Why Does Japan Have Butter Shortages?

Emergency Imports Again This Year

“Due to shortages, sales of butter are limited to one item per customer.” From spring until summer this year, signs like this were posted in the dairy sections of supermarkets and food stores around Japan. In fact, butter shortage notices have been a recurring sight for the past several years. This year it was particularly striking to see the number of stores that were completely out of butter and had shelves loaded with margarine instead.

Butter shortages have been prominent since 2008. In May 2015, the Ministry of Agriculture, Forestry, and Fisheries, foreseeing a shortfall of 7,000 tons, announced emergency measures to import 10,000 tons of butter by October, in advance of the Christmas-season spike in demand. Last year also required two rounds of emergency imports totaling 10,000 tons.

Annual butter consumption in Japan is 70,000–80,000 tons, of which around 10,000 tons is imported. Due to punitive tariffs, however, very little is imported by private companies. MAFF oversees butter and powdered skim milk supply and demand with the aim of protecting dairy farmers. But it does not import butter itself; the emergency imports are handled exclusively by an incorporated administrative agency called the Agriculture and Livestock Industries Corporation.

It took a while for the imports to produce results this year. Store shelves did not have ordinary supplies of butter on display until early autumn. And prices are 5%–6% higher than last year, at around ¥430 for 200 grams. Consumers are becoming increasingly unhappy with a situation where a staple like butter is not cheaply and readily available.

Most Japanese Butter from Hokkaidō

Why do these butter shortages keep recurring? To examine this issue, let us first look at the systems for production and distribution of milk and other dairy products.

To produce butter, raw milk from dairy cows is separated into skim milk and cream in a centrifuge, and the cream is pasteurized, churned, and kneaded into butter. It requires more than four liters of milk to make one 200-gram pack of butter. The skim milk is dehydrated and turned into powder.

Agricultural cooperatives and other designated groups in 10 regions around Japan collect the raw milk produced by dairy farmers on a unified basis and then sell it to multiple dairy industry companies, such as Meiji and Megmilk Snow Brand. The milk-collecting groups for each region are designated by the authorities at the national and prefectural levels under the 1966 Act on Temporary Measures Concerning Compensation Price for Producers of Milk for Manufacturing Use; it is based on this designation that they are authorized to trade in raw milk.

These groups hold discussions with the dairy industry to negotiate the content of annual contracts setting the prices of milk, which vary depending on whether it is to be sold to consumers fresh or made into dairy products like cheese and butter. Dairy farmers can also negotiate directly with dairy industry firms, but this means forgoing government subsidies and other assistance, so only 3% of producers opt to do so.

According to MAFF statistics on transactions by the designated groups, in July 2015 some 132,000 tons of raw milk was due to be made into butter and powdered skim milk. Nearly 90% of this milk—around 115,000 tons—was produced in Japan’s northernmost prefecture of Hokkaidō. By contrast, of the milk to be sold fresh to consumers, only a little over 20% of the total of 280,000 tons—around 65,000 tons—was produced in Hokkaidō, with the rest coming from other prefectures.

For nearly 50 years since the passing of the 1966 act, the national government has sought to maintain stable supplies of milk and other dairy products by managing production and distribution through the designated groups. For this purpose it has held to a policy of having distant Hokkaidō supply processed dairy products to Tokyo and other high-consumption urban areas around the country, while nearby prefectures provide these areas with fresh milk, which has a shorter shelf life.

Butter Given Lowest Priority

Milk to be used for making dairy products is about 30%–40% cheaper than that to be sold fresh. In Hokkaidō, productivity is high at large-scale dairy farms, bringing costs down, and there is the chance that overproduction would lead to an inflow of fresh milk into the metropolitan areas of Tokyo, Osaka, and Nagoya, squeezing out nearby producers. Under the 1966 act, the government has regulated supply by paying subsidies through the designated groups to Hokkaidō producers of milk for dairy products. The aim is to prevent a collapse in prices for both varieties of milk.

The total annual supply for fresh milk and dairy products combined is around 12 million tons (raw milk equivalent), of which 8 million tons is produced domestically, mainly to be sold fresh, and 4 million is imported, mainly in the form of dairy products.

Imports consist largely of dairy products for which restrictions have been eased, such as cheese and ice cream. These come mainly from Australia, New Zealand, Europe, and the United States. The imports include the “current access” volumes to which Japan agreed in the 1993 Uruguay Round of negotiations under the General Agreement on Tariffs and Trade, though the amounts in question are small.

Unlike other agricultural products, raw milk is produced on a daily basis and quickly goes off. To prevent waste, fresh milk production receives priority in the allocation of the current supply of raw milk, followed by such products as fresh cream and cheese. Demand for butter is relatively low compared with milk. As it can be kept for longer, when the volume of raw milk production is high, butter is produced to be stored and then distributed later when milk production declines. As it is given the lowest priority, however, butter production is easily affected by fluctuations in the supply of raw milk.

Last year, MAFF decided on emergency imports of butter based on the previous year’s experience. The intense heat of the summer of 2013 had caused domestic raw milk production to fall, resulting in shortages and making emergency imports necessary. The ministry reached a similar decision this year, taking into account the possibility of another blazing summer.

Dairy Farming Decline

Over the long term, raw milk production is declining. Increased scale and enhanced productivity led to a steady increase of milk production in the decades following World War II. But production volume peaked at 8.66 million tons in fiscal 1996 (April 1996 to March 1997) and had fallen to 7.33 million tons as of fiscal 2014. Consumption has also dropped over the past decade, due in part to the low birthrate and the aging of the population.

