Required Report - public distribution

**Date:** 4/22/2004

**GAIN Report Number:** KS4020

KS4020

**Korea, Republic of**

Agricultural Situation

**Economic and Agricultural Overview**

**2004**

**Approved by:**

![](media/image1.wmf)Marcus E. Lower, Director

#### Agricultural Trade Office

**Prepared by:**

Susan Phillips, Deputy Director

**Report Highlights:**

This report contains an economic and agricultural situation overview
through March 2004. The Korean economy grew at its fastest pace in
nearly two years during the fourth quarter of 2003, driven mainly by
exports. Agricultural imports from the U.S. were \$3.5 billion in 2003,
a 7.4 percent incease over the previous year. ATO Seoul will organize
several major promotional events within the next six months focusing on
U.S. consumer-oriented and other products.

Includes PSD Changes: No

Includes Trade Matrix: No

Unscheduled Report

Seoul ATO \[KS2\]

\[KS\]

***I. Economic Situation***

**A. Current state of the economy**

South Korea's economy grew at its fastest pace in nearly two years
during the fourth quarter of 2003, driven mainly by exports. The Bank of
Korea reported that the Korean economy grew by 3.1 percent in 2003,
above many initial estimates, but still the slowest rate of expansion
since the 1998 national balance of payments crisis. Three major economic
indicators--consumption, production, and investment---all rose
simultaneously in February 2004, the first time since December 2002,
generating expectations that the Korean economy might finally be
recovering.

# B. Prospects for the Korean economy in 2004 

**GDP growth:** Despite robust exports, the Korean economy in 2004 is
expected to post moderate growth of 4-5 percent, tempered by a sluggish
recovery of domestic consumption according to the Korean Economic
Research Institute (KERI). Economic recovery in the U.S. and rapid
growth in China are expected to offer a favorable external environment.
In contrast, domestic demand and, in particular, private consumption is
expected to remain soft because of weak employment and persistent
consumer debt problems.

**Household Consumption:** Consumer sentiment has been subdued since
late 2002, a result of the household debt problem and weak employment
conditions. According to KERI, private consumption in 2004 is expected
to be marginally stronger than 2003, at 3 percent, slightly below the
economic growth rate. Korea has huge consumer debt problems, as 3.8
million Koreans, or one-sixth of the workforce, are unable to meet their
debt obligations. The Bank of Korea reported on March 29 that the
outstanding debts of the average Korean citizen reached 10.1 million won
(\$8,450) in 2003, up 4.6 percent from a year ago. In a further worrying
trend, the number of corporate defaulters hit record numbers.

**Investment:** Korean private investment in 2004 is expected to be
around 8 percent due to a recovery in the global IT industry resulting
in increased investment in related sectors. This is a marked improvement
over the 1.6 percent growth seen in 2003. Labor-management discord,
political questions and anti-enterprise sentiments are factors that
could subdue business investment. (KERI)

**Trade:** Rapid growth in exports continues to drive Korea's economic
recovery. Exports surged by 39 percent in the first two months of 2004.
Even with the rise in international raw material prices, imports are
showing only modest growth, as Koreans cut back on the use of imported
oil.

#### C. Korea-Chile Free Trade Agreement

After five years of negotiations and a year-long debate in the Korean
National Assembly, the Free Trade Agreement (FTA) with Chile became
effective on April 1, 2004. Korea is to lift duties on nearly 90 percent
of all industrial goods and Chile will lift duties on many agricultural
goods. However, due to fervent protests by local farmers, 21
agricultural products, including rice, apples and pears, were excluded
from the pact.

The two sides will decide the fate of another 337 items after the Doha
Development Agenda talks are concluded. This has been the first FTA
signed by Korea and it was fiercely opposed by the domestic agriculture
sector. As a result, the Ministry of Agriculture and Forestry (MAF)
recently unveiled a support program for farmers worth 1.2 trillion won
(approximately \$100 billion) over the next seven years, whereby farmers
will receive compensation for the anticipated losses caused by Chilean
imports. The Korean government is currently in the process of
negotiating other bilateral trade agreements, most notably with Mexico,
Japan and Singapore.

