I '-ional Agricultural Trade and Policy Center
DERIVED DEMAND FOR FRESH CHEESE PRODUCTS
IMPORTED INTO JAPAN
Andreas P. Christou, Richard L. Kilmer, James A. Stearns, Shiferaw T. Feleke,
& Jiaoju Ge
PBTC 05-04 September 2005
POLICY BRIEF SERIES
Institute of Food and Agricultural Sciences
INTERNATIONAL AGRICULTURAL TRADE AND POLICY CENTER
THE INTERNATIONAL AGRICULTURAL TRADE AND POLICY CENTER
The International Agricultural Trade and Policy Center (IATPC) was established in 1990
in the Institute of Food and Agriculture Sciences (IFAS) at the University of Florida
(UF). The mission of the Center is to conduct a multi-disciplinary research, education and
outreach program with a major focus on issues that influence competitiveness of specialty
crop agriculture in support of consumers, industry, resource owners and policy makers.
The Center facilitates collaborative research, education and outreach programs across
colleges of the university, with other universities and with state, national and
international organizations. The Center's objectives are to:
* Serve as the University-wide focal point for research on international trade,
domestic and foreign legal and policy issues influencing specialty crop agriculture.
* Support initiatives that enable a better understanding of state, U.S. and international
policy issues impacting the competitiveness of specialty crops locally, nationally,
* Serve as a nation-wide resource for research on public policy issues concerning
* Disseminate research results to, and interact with, policymakers; research, business,
industry, and resource groups; and state, federal, and international agencies to
facilitate the policy debate on specialty crop issues.
Derived Demand for Fresh Cheese Products Imported into Japan
Andreas P. Christou, Richard L. Kilmer, James A. Sterns, Shiferaw T. Feleke and
The objective of this article is to estimate the derived demand for imported
fresh cheese products into Japan when fresh cheese import data are disaggregated by
source country of production. We provide empirical measures of the sensitivity of
demand to changes in total imports, own-price, and cross-prices among exporting
countries for fresh cheese. Japan's derived demand for U.S. fresh cheese products is
perfectly inelastic. Thus, the import demand competition among importing countries
should be based upon differences in product characteristics.
Changes in domestic and international policies will have a major effect on the
international cheese market. Specifically, U.S. dairy price supports may be phased out
in the future which may reduce milk costs for U.S. dairy products. This will cause U.S.
cheese products to become more competitive worldwide. As a result of the General
Agreement on Tariffs and Trade (GATT), which ended in 1997 but is still applied by
the WTO since the new act is still in the process of negotiation, world agricultural
1 Andreas Christou is a former graduate student in the Food and Resource Economics
Department at the University of Florida. Richard L. Kilmer is a professor in the Food and
Resource Economics Department at the University of Florida and a member of the International
Agricultural Trade and Policy Center (IATPC) at the University of Florida. James A. Stems is an
assistant professor and Shiferaw Feleke and Jiaoju Ge are graduate students in the Food and
Resource Economics Department at the University of Florida.
export subsidies will be reduced by 21% and the budget expenditures for export
subsidies will be reduced by 36%. Since an export subsidy is a payment by a
government to their exporters, this allows the exporters to sell their commodity to
another country at a reduced price. If a government reduces it's subsidies to its
exporters, the exporters must increase the price they charge importers for the
exporters' commodity. Because the subsidizing country's exporters must charge a
higher price in order to cover expenses, their exports are reduced. At the same time,
exporters from other countries will experience an increase in their exports as they are
more price competitive with the previously subsidized exporters.
The export subsidy reduction will have a major effect on the European Union
(E.U.) but a small effect on the U.S. In 2001, the E.U. was both the largest producer
(21.3%) and the largest consumer (21%) of cow's milk in the world, compared to
13.1% and 12% for the U.S. (CEC). The E.U. provides more than $1 billion in dairy
export subsidies which is more than 100 times what the U.S. spends on export
subsidies (NMPF). From 2000 through 2002, U.S. dairy exports that were
unsubsidized represented 81, 86, and 84 percent of total U.S. dairy exports (NMPF).
