Tuesday, January 13, 2015

The 2014 Butter Scare

One blogger that you should be following if you can read Japanese is Professor Hiroyuki Kishi, a former METI official whose acute criticism of Japanese economic policy is detailed and usually to the point. He doesn’t blog nearly often enough, and his latest post is dated December 26, 2014, where he took up the butter shortage, beginning in summer and widely reported in autumn, that threatened the production of Christmas cakes among other things.

There, he wonders why a butter shortage occurred although milk production had been down only 2% year-on-year and the government had added two emergency butter import tranches of 7000 tons (May ~) and 3000 tons (September ~), and places the blame squarely on the government’s shoulders. First, he takes note of the fact that the government has been pushing dairy farmers toward cheese production in recent years. According to Kishi, in FY2014, the Ministry of Agriculture, Forestry and Fisheries (MAFF) decided that it would install a permanent difference in subsidies to producers for milk used for butter and for chees with the former at 12.80 yen/kilo and 15.41 yen/kilo for the latter. He thinks that dairy farmers naturally gravitated toward milk for cheese, creating a butter shortage. He cites the summer increase in cheese production even as butter production was dropping. Second, he blames government intervention. He believes that the government’s virtual monopoly of butter imports creates inefficiencies that would be resolved by allowing market forces to prevail.

Interesting analysis, but could there be something more here than meets the eye? If inefficient government intervention created a shortage, why didn’t it create a glut with the 7000-ton and 3000-ton import tranches? My guess is that a lot of hoarding went on.

Imagine yourself going to the supermarket and noticing that there are fewer butter sticks and patties available than usual. If you are a butter user, you might be tempted to pick one up then and there, particularly if the one in your refrigerator needs to be replaced pretty soon. This could have a snowballing effect, clearing the shelves of butter until the shelves are replenished, first with manufacturers’ stock, later with the additional government imports. But all is not well even then. People, worried that the shortage could occur again, snap up the butter as soon as they appear. Media reports could create a stampede, turning what was initially a modest, temporary shortage into a crisis situation. Imagine every household refrigerator holding one extra stick or patty “just to be safe,” and you have a pretty large stock of butter that will be around until the fears wears off. A one-off increase in the supply of butter to match that stock, and a matching staggered decrease to be managed carefully.

Of course letting market forces deal with the situation by liberalizing imports could smooth out much of the fluctuation, which broadly considered, perhaps falls within the second point of Kishi’s analysis.

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