## *II. Agricultural Situation*

# A. Overall Agricultural Situation 

South Korea is roughly the size of the state of Indiana (99,853 square
kilometers) with a population of 47 million. By comparison, Indiana has
a population of one million. Because it is so mountainous, only 18.7
percent of the total land mass is available for agricultural production.
The number of people employed in agricultural, forestry and fisheries
has declined from 58.5 percent in 1965 to only 9.3 percent in 2002.

Agriculture has remained the most sluggish sector of the economy. In
2002, the contribution of agriculture to overall GDP was only about 4
percent. In 2003, according to the Bank of Korea, the farming sector
contracted even further as a result of severe weather conditions this
past summer.

Korea has one of the most protected agricultural economies in the world,
consisting of high production prices, supported by government purchases,
and high tariffs that protect domestic producers from import
competition. This is unlikely to change, as Koreans are very sympathetic
toward the farm sector and are very supportive of government protection
for agriculture.

South Korea imported \$13.4 billion of agricultural, forestry and
fishery products in 2003. The United States is the largest supplier of
agricultural products to Korea, but imports from China are growing
rapidly.

+-----------+--------------------+-------------------------------------+
| ####      |                    |                                     |
| ## Table  |                    |                                     |
| 1: Korean |                    |                                     |
|  Agricult |                    |                                     |
| ural Impo |                    |                                     |
| rts: 2003 |                    |                                     |
+-----------+--------------------+-------------------------------------+
| **Market  | **Country**        | **Major Products**                  |
| Share**   |                    |                                     |
+-----------+--------------------+-------------------------------------+
| 26.2 %    | United States      | Beef, Hides & Skins, Soybeans,      |
|           |                    | Wheat, Citrus                       |
+-----------+--------------------+-------------------------------------+
| 21.0 %    | China              | Maize, Fish, Wheat, Ginseng,        |
|           |                    | Plywood                             |
+-----------+--------------------+-------------------------------------+
| 8.4 %     | European Union     | Pork, Leather, Whey, Vegetable Saps |
|           |                    | & Extracts                          |
+-----------+--------------------+-------------------------------------+
| 7.5 %     | Australia          | Beef, Wheat, Sugar, Cotton, Logs    |
+-----------+--------------------+-------------------------------------+

According to U.S. Census data, the United States exported \$3.5 billion
of agricultural, fish and forest products to Korea in 2003. Despite a 10
percent increase in U.S. sales, Korea slipped to the fifth largest U.S.
agricultural export market, being surpassed by China.

Korea depends on imports for about 70 percent of its food and feed
consumption. The demand for imported food products is expected to
continue to increase as rising affluence and changing lifestyles foster
greater consumption of diverse and international cuisines.

In 2004, imports from the United States are expected to decline
significantly due to the current BSE ban on beef products and the avian
flu restrictions on uncooked poultry. In 2003, U.S. sales of beef and
poultry were \$813 million and \$35 million respectively. However,
import quotas on 14 agricultural items will be increased temporarily,
from March 29 through the end of 2004, according to the Ministry of
Finance and Economy. The decision to temporarily enlarge Korea's tariff
rate quotas (TRQ) on potatoes, corn, beans, soybeans, sesame seeds and
other products used for feed and processed food came as a result of
rising domestic prices.

# B. Basic Product Imports

Basic imports represented 24 percent, or \$838 million, of total imports
from the U.S. in 2003, up 8.6 percent from the previous year. In the
basic category, the U.S. has a 28 percent market share and the major
products are soybeans, wheat, cotton, maize and tobacco.

Korea has been the eighth largest market for U.S. soybeans in recent
years. In 2003, the value of U.S. soybeans increased 19 percent to \$322
million (1.2 million tons) and is expected to continue to grow in 2004
as a result of improved financial conditions in the crushing industry
and the almost doubling of the world soybean price over the past 14
months. The U.S. had an 81 percent share of Korean soybean imports.

