Media Global Economy 2022.01.31
Past successful experience has become outdated
The article was originally posted on RONZA on January 5th, 2022
Several years ago, the shortage of butter was a big issue. At the time, agricultural experts claimed that the decrease in raw milk production was caused by the abandonment of dairy farming. This time, the demand for raw milk decreased on account of the COVID-19 pandemic, leading to concerns over the disposal of 5,000 tons of raw milk around the turn of the year. Prime Minister Kishida made an exceptional call asking people to “drink an extra cup of milk to prevent disposal of milk.” In just several years, raw milk has shifted from a shortage to a surplus. The shift between a shortage and a surplus has been repeated in raw milk. Because raw milk is an item for which it is difficult to adjust the supply and demand, haphazard policies have been taken from moment to moment.
Regarding the disposal of raw milk, some say that the leftover milk should be used to make butter or utilized in new uses such as milk fiber using milk’s casein component.
Contrary to these outside public opinions on dairy farm issues, the solution proposed by MAFF, who are supposed to be professionals, was the simple “NEW (milk) plus one project” asking households to “drink an extra cup or bottle of milk,” just as the prime minister had appealed to people.
It seems that the best MAFF could do to draw people’s attention was to make a word play of “nyu (from gyu-nyu meaning “milk” in Japanese)” as “NEW” in the policy title.
Officials of the responsible section at MAFF, who are regularly involved in dairy farm issues, are probably familiar with the actual conditions of dairy farming and the dairy industry as well as milk and dairy products. However, only a few MAFF officials have studied economics, and officials have limits in transcending the existing framework of systems and ideas. We cannot expect them to understand the essence of the current systems and policies and present a policy that transcends their limits.
From 1989, I was engaged in dairy farming and milk issues at MAFF for four years. During the period when a butter shortage was an issue, I published the book, The Inconvenient Truth about the Butter Shortage (Gentosha Shinsho, 2016), which was well received by a professor at a national university specializing in dairy issues saying that the book was an excellent textbook in understanding dairy farm systems and policies. I think the book included many facts that even MAFF officials did not know. Five years have passed since its publication, but the book is selling reasonably well. Based on the content of the book, I would like to present in this article a radical solution for the dairy farm issue of swinging from a shortage to a surplus.
At one time, there was a saying at MAFF that officials put in charge of the three items of rice, milk, and sugar were able to advance their career. Perhaps my career was not successful because I had not been in charge of sugar. Anyway, these three items were called the “Three Whites” on account of their color.
Although all three items/industries are strategically and politically complicated, milk (dairy farming) is the most difficult to handle. The reason is that in production there is a divide between dairy farmers of prefectures other than Hokkaido mainly producing milk for drinking and those of Hokkaido mainly producing manufacturing milk for products such as butter. Another reason lies in the product’s specificity that various products are not only made from raw milk but can also be transformed back to milk.
Especially the latter complicates solving the issue. Let me explain briefly.
The following shows some principal products made from raw milk.
It is not only that there is a variety of products. Milk is an interesting item. Fresh cream and skim milk separate from milk. Butter (fat) is made by stirring fresh cream, and powdered skim milk is made by drying skim milk (protein (casein, whey), sugar, and other non-fat solids). If water is added to butter and powdered skim milk, they transform back to milk (combined or recombined milk). There is no other agricultural product that has reversibility like milk and dairy products.
Products marked “milk” at supermarkets are made from raw milk, those marked “combined milk” are made from raw milk and dairy products only, and those marked “milk beverage” such as coffee milk are made by adding components other than raw milk and dairy products. But there is no difference in the composition between “milk” and “combined milk.”
In Japan, milk consumption increases in the summer when cows cannot produce enough milk owing to being affected by the summer heat, causing a shortage of milk. Conversely, when milk consumption is low in the winter, cows produce more milk, causing an oversupply of milk. As a result, measures have been taken to make butter and powdered skim milk from milk left over in the winter (surplus milk) and transform them back to milk (combined milk) in the summer. When raw milk production in prefectures other than Hokkaido was almost satisfying the demand for drinking milk, there were processing plants for surplus milk in various areas of the country.
In cases where there is an oversupply of butter and powdered skim milk, milk (combined milk) is overproduced, resulting in the lowering of not only the milk price but also producer milk price, which constitutes the dairy farmers’ net income. Moreover, as I will mention later, the price of raw milk for butter and powdered skim milk is lower than that for drinking milk, so the recombined milk can be supplied at a price lower than normal milk. In cases where there is not much difference in price between milk and recombined milk, the dairy producer can make higher profits by producing recombined milk.Milk can be transformed back to combined milk even after being separated into butter and powdered skim milk
Internationally, milk had not been traded in the past owing to its perishable nature being a natural trade barrier. The tariff on milk is 25 percent, which is significantly lower compared with the tariffs (ad valorem equivalent (AVE)) on butter and other dairy products that exceed 200 percent. But since dairy products are traded, if milk is made from imported butter and powdered skim milk, it is virtually possible to import milk, overcoming the natural trade barrier. Because imports of dairy products affect the domestic milk market, import restrictions have been adopted as tariffs and state trading. (According to MAFF, the AVE of butter is 360 percent and that of powdered skim milk 218 percent.)
