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Group Title: Policy Brief Series - International Agricultural Trade and Policy Center. University of Florida ; no. 05-04
Title: Derived demand for fresh cheese products imported into Japan
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Title: Derived demand for fresh cheese products imported into Japan
Series Title: Policy Brief Series - International Agricultural Trade and Policy Center. University of Florida ; no. 05-04
Physical Description: Book
Language: English
Creator: Christou, Andreas P.
Kilmer, Richard L.
Stearns, James A.
Feleke, Shiferaw T.
Ge, Jiaoju
Publisher: International Agricultural Trade and Policy Center, Institute of Food and Agricultural Sciences, University of Florida
Institute of Food and Agricultural Sciences, University of Florida
Place of Publication: Gainesville, Fla.
Publication Date: 2005
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Volume ID: VID00001
Source Institution: University of Florida
Holding Location: University of Florida
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PBTC 05-04


I '-ional Agricultural Trade and Policy Center




DERIVED DEMAND FOR FRESH CHEESE PRODUCTS
IMPORTED INTO JAPAN
By
Andreas P. Christou, Richard L. Kilmer, James A. Stearns, Shiferaw T. Feleke,
& Jiaoju Ge
PBTC 05-04 September 2005


POLICY BRIEF SERIES


'V


i~fr


UNIVERSITY OF
FLORIDA


Institute of Food and Agricultural Sciences









INTERNATIONAL AGRICULTURAL TRADE AND POLICY CENTER


THE INTERNATIONAL AGRICULTURAL TRADE AND POLICY CENTER
(IATPC)

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,
and internationally.
* Serve as a nation-wide resource for research on public policy issues concerning
specialty crops.
* 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.







1

Derived Demand for Fresh Cheese Products Imported into Japan

Andreas P. Christou, Richard L. Kilmer, James A. Sterns, Shiferaw T. Feleke and
Jiaoju Ge1


Abstract


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.


Introduction


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

countries.

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







4

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.



Methodology


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)
Year
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


Empirical Projection


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.


Elasticities


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
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.
Feleke.
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
parentheses
*** 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.


Summary


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

international markets.

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.










References

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

Disarmament." http://www.usdec.org/files/pdfs/BalancedTradebooklet.pdf

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.




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