[Initial Report] Only Consumers Suffer from Dairy Farmers' Stubbornness

As consumer prices continue to rise, grocery prices have reached a critical point. On the 19th, citizens were shopping at a large supermarket in Seoul. Photo by Mun Honam munonam@

In South Korea, a strange phenomenon is occurring where the number of people drinking white milk is decreasing, yet prices continue to rise, breaking the law of supply and demand. Over the past 20 years, consumption of city milk (市乳) has declined while raw milk (原乳) production has been excessive, yet the price increase rate of raw milk during this period has exceeded that of the United States or Europe by six times. Currently, the price of raw milk is 1,083 won per liter, significantly higher than the U.S. (491 won) and Europe (470 won).

However, this year, an additional factor causing a 47 to 58 won per liter increase in raw milk prices has emerged. The Agricultural and Livestock Production Cost Survey, announced annually around May by Statistics Korea, serves as the basis for calculating raw milk prices. Last year, the production cost of milk per liter was 843 won, up 34 won (4.2%) from the previous year. The costs of compound feed for dairy farming and labor have increased significantly. If the current production cost-linked pricing system, which adjusts raw milk prices according to changes in production costs, is maintained, the final prices of processed goods in shopping baskets will inevitably rise sharply, and this burden will fall directly on consumers. When the price of raw milk rises, it triggers a chain increase in prices of dairy products such as cheese, butter, and ice cream, as well as everyday foods like coffee and bread. In an already high inflation environment with domestic consumer prices rising over 6%, 'milk inflation' adds insult to injury.

While the excessively high domestic raw milk price that stimulates inflation is a concern, the pricing system that contradicts market economy principles is an even bigger problem. The production cost-linked system was introduced in 2013 to increase milk production during times of shortage and to facilitate annual raw milk price negotiations between dairy farmers and dairy companies. However, this policy clearly conflicts with the current reality of milk surplus. The government is attempting to reform the production cost-linked system into a differentiated pricing system by usage, reflecting only supply-side price increase factors, but dairy farmers who resist change strongly oppose this, putting the government in a difficult position. Even if the government promises to guarantee or increase farmers' existing income, they remain unmoved. Analyzing the absolute raw milk price (1,083 won), including incentives (157 won), shows that it is 1.6 times the operating cost (667 won) and 1.4 times the production cost (791 won), indicating that Korean dairy farmers have relatively high profit margins compared to foreign counterparts, giving them little reason to welcome new policies.

The current dairy industry barely survives on three pillars: the quota system, the production cost-linked system, and government compensation for price differences. However, with fewer people drinking domestic milk and more seeking imported dairy products, it is difficult to secure the industry's sustainability. The price gap between domestic and foreign products is widening, and as consumption of drinking milk decreases, dairy companies' capacity to purchase domestic milk is shrinking, causing the raw milk self-sufficiency rate to plummet to the 40% range. From 2026, tariffs on U.S. and European cheese and city milk will be abolished, and domestic products will lose more ground to low-priced dairy product imports. The government's claim that the reason for overhauling the entire dairy system is to save, not kill, the dairy industry is gaining credibility. According to regulations, within one month after the release of production cost change figures by Statistics Korea, a committee consisting of three members from dairy farmer organizations, three from dairy companies, and one academic must be formed to set raw milk prices. However, this year the deadline has passed with no progress. It is time to reflect on whether complacency has set in. Putting aside the lazy habit of resisting innovation, it is hoped that negotiations will begin promptly for the uncertain future of the dairy industry. / Kim Hye-won, Deputy Head of Economic Department kimhye@