March 15, 2005

 

USDA Japan feed corn consumption down slightly

 

 

Feed corn consumption in Japan fell slightly due to the outbreak of avian influenza in Japan and a record breaking hot and long summer. However, the decline was offset by an increase in wet-milling demand. Both consumption and imports of grains will remain steady in the short term but are expected to decline over time. Feed grains will slowly decline due to a slow reduction in the overall livestock population and flour product consumption will shift as a result of changing appetites due to the rapidly aging population in Japan, according to a USDA report posted Monday on the Foreign Agricultural Service Web site.

 

 

Wheat Consumption Stays Flat

 

Over the long term, wheat consumption had been gradually increasing as consumers shifted from rice to processed wheat products such as bread and pasta. However, consumption has been flat since 2000, stemming from Japan's depressed economy. In 2003/04, as Post estimated, last year's wheat consumption increased slightly as the overall downward trend was temporarily offset due to higher price of rice caused by a short crop. In 2004/05, Post projects consumption will return to the 2002 level or even slightly lower. In the long term it is expected that consumption will continue to decline slowly because of the growing size of the elderly population who tend to eat more traditional foods such as rice.

 

Utilization Patterns

 

In 2003 production of wheat based products increased slightly over 2002. This was primarily due to increased production in late 2003 as a result of confirmation that of a poor rice crop that resulted in an anticipation of increased demand for wheat products in 2004. Wheat consumption did increase slightly as mentioned in the previous section, but Post evaluates this as a temporary trend. Because of Japan's demographic trends and continued stagnant economic performance, domestic production of selected wheat products is estimated to be flat or decline slightly in coming years. In addition, flour millers continue to be threatened by increasing imports of premixes (flour preparations) and semi-finished or finished products such as frozen dough.

 

Government Resale Price for 2005 Lowered for US Wheat while Raised for Others

 

MAFF controls both producer and resale prices for both domestic and imported wheat. MAFF buys imported wheat at international prices and sells it to domestic flour millers at higher prices. As shown in Table 13 below, the ratio in recent years has been consistent at 2.0, which means MAFF sells imported wheat at twice the purchase price. The table shows that the 2005 resale price for US Western White was lowered by 0.5 percent from 2004, but prices for Australian and Canadian wheat have been raised so that the overall resale price will remain at the same level as 2004. On the other hand, MAFF buys domestic wheat at a high price and sells it to domestic flour millers at a significantly lower price, lower than imported wheat so that the lower quality domestic wheat will be accepted. Revenues from transactions for imported wheat are used to help cover the cost difference between the purchase and resale of domestic wheat. This is referred to as the "Cost Pool System".

 

Wheat Imports Return to Normal

 

Total imports of wheat in calendar year (RMB) 2004 increased 4.7 percent, however, this represents a market correction as opposed to increase demand. Unusually high carry over stocks in RMB 2002 skewed RMB 2003 imports down approximately 200,000 to 300,000 metric tons as MAFF imported larger than normal amounts in the last few months of 2002 to take advantage of economic factors such as favorable prices or freight rates. The resulting high year-end stocks resulted in 200,000 to 300,000 metric tons fewer imports in RMB 2003. Therefore, the increase in 2004 is not reflective of the actual demand situation. The three year average (2002 - 2004) of 5.5 million tonnes represents the actual annual demand in Japan. However, over the medium term, increased imports of processed products will continue to reduce import demand for wheat.

 

The US share of total imports in 2004 was maintained at the previous year's level of 56 percent. Although production in Australia is forecast to drop this season from the previous year's record harvest, trade should be stable in 2005 (see GAIN Report #AS4043, Australia Grain Update - January 2005, 12/30/04); and #CA4057, Canada Grain and Feed Update, 8/27/04).

 

MAFF allows flour millers to import wheat outside of MAFF's control as long as they export an equivalent amount of wheat flour. This so-called "free wheat" is imported at world prices (less than half of MAFF's resale price) and is thus very profitable. This system also provides millers with an export market for their lower quality flour, which otherwise would have little value in the domestic market.

 

Stocks

 

Japan holds emergency stocks of wheat at the level equivalent to 2.6's; worth of demand. Although the actual stock figures are not disclosed, it is assumed to be around 1.2 million tonnes.

 

Feed Wheat Imports through SBS System

 

In 1999, MAFF introduced the Simultaneous Buy and Sell (SBS) system for imported wheat and barley for feed use. During JFY 2004, MAFF conducted five SBS tenders, through which 75,030 million tonnes of imported wheat was contracted. Periodically Japan buys small amounts of wheat from non-traditional suppliers, such as the Ukraine and China, to test the market in the event of problems with their usual suppliers. In the near future Post does not see a significant advance by these low cost producers but they will continue to attract feed manufacturers as alternative suppliers in the future.

 

Marketing

 

The US Wheat Associates (USWA) has been diligently conducting activities to maintain and enhance trade relationships between US industry and Japanese flour millers and other end users. In addition, it has embarked on cultivating users of US durum wheat. A reverse trade mission was conducted in 2004 for this particular purpose, and received good reactions from the participants. The second mission is planned later this year.

 

Soybean Commingling in Wheat

 

Japan's Ministry of Health, Labor and Welfare (MHLW) enacted a new requirement for labeling of allergens in April 2003. Although it is labeling is voluntary for soybeans, flour millers are concerned that it might become mandatory in the near future. As a result, in January 2004, MAFF established a new specification in its purchase contract for shipments, effective last March, which sets a tolerance of soybean presence in wheat at 0.4 percent. Since then, no incidents of commingling have been reported.

