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Cablegate: Impact On Japan of Rising Food/Agricultural Commodity

VZCZCXRO3531
RR RUEHFK RUEHKSO RUEHNAG RUEHRN
DE RUEHKO #1201/01 1230138
ZNR UUUUU ZZH
R 020138Z MAY 08
FM AMEMBASSY TOKYO
TO RUEHC/SECSTATE WASHDC 3930
INFO RUEHRN/USMISSION UN ROME
RUCNDT/USMISSION USUN NEW YORK 9636
RUEHRC/USDA FAS WASHDC 8577
RUEATRS/TREASURY DEPT WASHDC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEHBS/USEU BRUSSELS
RUEHFR/AMEMBASSY PARIS 6075
RUEHLO/AMEMBASSY LONDON 2027
RUEHRO/AMEMBASSY ROME 2081
RUEHOT/AMEMBASSY OTTAWA 9640
RUEHRL/AMEMBASSY BERLIN 1390
RUEHMO/AMEMBASSY MOSCOW 2261
RUEHBJ/AMEMBASSY BEIJING 3125
RUEHUL/AMEMBASSY SEOUL 9142
RUEHIN/AIT TAIPEI 7008
RUEHML/AMEMBASSY MANILA 1197
RUEHOK/AMCONSUL OSAKA KOBE 1266
RUEHFK/AMCONSUL FUKUOKA 7587
RUEHKSO/AMCONSUL SAPPORO 8182
RUEHNAG/AMCONSUL NAGOYA 5952

UNCLAS SECTION 01 OF 03 TOKYO 001201

SIPDIS

SENSITIVE
SIPDIS

STATE FOR EEB/TPP/ABT/ATP - SPECK
STATE PASS USTR FOR CUTLER, BEEMAN
TREASURY FOR IA/AUSTIN AND MCCOY

E.O. 12958: N/A
TAGS: EAGR ETRD ECON PGOV PREL JA
SUBJECT: Impact on Japan of Rising Food/Agricultural Commodity
Prices

REF: State 39410

1. (SBU) Summary: The run up in commodity prices and fear of
proliferation of export restrictions by long-standing suppliers has
led to the reemergence of food security as a national political
issue in Japan. The GOJ has seen the situation as underscoring the
urgency of boosting its food self-sufficiency rate. A particular
concern among Japanese on this front vis a vis the U.S. comes from
memories of President Nixon's decision in 1973 to halt soybean
exports to Japan due to U.S. domestic economic situations, while
apparently glossing over subsequent U.S. policy developments in the
following decades. While Japanese consumers are able to outbid
other countries for traded food commodities, physical stocks of
wheat and feed grains are tight and there is very little cushion
against disruptions in trade. End summary.

Demand and Supply of Foodstuffs
-------------------------------

2. (SBU) The value of Japan's agricultural output has been in
decline since the mid-1980s. Japan's farm population is rapidly
aging, with more than 70% of farmers over 60 years of age. The
average farm size is only about four acres, and south of Hokkaido
the size is substantially smaller. Advanced fertilizers and farm
machinery and fiscal help through a vast array of price supports are
essential to maintaining agriculture in Japan today. Japanese
policy makers are concerned because Japan imports over 60 percent of
its food on a calorie basis. The major reasons for such a low rate
of self-sufficiency are a shortage of arable land and increasing
consumption of meat, which is either imported or produced locally
with imported feed.

3. (SBU) The most important commodity in the Japanese diet is
rice, in which Japan is largely self-sufficient. Rice imports face
prohibitive tariffs and international trade has only a marginal
impact in the overall supply and demand picture. Consequently,
unlike many other countries, Japan is not experiencing a crisis in
supplies of its staple food. In addition, Japan has stocks of 2.3
MMT including 1.5 MMT of imported rice (mostly U.S. origin). This
amount roughly equals 3.3 months supply. In fact, to deal with a
chronic rice surplus, the GOJ increasingly has been diverting rice
stocks to the feed sector.

4. (SBU) In the recent past, Japan held emergency stocks of wheat
equivalent to 2.6 months' worth of demand. Due to the shortened
time necessary to obtain alternative supplies in case of an
emergency, stocks were reduced to 2.3 months' supply at the end of
JFY 2005, and cut further to 1.8 months' worth in 2006. Although
the actual stock figures are not disclosed, 1.8 months' worth of
stocks translates to around 900,000 metric tons. The United States
is Japan's largest supplier and provided about half the wheat Japan
imported in 2007.

