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Group Title: Policy Brief Series - International Agricultural Trade and Policy Center. University of Florida ; no. 6-08
Title: Derived demand for grated cheese products imported into Japan
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 Material Information
Title: Derived demand for grated cheese products imported into Japan
Series Title: Policy Brief Series - International Agricultural Trade and Policy Center. University of Florida ; no. 6-08
Physical Description: Book
Language: English
Creator: Christou, Andreas P.
Kilmer, Richard L.
Sterns, 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: 2006
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Bibliographic ID: UF00089779
Volume ID: VID00001
Source Institution: University of Florida
Holding Location: University of Florida
Rights Management: All rights reserved by the source institution and holding location.

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PBTC 6-08


I ional Agricultural Trade and Policy Center




Derived Demand for Grated Cheese Products
Imported into Japan
By: Andreas P. Christou, Richard L. Kilmer, James A. Sterns, Shiferaw T.
Feleke, and Jiaoju Ge


PBTC 6-08 December 2006


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 Grated 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

grated cheese products into Japan when grated cheese import data are disaggregated

by 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

grated cheese. Japan's derived demand for U.S. grated 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. The General Agreement on

Tariffs and Trade (GATT) ended in 1997 and is still applied by the WTO since the

new act is still in the process of negotiation. This means that world agricultural export


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.










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

will likely increase the price they charge importers for the exporter's commodity.

Because the subsidizing country's exporters will likely 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 based on increasing per capital income. Even though cheese consumption in

Japan is low as compared to the E.U., the U.S., Canada, Brazil and Russia on a total










ton basis, 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

grated cheese into Japan when grated cheese import data are disaggregated by source

country of production and to provide empirical estimates of the sensitivity of grated

cheese demand to changes in total imports, own price, and cross prices among

exporting countries.


Background of U.S. and Japan grated cheese market


The quantity of U.S. Grated cheese exports ranged from 4,844 metric tons in

1991 to 24,564 metric tons in 2002 before falling to 17,057 metric tons in 2003 (Table

1). Grated cheese exports increased an average of 13.8% per year which is slightly

higher than the average annual rate of 12.5% for all cheeses exported by the U.S. The

percentage change per year in grated cheese exports is variable ranging from -30.6%

to 51.2% (Table 1). The grated cheese share of total U.S. cheese exports increased

from 35% in 1991 to 44.2% in 2002 before dropping to 31.8% in 2003. The grated

cheese market share was as low as 21.7% during the 1991-2003 period.


Over the same time period, Japan's grated cheese imports from the U.S. were

also variable. The average annual rate increase was 13.1% (Table 2), but slightly

lower than the change in U.S. exports of grated cheese (13.8%) (Table 1).

Furthermore, U.S. grated cheese exports to Japan peaked in 2000 at 1,994 metric tons

and continued to drop in 2001 and 2003 with a slight increase in 2002 (Table 2). The

year to year change in the Japan grated cheese imports from U.S. averaged 13.1%

which is lower than total grated cheese imports into Japan (21.2%) (Table 2).

Furthermore, the U.S. share of Japan grated cheese imports averaged 50.3 percent










from 1991 through 2003 and generally trended downward over that period. Over all,

for the Japan cheese import market, Australia ranked first, New Zealand ranked

second and the U. S. ranked ninth in 2004. All the above information suggests the U.S.

grated cheese exports to Japan have the potential to increase if the cheese industry


Table 1. U.S. Cheese Exports, 1991-2003.

U.S. Cheese Exports (Metric Tons)
Year Percent Percent Percent
Grated Cheese Change All Cheese Change Share

1991 4,844 ~ 13,856 ~ 35.0
1992 4,481 -7.5 17,467 26.1 25.7
1993 5,506 22.9 18,521 6.0 29.7
1994 7,775 41.2 24,761 33.7 31.4
1995 9,049 16.4 31,990 29.2 28.3
1996 10,720 18.5 35,845 12.1 29.9
1997 8,702 -18.8 40,156 12.0 21.7
1998 9,009 3.5 40,591 1.1 22.2
1999 13,625 51.2 43,120 6.2 31.6
2000 14,788 8.5 49,865 15.6 29.7
2001 21,888 48.0 53,958 8.2 40.6
2002 24,564 12.2 55,620 3.1 44.2
2003 17,057 -30.6 53,700 -3.5 31.8
Total 152,009 ~ 479,449 ~ 31.7
Average 11,693 13.8 36,881 12.5 ~



Data Source: United Nations COMTRADE Databases, 2004


finds an effective marketing strategy to compete with other countries.



