Dairy UK – Written Evidence (JTN0013)

Dairy UK

1. Dairy UK is a processor-led organisation representing farmer-owned co-ops and private dairy companies producing safe, nutritious and sustainable dairy foods. Our overarching mission is to promote the consumption of great tasting British dairy products at home and on the international market.

2. Further information can be found at www.dairyuk.org

Defensive Interests

3. The Japanese industry is not a competitive challenge to the UK dairy sector. Japan does not have a structural surplus of milk production that requires exporting. Japanese dairy exports are low to negligible in volume. Instead Japan is not self-sufficient in milk which results in significant imports, particularly for cheese. There is also a requirement to import butter.

                                                                        Source: International Dairy Federation

4. The absence of Japanese exports is also due to;

1. High raw material costs.  Japan has very high domestic prices with raw milk prices roughly at 65 pence per litre (compared to 28ppl in the UK). This makes Japanese exports uncompetitive in price sensitive dairy markets.

2. The Japanese industry operates a system of milk price pooling which standardises the prices paid to groups of farmers. This means that:
• There is no incentive/mechanism for farmers to meet any foreign export requirements.

• The system creates issues of traceability, which could conflict with Export Health Certification requirements for foreign markets.

3. Processors would have the challenge of meeting export standards such as the UK’s BRC standards.

5. Longer term this position is unlikely to change. Japanese milk production is currently relatively stable at around 7.3 million tonnes. There is considerable concern in Japan about the age profile of Japanese farmers and the viability of the current system of industry organisation. Articles suggest the average age of a dairy farmer ranges around 65-70 and the country is struggling to recruit the next generation.

Offensive Interests

6. The Japanese dairy market does present significant opportunities in the long-term but major challenges would have to be surmounted to realise them.

7. In Japan, dairy is a staple across all ages. Price, taste and health & safety are the main factors Japanese consumers look for, usually in that order.

8. Japanese food culture is becoming more international with consumers becoming interested in foreign products resulting in more foreign restaurants opening.

9. Whilst cheese consumption in Japan is not as high as Europe, it has been rising quite strongly over a number of years. Butter has not performed as well but it has been increasing over the past couple of years.

10.         To meet domestic demand Japan imports a significant volume of cheese with volumes and value rising over the past five years.

Japanese Imports of Cheese 2015 - 2019

11.         Almost all exporting countries have recorded an increase in cheese volumes to Japan. By market share the portion held by the EU has risen whilst the share held by New Zealand has fallen.

Japanese Imports of Butter 2015 -2019

12.         Japanese imports of butter are less significant but the trend, whilst erratic, is still positive.

13.         Whilst New Zealand and Australia are currently the main exporters to Japan, they may have some challenges in servicing growth in the Japanese market in the future which could create opportunities for other exporters. New Zealand is focusing more on environmental concerns which has been restricting the growth potential of milk production in the country. Australia has more severe environmental concerns because of repeated droughts, which has seen milk production decline.

14.         For both cheese and butter UK export volumes are small.

15.         Japanese import tariffs are significant with dairy tariffs at 35%. However, because Japanese internal prices are so high these tariffs are not prohibitive. It is possible to export UK product at full tariff and to still be price competitive on the Japanese market. However, Australia and New Zealand benefit from reduced tariffs in Tariff Rate Quotas under diverse trade agreements which give them improved margins and/or greater price competitiveness.

16.         A report titled: An Analysis of the Current Market and its Opportunities for European SMEs, published in 2018, looked at the Japanese dairy market and the opportunities for the EU. The report identified barriers to getting into the market along with recommendations to EU businesses and policy makers which are indicative of the challenges facing UK exporters.

17.         In summary the major challenges to expanding UK market share are;

• Finding routes to market: establishing and expanding a market position in Japan requires the creation of stable and invested collaborative partnerships with companies that have the requisite expertise. These take time to initiate and develop.

The distribution network in Japan is very rigid.  Japanese distribution channels to market have been secured over many years and breaking down these challenges is difficult.

• Educating Japanese consumers to appreciate UK dairy products: a very long term approach to education of Japanese society on the use and experience of British Dairy produce is needed.  Paramount to the success of tasting presentations is to have British representatives from UK dairy companies/sector champions in attendance to underpin the validity of the product offered.  Support from GB Government for SME’s would be useful here.

• Meeting expectations on packaging: whilst some pre-packaged cheese products do find their way onto the Japanese retail market buyers and consumers are nervous of imported pre-packaged product.  This may require investment in packing facilities in Japan to overcome this cultural barrier.

• Trade shows: any British attendance at Japanese trade shows must extend to a minimum of at least three years of attendance to showcase commitment to the market.  It is contended that an appropriate planning time frame is a decade.

• Marketing expertise: there are few organisations that have the accumulated experience and insight to sustain effective marketing campaigns in Japan.
   
• Cultural awareness: trading with Japan is unique. This requires investment in training staff into the nuances of trading with Japan.

• Standards: the Japanese have stringent rules and regulations for food imports. Attention to detail is paramount.  An awareness of the influence of the US FDA on the Japanese regulatory framework is necessary too.

18.         Overall, an FTA with Japan would beneficial to the UK dairy sector. Japan is unquestionably a rich market and premium cheese might be an opportunity, but it is difficult to define the prize for this sector given the need to educate Japanese consumers into appreciating British cheeses. There are probably much bigger opportunities in food ingredients for those companies that are willing to make a major investment to secure a position. Overall, whilst in the short-term there may be more immediately commercially beneficial opportunities elsewhere, in the longer term, the potential of the market opportunities created by an FTA could be significant.

27 August 2020