The reduction in export subsidies by other countries will help the U.S. be more
competitive in the international cheese market and increase market share.
The United States Dairy Export Council (USDEC) has identified Japan as one
of the countries that will increase its share of world imports of dairy products in the
future. Even though cheese consumption in Japan is low, the cheese market shows
room for expansion and potential in the future.
The objective of this study is to estimate the derived demand for imported
fresh cheese into Japan when cheese import data are disaggregated by source country
of production and to provide empirical estimates of the sensitivity of fresh cheese
demand to changes in total imports, own price, and cross prices among exporting
Background of U.S. and Japan fresh cheese market
The quantity of U.S. fresh cheese exports ranged from 472 metric tons in 1991
to 8,034 metric tons in 2003 (Table 1). Fresh cheese exports increased an average of
31.2% per year which is higher than the average annual rate of 12.5% for all cheeses
exported by the U.S. However, the percentage change per year in fresh cheese exports
is variable. Furthermore, the fresh cheese share of total U.S. cheese exports increased
from 3.4 percent in 1991 to 15 percent in 2003 (Table 1).
Table 1. U.S. Fresh Cheese Exports, 1991-2003.
U.S. Cheese Exports (Metric Tons)
Year Percent Percent Percent
Fresh Cheese Change All Cheese Change Share
1991 472 13,856 3.4
1992 364 -22.8 17,467 26.1 2.1
1993 677 85.7 18,521 6.0 3.7
1994 1,024 51.4 24,761 33.7 4.1
1995 1,487 45.2 31,990 29.2 4.6
1996 1,994 34.1 35,845 12.1 5.6
1997 2,178 9.2 40,156 12.0 5.4
1998 2,095 -3.8 40,591 1.1 5.2
1999 3,253 55.3 43,120 6.2 7.5
2000 3,628 11.5 49,865 15.6 7.3
2001 6,717 85.2 53,958 8.2 12.4
2002 5,917 -11.9 55,620 3.1 10.6
2003 8,034 35.8 53,700 -3.5 15.0
Total 37,839 ~ 479,449 7.9
Average 2,911 31.2 36,881 12.5
Source: United Nations COMTRADE Databases, 2004
Over the same time period, Japan's fresh cheese imports from the U.S. were
also variable. The average annual rate increase was 68.3% (Table 2), more than twice
the change in U.S. exports of fresh cheese (31.2%). The 68.3% is inflated due to the
large percentage increases in 1992, 1993, and 1994. Furthermore, U.S. fresh cheese
imports to Japan peaked in 2001 at 2,360 metric tons and continued to drop in 2002
and 2003. The U.S. share of fresh cheese imports into Japan peaked at 4.8% in 1996
and has trended downward through 2003 with the trend being reversed in 2000 and
2001. This suggests that U.S. fresh cheese exports to Japan have the potential to
increase if the cheese industry finds an effective marketing strategy.
The differential factor allocation model is an input derived demand model (i.e.,
not consumer demand). The derived demand model is determined from the
minimization of the cost to obtain a predetermined level of output. The inputs are
cheeses that come from different countries. This formulation allows the competitive
advantage/disadvantage to be analyzed that each country experiences relative to other
countries. The sensitivity of the quantity demanded to a country's own price (price
elasticity of demand) as well as to the price of a competing country (cross price
elasticity of demand) is calculated from the derived demand equation. The price
elasticity of demand is used to determine the impact of export subsidy reduction on an
exporters' quantity of exports. The cross price elasticities of demand are used to
determine the level of competition between countries. The Divisia import elasticity
shows the percentage change in a country's exports that are imported into another
country given a one percent change in the importing country's imports.
Table 2. Japan Fresh Cheese Imports, 1991-2003.