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 that each country experiences relative to other countries to be







5

analyzed. 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

exporter's quantity of exports. The cross price elasticities of demand are used to


Table 2. Japan Grated Cheese Imports, 1991-2003.



Year Grated Cheese Imports (Metric Tons)
U.S. Percent Change World Percent Change Percent Share
1991 473 ~ 552 ~ 85.7%
1992 562 18.8% 768 39.2% 73.1%
1993 616 9.6% 930 21.1% 66.2%
1994 633 2.8% 1075 15.6% 58.9%
1995 889 40.3% 2253 109.6% 39.5%
1996 1,348 51.7% 2493 10.6% 54.1%
1997 1,525 13.1% 2633 5.6% 57.9%
1998 1,849 21.3% 3138 19.2% 58.9%
1999 1,814 -1.9% 3906 24.5% 46.4%
2000 1,994 9.9% 4167 6.7% 47.9%
2001 1,908 -4.3% 4368 4.8% 43.7%
2002 1,931 1.2% 4034 -7.6% 47.9%
2003 1,830 -5.3% 4223 4.7% 43.3%
Total 17,373 ~ 34,541 ~ 50.3%
Average 1,336 13.1% 2,657 21.2%


Data Source: "Ministry


of Finance Japan" website, 2004


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.



Empirical Projection


The Divisia index elasticities are 0.848, 0.431, and 5.926 for the U.S., the







6

European Union (E.U.), and rest of the world (ROW), respectively (Table 3). This

indicates that if total grated cheese imports into Japan increase by 1.0%, holding all

prices constant, cheese exports to Japan from these countries will increase by 0.848%,

0.431%, and 5.926%. The biggest beneficiary when total cheese imports into Japan

increase is the ROW, with the U.S. receiving the second largest increase.


Table 3. Conditional Divisia and Price Elasticities of Derived Demand for Imported Grated
Cheese into Japan.



Elasticities

Conditional Cross-Price

Exporting Divisia Conditionala United EU ROWb
Country Index Own-Price States
United 0.848** -0.056 0.051 0.005
States (0.114) (0.078) (0.073) (0.019)

EU 0.431* -0.167 0.187 -0.020
(0.203) (0.258) (0.267) (0.033)
ROW 5.926** 0.007 0.081 -0.088
(1.550) (0.262) (0.308) (0.146)
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;
c The ANALYZ routine in TSP was used to calculate the asymptotic standard errors in
parentheses
Significance level = 0.01;
**Significance level = 0.05
Significance level = 0.10



For the U.S., the E.U., and the ROW, the conditional own-price elasticities are

not statistically different from zero (Table 3). This suggests that price is not a

significant factor for the grated 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 are also statistically insignificant among the U.S.,

the E.U., and the ROW. This indicates there is no substitution or complementary

relationship among them. Therefore, the above two countries and the ROW do not

compete on a price basis with each other in the Japan grated cheese import market.


Implications


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. The results of the derived demand for imported

grated cheese show that grated cheese importers most probably do not compete with

one another on a price basis in the grated cheese market; therefore, the best strategy

for the U.S. dairy industry to increase grated cheese exports to Japan is to compete

through product characteristics.










References

Christou, Andreas P., Richard L. Kilmer, James A. Stems and Shiferaw T. Feleke.

(2005). "Derived Demand for Grated Cheese Products Imported Into Japan".

Agribusiness, vol. 21 (1)1-16


Commission of the European Communities (CEC). Report on milk Quotas SEC (2002)

789 final, p.5.

Ministry of Finance Japan website. (2005). "Commodity imported by country".

http://www.customs.go.jp/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.

USDA-FAS report. 'Japan dairy and products annual report, 2004'.

http://www.fas.usda.gov/gainfiles/200411/146118058.pdf, date visited 10/09/2005.

USDA-FAS website. 'cheese consumption summary for selected countries'.

http://www.fas.usda.gov/dlp/circular/2005/05-07Dairy/cheesec.pdf, date visited

10/09/2005




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