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