5. (SBU) Japan, however, has almost no domestic feed grain
production. The GOJ holds emergency stocks of three essential feed
grains: corn, sorghum, and barley. The breakdown for 2007 is
536,000 MT for corn, 64,000 MT for sorghum and 350,000 MT for
barley. MAFF instructs the private sector to hold a similar level
of stocks. In addition, approximately 650,000 MT of surplus rice is
used for feed annually. Combined with these privately held stocks,
the entire feed grain stocks are equivalent of about one month to
six week's worth of demand.

6. (SBU) Japan is the largest export market for U.S. corn, valued
at $2.6 billion, or 15 MMT, in CY2007. In recent months, Japan's
normally high dependence on U.S. corn grew to nearly 100% and, put

TOKYO 00001201 002 OF 003


starkly, most cattle, pork, and poultry would quickly starve without
constant supplies of U.S. corn. Feed use accounts for about 70% of
corn consumption and, on average, half of the calories consumed by
Japanese livestock come from U.S. corn. There is a separate market
for food-use corn, accounting for about 30% of consumption. Other
corn suppliers, such as China and Argentina, have put in place
export restrictions or taxes on corn and, in any case, would not be
able to supply sufficient quantities to replace imports from the
United States. Government and private stocks combined provide only
a four to six week buffer. As corn markets have tightened, anxiety
has increased within the government and the feed industry about the
availability of U.S. corn in the coming crop year.

Domestic Politics
-----------------

7. (SBU) Many in Japan, including some government officials, are
quick to blame biofuels, for example, for the increase in global
food prices. In April, MAFF Minister Wakabayashi was questioned in
the Diet about the role U.S. biofuels policy has played in
increasing food prices. As a result, Japan has proposed that food
security be included as an agenda item at the G8 Summit, which will
be held in Japan this July.

Economy
-------

8. (SBU) Japan remains the world's second largest national economy
and boasts some of the world's wealthiest consumers. This economic
muscle allows Japan to outbid other importing countries for
available supplies. Similarly, in recent months, the yen has
appreciated relative to the dollar, helping to mitigate some of the
dollar price increases for agricultural imports. For Japan's
economy as a whole, no significant macroeconomic impact is expected
from the run up in agricultural commodity prices.

9. (SBU) Initially, retailers and manufacturers bore most of the
increase in input costs. More recently, these costs are being
transmitted to consumers. For example, since May 2007, flour prices
have edged up twice - after having been stable for 24 years. This
comes as a 15 year period of deflation, when almost all prices were
stable or falling, is ending. So even though they are financially
able to pay more, consumers are still making the mental shift from a
buyer's to a seller's market. This situation is further stimulating
increased media coverage and political attention on food prices and
food security.

Environmental Impact
--------------------

10. (U) There has not been a significant impact on Japan's
environment resulting from the run up in international commodity
prices.

Government Response
-------------------

11. (SBU) Japan's policy response to tight supplies has been to
focus on the (unrealistic) goal of increasing self-sufficiency. The
Food Self-sufficiency Improvement Council of the Ministry of
Agriculture, Forestry and Fisheries (MAFF), which was established in
2005, set forth six objectives for 2007-08: 1) conduct strategic
public relations programs on the importance of raising food
self-sufficiency; 2) promote rice consumption; 3) improve
self-sufficiency in feed; 4) reduce oil/fat intake; 5) expand
vegetable production; 6) conduct a "food education" campaign (e.g.,

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"Grow locally, consume locally").

Impact on Post Programs
-----------------------

12. (U) Post programs have been unaffected by the increase in food
prices to date.

Policy Proposals
----------------

13. (SBU) Despite public statements from the U.S. Department of
Agriculture that the United States will remain a reliable supplier,
the recent grain price situation has exacerbated concerns over food
security in Japan. In early 2008, FAS/Japan developed a
multi-faceted strategy to counter the fallacy that food
self-sufficiency equals food security. Our message is that, in
fact, imports are part of the solution not part of the problem and
as Japan's number one supplier we can be relied upon to supply high
quality products. In addition, Japan needs to view biotechnology as
part of the solution to its own food security and that of the rest
of the world.

14. (SBU) Given Japan's high and increasing dependence on food
imports, the USG should endeavor to change the paradigm in Japan to
seeing expanded trade with its democratic ally as a solution rather
than a threat. This situation presents an especially clear area of
opportunity in 2008 as many other exporters (e.g., Argentina, China,
the EU, India, Russia, Viet Nam, etc.) have put in place food export
taxes or export restrictions. Our assurances of U.S. commitment to
Japan's food security would reinforce Japanese confidence both as a
trading partner and as a strategic ally and potentially provide an
opening to engage Japan more meaningfully on the need for structural
reforms of its agricultural economy.

List of Relevant Reports/Cables
-------------------------------

See GAIN Report Number JA8021 (4/21/2008)

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