"Fee Collecting Without Effort": Wholesale Corporations Rake In 188.6 Billion Won With No Oversight or Expulsion for 40 Years [The Weather Is Not to Blame] ④

Full Control Over Auctions and Listing Fees as Revenue Sources
Low Risk and Stable Cash Generation
Entry of Mid-Sized Companies from Unrelated Sectors Like Steel and Construction
Annual Operating Margins in the 20% Range and Tens of Billion

Editor's NoteWe are living in an era where "agflation"-agricultural inflation driven by climate change-has become a constant. Whenever abnormal weather events like droughts, heavy rainfall, or heatwaves occur, food prices on the table fluctuate wildly. Unpredictable weather, which leads to poor harvests, is often cited as the cause of soaring agricultural prices. This is only half true. The opaque distribution structure of agricultural products manipulates prices, using the weather as a shield. Farmers are frustrated as the crops they have painstakingly grown fail to fetch fair prices in the market, while consumers are caught in a vicious cycle of paying far more than the shipping price from the production site. The Asia Business Daily has investigated the cartel-like structure hidden within agricultural distribution under the guise of weather, and sought alternatives to the agricultural auction system that has been entrenched for 40 years.

#Last year, the combined sales of the five major fruit and vegetable wholesale corporations at Garak Market reached 188.6 billion won, an 11% increase from the previous year. Due to abnormal weather conditions, production volumes dropped and agricultural prices soared, leading to buzzwords like "golden apples" and "golden pears" to describe the heavy burden on consumers, yet the wholesale corporations reported strong results.

Wholesale corporations are often cited as the main culprits behind inflated agricultural distribution costs. When agricultural products consigned by producers are auctioned and the final price is set, the wholesale corporations take a listing fee of 4-7%. The higher the auction price, the greater their profit. This structure has led to criticism that wholesale corporations "make money from commissions without lifting a finger," even as farmers' profits shrink due to volatile market prices.

Wholesale corporation sign at the Agricultural and Marine Products Wholesale Market in Garak-dong, Songpa-gu, Seoul. Photo by Kim Heungsun

Enormous Profit Margins: "Commission Business and Dividend Bonanza for Non-Agricultural Firms"

According to a report titled "Analysis of Domestic Agricultural Product Distribution Structure" released last year by the Korea Consumer Organizations Council's Price Monitoring Center, the five private wholesale corporations at the Garak-dong Agricultural and Marine Products Wholesale Market in Songpa-gu, Seoul (Seoul Cheongwa, Joongang Cheongwa, Donghwa Cheongwa, Korea Cheongwa, and Daea Cheongwa) recorded an average operating margin of 23.87% over the five years from 2019 to 2023.

Among the 32 public wholesale market corporations nationwide, excluding Garak Market, the eight companies that disclosed their financial statements (Seobu Cheongwa, Dongbu Cheongwa, Hyoseong Cheongwa, Daeyang Cheongwa, Dure Cheongwa, Honam Cheongwa, Guri Cheongwa, and Internet Cheongwa) posted an average operating margin of 12.48% during the same period. This far exceeds the 1-3% operating margins of major retail channels such as large supermarkets and Coupang, as well as the 6.9% average for major food companies as of last year.

The Korea Consumer Organizations Council pointed out, "Wholesale market corporations earn profits by collecting commissions on transactions without bearing risks such as inventory," adding, "Given this structure, there are doubts as to whether their operating margins are excessive."

After an auction, wholesale corporations immediately pay the winning bid amount, minus the commission, to the consignor. If the intermediate wholesaler who won the bid delays payment, interest is charged. Baek Hyesuk, head of the Sustainable National Table Forum, explained, "Initially, wholesale corporations and intermediate wholesalers started out as equals, but now, due to the issue of interest, intermediate wholesalers are essentially subordinated to the wholesale corporations." She added, "Wholesale corporations earn significant non-operating income from interest charged to intermediate wholesalers, in addition to their auction commissions."

For example, Seoul Cheongwa earned about 1.5 billion won in interest income out of a total of 3 billion won in non-operating income last year. This is nearly five times higher than the 300 million won recorded in 2021.

Because wholesale corporations face little risk and can generate stable cash flow, they are attractive to large capital. All five private wholesale corporations at Garak Market-Seoul Cheongwa (Koryo Steel), Joongang Cheongwa (Taepyeongyang Development), Donghwa Cheongwa (Shilla Trading), Korea Cheongwa (The Korea Holdings), and Daea Cheongwa (Hoban Group)-have major shareholders that are steel, construction, deep-sea fishing, and management consulting firms with no connection to agriculture.

