Prices of butter in Japan exorbitant due to import controls

The gap is growing between the price of butter in Japan and its price internationally. While supplies of butter remain short in Japan, importing low-cost butter from overseas is complicated by the Japanese government's sharp curtailing of the volume of imports to protect the nation's relatively uncompetitive dairy farmers.

State-based trade

According to the Agriculture & Livestock Industries Corporation, a governmental organisation, the price of butter in Japan sold to large-scale buyers rose to 1,374 yen (S$15.50) per kilogram in June. This is in contrast with an international price of US$3.125 (S$4.40), making the domestic price 3.5 times the international price.

Among dairy products distributed in Japan, milk is nearly 100 per cent domestically produced as it is perishable and not suited to long-distance transport. Conversely, relatively nonperishable butter allows for the entry of foreign-made products, with which domestically produced butter cannot compete on price. The Japanese government is controlling import volume to protect domestic dairy farmers, by methods including the imposition of tariffs.

Among dairy products, the government is targeting in particular several products - including butter and skimmed milk powder - for "state-based trade," in which the government controls import volumes and price levels. Under agreement with the World Trade Organisation, the Agriculture & Livestock Industries Corporation imports a volume of dairy product equivalent to at least 137,000 tons of raw milk per year, with additional imports making up for shortfalls. In both cases, the tariff rate for butter is 35 per cent. The price at which the Agriculture & Livestock Industries Corporation sells to the private sector is even higher.

Private businesses are also able to import butter. In that case, in addition to a 29.8 per cent tariff applied against the price, a tariff of 985 yen per kilogram is imposed. As a result, the price level exceeds the wholesale price of domestically produced product, keeping the pressure off of that butter. For this reason, imports do not exceed several hundred tons per year.

Dairy product manufacturers prioritize milk production for fresh raw milk, ahead of production of products such as butter. As the number of persons engaged in dairy farming declines, the total volume of raw milk produced from dairy cows continues to decrease, leaving raw milk for use in butter scarce. With the government sharply controlling import volumes at the same time, supplies cannot easily be increased. This is the reason behind the recent "butter shortage" in Japan.

Despite the government importing an additional 10,000 tons for two years straight, the transport of product by ship means that time is required to address limited supplies.

Touched on in TPP

In negotiations for the Trans-Pacific Partnership agreement, the Japanese government positions dairy products as one of five key items for which tariffs are to be kept. This protection of dairy farmers stems from concerns over the ability to maintain stable supplies of milk, a perishable product not suited to import, should increased imports of low-cost butter impact Japan's dairy farmers.

The volume of raw milk produced by dairy cows decreases with the cows' physical stamina in the heat of summer, and increases in winter. Demand, however, increases in summer, especially for milk, and decreases in winter. For this reason, the winter season tends toward oversupply.

Butter and skimmed milk powder play a role as "adjustment valves" for supply-and-demand instability. Dairy product manufacturers address the season of oversupply, from winter to early spring, by increasing production of butter and other nonperishable dairy products. If pressure from low-cost imported products leaves manufacturers unable to produce butter and other products, responding to fluctuations in supply and demand would become difficult and business conditions for dairy farmers would become severe.

However, an increase in butter imports would have significant merits for consumers, including alleviation of shortages and lower retail prices. In TPP negotiations, New Zealand is currently requesting a significant increase in Japan's import volume, to the equivalent of 1.03 million tons of raw milk. The Japanese government is seeking to set a special TPP import framework of low tariffs for New Zealand and other countries, and is continuing negotiations.