Background of Research
After the large-scale outbreak of foot-and-mouth disease in 2010-11, with the policy for increasing raw milk production and two increases in raw milk prices in 2011 and 2013, the oversupply problem of raw milk occurred in 2014 and 2015. The Korean government has carried forward the Dairy Industry Advancement Measure based on the national supply-demand control system in June 2013 to solve the imbalance between raw milk supply and demand. However, because stakeholders have not agreed on the measure, there has been a limit in solving the supply-demand problem. On the other hand, with the conclusion of FTAs with developed countries in the dairy industry including the US, the EU, and New Zealand, the import of dairy products has increased greatly. Therefore, focusing only on the market milk industry is forecast to have a limit in terms of the sustainable development of the dairy sector. Thus, this study aimed to seek viable plans to improve the structure of supply and demand, price, and marketing of raw milk for long-term supply-demand stabilization of raw milk and for the medium- and long-term development of the dairy industry.

Method of Research
To examine the current state and problems of the dairy sector and system, we reviewed the government’s measures for the industry so far, the Korea Dairy Committee’s data, and various previous studies. To analyze the improvement effects of the introduction of systems, we estimated a model of raw milk supply functions and market milk demand functions. To evaluate the impact of the proposed dairy systems on each agent and their acceptability, we carried out a qualitative analysis through interview research by agent; we conducted a quantitative analysis by using supply-demand balance levels to assess economic effects on each agent. To examine the dairy industries and systems in Japan, the EU, and the US, we made overseas business trips and commissioned research. Particularly, to seek viable alternatives, we collected diverse opinions by holding 11 research council meetings and policy workshops which the Livestock Management Division of the Ministry of Agriculture, Food and Rural Affairs, the Korea Dairy Committee, the Korea Dairy & Beef Farmers Association, the Korea Dairy Industries Association, and related experts attended.

Research Results and Implications
The problems of the dairy sector are as follows: the supply-demand imbalance, the limit in expanding consumption due to market milk-centeredness, and low international competitiveness from an industrial aspect; and ambiguity in the Dairy Promotion Act and the Korea Dairy Committee’s projects, failures in supply-demand control due to the limit in quota management, the raw milk price sliding system not reflecting supply and demand, an increase in milk collection costs due to overlapping milk collection, and the inconsistency of the support project for milk for processing and its objective from an institutional aspect.
Japan, the US, and the EU are making efforts to control supply and demand mostly through a mandatory quota system. The countries also operate an end-use pricing system and a pooled milk price system, and implement support policies including payments to farmers producing milk for processing or price support programs for income preservation in case of farms’ income reduction.
The following are the results of evaluating plans to control raw milk supply and demand such as the national quota system, the national supply-demand control system, and the individual quota management system for milk companies currently under discussion. It seems to be difficult to implement the national quota system in a short period of time because of farms’ low willingness to participate and difficulties in amending the law. Although the national supply-demand control system has a limit in solving the problem fundamentally, its introduction does not decrease farms’ income; therefore, it will be easy to introduce the system. It will be hard to implement the individual quota management system for milk companies due to farms’ and milk collection cooperatives’ low willingness to participate.
This study set a sustainable dairy industry as the sector’s vision for its structural improvement, and supply-demand stabilization of raw milk and expansion of the domestic dairy products market as key objectives. To achieve the goals, we proposed plans as follows: reviewing and amending the Dairy Promotion Act; introducing the national quota system in stages; improving the raw milk price sliding system by reflecting supply and demand; adopting a seasonal differential pricing system; introducing an end-use pricing system by improving the support project for milk for processing and establishing a plan to develop the milk processing industry; and reforming a milk collection system linked to the national quota system. Last, we presented a medium- and long-term road map to effectively implement these improvement plans.


Researchers: Ji Inbae, Kim Hyunjoong and Seo Gangcheol
Research Period: 2016. 1. ～ 2016. 10.
E-mail address: jiinbae@krei.re.kr