Imports of U.S. wheat increased to \$260 million (1.4 million tons), up
24 percent by value in 2003. The U.S. had a 43 percent market share of
total Korean wheat imports. Local production is unlikely to increase
significantly due to the limited demand for wheat flour made from
locally grown wheat and limited production area. However, Australia and
Canada, principal competitors in the milling wheat market, continue to
gain market share by conducting extensive market research on taste
preferences.

The Korean textile industry remains strong, and domestic demand combined
with increased textile export opportunities will increase Korean cotton
consumption. Korea was the ninth largest market for U.S. cotton in 2003.
As the Korean textile industry shifts its focus to the production of
higher quality products, demand for U.S. and Australian cotton is
expected to increase at the expense of China and Uzbekistan. Imports of
U.S. cotton increased to \$149 million (116,893 tons), up 29 percent by
value. The U.S. had a 38 percent share of Korean cotton imports.

Corn imports from the U.S. dropped significantly in the past two years
due to imports from China. Imports of U.S. corn were \$41 million
(274,770 tons) in 2003, down 63 percent by value. With the change in
China's corn export policy in 2004, Korean buyers purchase on the basis
of optional origin contracts, which provide for loading in China, Brazil
or the U.S. So far, suppliers have opted to fulfill their optional
origin contracts for feed corn by supplying from the U.S. Brazil has
been the primary origin for processing corn due to non-GM contract
specifications. When logistical constraints preclude Brazil, such as
when vessels are all being used for soybeans, identity preserved non-GM
corn from the U.S. can become attractive for the Korean processing
sector. Nevertheless, the total volume of non-GM U.S. corn to Korea is
expected to remain quite low. Korea imported \$2 million (3,157 tons) of
popcorn from the U.S. in 2003, a 68 percent market share. The U.S. share
of total Korean corn imports was 4 percent in 2003.

# 

Korea currently maintains a minimum market access (MMA) regime limiting
rice imports to 4 percent of the country's domestic rice market, and
requiring that the shipments be controlled directly by the government's
rice distribution monopoly. Under the terms of the 1994 Uruguay Round
agreement, however, which allowed Korea to maintain quotas and delay the
levying of tariffs on rice imports for up to 10 years, the country is
obliged to conclude talks on opening its rice market by the end of 2004.
South Korea purchased 30,000 tons of U.S. medium grain rice in 2001,
40,000 tons in 2002 and 55,000 tons in 2003. None of this rice has been
allowed to enter the domestic table market, but was channeled to
industrial uses.

# C. Intermediate Product Imports

Imports of intermediate products (products that receive some processing,
but are generally not yet ready for final consumption) represented 23
percent or \$823 million of total imports from the U.S. in 2003, down
2.3 percent from the previous year. In the intermediate products
category, the U.S. has a 27 percent market share and the major products
were hides and skins, hay and fodder, leather of bovine, animal feeds,
and soybean meal.

