Whole Milk Price in South Korea increases, triggering worries about Milkflation among consumers
A subcommittee of the Korea Dairy Committee, composed of representatives from dairy processing companies and dairy farmers, determines raw milk prices every year. This year was the first time the new price differentiation system was used. Settlement for this year’s negotiation finally came on July 27 after 11 rounds of tough negotiations. The parties involved agreed to increase the price of raw milk by KRW 88 (USD 0.067) per liter, the highest increase since 2013. Therefore, raw milk for drinking will enter the KRW1,000 (USD 0.76) range for the first time, from last year’s settled price of KRW 996 (USD 0.76) per liter to KRW 1084 (USD 0.83) per liter. Raw milk for dairy products, such as cheese and condensed milk, has been settled to increase by KRW 87 (USD 0.067) per liter, increasing the price from KRW 800 (USD 0.61) per liter to KRW 887 (USD 0.68) per liter. The prices are set to take effect in October of this year.
Source: Korea Dairy Committee
Increasing Production Cost Adding Hardship to South Korean Dairy Farmers
Whole milk consumption is decreasing due to South Korea’s low birth rates and aging population. Yet, raw milk prices are increasing due to the Korean pricing system and the increase in production costs.
Due to poor feed production conditions locally, South Korea heavily depends on imported feed. South Korea imports nearly 95% of its feed, which accounts for 59.5% of the total domestic production cost. The war in Ukraine, extreme weather conditions from climate change, and increasing exchange rate led to complications in importing and raised feed costs. The limited agricultural land and rising production costs increased milk prices, forcing consumers to rely on less expensive imported dairy products. According to the Ministry of Agriculture, Food and Rural Affairs, milk prices have increased by 72.2% over the past 20 years. Meanwhile, domestic production has fallen, and the import of dairy products increased by 272.7%. This has resulted in South Korea’s self-sufficiency ratio dropping from 77.3% in 2001 to 48.1% in 2020.
Source: Korea Dairy Committee
More than 300 dairy farms have shut down in the past two years. Plummeting prices of milking cows and dwindling livestock further demonstrate the bleak conditions of the dairy industry. According to the National Agricultural Cooperative Federation, the price of one milking cow in Dec-22 dropped to KRW 19,000 (USD 14.52), a 91% decrease YoY. According to the Korea Rural Economic Institute, milking dairy cow livestock has been decreasing throughout the year. In Sept-23, dairy cows decreased from 40,000 to 38,9000, a 2.6% decrease YoY. This is due to high production costs lowering the profit of milking cows. Farmers state that no one would take them even if the cows were free. The sustainability of the dairy farming industry is a concern for the South Korean government, and it has made efforts to improve the situation. Such was the case in 2013 when the dairy industry faced extreme hardships. The government reformed the raw milk price system to protect dairy farmers and compensate for the increasing production cost.
The Flaw of Korea’s Pricing System interlocked with Production Cost
Due to the complicated nature of raw milk, it is difficult to control short-term production, making the imbalance between supply and demand higher than other agricultural commodities. Therefore, raw milk prices cannot be entirely entrusted to the market economy and must be partially regulated by government policies. Most countries, including South Korea, have a fixed pricing system in place to ensure price stability. However, unlike other countries, South Korea’s pricing system uses only a single price that is linked to production cost.
Under the system, 90% to 110% of changes in the previous year’s production costs are added to the previous price to determine the current year’s raw milk prices. In simpler terms, changes in 2022 production costs are used to determine all of 2023’s raw milk prices. However, this pricing system was heavily criticized by dairy processors saying that the system only considers the supply side and completely ignores the law of demand. Under the pricing system, prices can only go up due to increasing production costs, even when demand and consumption have been decreasing in South Korea.
In addition to the pricing system, the raw milk quota system is narrowing the profit margins of milk processing companies. The raw milk quota system was implemented in 2002 when supply was not meeting demand. The system obligates companies to buy a certain quantity of milk from farmers yearly. With current diminishing consumption, companies are being forced to buy more than they need, creating an oversupply of raw milk. According to the Chairman of the Korea Dairy Committee, in 2021, dairy processing companies only needed 1.7 million metric tons (mmt) of raw milk for consumption. Still, they were forced to buy 2.04 mmt of raw milk at higher prices than imported raw milk. This raised the issue that dairy farmers have become complacent, depending on high purchase prices and the guaranteed quota. The farmers benefited from having high production costs and did not have a reason to improve supply chain management, invest in new technologies, and learn new farming techniques.
