Research Reports
A Study on the Analysis of the Milk Demand and Supply Management System in Korea
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AuthorSong, Jooho
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Publication Date2005.12.01
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Original
In 1999, Korea Dairy Committee (KDC) was established with an aim to stabilize the supply/demand and price of raw milk. However, as the committee accounts for collecting only 27 percent of the entire milk production, it is less capable of adjusting the supply and demand of milk. Against the backdrop, there have been active discussions on reforming the overall milk supply and demand management system.
The problem of the milk supply and demand policy in Korea is that the system for flexible milk price and production volume adjustment is lacking. Milk price increased when production costs increased, but not vice versa, and the market situation was not taken into account in determining the price. The current two-tier milk collection structure composed of the indirect milk collection by KDC and the direct collection by dairy product manufacturers makes flexible response to demand and supply changes more difficult.
This study has estimated the dairy products demand function and the milk supply function. To build the mid- to short-term milk supply reaction model, the model of number of dairy cows and the model of milk production volume per head were separated. In addition, the effects of the expanded market liberation under the DDA were analyzed by milk components (fat and solid- non-fat). As a result, it was found that if the tariff is cut down 50 percent from the current level, the local milk production volume is expected to drop 2.1 percent compared with the production volume under the current tariff system (base volume), and the price for processed milk will fall 7.5 percent. If the tariff is 100 percent waived, the production volume is expected to drop 6.5 percent compared with the base volume and the price for processed milk is forecast to fall 23 percent. Likewise, the tariff reduction or waiver is projected to have a huge impact on the income of dairy farm households so income support policy is required.
With the milk oversupply unabated, KDC has introduced the differentiated pricing system for surplus milk from October 2002. Under the system, the committee classifies the milk collected above contracted amount as surplus milk and pays dairy farmers lower price for the surplus than the normal price. In this system, "Reference Amount of Milk" by farm household plays the same role as a quota. A quota system has brought about market distortion and quota rent, so it was criticized as lowering competitiveness over the long run by causing additional costs. However, over the short term, the quota system is believed to contribute to reducing the government's spending and stabilizing farm household income by striking a balance between demand and supply. Since introduced, the differentiated pricing system for surplus milk has reduced the surplus milk volume from 310,000 tonnes in 2002 to 120,000 tonnes at the end of 2004. However, farm households continue to demand the increase of the quota, making it instrumental to work out fundamental solutions.
The study took a look at the measures to adjust supply and demand of milk while maintaining the basic framework of the current quota system. To enable price to function to adjust supply and demand, the current milk pricing system should be reformed. To this end, dairy farms should initiate the establishment of their organizations by region and make them negotiate over price with dairy product manufacturers. The government should also guarantee the minimum price. Besides, as in foreign countries, differentiated prices should be applied to milk used for different purposes, and the system of paying the blend price to farm households should be adopted. Furthermore, the price support system should be implemented for milk processing in order to nurture the domestic milk processing industry.
Researchers: Song, Joo-Ho, Jeong, Min-Kook, Kim, Hyun-Jung, Lee, Hyun-Ok, Ahn, Byung-Il
E-mail address: jhsong@krei.re.kr
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