Japanese butter on the table in Pacific trade talks

Japan has been grappling with a severe butter shortage that critics say highlights a bigger problem with the country's protected agricultural sector, a key sticking point in high-profile trade talks this week in Hawaii.

The United States, Japan, and 10 other Pacific Rim countries are looking to finalise the most ambitious trade deal in decades, a vast free-trade bloc encompassing 40 percent of the world's economy.

But the proposed Trans-Pacific Partnership (TPP) has drawn the ire of Japan's politically powerful agriculture lobby and sparked public protests by farmers over fears it will mean an onslaught of cheaper foreign imports.

Free-trade backers counter that Japan's food growers have been living behind sky-high tariffs and other protectionist barriers for too long, creating an inefficient system that puts overpriced food on supermarket shelves.

The butter market, where domestic production has not been keeping up with demand and imports are tightly restricted, highlights a wider problem, they say.

The Japan Dairy Association has warned that butter demand will outstrip supply by more than 7,000 tons this year, prompting the government to resort to emergency imports to fill the gap.

Butter shortages last year provoked anguish for shoppers, especially in the run-up to the Christmas cake-baking season, with grocery stores nationwide forced to resort to rationing.
"It is tempting to dismiss this (latest) episode as an amusing footnote, but it highlights the broader failure of Japan's agricultural policy," says Marcel Thieliant from research firm Capital Economics.

"The command economy approach... prevents farmers from responding flexibly to swings in demand."

- 'Status quo spells demise' -

Japan has myriad regulations and high tariffs on farm products -- the levy on imported rice can reach an eye-watering 800 percent -- that have been a key sticking point in Tokyo's talks with Washington over the TPP.

The government is now considering cutting levies as Prime Minister Shinzo Abe looks to overhaul Japan's agricultural sector -- part of his wider plan to jumpstart the world's number three economy.

The move to open up the market for key products including beef and rice to foreign competition has already put him on a collision course with the country's powerful farm lobby.
"Trying to protect the Japanese farming sector with tariffs has not created a lucrative industry," says Toshihiro Nagahama, chief economist at Dai-Ichi Life Research Institute.

"Maintaining the status quo would only mean the eventual demise of the sector."

The push for liberalisation comes as Japan's agricultural sector is fighting a losing battle with demographics as more and more farmers retire -- the average age is 67 -- without any young people to replace them.

This is exacerbated by the fact that agricultural production is dominated by small-scale producers who rely on subsidies, while government regulations effectively shut out big firms.

Rice is another example of the problem, some say. Even though it is a revered staple, much of Japan's output comes from families, who grow the grain on small plots part-time while also working in other sectors.

- 'No easy solution' -

At the root of the butter problem is a wider dairy deficit that has seen farmers prioritising the raw material for sales of liquid milk.

Herds have been cut over recent decades as demand slimmed in line with a rapidly ageing population.

Japan has about 18,600 dairy farming households -- down 10,000 in the past decade -- and that could keep falling if Tokyo cuts tariffs, said Tetsuo Ishihara, managing director at the Japan Dairy Industry Association.

"With many producers retiring, the number of milk cows is falling. There is no easy solution to reverse the trend. Farmers' worries about TPP are making the situation worse."

Last year's butter imports -- 10,000 tons -- were just the latest government move to fill the void.

Dairy giant New Zealand, which is part of the trade talks, has reportedly pointed to Japan's butter shortage as an example of why trade in the sector needs to be liberalised.

While Japan's farmers nervously watch the talks -- also including Australia, Brunei, Canada, Chile, Malaysia, Mexico, Peru, Singapore, and Vietnam -- some see few other options for an inefficient sector.

"The TPP could help boost exports of quality Japanese farm products to foreign markets," said Nagahama at Dai-Ichi Life Research.

"The government can take preventive measures to stop causing catastrophic damage to farmers. But we don't have a choice except to make farming more competitive and not protect it.

"We have to make it a profit-generating industry."