Fresh Cheese Imports (Metric Tons)
U.S. Percent Total Percent Percent
Change Change Share
1991 33 ~ 5,637 ~ 0.6
1992 58 76.9 11,641 106.5 0.5
1993 356 508.8 18,461 58.6 1.9
1994 842 136.5 25,079 35.8 3.4
1995 1,275 51.4 28,708 14.5 4.4
1996 1,652 29.6 34,383 19.8 4.8
1997 1,863 12.8 42,059 22.3 4.4
1998 2,023 8.5 47,901 13.9 4.2
1999 1,750 -13.5 53,165 11.0 3.3
2000 2,160 23.4 63,525 19.5 3.4
2001 2,360 9.2 59,987 -5.6 3.9
2002 1,879 -20.4 65,657 9.5 2.9
2003 1,804 -4.0 58,521 -10.9 3.1
Total 18,055 ~ 514,724 3.5
Average 1,389 68.3a 39,594 24.6_
a This figure is inflated due to the large percentage increases in 1992, 1993, and 1994.
Source: "Ministry of Finance Japan" website, 2004
The Divisia index elasticities are 0.788, 0.367, 1.301, 0.505, 1.117, and 0.824
for the U.S., Norway, the European Union (E.U.), New Zealand, Australia, and ROW,
respectively (Table 3). This indicates that if total fresh cheese imports into Japan
increase by 1.0%, cheese exports to Japan from these countries will increase by
0.788%, 0.367%, 1.301%, 0.505%, 1.117%, and 0.824%. Therefore, the biggest
beneficiary when total cheese imports into Japan increase is the E.U. and the U.S. is
the fourth beneficiary base on the Divisia elasticity.
For the conditional own-price elasticities, only Norway (-0.366) and the E.U.
(-0.474) are significantly different from zero (Table 3). If the price of Norway and the
E.U. decreased by 1%, the fresh cheese exported into Japan from those two countries
Table 3. Conditional Divisia and Price Elasticities of the Derived Demand for
Imported Fresh Cheese.
Conditional a Cross-Price
Exporting Divisia Conditional United Norway EU New Australia ROW b
Countries Index Own-Price States Zealand
United 0.788*** -0.014 -0.129 0.641** -0.309*** -0.226*** 0.038
States (0.223) (0.091) (0.123) (0.200) (0.090) (0.071) (0.091)
Norway 0.367*** -0.366** -0.033 0.663*** -0.451** 0.192*** -0.006
(0.126) (0.170) (0.031) (0.194) (0.113) (0.025) (0.035)
European 1.301*** -0.474*** 0.066*** 0.270*** 0.205*** -0.052 -0.016
Union (0.133) (0.131) (0.021) (0.079) (0.058) (0.041) (0.027)
New 0.505*** 0.056 -0.125** -0.717** 0.802*** -0.170** 0.154*
Zealand (0.172) (0.202) (0.036) (0.180) (0.228) (0.030) (0.041)
Australia 1.117*** 0.056 -0.022*** 0.075*** -0.050 -0.041** -0.017
(0.099) (0.035) (0.007) (0.010) (0.039) (0.007) (0.011)
ROW 0.824** -0.078 0.043 -0.025 -0.173 0.434*** -0.201
(0.399) (0.171) (0.103) (0.156) (0.297) (0.116) (0.131)
Source: Andreas P. Christou, Richard L. Kilmer, James A. Sterns and Shiferaw T.
a Conditional: the elasticities are based on a predetermined level of output
b ROW = rest of the world
' The ANALYZ routine in TSP was used to calculate the asymptotic standard errors in
*** Significance level = 0.01
SSignificance level = 0.05
Significance level = 0.10
will increase by 0.366% and 0.474%, respectively. However, for the U.S., New
Zealand, Australia and ROW, the conditional own-price elasticities are not
statistically significant. This suggests that price is not a significant factor for the fresh
cheese exported into Japan. A change in the price of these source countries will not
change the quantity of their imports into Japan.
