Issue 29: Getting Ready For Export

Issue 29
Jul/Aug – 1996
Story Title: Getting Ready For Export
Author: Grant Vinning

Lotus Red Network is a newly formed group of hydroponic vegetable growers who have combined their resources to export leafy vegetables and herbs to the rapidly developing markets of Asia. Asian Specialist GRANT VINNING reports on their progress.

Currently, Australia leads the world in the production of hydroponic lettuce, and a newly formed group of hydroponic vegetable growers have combined their production and marketing resources and skills to export their produce to the rapidly developing markets of Asia. Based along the east coast of Australia, Lotus Red has a total production capacity of 4000 tonnes of lettuce, and is in the process of expanding production. This means it will be able to offer its customers greater volume and a wider range of products, underpinned by significant guarantees of supply.

Lotus Red members already enjoy a strong reputation for consistently supplying a wide range of lettuce and herbs to the domestic market. One Lotus Red member supplies the majority of airlines operating in and out of Australia with their business and first-class passenger leafy salad requirements. The 1996 winner of the New South Wales Best Family Restaurant Award is also supplied by a Lotus Red member, and another member is the recipient of the Royal Easter Show’s (Australia’s premier agricultural show) Best Lettuce Award for the last 4 consecutive years.

Lotus Red members recently attended two back-to-back marketing skills workshops, where several Asian markets with significant export opportunities were identified. Japan emerged as the Network’s primary market for export, based upon its economic size and its food imports.

Japanese Vegetable Industry
Historically, the Japanese vegetable industry has had a relatively low profile, which means that it has received no detailed attention from Australian researchers. While its agricultural sector has been examined from a number of perspectives, and specific industries studied separately by Australian authors, its vegetable industry has rarely been studied either separately or jointly. Further, any study has usually been in the context of the total horticultural industry.

The absence of any detailed study is surprising for several reasons. Foremost, the contribution of vegetables to agricultural gross national product is the highest after that of rice, and more than twice as great as that of the next sector. While vegetable production and consumption appear to have remained static over the past two decades, the composition has changed substantially due to changing consumer tastes.

Convenience, Simplicity & Healthiness
Japan’s rapid economic growth in the 1960s and 1970s was accompanied by dietary changes associated with increased affluence, greater urbanisation, an increased number of working women, a demand for convenience in cooking, and increased eating out.

Dietary changes included a shift away from preserved to fresh vegetables, from root vegetables to leafy vegetables. There has been a decline in the demand for starchy staples, and a marked increase in the popularity of western green and leafy vegetables. It is also noteworthy that the amount and type of vegetable consumption differs between different age groups, and between men and women.

A 1990 Ministry of Agriculture, Forestry and Fisheries (MAFF) survey on long-term changes indicates convenience, simplicity and healthiness are important future trends in the Japanese diet. Subsequently, western and leafy type vegetables should benefit from their association with convenience and healthiness, and from the internationalisation of the Japanese way of life.

Within the overall static vegetable production, the changing patterns of vegetable consumption constitute very significant opportunities for potential exporters. Other significant indicators include a declining production base caused by the decline in numbers and the ageing of Japanese vegetable farmers, a declining rural labour force, and the pressure on available arable land.

Japanese Vegetable Production
The outstanding feature of Japanese agriculture, taken as a whole, is its lack of diversity: a few products are grown by a large number of farmers. Although Japan is able to grow a wide range of vegetables, fewer than 30 varieties account for most of the vegetables commonly marketed.

While overall vegetable production has remained relatively static, there have been significant changes in the types of vegetables produced, including a decline in traditional root crops, an increase in production of the western, leaf vegetable group (cauliflower, celery and lettuce), and increases in melon, strawberry, sweet pepper, cabbage, carrot and onion.

There have also been significant location changes as Japanese producers seek to extend the seasonality of their vegetables by adjusting crop selection to avoid heat and cold extremities. The substantial increase in protected crop production also reflects the desire by Japanese vegetable producers to optimise scarce land resources.