According to data compiled from disclosures on the Financial Supervisory Service's electronic disclosure system, these five corporations paid out a total of 84.9 billion won in dividends from 2019 to last year. This amounts to 63% of their combined net profit of 134.8 billion won over the same period. The Korea Consumer Organizations Council criticized, "Wholesale market corporations are funneling much of the profit earned from agricultural distribution directly to shareholders through simple dividends," and urged, "They should seek ways to coexist with consumers and producers by making efforts and investments to advance agricultural distribution."

A Legal Monopoly Overlooked for 40 Years... Stalled Reforms

Korea's public wholesale market system was introduced in 1985 to correct the irrational structure of agricultural price determination. Previously, farmers would voluntarily hand over their produce to middlemen, who would then exploit their informational advantage to drive down prices or delay payments. To prevent producer losses, the government enacted the Act on Distribution and Price Stabilization of Agricultural and Fishery Products (the Agricultural and Fishery Products Act) in 1976. Subsequently, 33 public wholesale markets were established nationwide, and the listing transaction system (auction) was introduced to ensure transparent price setting through auctions.

In the auction system, instead of negotiating directly, a small number of wholesale market corporations act as sales agents for producers, while intermediate wholesalers act as purchasing agents, with prices determined through competitive bidding. In theory, this institutionalizes fair trade. However, over time, problems have emerged. Because bid prices depend on the daily supply and demand of intermediate wholesalers participating in the auction, prices fluctuate wildly, and suspicions of price collusion among auction participants have arisen.

To overcome the limitations of the auction system, the government introduced the "market wholesaler system" in 2000 and the "fixed price and private contract" methods in 2012. The market wholesaler system allows farmers to negotiate directly with market wholesalers in advance, reducing the distribution process by one step compared to auctions and lowering costs. Prices are also more stable because they are agreed upon in advance. The fixed price and private contract methods allow prices to be set in advance (fixed price) or for transactions to be conducted with specific parties (private contract), both without going through the auction process. These methods offer the advantage of less price fluctuation compared to auctions.

However, the auction system still dominates. According to the Korea Agro-Fisheries & Food Trade Corporation (aT) Wholesale Market Statistical Yearbook, the share of fixed price and private contract transactions by volume in all public wholesale markets (fruits and vegetables) increased from 9% in 2012 to 20.4% last year, but auctions still account for about 80%. For fixed price and private contract transactions to be effective, more experienced and capable auctioneers are needed, but the ratio of certified auctioneers to actual auctioneers in the fruit and vegetable sector fell from 28.4% in 2011 to 23.2% in 2022.

The market wholesaler system is only implemented in a few markets, so its impact is limited. At Garak Market, 82% of transactions (by volume, fruit and vegetable sector) are via auction, about 10% are fixed price and private contract, and 7.5% are exceptional listing transactions. At Seoul's Gangseo Market, the only public wholesale market to operate the market wholesaler system, the share is 59.5% for the market wholesaler system and 31.2% for auctions. However, Gangseo Market accounted for only 9.5% of total fruit and vegetable transaction value in all public wholesale markets last year, so its significance is limited.

With wholesale market corporations monopolizing auctions across the entire market, a handful of companies have maintained their status for 40 years without meaningful checks, leading to ongoing concerns about monopoly. Under the current Agricultural and Fishery Products Act, wholesale market corporations at central wholesale markets are designated by the Minister of Agriculture, Food and Rural Affairs or the Minister of Oceans and Fisheries, with a designation period set between five and ten years.

However, there are no specified procedures for re-designating corporations whose terms have expired, nor are there concrete evaluation criteria. The five wholesale corporations at Garak Market have never been replaced since the market opened. During this time, these companies were caught colluding on commissions for 16 years and were fined billions of won by the Fair Trade Commission in 2018, but were not expelled from the market.

There have been attempts to break up this monopoly. In the 22nd National Assembly, Park Junghyun, a member of the Public Administration and Security Committee from the Democratic Party, sponsored a partial amendment to the Agricultural and Fishery Products Act last June to improve the designation system for wholesale market corporations. The main points are to select corporations through open competition when designating wholesale market corporations and to set the re-designation period at up to five years. To encourage competition, the amendment also sets a cap on the number of wholesale corporations in the same market and allows for the attachment of conditions necessary for price stability, protection of farmers' rights, and advancement of wholesale distribution when re-designating corporations. However, the amendment has been pending for nearly five months.

An industry insider, speaking on condition of anonymity, said, "The government is pushing to expand fixed price and private contract transactions, but wholesale corporations continue to operate the auction system because it is more profitable and requires less manpower, such as veteran auctioneers. To maintain this, wholesale corporations have engaged in various lobbying activities, which is why the dominant position of the auction system has remained unshaken for decades."

Ahead of the Chuseok holiday, on September 9, at the Vegetable Building of the Garak-dong Agricultural and Marine Products Wholesale Market in Songpa-gu, Seoul, auctions were taking place as intermediate wholesalers examined the products. Photo by Kim Heungsun

<To be continued in Part 5 of 'The Weather Is Not to Blame.'>