Wednesday, November 14, 2018
 Korea Imports of Powered Milk Despite Oversupply  

Imports of dried milk are increasing steeply while the market suffers an oversupply of milk. Analysts point out that market mechanisms such as supply and demand aren't working properly in the milk industry due to its peculiar pricing system.


According to Korea Customs Service, the country imported 23,296 tons of dried milk last year, which is more than double the 9,270 tons imported in 2010.


The increasing imports don't seem to make sense when considering that milk is piling up unsold. Fresh milk that isn't sold is immediately dried for storage. Currently, near 20,000 tons of dried milk are piled in inventories, soaring from 1,050 tons in 2010. This is equivalent to 200,000 tons of fresh milk, which is 10 percent of the total milk produced last year.


The milk inventory is expected to increase, as only 1.8 million tons of fresh milk are expected to be consumed this year, while production will reach 2.1 million tons. This means 30,000 tons of dried milk will be added to inventories. Milk consumption is continuing to fall due to the low birthrate and dairy alternatives such as soy milk. Per capita consumption of fresh milk stood at 26.9 kilograms in 2014, down 12.7 percent from 2000.


Despite increasing inventories, food manufacturers are importing powdered milk from overseas as it is much cheaper than domestic products ― one-sixth the domestic price on average.


The huge gap is due to Korea's peculiar milk pricing system which was introduced in 2013. Following fierce confrontations between dairy farmers and milk companies over pricing, the milk price is now determined based on changes in production cost and inflation. As production costs aren't likely to fall and deflation isn't likely, milk prices don't fall despite decreasing demand. In 2014 and 2015, milk inventories soared to record highs, but prices remained frozen. The industry expects prices will be frozen this year as well despite the huge surplus. While the global oversupply pulled down milk prices in other countries, the mechanism of supply and demand doesn't apply to Korea's milk pricing.


Under the pricing mechanism, dairy farmers are guaranteed profits for supplying their milk to milk companies according to their quota. If the milk companies buy more than the quota, the milk companies also get subsidies from the government.


Analysts say that the milk pricing system needs change, so that supply and demand can adjust the price. Diversification by milk farmers, such as those producing cheese or developing tourist programs, is also cited as a solution. 


Source: Korea Times


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