+--------+--------------------+------------+------------+-------------+
| *      |                    |            |            |             |
| *Table |                    |            |            |             |
| 3:     |                    |            |            |             |
| Interm |                    |            |            |             |
| ediate |                    |            |            |             |
| Com    |                    |            |            |             |
| modity |                    |            |            |             |
| I      |                    |            |            |             |
| mports |                    |            |            |             |
| from   |                    |            |            |             |
| the    |                    |            |            |             |
| U.S.:  |                    |            |            |             |
| 2003** |                    |            |            |             |
|        |                    |            |            |             |
| **(Ca  |                    |            |            |             |
| lendar |                    |            |            |             |
| Yea    |                    |            |            |             |
| r/U.S. |                    |            |            |             |
| \$     |                    |            |            |             |
| 000)** |                    |            |            |             |
+--------+--------------------+------------+------------+-------------+
| H.S.   |                    | Total      | Imports    | Market      |
| Codes  |                    | Imports    | from the   | Share       |
|        |                    |            | U.S.       |             |
+--------+--------------------+------------+------------+-------------+
| 4101   | Hides & Skins      | \$471,252  | \$427,809  | 91%         |
|        | (Bovine)           |            |            |             |
+--------+--------------------+------------+------------+-------------+
| 1214   | Hay & Fodder       | \$104,869  | \$91,835   | 88%         |
+--------+--------------------+------------+------------+-------------+
| 4104   | Leather (Bovine)   | \$135,294  | \$52,640   | 39%         |
+--------+--------------------+------------+------------+-------------+
| 2309   | Animal Feeds       | \$118,885  | \$39,488   | 33%         |
+--------+--------------------+------------+------------+-------------+
| 1507   | Soybean Oil        | \$89,776   | \$23,080   | 26%         |
+--------+--------------------+------------+------------+-------------+
| 2304   | Soybean Meal       | \$314,655  | \$22,859   | 7%          |
+--------+--------------------+------------+------------+-------------+
| 4301   | Raw Furskins       | \$54,706   | \$22,492   | 41%         |
+--------+--------------------+------------+------------+-------------+
| 1517   | Margarine &        | \$19,333   | \$12,474   | 65%         |
|        | Shortening         |            |            |             |
+--------+--------------------+------------+------------+-------------+
| 1901   | Malt               | \$45,115   | \$11,586   | 26%         |
+--------+--------------------+------------+------------+-------------+
| 2101   | Extracts &         | \$33,282   | \$11,343   | 34%         |
|        | Essences           |            |            |             |
+--------+--------------------+------------+------------+-------------+
|        | Others             | \          | \$107,518  | 6%          |
|        |                    | $1,675,465 |            |             |
+--------+--------------------+------------+------------+-------------+
|        | TOTAL              | \          | \$823,124  | 27%         |
|        |                    | $3,062,632 |            |             |
+--------+--------------------+------------+------------+-------------+

Hides and skins represented more than half of the total intermediate
products category. Imports from the U.S. were \$428 million in 2003,
down 6 percent by value. Although these products accounted for a large
share of intermediate product imports, it is likely they will continue
to decline slightly each year as the tanning industry moves to lower
labor cost areas such as China. The U.S. had over a 90 percent share of
this market.

Hay and Fodder imports have been steadily increasing; imports were \$92
million (488,825 tons), up 13 percent by value in 2003. Currently, Korea
imports grass hay within a TRQ for Forage Products established under the
Uruguay Round Agricultural Agreement which covers fodder roots
(1214-90-1000), forages excluding alfalfa meal, pellets and bales
(1214-90-9090), and vegetable materials (excluding acorns, chestnut
hulls and cotton seed hulls (2308-00-9000). The tariff within the TRQ is
2 percent and the Korean government set the quantity at 495,000 tons in
2003 and 700,000 tons in 2004. The U.S. has an 85 percent share of
Korean hay and fodder imports.

Animal feeds and pet food product imports were \$39 million in 2003, up
42 percent by value. Korea has become one of the fastest growing pet
food markets in the world. Korean pet owners spend an estimated \$250
million annually on pet food. The market is increasing not only because
people are buying more pets, but also as a result of rising incomes, pet
owners are more willing to purchase higher quality pet food. Currently,
24 percent of locally consumed pet food is imported. Australia dominates
the canned food market while the U.S. is the main supplier of dry food.

Malt imports from the U.S. were \$12 million in 2003, up 30 percent, and
include food preparations of flour, starch or dairy products (not
containing cocoa powder), preparations for infant use put up for retail
sale, and corn-soya milk blends. Extracts and Essences from the U.S.
were \$11 million in 2003, up 8 percent and include mostly instant
coffee packaged for retail sale, coffee extracts, essences and
concentrates, and preparations with a basis of coffee.

# D. Consumer-Oriented Product Imports

Imports of consumer-oriented products (or high-value products)
represented 45 percent or \$1.6 billion of total imports from the U.S.
in 2003, up 16 percent from the previous year. In the consumer-oriented
products category, the U.S. had a 41 percent market share and the major
products were frozen beef, fresh/chilled beef, edible offals, citrus,
fruit juices, and poultry.

