Concerns Over Milkflation... Will Retail Industry Margins Be Affected?

As negotiations between the dairy industry and milk companies over this year's milk price increase face difficulties, attention is focused on the government's potential adjustment of the distribution industry's margin rates. This comes amid concerns that the distribution margin, which accounts for about 30% of the milk price, may be excessively high.

According to the dairy industry on the 24th, the Dairy Promotion Committee subcommittee, composed of the dairy industry and milk companies, will hold its 10th negotiation session in the afternoon. Both sides are discussing a price increase in the range of 69 to 104 KRW per liter of raw milk this year. This adjustment range reflects the significant rise in production costs such as feed prices last year, making a raw milk price increase inevitable. However, opinions differ on the extent of the increase. Dairy farmers argue that an increase of at least 100 KRW per liter is necessary, while the milk companies are requesting the minimum increase. Even if the milk companies' position is accepted and the price rises by 69 KRW per liter, it would be the largest increase ever recorded.

The raw milk price was frozen at 922 KRW per liter in 2017, then increased by 4 KRW to 926 KRW in 2018, and frozen again during 2019-2020. The following year, in 2021, it rose by 21 KRW to 947 KRW, and last year it increased by 49 KRW to 996 KRW. After this year's adjustment, the raw milk price is expected to be between 1,066 and 1,096 KRW per liter.

The problem is that if the raw milk price rises, a chain reaction of price increases in products using milk as a raw material?such as ice cream, bread, and coffee?will be inevitable, leading to "milkflation" (milk + inflation). This is because the burden on consumers' food prices will increase if the raw milk price hike coincides with the recent surge in vegetable prices caused by heavy rains. The Ministry of Agriculture, Food and Rural Affairs has called about ten dairy companies, including Seoul Milk, Maeil Dairies, Namyang Dairy Products, and Binggrae, to urge restraint in raising dairy product prices, but whether this will be implemented remains uncertain.

Accordingly, opinions have emerged that the government should scrutinize the margin increase in the distribution industry. According to an analysis of the milk market by the Korea Consumer Organization's Price Monitoring Center last year, the distribution sector's margin accounted for 35.6% of the consumer price of milk. This is 5.3 percentage points lower than the margin of dairy farmers producing raw milk (40.9%) but 12.1 percentage points higher than that of the milk companies (23.5%). The Price Monitoring Center viewed Korea's milk distribution margin as excessive. During the same period, the margin rates were lower in countries such as the United States (8.82%) and Japan (11.4?17.7%).

Price authorities hold a negative stance on directly regulating the milk margin rate of the distribution industry. A Ministry of Economy and Finance official said, "We are monitoring the possibility of an excessive increase in milk prices, as consumer groups have expressed concerns," but added, "It is not a matter where we can directly intervene in the industry's margin rates." However, if the milk price rises excessively, there is a possibility that the government may recommend or partially adjust margins to stabilize prices. Measures such as investigating milk consumption patterns and comprehensively reviewing the appropriateness of the raw milk price increase are being discussed.

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