Price Differentiation system by end-use
To better reflect market conditions and increase the competitiveness of the dairy market, the government proposed a new price differentiation system in 2020. The new proposed system was closer to one used internationally, like in the United States (US). However, fierce opposition from the Korea Dairy & Beef Farmers meant it took two years to negotiate the system. The previous pricing system was then abolished and replaced by the new price differentiation system that was first used in 2023. Under the new pricing system, raw milk will be divided into two categories depending on their end usage: raw milk for drinking purposes and raw milk for making other dairy products. They will be given different prices and lowered quotas. Raw milk for drinking purposes will remain close to the current price, and the price of raw milk for making dairy products will decrease. The government hopes the lowered cost of raw milk for making dairy products will increase purchases from dairy processing companies without further cost incursions, which will lower imports of raw milk in turn. The government hopes this will increase South Korea’s price competitiveness against cheaper imported milk.
The new pricing system will also allow a lowered percentage of changes in production costs during negotiation. Last year’s production cost increased from KRW 843 (USD 0.64) per liter to KRW 959 (USD 0.73) per liter, a 13.7% increase. Therefore, under the previous system, the bargaining range of this year’s negotiation would have been between KRW 104 (USD 0.079) to KRW 127 (USD 0.097) per liter to reflect 90 to 110% of KRW 116 (USD 0.089). However, under the new price differentiation system, only 60% to 90% production cost increases were applied, setting the bargaining range from KRW 69 (USD 0.053) to KRW 104 (USD 0.079). Although this is not a perfect system, this new price system better reflects changing consumption and is seen as a positive step toward the longevity and sustainability of the South Korean dairy industry.
Expected situation from Milkflation
Despite the renewed pricing system, high production costs meant an increase in raw milk was inevitable this year. The steep price spike of KRW 88 (USD 0.067) is creating concerns about high milk prices. According to the Korean Statistical Information Service (KOSIS), milk prices in Jun-23 saw a 9.3% increase year-on-year (YoY), the highest growth in nine years. Despite government pleas to refrain from increasing the current price of KRW 2,800 (USD 2.14) per liter, prices are expected to rise above KRW 3,000 (USD 2.29) per liter.
When last year's raw milk prices increased by KRW 49 (USD 0.037) per liter, major dairy companies raised their prices. Seoul Milk increased by 6.6%, Maeil Dairies increased by 9.6%, and Namyang Dairy Products increased by 8.6%. The market also saw a 20% increase in ice cream prices and a 10% increase in cookies when major brands, such as Lotte Food Binggrae, increased prices.
South Korean milk is losing competitiveness against foreign imports as consumers find alternatives, including pasteurized milk. Pasteurization involves heating milk to a specific temperature to kill off bacteria, allowing for longer shelf-life and having no nutritional difference from whole milk. With rising whole milk prices, imported pasteurized milk is increasing in Korea. According to the Korean Customs Office, South Korea's imports of pasteurized milk increased from 14,675 metric tons (mt) to 18,379 mt. Although pasteurized milk prices have also increased, they are still significantly lower than domestic milk prices.
Poland’s pasteurized milk, which makes up 75% of the pasteurized milk market in South Korea, is being sold at KRW 1,300 (USD 0.99) to KRW1,600 (USD 1.22) per liter, half the price of domestic milk. Experts also believe that the Korean market will be further flooded with cheaper imported milk when the upcoming 2026 abolishment of dairy tariffs with the US-European Union (EU) Free Trade Agreement (FTA) takes effect. In addition, interest in plant-based substitutes is rising, and the milk substitutes market is expected to exceed one trillion KRW (USD 7.63 million) by 2026. Korea has seen increasing food companies entering the market, such as CJ Foodville and Samyang Foods, launching their plant-based milk products to the market recently. An announcement from Shinsegae Foods followed on August 3, saying that they are in the testing stages and are preparing to enter the market as well.
Rising milk prices will only increase consumer burden. This will further reduce consumption and demand, exacerbating the dire situation in the dairy industry. Although the renewed pricing system is a positive change, the accumulated price from the previous pricing system and increased production costs have resulted in high raw milk prices this year. Dairy farmers cannot be complacent, relying solely on the pricing system. It will be to their benefit to start investing in technologies that reduce production costs – modernizing their farms, improving logistics, and raising efficiency. The South Korean Government needs to support farmers by funding research and expanding training programs. The government also needs to rethink the improvement of the price differentiating system to better reflect market conditions. However, the tension between the dairy processing companies and dairy farmers, combined with the long and tedious bureaucratic system, means reform will unlikely occur soon.