+-----------------+--------------------+----------+----------+--------+
| **Table 4:      |                    |          |          |        |
| Co              |                    |          |          |        |
| nsumer-Oriented |                    |          |          |        |
| Commodity       |                    |          |          |        |
| Imports from    |                    |          |          |        |
| the U.S.:       |                    |          |          |        |
| 2003**          |                    |          |          |        |
|                 |                    |          |          |        |
| **(Calendar     |                    |          |          |        |
| Year/ U.S.      |                    |          |          |        |
| \$000)**        |                    |          |          |        |
+-----------------+--------------------+----------+----------+--------+
| H.S. Code       |                    | Total    | Imports  | Market |
|                 |                    | Imports  | from the | Share  |
|                 |                    |          | U.S.     |        |
+-----------------+--------------------+----------+----------+--------+
| 0202            | Beef, Frozen       | \        | \        | 77%    |
|                 |                    | $951,359 | $728,083 |        |
+-----------------+--------------------+----------+----------+--------+
| 0805            | Citrus Fruit,      | \        | \        | 97%    |
|                 | Fresh/Dried        | $118,414 | $115,025 |        |
+-----------------+--------------------+----------+----------+--------+
| 0201            | Beef, Fresh or     | \        | \$85,155 | 71%    |
|                 | Chilled            | $119,969 |          |        |
+-----------------+--------------------+----------+----------+--------+
| 0206            | Edible Offals      | \        | \$73,967 | 69%    |
|                 |                    | $107,699 |          |        |
+-----------------+--------------------+----------+----------+--------+
| 2004/2005       | Other Vegetables   | \$86,281 | \$52,428 | 61%    |
+-----------------+--------------------+----------+----------+--------+
| 2009            | Fruit Juices       | \        | \$41,557 | 40%    |
|                 |                    | $105,116 |          |        |
+-----------------+--------------------+----------+----------+--------+
| 0207            | Poultry Meat &     | \$96,496 | \$35,420 | 37%    |
|                 | Offals             |          |          |        |
+-----------------+--------------------+----------+----------+--------+
| 1806            | Chocolate          | \$99,124 | \$33,295 | 34%    |
+-----------------+--------------------+----------+----------+--------+
| 0802            | Other Nuts         | \$35,453 | \$32,099 | 91%    |
+-----------------+--------------------+----------+----------+--------+
| 0406            | Cheese & Curd      | \$93,829 | \$17,083 | 18%    |
+-----------------+--------------------+----------+----------+--------+
|                 | Others             | \$1      | \        | 18%    |
|                 |                    | ,965,437 | $349,636 |        |
+-----------------+--------------------+----------+----------+--------+
|                 | TOTAL              | \$3      | \$1      | 41%    |
|                 |                    | ,779,177 | ,563,748 |        |
+-----------------+--------------------+----------+----------+--------+

In 2003, the U.S. had a 77 percent share of Korean frozen beef market
and a 71 percent share of the fresh/chilled market. Ninety percent of
beef imports from the U.S. were frozen product amounting to \$728
million in 2003, up 32 percent by value from the previous year. Imports
of fresh/chilled beef from the U.S. were \$85 million in 2003, up 120
percent by value. As of December 27, 2003, the Korean Government placed
a ban on BSE associated commodities such as ruminants and ruminant
products from the United States. However, products such as raw hides,
milk and milk products, semen and tallow are permitted.

Edible offals are considered a delicacy in Korea, especially items like
pork feet, intestines, livers, oxtails, and tongue. Korea will pay top
dollar for these items. Imports were \$74 million in 2003, up 12 percent
by value.

Poultry imports were \$35 million in 2003, a decrease of 37 percent from
the previous year. Korean consumers preferred Thai chicken because they
could provide cleaner deboned meat products. When Hi Path Avian
Influenza (HPAI) broke out in Thailand, U.S. chicken became somewhat
more popular; however, after the outbreak of HPAI in Texas, uncooked
poultry products from the U.S. were banned. The local poultry industry
has also been hit with HPAI causing a dramatic decline in local
consumption of poultry. The Korean government and the local industry
made a concerted effort to increase consumption by addressing consumer's
food safety concerns.