Butter processed from leftover raw milk will eventually be transformed back to combined milk. This would not be a solution. Officials in charge at MAFF had no choice but to reduce the supply of raw milk or boost consumption of milk and dairy products as have been proposed this time.
Not only that, butter and powdered skim milk are produced from raw milk and supplied at the same time. But their demands vary as they are different products. The case of mass food poisoning in the Snow Brand Milk Products Company in June 2000 was caused by the toxin pollution of skim milk resulting from a power outage at Taiki Plant in Hokkaido. Children suffered food poisoning drinking Snow Brand Low-fat Milk (combined milk) made from this skim milk. Since then, demand for powdered skim milk has significantly decreased. Accordingly, if butter is made from a certain amount of raw milk, there will be a surplus of powdered skim milk.
If there is a surplus, powdered skim milk is used to produce combined milk, resulting in increased supply of overall milk, including combined milk. This would lead to lowering the price of raw milk for drinking that is crucial to dairy farmers of prefectures other than Hokkaido. MAFF and the dairy industry feared such a situation. To prevent it, they controlled the supply of raw milk, which meant that butter, which is produced at the same time as powdered skim milk, would be supplied only in lower amounts.
When butter was in short supply in Japan in 2014, it was in excess in the international market. If butter were freely traded by private companies, it could have been imported to make up for the shortage and there would have been no problem.
However, imports of butter and powdered skim milk are conducted centrally and exclusively through a state trade enterprise by MAFF (Agriculture & Livestock Industries Corporation). In fear of increased production of combined milk from excess imported butter, MAFF did not import sufficient butter. Dairy farm associations of prefectures other than Hokkaido producing raw milk mainly for drinking opposed the imports. This was the whole point behind the butter shortage in 2014. The cause of the shortage was not an abandonment of dairy farming as had been emphasized by agricultural economists and MAFF. MAFF has concealed the inconvenient truth.
This time, there is an overstock of powdered skim milk. On December 23, the government and the ruling parties just decided to subsidize approximately 3.6 billion yen as part of the expenses to divert 25,000 tons of accumulated private stock of powdered skim milk to cattle feed owing to decreased demand. If raw milk is put to making butter, the quantity of powdered skim milk will become even more excessive.
The proposal of new uses seems to fail to understand the nature of milk and dairy products. Since casein is made by eliminating fat and whey protein from milk, the use of casein would need to consider how to dispose of the butter and whey that are produced at the same time. If the current supply and demand of butter is balanced, the amount of butter increased using casein will have to be balanced by reducing production from raw milk. It would not be a solution to the surplus of milk. If the new use were promising, dairy companies would have already used milk for it. The fact that it has not been taken up means that there is a technological problem or the economic reason that the cost is too high to compete with other fibers.
What promoted dairy farming was the Act on Temporary Measures concerning Compensation Price for Producers of Milk for Manufacturing Use (the so-called “Deficiency Payment Act”) enacted in 1965. Until then, the price of raw milk was the same for all uses without distinction between drinking and dairy products. Since the price of dairy products was low, dairy producers would suffer losses if they made dairy products with raw milk at that price. To make up for these losses, producers tried to have the price of raw milk cut in order to make a profit selling drinking milk. As a result, there were always disagreements between dairy producers and dairy farmers, who were asked to cut the price of raw milk.
The Deficiency Payment Act is a system in which the government compensates (pays the deficiency) for the difference between the guaranteed price of raw milk that enables dairy farmers to reproduce butter, powdered skim milk, etc. (called manufacturing milk) and the payable price of dairy manufacturers.
Since dairy products such as butter and powdered skim milk are low in price unlike drinking milk, dairy producers have little money to pay for manufacturing milk used for these dairy products. As such, even large producers in Hokkaido cannot continue reproduction at such a price. Therefore, by adding the deficit amount to the milk money which dairy manufacturers can pay, the government guaranteed a certain amount of money to the dairy farmers in Hokkaido to enable reproduction of dairy farming. Since the money paid for milk is kept low, dairy manufacturers can also be profitable.
The price relation is [milk price for drinking milk > guaranteed price including deficiency payment to dairy farmers > milk money payable by dairy manufacturers]. If the price of milk used for drinking milk in prefectures other than Hokkaido is lower than the guaranteed price plus the cost of transporting milk from Hokkaido, the outflow of milk from Hokkaido to other prefectures can be prevented, stabilizing the milk price of the prefectures. Stated differently, the price of milk for drinking of prefectures other than Hokkaido is guaranteed up to the price of guaranteed price of manufacturing milk plus the cost of transporting milk from Hokkaido to the prefectures.