 

 

CORN

 

Production

 

Corn production is negligible in Japan.

 

With US beef, which occupied one third of Japan's total beef consumption, absent from the market throughout 2004, it was expected that some replacement demand would go to chicken and pork. However, there was only a small increase in animal numbers but it did not translate into an increased demand for feed. Livestock numbers did not increase significantly as expected for a variety of reasons. The domestic price of calves soared, limiting expansion of the domestic cattle production (in any event, Japanese beef is produced and marketed in a way that producers have difficulty in producing the types of cuts traditionally supplied by the US). With the outbreak of avian influenza (AI) in Japan in February 2004, domestic poultry producers became hesitant to build up the broiler/layer population. While pork consumption has increased, Japanese pork producers also face constraints. Since the majority of the additional demand is coming from the foodservice sector that relies on low cost supplies, cheaper imports have benefited over higher-priced domestic pork.

 

Japan found its first case of high-pathogenic AI in 79 years in Yamaguchi Prefecture in February 2004. The disease spread to several other prefectures in western Japan and disrupted poultry supplies in the first half of 2004. Coupled with a record breaking hot summer, which reduced feed consumption among all animals, demand for feed corn in 2004 (January - October) dropped by 3 percent from the same period in 2003.

 

While there is no expected change in the overalldeclining trend in Japan's livestock population over the years, with so many unknowns in animal health/quarantine issues at this point, it is extremely difficult to make any long-term forecast on feed consumption.

 

Corn is the major ingredient used in compound and mixed feed. The ingredient ratio is adjusted from year-to-year, depending on prices of various grains, but the corn ratio has been fairly constant at 48-50 percent in recent years. Of the total demand for corn, about 45 percent comes from the poultry sector.

 

Production of Feed Flat in 2003/04 but Expected to Decline in 2004/05

 

The total production of compound feed in JFY 2003 shows a continued slight increase from 2002, due to the post-BSE cattle feed demand (Japan's first BSE was detected in September 2001.) and increase in swine population. In JFY 2004, Post projects that this temporary increase will cease and turn to a decline of around 2 percent. In the long term, the downward trend in livestock population appears irreversible. Feed demand in Japan is expected to decline slowly but surely.

 

Prices

 

The cost of imported corn, including from China, jumped significantly in 2004, reflecting higher export prices and continued high trans-Pacific freight rates. The US Gulf -Japan rates hit 70 US Dollars (USD) per long ton in February 2004, went down to 36 USD in June, and then took an upturn again to reach 60 USD in February 2005.

 

Trade Returning to US as Star link Issue Diminishing and China Becomes Less Competitive

 

As described above, feed corn imports in 2004 were down due to the impact of avian influenza and a hot summer, in addition to Japan's stock adjustment (See the following section on Stocks.)

 

Food corn imports increased significantly in RMB 2004 due to an aggregate demand increase in the beverage sector, particularly for high fructose corn syrup (HFCS) used in low alcoholic drinks like happoshu (light beer) and other alcoholic beverages. This reflects an increased popularity for these drinks in addition to a higher demand for soft drinks during the record breaking hot summer. Since China did not have exportable supplies in the first half of the year, the United States took advantage of the situation and recorded an above 50 percent increase in food corn imports. Supporting factors include recent Star Link monitoring showing zero detections and diligent efforts by the US industry to educate Japanese users about its rigorous Identity Preserved (IP) handling program.

 

Therefore, the increase in food corn imports offset the decline in feed corn imports for RMB 2004. Looking at the marketing year (MY) imports (October 2003 - September 2004) total corn imports as well as imports from the United States were near the MY 2003 figures. With the reported record production in the United States and expected recovery in production in both Argentina and Brazil, trade in 2005 is expected to be stable. As the US and South American prices have come down, China's competitiveness has been weakened. Unless China resumes its export incentive program, China's share in the export corn market will not likely be recovered (see GAIN Report, #CH5015, China Grain and Feed Annual, 2/4/05).

 

Stocks

 

Japan holds emergency stocks of essential feed grains, i.e. corn, sorghum, and barley. For over a decade until 2003, the stock level was set at approximately 630,000-670,000 million tonnes, 130,000-170,000 million tonnes and 390,000-400,000 million tonnes respectively for the three grains with a total of 1,200,000 million tonnes. Since the recent reduction in reduced government expenditures, beginning in 2003 stocks have been reduced to 1,000,000 million tonnes in 2003 and 950,000 million tonnes in 2004. The breakdown in 2004 is 534,000 million tonnes for corn, 66,000 million tonnes for barley and 350,000 million tonnes for barley.

 

Marketing

 

With traditional markets for coarse grains expected to decline as Japan's domestic livestock production contracts, the US Grains Council (USGC) continues to explore markets for "new use" products featuring Value Enhanced Grains (VEG) such as high oil corn. Promoting VEG aims at increasing the total monetary value of coarse grains exported to Japan, offsetting the forecast decline in export volume with a long-term perspective.

 

In June 2004, USGC took a delegation of Japanese food corn users to the United States to visit IP handling facilities and farms to gain their confidence in the US IP handling system.

 

In addition, USGC is educating Japanese trade about the use of corn in ethanol production as well as in biomaterials.