Imports of U.S. citrus products, mostly navel oranges grew steadily in
2003 and are expected to increase further next year due to the poor
domestic fruit crop and competitive U.S. prices. Citrus imports from the
U.S. were \$115 million in 2003, up 26 percent by value. In 2004, the
TRQ for citrus is effectively phased out as the TRQ and the out-of-TRQ
tariff rates are equal at 50 percent. The FTA with Chile is expected to
result in a greater availability of Chilean citrus in the Korean market,
which will compete strongly with U.S. citrus.

### *III. Promotional Opportunities*

ATO Seoul focuses promotional efforts on several major activities
throughout the year aimed at promoting mainly U.S. consumer-oriented
food products. Upcoming events include:

May 2004 National Restaurant Association 2004

ATO Seoul will sponsor food service importers to the Show.

For more information: <SangYong.Oh@usda.gov>

May 2004 All Things Organic/FMI

ATO Seoul will sponsor organic processed product buyers to the Show

WUSATA will host this group in the Pacific Northwest.

For more information: <YoungSook.Oh@usda.gov>

May 2004 Culinary Camp

ATO Seoul will organize a culinary workshop for menu development
training targeting restaurant chains chefs. This activity will teach
chefs about the advantages and applicability of U.S. value-added
(further-processed) products.

For more information: <SangYong.Oh@usda.gov>

May 2004 Seoul International Wine Expo

ATO Seoul will organize a U.S. wine pavilion and seminar for Korean wine
buyers.

For more information: <SangYong.Oh@usda.gov>

Jun 2004 All Candy Expo 2004

ATO Seoul will sponsor a buying mission with the assistance of the
National Confectioner's Association and the Mid-America International
Agri-Trade Council (MIATCO).

For more information: <SehWon.Kim@usda.gov>

Aug/Sep 2004 U.S. Retail Product Promotion

ATO Seoul will organize a U.S. product promotion with a major retailer
in Seoul.

ATO Seoul will recruit interested importers who can deliver currently
available U.S. products.

For more information: <SehWon.Kim@usda.gov>

Nov 2004 Busan 2^nd^ International Seafood Expo

ATO Seoul will organize a U.S. pavilion with the assistance of the
Southern U.S. Trade Association (SUSTA).

For more information: <SehWon@usda.gov>

***IV. KEY CONTACTS AND FURTHER INFORMATION***

**For further information about the Korean agricultural market, please
contact:**

U.S. Agricultural Trade Office

Korean Address: Room 303, Leema Building, 146-1, Susong-dong,
Chongro-ku, Seoul, South Korea

U.S. Mailing Address: U.S. Embassy Seoul, Unit 15550-ATO, APO, AP
96205-5550

Telephone: 82-2 397-4188 Fax: 82-2 720-7921

E-mail: <atoseoul@usda.gov>

Website: [www.atoseoul.com]{.underline}

Agricultural Affairs Office

Korean Address: U.S. Embassy, 82, Sejong-ro, Chongro-ku, Seoul, South
Korea

U.S. Mailing Address: U.S. Embassy Seoul, Unit 15550-AgAff, APO, AP
96205-5550

Telephone: 82-2 397-4297 Fax: 82-2 738-7147

E-mail: <agseoul@usda.gov>

**For more information on how you can register for USDA/FAS's Supplier
List:**

The United States Department of Agriculture's Foreign Agricultural
Service (USDA/FAS) offers information and services that can be
beneficial to both new and experienced exporters. For example, the U.S.
Suppliers Service is a searchable database of over 5,000 U.S. exporters
and their products, which is used by USDA/FAS worldwide to help
facilitate connecting potential buyers with U.S. suppliers. This
database is used by more than 85 USDA FAS Overseas offices, such as the
ATO in Seoul to help export agents, trading companies, importers and
foreign market buyers locate U.S. suppliers. It is also used to recruit
U.S. exporters to participate in market development activities sponsored
by USDA and federal export programs.

You can register online for this service at
**[http://www.fas.usda.gov/agexport/exporter.html]{.underline}**

Additional FAS/Seoul commodity, sector and product reports can be found
on the FAS Website at
<http://www.fas.usda.gov/scriptsw/attacherep/default.asp>.