Considerable structural adjustment within the Japanese vegetable industry has also occurred since the early 1970s, through factors such as increased farm sizes, decreasing availability of rural labour, pressure on available land due to urban encroachment, and a farmer population which is both ageing and declining in numbers.

In February 1990, Japan had 3.8 million farm households (in 1960 the figure was 6 million; 1970, 5.4 million; and 1980, 4.6 million), of which 80% were engaged in vegetable cultivation. A relatively small 22% produced vegetables for shipment to market.

Owing to considerable structural adjustments in the early 1970’s, the number of farm households cultivating more than 1 hectare doubled to about 10% and the share of such farms of the total area doubled to 40%. Such structural adjustment is being hastened by the impending shortage of farmers.

A related issue is the increase in the leasing of land. Consolidation may increase the international competitiveness of Japanese vegetable producers through better economies of scale. However, consolidation also requires considerable increases in capital outlays which may slow down the process.

Even in a country characterised by compactness, vegetable farms are very small. At an average of only 0.17ha, they are significantly smaller than the average sized farm household of 1.2 ha. Similarly, while 40% of Japanese farms occupy less than 0.5 ha, the comparable estimate for vegetable farms is 80%. The small size of Japanese vegetable farms reduces the ability of farmers individually to gain a position of strength against wholesalers.

Vegetable Imports
Since the early 1990’s, Japanese imports of agricultural and fishery products have been increasing, with the rate of growth for imports destined for further processing, greater than the rate of growth of imports for direct consumption. Vegetable imports supplement domestic shortfalls and introduce new vegetables. Thus, imports both lead and react to changes in consumer taste.

Fresh vegetable imports can be categorised into three groups. The first are those imported on a year-round basis. Broccoli and carrots are prime examples. The second group is made up of vegetables such as asparagus and onions, which are imported during the Japanese off-season. The third group are vegetables which are imported on a spot basis in response to sudden price increases caused primarily by seasonal factors. For example, in the summer-autumn of 1991 Japan experienced a series of devastating typhoons. Vegetable production plummeted and prices rose dramatically. In response, there were surges in imports of both broccoli and lettuce.

Distribution Systems
For most food and non-food products, Japan’s distribution system is generally considered to be unnecessarily long and complicated, outdated and rigid. While non-Japanese have frequently accused the distribution system of being a major cause of high prices and an impediment to trade, the accusation is now being echoed by the Japanese themselves and commentators on the Japanese economy. An associated criticism is the practice of keiretsuka, or the relationship which ties manufacturers, wholesalers, retailers and distributors together. The distribution system can only be fully understood if considered in terms of cultural and societal factors as well as traditional, structural and regulatory issues.

Broadly, the Japanese food distribution system is one of a large number of small distributors supplying an even greater number of even smaller food outlets. In 1988 there were 1.6 million retail stores, of which 625,000 were food and beverage outlets. Japan has 132 retail stores for every 10,000 population, a ratio that is nearly double that of the United States and Germany.

There are several pathways along which vegetables can be exported to Japan: through trading houses, specialty importers, primary wholesalers or retailers.

Trading Houses
Japans trading houses, the sogo shosas, are the major importers of most products into the country, and by far the most important route for imported food. The main strengths of the sogo shosas are their widespread experience in dealing with virtually every product imported into Japan and their access to Japan’s distribution system through affiliated companies.

Sogo shosas usually operate in two basic but contrasting ways. The first involves receiving orders from retailers and then using their worldwide networks to fill these orders. The second method involves their purchasing a particular product and then seeking customers in Japan.

The varying styles relate very much to the willingness of the retailer to bear risk. In recent years, the second approach has resulted in sogo shosas taking an equity position through joint ventures. This approach has been quite marked in the vegetable industry. Some sogo shosas have formed their own food sector groups and arranged their own food exhibitions.

Specialty Importers
Specialty importers are becoming more important as they concentrate on particular food imports. Horticultural specialty importers offer more dedicated supplies and claim to better accommodate the peculiarities of the products than the more general and sometimes opportunistic trading houses. Generally, they are small and hence may be more flexible in reacting quickly to fluctuating prices, especially with vegetables.