The cross-price elasticities for EU/US, New Zealand/US and Australia/US are
0.066, -0.125 and -0.022, respectively. These elasticities show that if the price of
U.S. fresh cheese increases by 1%, the quantity of fresh cheese exported into Japan
from the E.U. will increase by 0.066%, but the quantity of fresh cheese exported from
New Zealand and Australia will decrease by 0.125% and 0.022%, respectively. This
indicates that there is a substitution relationship between the E.U. and the U.S., but
complimentary relationships among New Zealand, Australia and the U.S. The cross
price elasticity between Norway and the U.S. is statistically insignificant, which
indicates that Norway is not a competitor of the U.S.
The cross-price elasticities for US/EU, US/New Zealand and US/Australia are
0.641, -0.309, and -0.226 and statistically significant. E.U. is a competitor for U.S.
fresh cheese exported into the Japan market. When the E.U. changes its price by 1%,
the U.S. is impacted more (0.641%) than the E.U. is impacted (0.066%) when the
U.S.changes its price by 1%. This indicates that the E.U.'s quantity is more insulated
from U.S. price changes than the U.S. quantity is from E.U. price changes. In fact,
this asymmetric relationship between the U.S. and the E.U. is also true between
Norway and the E.U and New Zealand and the E.U. There is no relationship between
the E.U. and either Australia or ROW. Their cross price elasticities are not
significantly different from zero.
New Zealand and Australia act in a complementary fashion with the U.S. If
the fresh cheese price of New Zealand or Australia rises by 1%, the U.S. quantity is
impacted more (-0.309% and -0.226%) than the New Zealand and Australia quantities
are impacted (-0.125% and -0.22%) when the U.S. changes its price. This indicates
that the New Zealand and Australia quantities are more insulated from U.S. price
changes that the U.S. quantity is from New Zealand and Australian price changes.
The U.S. is the second largest cheese producer in the world, accounting for 25
percent of world cheese output (Christou, et.al., p.2). However, exports of U.S. cheese
have been a small share of total U.S. production (Christou, et.al., p.2). and
international dairy markets have been unattractive to U.S. dairy companies. Given the
attempts of domestic and international policy makers to reduce trade barriers, U.S.
manufacturers of cheese products have a growing interest in becoming successful in
Results of the derived demand for imported fresh cheese show that as Japan's
total imports increase, U.S. fresh cheese imports will increase as well. The U.S. had
the third largest change in imports among all countries (see Divisia index elasticity).
Conditional cross-price elasticities in Japan indicate that the U.S., Norway, and
New Zealand fresh cheeses are substitutable for the E.U. fresh cheese. However,
when the E.U. prices increase because of potential subsidy reductions, U.S. fresh
cheese imports will increase by a smaller percentage than Norway and New Zealand;
however, Australia and ROW will realize no gain.
In conclusion, when the E.U. subsidy is reduced, the reduction will benefit the
U.S. fresh cheese exports to Japan; however, the fresh cheese market is an inelastic
price competitive market given that all own-price elasticities are inelastic or
insignificant. This suggests that the U.S. should compete through product
characteristics in the fresh cheese market since its own-price elasticity is insignificant,
meaning that a change in the U.S. price will have a very small effect on the quantity
consumed of U.S. fresh cheese. Following this strategy as well as the increasing Japan
fresh cheese market, the market share of U.S. fresh cheese exports to Japan have the
potential to increase.
Christou, Andreas P., Richard L. Kilmer, James A. Stems and Shiferaw T. Feleke.
(2005). "Derived Demand for Fresh Cheese Products Imported Into Japan".
Agribusiness, vol. 21 (1)1-16.
Ministry of Finance Japan website. (2005). "Commodity imported by country".
http://www.customs.go.ip/toukei/srch/indexe.htm, date visited 03/20/2005.
National Milk Producers Federation (NMPF). "Balanced Trade, Not Unilateral
date visited: April 21, 2005.
United Nations COMTRADE database. (2005). "U.S. cheese exported by category".
http://unstats.un.org/unsd/comtrade/, date visited 04/01/2005.
Commission of the European Communities (CEC). Report on milk Quotas SEC (2002)
789 final, p.5.