A number of smaller TRQs are specific to just one product type. Natural cheese for processing is subject to a TRQ, but has zero within-quota and over-quota tariffs. Cheeses, frozen yogurt and ice cream with no TRQs have tariffs of 20-30 percent.

Even with these TRQs and tariffs, imports are substantial. According to the Attaché estimates, about 13 percent of the butter consumed was imported in 2012, 18 percent of non-fat dried milk, and 82 percent of cheese. In 2011, the U.S. and New Zealand were the leaders in butter exports to Japan at 5,000 metric tons (MT) each, with the Netherlands third at 2000 MT. For cheese, Australia was the leading exporter at 90,100 MT, New Zealand at 56,300 MT, followed by the U.S. at 21,400 MT.

To ensure year round supplies of milk for fluid consumption, currently 53 percent of production, Japan would likely have to maintain at least 60 percent of its current production under any effort to provide greater access for imports. That would result in about 6.9 billion pounds of current production from 320,000 cows that would have to compete against imports priced at world markets with supplies not constrained by TRQs.