Is the Milk Shortage Coming While Trying to Control the 'Milk Inflation'?... Government and Dairy Farmers in a Standoff

[Image source=Yonhap News]

[Asia Economy Sejong=Reporter Kim Hyewon] Concerns over an unexpected milk shortage are growing. This is due to the dairy farmers' organizations strongly opposing the government's move to reform the pricing system of raw milk, the main ingredient of milk, citing income instability. Although the government presented a revised proposal retreating from its original stance, producer groups have called it a policy that ignores reality and have announced high-intensity struggles, including refusal to deliver milk. However, with the cancellation of the designation of the Dairy Promotion Committee as a public institution, which was another source of conflict, the justification for collective supply refusal by dairy farmers has somewhat diminished.

Soaring Milk Prices... Government Pushes to Reform from Cost-Linked System to Differential Pricing by Usage

According to the government and industry on the 1st, the Ministry of Agriculture, Food and Rural Affairs is preparing a plan to improve the dairy industry system, aiming for October, which includes introducing a differential pricing system by usage and restructuring the decision-making structure of the Dairy Promotion Committee.

The core of the government's reform plan is to change the raw milk price determination system from the current raw milk price linkage system (cost-linked system) to a differential pricing system by usage. The raw milk price linkage system, introduced by the government in 2013 to increase production amid milk supply shortages, was based on setting raw milk prices by adding dairy farmers' production costs and various incentives. The initial intention to stabilize the dairy industry was good. The problem is that after implementing a system not based on supply and demand laws, milk prices have continuously risen, while consumption has decreased due to high prices, causing an increase in prices of other foods made from dairy products. According to the Ministry of Agriculture, Food and Rural Affairs, the current raw milk price in Korea is 1,083 KRW per liter, more than double that of the US (491 KRW) and Europe (470 KRW). Losing price competitiveness, the market share of domestic dairy products fell from 77.3% in 2001 to 48.1% in 2020.

The differential pricing system by usage means applying different prices by dividing raw milk into drinking milk used to make white milk and processed milk used to make cheese, butter, etc. The Ministry proposed supplying drinking milk, which has high demand, at the current price of 1,100 KRW, and processed milk at 800 KRW. For processed milk, the government would subsidize part of the price difference. In the first year, 1.9 million tons of drinking milk and 200,000 tons of processed milk would be applied, increasing to 1.85 million tons and 300,000 tons in the second year, and 1.8 million tons and 400,000 tons in the following year, respectively, with phased application considering market conditions, according to the government's revised proposal.

However, the Korea Dairy & Beef Farmers Association immediately issued a statement saying, "Dairy farmers find it difficult to increase milk production due to soaring production costs and various environmental regulations," and "Adjusting the normal quota to 1.9 million tons, the production level during the foot-and-mouth disease outbreak in 2011, would provoke a milk shortage."

The Ministry judged that comparing farmers' production and sales income under the first year of the proposed differential pricing system and the current system would actually increase farmers' sales income by more than 150 billion KRW. In response, the association said, "Considering last year's feed cost surge alone, production costs are predicted to increase by more than 10% to over 900 KRW, so almost no farmer would produce processed milk at 800 KRW."

Failure to Designate Dairy Promotion Committee as Public Institution... Producer-Centered Board Composition Remains an Issue

Noise surrounding the Dairy Promotion Committee, which determines raw milk prices, continues. The government's attempt to newly designate the Dairy Promotion Committee as a public institution was scrapped amid internal and external backlash, viewing it as de facto price control.

However, the fact that the Dairy Promotion Committee's board is composed mainly of producer groups, creating a 'tilted playing field' in decision-making, is pointed out as a problem to be resolved. The board requires attendance of more than two-thirds of the 15 directors to convene, but since 7 of the 15 directors are from producer groups, if they oppose, the board cannot even hold a meeting.

In response, the Ministry proposed increasing the board members from 15 to 23 (3 government, 3 academia, 1 lawyer, 1 accountant, 1 Dairy Promotion Committee member, 3 consumer representatives, 7 producer representatives, 4 dairy company representatives), removing the requirement that more than two-thirds of directors must attend to convene, but strengthening the voting condition to a majority of attendees. When producer groups opposed this as a move to nullify their bargaining rights, the Ministry proposed a revised plan to form a separate subcommittee to grant authority over raw milk purchase volumes and price decisions. The association is expected to hold a resolution meeting this month to decide whether to stop raw milk deliveries.

Whether the situation will escalate to a milk delivery refusal by dairy farmer groups remains uncertain, as failing to fulfill raw milk supply contracts with dairy companies could lead to legal disputes.

This content was produced with the assistance of AI translation services.