Under the Deficiency Payment Act, the price of raw milk changes depending on its use as drinking milk or manufacturing milk. The price paid for manufacturing milk by dairy manufacturers was kept low by the Deficiency Payment Act, and dairy manufacturers no longer suffered losses from manufacturing dairy products. Consequently, a price of raw milk higher than what had previously been the same for all uses could be paid for drinking milk. The deficiency payment, which was made only to manufacturing milk in Hokkaido, indirectly realized the guarantee of milk prices across the nation, including that for drinking milk. From this point on, the disputes over the milk price between dairy farmers and dairy manufacturers calmed down. The production of raw milk in Hokkaido grew to account for 56 percent of the total domestic production (2020).
The purpose behind the state trade system and Deficiency Payment Act for dairy products was to keep the price of raw milk for drinking milk high. However, MAFF, the dairy farmers and the dairy industry did not realize that this would become outdated.
The amount of raw milk production that had been about 8.5 million tons in the 1990s has decreased to 7.5 million tons, overtaken by strong demand for bottled green tea which has been recently developped. The consumption of bottled green tea, which was almost zero in the 1990s, grew to 2.5 million kiloliters by around 2007. If the price of drinking milk is kept high, its consumption cannot be expanded.
Previous systems aimed to block the domestic market of not only dairy products but also drinking milk from the international market, using tariffs and state trade. In other words, the government eliminated the possibility of exports from the domestic dairy policy. However, over time there has been a shift to trading milk, not dairy products. The dairy industry does not seem to have noticed it, but geographically distant countries, such as Germany, Poland, and New Zealand, are rapidly expanding their exports of milk to China.
(Source) Created by the author from the Food and Agriculture Organization Corporate Statistical Database (FAOSTAT)
In China, where the melamine incident (milk powder tainted with melamine) occurred, Japanese milk and dairy products are highly valued, as seen in a lot of Chinese travelers purchasing powdered milk for babies in Japan. Milk consumption and imports are increasing in China. Furthermore, the milk exported to China from Germany, France, and New Zealand is long-life milk. Japan is close to China and can export milk that is more delicious than long-life milk, which has a burnt smell.
Since more than thirty years ago, raw milk produced in Hokkaido (production amount increased from 3.6 million tons in 2000 to 4.16 million tons in 2020) has been transported by ship to other prefectures. Today, Hokkaido’s raw milk is supplied daily to the Kanto and Chukyo areas by large, high-speed ships that connect Hokkaido’s Kushiro Harbor and Ibaraki’s Hitachi Harbor in twenty hours. In 2020, 530,000 tons of raw milk was shipped. Separately from this, drinking milk packed in Hokkaido has also been shipped to other prefectures. The amount was 400,000 tons in 2020. Both amounts are a record high. In total, the amounts account for 22 percent of Hokkaido’s total raw milk production. If raw milk can be sent from Hokkaido to Kanto, Japan should be able to export raw milk and drinking milk to China and nearby countries. Japan’s dairy farming, including that of Hokkaido, should target Asian markets for supplying drinking milk.
The great benefit of this is that the adjustment of supply and demand can be made by exporting raw milk. If increased amounts of raw milk are produced as has happened this time, exports can be increased, and if lower amounts of raw milk are produced, exports can be decreased. Until today, the adjustment of supply and demand has been considered only in the domestic market. We should look towards the international market as a regulator of raw milk supply and demand.
When considering export of raw milk for drinking, there would be no need for Japan to go to the extent of producing butter and other dairy products at triple the international prices, using domestic raw milk that is at a higher price than that of New Zealand. With the expansion of exports, if the amount of manufacturing milk and products made thereof, such as butter and powdered skim milk, decreased, not only would the deficiency payment be reduced, but also there would be no need for high tariffs or a state trade system to protect butter and other dairy products. The burden borne by the Japanese people as taxpayers as well as consumers would be significantly eased. Butter could be imported freely from the international market at lower prices. There would be no more shortages of butter.
The difference in the price of milk depending on use, setting a low price for manufacturing milk and a high price for drinking milk, has caused a drop in demand for drinking milk. If Japan is to target the drinking milk markets in Asia, it not only has to prioritize the quality of production but also price competitiveness. Japan should abolish the difference in the price of milk depending on use and deficiency payment, and shift to a single milk price system as Australia has through reforms. If the price of drinking milk is lowered, the domestic demand for drinking milk that has currently been overtaken by green tea can be regained. Consumers will also receive the benefits of a lower milk price.
If dairy farmers cannot make profits, there are other measures that can be taken such as the introduction of single direct payments as in Europe and the United States. However, the average net income of dairy farmers exceeds 15 million yen. Dairy farmers importing corn and grass for feed from the United States cannot supply food in times of a food crisis. Moreover, they accumulate a massive amount of nitrogen generated by manure from cattle on to Japanese soil, placing a significant burden on the environment. This also applies to other livestock farming for meat and eggs. Japanese people must seriously discuss whether the protection of livestock is necessary.