Primary Wholesaler
Primary wholesalers operate from central wholesale markets. They can distribute imported vegetables as sole agents, tokuyakutenkai, for either the food service sector or retailers, or as a speculating importer. In the latter role, they use their market premises to display imported vegetables, even though these are rarely auctioned from the floor of the wholesale markets. The former approach is more common with processed vegetables and the latter with fresh products. Distribution channels tend to be regional and local, but some wholesalers plan to become national distributors. Due to their small scale, they are often very specialised.

Retail stores are becoming increasingly involved with the direct importation of food. In addition, groups of retailers have formed their own buying associations.

A number of retailers have overseas operations. One result has been an increased awareness of vegetables, usually peculiar to the host country, which are then exported back to the domestic stores. Another development has been the opening in third countries of offices dedicated to sourcing products for the Japanese market. An advantage of this move for potential exporters in the third country is access to the retailers’ very precise specifications. Increasingly, retailers are also establishing their own distribution centres. For retailers, direct importation can stabilise supplies and purchasing costs. Because they sell directly to end users, retailers’ specifications tend to be very precise and include delivery timing, product specification and shipping conditions.

Import Requirements
The Japanese have very rigorous import requirements. While these may be considered more onerous than those of most other importing countries, at least the requirements have been spelt out by the various Japanese authorities. Failure to know and comply with the requirements will be detrimental to the exporter. Precise compliance with required documentation as it relates to quarantine, phytosanitary certificates, and importing procedures will reduce potentially harmful delays to imports.

Japanese vegetable imports are subject to three legal requirements: tariffs, quarantine regulations and food sanitation laws.

Japan applies general, preferential, and temporary tariffs to fresh and processed vegetables. Specific vegetables from less developed and developing countries enter tariff-free, whereas developed countries pay either the general or preferential rate. Generally, the more processed the product, the higher the tariff rate. Rates of 10% are common, with the occasional vegetable being subject to a rate of 22%.

Japan’s status of being relatively free of exotic pests and diseases, owes a great deal to its 200 years of international isolation enforced by the Tokugawa shogunate. The thrust of Japan’s modern plant quarantine laws has been to identify injurious pests and diseases, and countries from which plants could harbour such pests and diseases, so as to prevent their spread in Japan. Injurious pests and diseases of quarantine significance to the Japanese vegetable industry include:

Potato canker (Synchyttrium endobioticum) *
Colorado beetle (Leptinotarsa decemlineata)
Golden nematode (Heterodera rosochiensis)
Tobacco blue mold (Peronospora tobacina)
Burrowing nematode (Radopholus similis)
Queensland Fruit Fly (Dacus tryoni)
Melon fly (Chaetodacus cucurbitae)
Sweet potato weevil (Cylas formicarius)
Small sweet potato weevil (Eusceps batatae)
Sweet potato stem borer (Omphisa anastomosalis)

* Where fumigation is required, hydrogen cyanide gas and methyl bromide are used, depending on the pest species (the latter turns lettuce brown, rendering it unsaleable).

In recent years, there have been negotiations for the lifting of quarantine restrictions from some countries, which have been more than satisfactorily resolved. This stems from a greater international acceptance of the harmonisation of standards, especially of evaluation techniques. An example of the relatively more liberal approach has been the dropping of the requirement that ice used in the shipment of broccoli must be made from distilled water.

Where a product fails inspection, the decision to fumigate is left to the importer. Failure to pass the subsequent quarantine inspection usually results in the consignment’s destruction.

Food Sanitation Law
Japan’s Food Sanitation Law seeks to ensure that imported foods meet Japanese health standards. Essentially, harvested crops are associated with food and are the responsibility of the Ministry of Health and Welfare, whereas prior-to-harvest crops are considered to be agriculture and are the responsibility of MAFF. Administered by the Ministry of Health and Welfare, the Food Sanitation Law relates to additives, chemical residue limits, and labelling requirements.

