The price of raw milk sold to dairy product makers rose by ¥5 per kg in October as imported cattle feed gets costlier amid the weakening yen.

In response, three major milk product makers — Meiji Co., Morinaga Milk Industry Co. and Megmilk Snow Brand — have raised the retail prices of their products by 1 to 4 percent.

“The milk industry has long been in an abnormal state of severe price competition,” said Masatoshi Uchihashi, director general of the Japan Dairy Council.

“If the government does not provide financial support to make up (for the price rise at the source), we must pass on the increase to consumers,” he said.

Dairy farmers had originally sought to raise their per-kilogram price by ¥6 or ¥7, but milk product makers opposed the increase. Farmers finally compromised at ¥5 because the producers did not want negotiations to be prolonged.

But milk consumption “has been dwindling due to the declining number of children and the diversification of beverages,” Uchihashi said. The price hike may fuel a further downtrend in milk consumption.

The milk industry faced price hikes in 2008 and 2009, but consumption fell by 10 percent during that time, according to the Japan Dairy Council.

Now more and more retailers are marketing inexpensive private-brand milk products, putting further downward pressure on prices.

“Consumers want cheap products. It is quite possible consumption may shrink” further if milk prices are raised, an industry expert warned.

Raw milk prices are going up mainly because cattle feed accounts for half of the production cost for dairy farmers, who have to rely on compound feed mainly composed of imported grains. The weak yen means imported feed is costlier, and dairy farmers are suffering, industry sources said.

Compound feed cost ¥44,300 a bushel (about 25 kg) in October 2006, but sold for ¥67,900 last September.

The milk industry has set up a fund, collecting money from dairy farmers and feed makers as well as subsidies from the state, in a bid to respond to rapid price hikes.

But the fund ran out of money and now has liabilities of ¥100 billion because it injected massive amounts of cash to stabilize milk prices. In the July-September period, dairy farmers and feed makers could not cover their costs and ended up forcing the state to pay ¥8.1 billion more than it should have. Thus the milk industry has no choice but to pass on the increased costs to consumers by raising retail prices.

Farmers and other industry sources agree the compound feed, which is more nutritious than ordinary feed, is essential to ensuring adequate milk supply.

So why not stop mass-producing using compound feed if consumption is falling and production costs are rising? The industry considers it a given that mass production should continue. Breeding improvements have advanced to the point that a typical dairy cow can yield about 8,000 kg of milk a year, making Japan the world’s fourth-most effective milk producer.

So why increase supply when demand is down?

One answer is cheese.

“Imported cheese accounts for 80 percent of the total supplies for domestic consumption. There is big room for domestically produced cheese to grow,” said Yuichiro Watanabe, an official in charge of milk products at the Agriculture, Forestry and Fisheries Ministry.

The farm ministry noted that domestically made cheese came to 490,000 tons when translated into raw milk in fiscal 2012, about a sixth of the level of imported cheese, or 3 million tons of raw milk.

There are 10 cooperatives of state-designated raw-milk producers. The co-ops, which serve the same role as agricultural co-ops for other farmers, collect fresh milk from farmers and sell it to the domestic milk products industry.

Individual farmers are not banned from selling their milk on their own, but they are not eligible for state subsidies unless they sell via the designated cooperatives.

Raw milk spoils quickly, and thus any surplus is processed into butter, powdered nonfat milk and other milk products.

Milk production has been falling, while inventories of butter and powdered nonfat milk have been rising. The amount of milk production dropped to 3.66 million tons in fiscal 2011 from 4.76 million tons in fiscal 1998.

Meanwhile the inventories of butter and powdered nonfat milk products have exceeded 2.5 months’ supply, or 18,000 tons of butter and 35,000 tons of powdered nonfat milk, a level widely perceived as appropriate for producers. For four years from 2004, excessive inventories of powdered nonfat milk went to feed pigs.

Suddenly cheese caught the industry’s attention as a way to use the surplus in raw milk.

From fiscal 2011, the agriculture ministry has been providing ¥8.8 billion in subsidies annually for cheese production. Hence, domestic output of natural solid cheese rose to about 47,000 tons in 2012 from 28,000 tons in 1990.

Once a year, the designated cooperatives negotiate with milk product makers to decide the price of raw milk to be used for each milk product.

Raw milk for drinking was priced at ¥110 per kg in fiscal 2012, but the raw milk price for products that compete with imports were much lower; those for butter and powdered nonfat milk were ¥70 per kg, and cheese was ¥50, both below the production costs.

But farmers have no say in what their raw milk is sold for, as the co-ops have control of this decision.

Farmer incomes are determined by multiplying the average selling price by the amount of raw milk produced after all deals are done.

Thus if most raw milk is used for cheap products, the average selling price is lower, and so are dairy farmer incomes. So increasing production for cheese only means a smaller income.

“Increasing cheese production would only mean a deficit (for farmers),” a business pundit said.

Farm ministry statistics show farmers tend to rely more on subsidies if they mass-produce.

Nonetheless, the agriculture ministry plans to increase raw milk production to 8 million tons in fiscal 2020, up by 50,000 tons from fiscal 2008.

The Trans-Pacific Partnership negotiations are continuing and Japan probably cannot maintain high tariffs on milk products forever. A policy change may be necessary soon.

This section, which will appear every second and fourth Monday, features translated stories on hot national topics from the monthly magazine Wedge. The original article was published in the December issue. To see Wedge’s website, go to wedge.ismedia.jp