[Asia Economy Sejong=Reporter Kim Hyewon] An ironic situation has continued for several years where the number of people buying milk is decreasing, but the price of raw milk, the raw material for making milk, keeps rising. Meanwhile, the processed dairy product market, such as cheese and butter, where demand is rapidly increasing, is losing out to cheaper imported raw milk. There are voices calling for urgent institutional improvements, such as the price calculation system, to enhance the competitiveness of the domestic dairy industry, which is practically dependent on government policy and financial support.
According to the dairy industry on the 21st, despite a sharp decline in the consumption of drinking milk and other milk products, the price of raw milk has increased by 72.2%, from 629 won per liter to 1,083 won over the past 20 years. During the same period, the price increase rate far exceeds that of Japan (33.8%), Europe (19.6%), and the United States (11.8%). Analyzing the absolute amount of 1,083 won for raw milk, it is 1.6 times the management cost (667 won) and 1.4 times the production cost (791 won). The industry evaluates that the profit margin of domestic dairy farms is at a high level compared to foreign countries where prices fluctuate between management and production costs.
This phenomenon stems from being bound by systems such as the quota system and production cost linkage system, which have failed to properly reflect reality despite changes in market supply and demand conditions. The domestic dairy industry is currently sustained by three pillars: the quota system, the production cost linkage system, and government compensation for the price difference.
First, the raw milk quota amount (2.23 million tons) exceeds the demand amount (1.75 million tons). However, raw milk within the quota can be traded at a fixed price higher than the market price. In particular, the quota system applies only to the price of drinking milk, whose consumption is decreasing, and is criticized as a system disconnected from the reality of increasing consumption of processed dairy products. With advances in cold chain and dairy product processing technologies, the significance of the quota system has weakened. In Europe, the quota system was abolished in 2015.
Even if the quota system exists, the international price is only about 400 to 500 won per liter, so domestic dairy companies cannot purchase all domestic raw milk priced in the 1,000 won range. At this time, the government subsidizes part of the purchase price, paying 33.6 billion won in 2020. This amounts to about 7 million won per quota-holding farm (4,800 farms). Over the past 20 years, the supply of imported raw milk has increased by 272.7%, while the domestic self-sufficiency rate has dropped by 29.2 percentage points from 77.3% to 48.1%. This is the current state of declining competitiveness in the dairy industry.
The government’s position to revive the dairy industry is to first reform the current production cost linkage system, which adjusts raw milk prices only according to changes in production costs, into a differentiated price system by usage. The production cost linkage system was introduced in 2013 with the purpose of increasing milk production when milk was scarce in the past and facilitating annual raw milk price negotiations between dairy farmers and dairy companies. However, as drinking milk consumption continues to decline, the production cost linkage system has been criticized for reflecting only price increase factors on the supply side and violating the market economy principle of balancing supply and demand. From the producers’ perspective, the quota system and production cost linkage system guarantee production volume and price, so they are negative about institutional improvements.
A challenge to be resolved is that the Dairy Promotion Board, which decides raw milk prices, is composed mainly of producers. The Dairy Promotion Board requires the attendance of more than two-thirds of its 15 directors to hold a meeting, and 7 of the 15 directors are from producer organizations. If the agenda is opposed by them, it is impossible to even convene the meeting.
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