Business Relationships
Potential western exporters to Japan need to have an understanding of Japanese business relationships. While describing the distribution system, the term keiretsuka was used to describe the relationship between manufacturers, wholesalers, retailers and distributors. Keiretsuka relationships also involve importers. These relationships could be vital if a potential exporter wishes to penetrate the market with a new product. The relationship one’s importer has with retailers is very important in determining the success of the venture.

Keiretsuka can be equally important in less dramatic ways. If the importation of a particular vegetable is likely to be troublesome, for example, involving specialised storage and a high probability of fumigation, then the importer’s relationship with others at this end of the distribution chain becomes vital.

The Japanese place heavy reliance on relationships. Invariably, the first business relationship entered into with the Japanese will be very significant. Once entered into, it is difficult to break. The decision to change importers, for example, should be taken only after very careful consideration. Relationships with others in the distribution chain could be adversely affected and a whole new market strategy required. The lesson is that the research undertaken to enter the market must pay particular attention to the relationships involved in the proposed business plan.

There are many indicators to suggest Japanese imports will continue to enjoy strong growth. Japanese agriculture is highly supported by government at national, prefectural and municipal level. The common methods of support are grants, low interest loans for farmers and their agricultural organisations, and price support.

For a number of years now, the Japanese government has been gradually reducing its level of assistance. At the same time, it has put in place a number of policies designed to improve the competitiveness of the domestic agricultural sector.

To achieve this, the Japanese Government has adopted two broad policy approaches. The first involves the Japanese government’s reduction in direct financial assistance to its primary producers: at the same time, there have been reductions in government price support systems.

The second approach involves encouraging cost-efficient farming by expanding farming scale and reducing production costs. Another policy instrument has been to narrow the gap between domestic and international prices by liberalising the range of agricultural imports. According to Lotus Red research, vegetable production is gradually declining, with a large increase in the import of fresh vegetables.

One of the main objectives of Lotus Red is to identify windows of opportunity for their leafy produce. Since the early 1990’s, lettuce marketing occurs year-round at the major Japanese markets. There has been more than a 50% increase in the volume of lettuce marketed through the central wholesale system over the past decade, mostly from the west coast of the United States. Further, prices exhibit the traditional inverse relationship to throughput, and it appears that despite the huge increase in throughput, prices have held their value.

Much more work still needs to done by Lotus Red in its export drive to Asia, including an Export Market Development Mission planned for the third quarter of 1996.

Grant Vinning is the Managing Director of Asian Market Research (AMR), and Export Specialist Consultant for Lotus Red Pty Ltd. Grant recently completed a 400-page study which analysed Asian vegetables in terms of use, production, major markets, export and prices. He was also responsible for the successful ’88 Red’ promotion which saw temperate fruit producers from Queensland develop new markets for their fruit in Asia. Grant is also the author of ‘Inside Japan’s Vegetable Industry’, published by the Queensland Department of Primary Industry.

ETRO 1987a,
Dietary trends in Japan,
Japan External Trade organisation, Tokyo.

AFF 1989,
Status of Vegetable Production and its Marketing in Japan,
Mimeograph, Food and Marketing Bureau, Ministry of Agriculture, Forestry and Fisheries, Tsukuba International Agricultural Training Centre, Tsukuba.

Matsuda, Y., 1989,
‘An analysis of consumer food needs’,
Journal of Rural Problems, 25(4), 168-76
(Japanese with English summary).

Vinning, G. S.,
Inside Japan’s Vegetable Industry,
Queensland Department of Primary Industries.

Vinning, G.S.,
Marketing into Asia: Export Market Development,
Lotus Red Workshop #1, Gosford, 1996

Vinning, G.S.,
Price Profiling: Vegetables in Japan,
Lotus Red Workshop #1, Gosford, 1996

Vinning, G.S.,
Marketing into Asia: Japan and Taiwan,
Lotus Red Workshop #1, Gosford, 1996

Lotus Red Pty Ltd was formed in October 1995 with the assistance of the Department of Primary Industries & Energy (DPIE), and managed by the Central Coast Regional Development Corporation.