As of February 1, 2015, the number of dairy farmers was down 5% from a year earlier to 17,700, according to MAFF figures; this is around two-thirds the total of nearly 28,000 a decade ago. The drop is most pronounced in the small-scale operations of prefectures other than Hokkaidō. Some dairy farmers are attempting to scale up to achieve greater productivity, but they face soaring costs for personnel, power, and imported feed. Farmers have been losing hope in the dairy business, and there is a serious shortage of successors willing to take over existing dairy farms.

J-Milk, the Japan Dairy Association, is a group consisting of representatives from the dairy industry and agricultural cooperatives. J-Milk publishes regular estimates for future raw milk, fresh milk, and dairy product demand. Shimomura Yoshikazu, a senior member of the group’s production and distribution group, says that the industry changed dramatically after the global economic crisis hit Japan in 2008.

“At the same time that raw milk production has fallen, consumers have been drinking less fresh milk and buying more products using fresh cream, cheese, and butter. Although they face seasonal fluctuations in milking periods and yields, dairy farmers are always working at milking their cows. But production of butter for sale to consumers comes last, and so it ends up being impacted [by declines in the supply of raw milk]. It’s a structural problem.”

TPP a Game Changer?

From late July this year, various media reported that the Japanese government was proposing the adoption of a low-tariff quota for priority imports of butter. The proposal, made as talks on the Trans-Pacific Partnership trade pact were in their final stage, would allow increased butter imports from countries like New Zealand and Australia, which have been pushing Japan to open up its dairy market. So butter is again in the spotlight. But can we hope for trade liberalization under the TPP to end the chronic shortages in Japan’s butter supply?

Honma Masayoshi, a professor at the University of Tokyo specializing in agricultural and resource economics, insists on the need for liberalization. “The traditional planned-economy approach is no longer tenable,” he declares. “We have reached a situation [for milk] similar to that for rice back in 1995, when the staple food control system was abolished. Under the current setup, dairy farmers have to deliver all of their raw milk to designated groups and pay them hefty fees, just as used to be the case for rice. Under this sort of setup, the market mechanism doesn’t function. We should rely on imports for butter and powdered skim milk, and domestic producers should aim to increase their profitability by playing to their strengths in quality and safety of fresh milk.”

Honma believes that the government should create a setup that will give rein to dairy farmers’ individuality and ambition, such as by freeing them to negotiate directly with dairy product makers without going through the designated groups—a practice that, as noted above, the current system discourages. He also hopes that producers will set their sights on exports, emulating the success of the meat industry in establishing wagyū, or Japanese beef, as an international brand.

More and More Dairy Farmers Quitting

By contrast, Uchihashi Masatoshi—director general of the Japan Dairy Council, which represents producers’ groups from around the country—expresses the fear that even if milk prices rise, they will not be able to cover the sharp increases in fuel and feed costs resulting from the yen’s depreciation.

“We’ve fallen into a state of affairs where even those who work hard can’t make a profit. In Japan, the government provides price supports for milk, but it doesn’t offer the direct income support for dairy farmers that’s provided in Europe and North America. More and more people are pessimistic about the intensified competition the TPP will bring and are quitting dairy farming. Without sufficient strength in the production sector, it’s impossible to guarantee a secure supply of butter. And even if imports are liberalized, there will be safety concerns, and it may not be possible to ensure a stable supply. There will also be an increased likelihood of sharp price fluctuations.”

An official from MAFF’s milk and dairy products division explains that the butter trade is nationally controlled and there are no plans to change this.

“For dairy farmers, butter production serves as a means of regulating supply and demand. If a lot of foreign butter is imported, they are liable to cut their production of raw milk to a bare minimum so as to avoid ending up with extra milk that they can only throw away. This might even lead to shortages of fresh milk, for which demand is much higher than for butter. But it would be a bad thing for butter shortages to become chronic, so we will come up with precise projections of demand more quickly.”

At a Turning Point

It is impossible to predict exactly how the TPP will affect dairy products. That said, as globalization progresses, the trend toward trade liberalization continues to pick up speed—not just for butter, but for all kinds of products. Yasaka Masamitsu is an associate professor at the University of Tokyo well versed in dairy policy. He says that if Japan moves from the present setup, in which quantities are strictly managed and the market does not decide prices, to liberalized butter imports, a crash in prices for other dairy products and fresh milk is unavoidable, along with the chance that dairy farmers will suffer further blows. “New incentives are needed to shore up the market,” he stresses.

“Until the 1980s, Japanese dairy farmers succeeded in increasing their scale, and finding successors had not emerged as a problem. Since the 1990s, though, the industry has been in decline. The government introduced a raft of incentives to attract new people to agriculture, but they didn’t produce the desired results. Still, many young people are interested in becoming dairy farmers. What’s needed are new incentives, such as for the dairy industry to establish a fund with the help of the government that would help new farmers make the needed investments to get started, which are greater than those required for other types of agriculture.”

In July, MAFF launched an investigative commission to consider how raw milk transactions should be conducted. After discussions with representatives of producers and the dairy industry on such topics as the introduction of a tender system, the commission is to announce its recommendations by the end of this year. Given the ongoing talk of butter shortages, the protected system that has endured for half a century appears to be at a turning point. Will the government be able to successfully tackle the problem of high costs and stem the drift away from dairy farming while ensuring an affordable, high-quality supply of dairy products? Consumers will be monitoring the progress of reform efforts by the government, farmers, and the dairy industry.