Milk Prices Rise Again to 3,000 Won per 1ℓ...Concerns Over 'Milkflation'

Decline in Dairy Companies' Performance Due to Reduced Consumption and Rising Crude Oil Prices
Crude Oil Price Expected to Increase by 69~104 Won per Liter
Calls for Tax Support and Other Measures for Manufacturers

As domestic milk consumption declines every year, the poor performance of local dairy companies is accelerating, and this year, raw milk prices are expected to rise by the largest margin ever. Due to a raw milk price determination system that is disconnected from actual consumption, raw milk prices are increasing, which is expected to lead to a chain reaction of price hikes for milk and related products. In this situation, consumers are likely to bear the full burden of the price increases.

According to the distribution consumption statistics from the Dairy Promotion Council on the 23rd, the per capita consumption of white raw milk (plain milk) in Korea decreased from 28.10 kg in 2012 to 26.20 kg in 2022. Meanwhile, the price of raw milk per liter has been rising sharply, increasing by 4 won in 2018, 21 won in 2021, and 49 won last year, fueling the rise in milk prices.

Although consumption has steadily shrunk, prices have been raised every year, damaging the performance of dairy companies. Maeil Dairies reported an operating profit of 60.7 billion won last year, down 30.9% from the previous year. In the first quarter of this year, operating profit was 12.6 billion won, a 25.6% decrease. Seoul Milk’s operating profit shrank from 58.2 billion won in 2021 to 47.3 billion won last year, a decline of 18.7%, while Namyang Dairy continued to post an operating loss of 86.8 billion won during the same period.

Raw Milk Prices to Rise to Record High Levels

The underlying cause of the poor performance of dairy companies recently is the raw milk price determination system, which does not properly consider consumption volume. The Dairy Promotion Council, composed of representatives from the dairy farming and dairy industries, formed a subcommittee on the 9th to negotiate this year’s raw milk prices. Until now, the basic raw milk price was determined based on the previous year’s “Livestock Product Production Cost Survey” published by Statistics Korea. However, with the implementation of a new dairy system this year, the negotiation scope is set by considering both the production cost survey results and changes in milk usage.

Until last year, raw milk prices were determined by the “production cost linkage system.” This system sets raw milk prices solely based on changes in dairy farmers’ production costs. However, despite declining milk demand, raw milk prices only rose, leading to criticism. Consequently, in September last year, the milk price determination system was reformed into a “differential pricing system by usage.” Starting this year, the differential pricing system divides raw milk into “beverage milk” for drinking and “processed milk” used in yogurt, ice cream, and other products. The beverage milk price is maintained at the current level, while the processed milk price is set lower. This system was introduced because the dairy industry argued that purchasing processed milk at a lower price would reduce prices of domestic processed dairy products and help them compete against cheaper imported products. It is also expected to increase the milk self-sufficiency rate in the long term.

Under this new system, raw milk prices this year are expected to increase within the range of 69 to 104 won per liter, making the raw milk price between 1,065 and 1,100 won per liter. Even if negotiations settle at the lowest point, a 69 won increase is the largest price hike since the production cost linkage system was implemented in 2013, when prices rose by 106 won.

However, the government states that even if the maximum negotiation range is applied, the increase is lower than in the past. This is because the previous production cost linkage system allowed increases between 104 and 127 won per liter (90?110% of production cost changes), whereas this year’s range is 69 to 104 won (60?90%). Last year, beverage milk usage decreased by 1.6%, from 1.753 million tons to 1.725 million tons. If the change in beverage milk usage is within 1.7%, it is classified as “appropriate,” and 60?90% of the production cost change amount is set as the price negotiation range.

Concerns Over Milkflation... Vicious Cycle of Consumption Slump

If raw milk prices exceed 1,000 won and rise to 1,100 won, the first problem to face will undoubtedly be “milkflation,” where milk prices and prices of related products such as bread and coffee rise in a chain reaction. When raw milk prices increased by 49 won per liter (5.1%) last year, major dairy companies such as Seoul Milk (6.6%), Maeil Dairies (9.6%), and Namyang Dairy (8.6%) raised prices by more than the increase in raw milk prices. Since this year’s raw milk price increase is expected to be between 6.9% and 10.4%, manufacturers are also expected to raise milk prices by more than the raw milk price increase, making it a foregone conclusion that a 1-liter pack of milk will exceed 3,000 won.

The dairy industry is concerned that a sharp increase in raw milk prices could lead to a consumption slump. Due to the nature of the current price determination system, which reflects increases in raw milk production costs in prices, continuous increases in raw milk prices are inevitable, and the increased raw material costs will inevitably be partially passed on to consumers. There are also criticisms regarding the effectiveness of the differential pricing system introduced to limit price increases. Since beverage milk accounts for about 95% of consumption, maintaining the processed milk price slightly lower, which accounts for only about 5%, is unlikely to lead to meaningful price reductions in processed dairy products.

Of course, the dairy farming sector also has its arguments. They say that given the steep rise in production costs, a similar level of raw milk price increase is unavoidable to prevent the collapse of the production base. According to Statistics Korea, last year’s milk production cost was 959 won per liter, up 13.7% (116 won) from the previous year. Due to the Russia-Ukraine war last year, global grain prices rose, causing feed costs, which account for more than half of production costs, to increase to 641 won per kg, up 20.7% from the previous year. During the same period, self-labor costs also rose 6.4% to 21,609 won per hour.

Within the dairy industry, voices are calling for support for manufacturers or market expansion under the current system, where annual raw milk price increases are inevitable. A dairy industry official explained, “It is practically impossible for companies to fully absorb the increased raw milk prices. Although dairy companies raise product prices, they conduct year-round discounts through bundle products, so it is difficult to say they fully benefit from the price increases.” Another industry insider added, “Support funds for raw milk purchases or tax incentives for companies are needed. If possible, national campaigns to expand milk consumption and other efforts to expand the market should also be added.”

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