Required Report - public distribution

**Date:** 10/21/2003

**GAIN Report Number:** KS3064

KS3064

**Korea, Republic of**

### Dairy and Products

**Annual**

**2003**

**Approved by:**

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

#### Agricultural Trade Office

**Prepared by:**

Oh Young Sook, Assistant Ag. Marketing Specialist

**Report Highlights:**

Imports of dairy products in 2003 have been negatively impacted by the
slow Korean economy and the domestic surplus of milk production. The
surplus is being used to produce greater quantities of non-fat dry milk
(NFDM) and cheese than in previous years. There is still a demand for
high-quality U.S. cheeses despite the economic difficulties and it is
expected that imports from the U.S. will grow at an annual rate of 5
percent for the foreseeable future.

Includes PSD Changes: Yes

Includes Trade Matrix: Yes

Annual Report

Seoul ATO \[KS2\]

\[KS\]

***Section I. Situation And Outlook - South Korea***

Korea imported approximately \$172 million in 2002. Cheese products
accounted for half of all dairy imports, whey products accounted for 30
percent, mixed milk powder accounted for 9 percent, and ice cream
accounted for 6 percent.

The U.S. currently has an 18 percent market share by value for dairy
products, except for ice cream for which the U.S. has a 60 percent
market share.

**Table 1: Major Dairy Products Import to Korea (2001- 2002)** (Metric
Tons)

  ---------------- -------------- -------- -------- -------- -------- -------- -------
  Products (HS     Current Tariff 2001              2002              \%       
  Code)                                                               Change   

                                  U.S.     Total    U.S.     Total    U.S.     Total

  Cheese (HS0406)  37.1%          3,728    34,453   3,910    31,984   5%       -7%

  NFDM (HS0402.10) (20%           0        5,110    0        4,150    0        -2%
                   -180.4%)^1^                                                 

  Whole Fat DM     (40% -         0        1,640    0        1,071    0        -35%
  (HS0402.21)      180.4%)^2^                                                  

  Mixed Milk       37.1%          918      18,204   0        13,946   -100%    -23%
  (HS0404.90)                                                                  

  Butter           (40%-90%)^3^   19       1,042    20       1,000    -5%      -4%
  (HS0405.10)                                                                  

  Whey Powder      (20% -         14,662   25,871   15,754   26,487   7%       2%
  (HS0404.10.10)   54.5%)^4^                                                   

  Ice Cream        54.6%          2,054    2,374    1,701    2,785    -17%     17%
  (HS2105)                                                                     
  ---------------- -------------- -------- -------- -------- -------- -------- -------

Source: 2003 Korea Customs & Trade Institute

Notes:

1: 20% tariff within the quota of 988.1 metric tons, 180.4% tariff out
of the quota

2: 40% tariff with the quota of 547.5 metric tons, 180.4% tariff out of
the quota

3: 40% tariff within the quota of 401.1 metric tons, 90% tariff out of
the quota

4: 20% tariff within the quota of 50,763 metric tons, 54.5% tariff out
of the quota

Korea does not import raw milk because of the domestic production
surplus. Limited domestic production facilities and unreliable local
supplies, however, will continue to encourage imports of other dairy
products. The expanding younger age groups and the trend toward western
foods have supported increased consumption of dairy products.

## Table 2: Per Capita Consumption of Selected Dairy Products

(Kilogram)

  ------------- --------- --------- ------------- ------------ ------------ -------------
                **Raw     **Fluid   **Fermented   **Cheese**   **Butter**   **Condensed
                Milk**    Milk**    Milk**                                  Milk**

  **1986**      28.2      22.1      4.1           0.02         0.09         0.06

  **1990**      42.8      31.2      8.2           0.17         0.17         0.08

  **1995**      47.8      34.5      13.0          0.26         0.06         0.08

  **2000**      59.7      35.9      11.2          0.92         0.10         0.09

  **2002**      63.9      34.7      11.2          1.09         0.11         0.08
  ------------- --------- --------- ------------- ------------ ------------ -------------

Source: Korea Dairy Industry Association

Older Korean consumers do not consume dairy products; however younger
consumers are becoming more familiar with the taste. The surplus of raw
milk production, has led the government to promote milk in school and
through the media. Cheese consumption continues to get a boost from the
proliferation of pizza restaurants.

The sluggish domestic economic situation has also lent to slowing of
dairy imports. Although economic growth rates are expected to be 3 to 4
percent in 2003, this is a significant decline from the 6.3 percent of
2002. In addition, the local production of NFDM and cheeses is expected
to increase in 2003. Industry sources, nevertheless, expect that there
will still be a significant demand for high quality U.S. cheeses.

The Korean Ministry of Agriculture & Forestry (MAF) plans to cut
domestic raw milk production by seven percent in 2003, and another three
percent in 2004. MAF has been performing that it would compensate
farmers 8 cents (96 Korean Won) per liter if they (based on past
production history) reduced production since July 2003, and compensated
US\$83 (100,000 Korean Won) per liter if they stopped producing milk
permanently during a month last June 2003 .

The data below shows the downward trend in herd size and farm numbers.
Conversely, the number of head per farm has gone up which is more
efficient to profit.

### Table 3: Dairy Herd Information

  ------------------ ------------ --------- --------- ------------- ------------
                     **December   **March   **June    **September   **December
                     2001**       2002**    2002**    2002**        2002**

  Total Dairy Cows   548,000      548,000   545,000   543,000       544,000
  (% Change from                                                    (99.3%)
  2001)                                                             

  Milking Cows (%    258,000      270,000   263,000   255,000       252,000
  Change from 2001)                                                 (97.7%)

  Dairy Farms (%     12,800       12,300    12,100    12,000        11,700
  Change from 2001)                                                 (91.4%)

  Dairy Cows Per     42.7         44.5      44.9      45.2          46.4
  Farm                                                              
  ------------------ ------------ --------- --------- ------------- ------------

Source: 2003 Korea Livestock Yearbook

Besides controlling the quantity of milk production, MAF is encouraging
(through state governments) consumers to drink dairy beverages instead
of carbonated sodas. A nationwide campaign for milk consumption and
promotion includes educating the public about the benefits and
superiority of milk relative to other beverages.

**1. Fluid Milk**

In 2002, Korean raw milk production was 2.537 million metric tons, up 8
percent from the previous year, but drinkable (pasteurized) milk
consumption decreased by 4.4 percent, this category includes regular
white milk and flavored milks. Regular white milk is becoming less
popular than flavored milks and regular white milk consumption has
declined 7.2 percent in the past year. Out of total production, 373,000
metric tons was processed and the remaining 500,000 metric ton was
surplus. Despite the surplus of raw milk, Korea still needs to import
milk powders. The price for local raw milk is about double the price of
imported milk powder.

The following table shows the MAF's official estimates for milk
production and consumption.

## Table 4: Overall Milk Supply and Demand^1^

(Thousand Metric Tons)

  ---------- ---------------- ------------ ----------- ------------ --------------- -------------
  **Year**   **Supply**                                **Demand**   **Self          **NFDM
                                                                    Sufficiency**   Inventory**

             **Production**   **Import**   **Total**                                

  **1998**   2,027            282          2,309       2,299        88.2%           8.3

  **1999**   2,244            456          2,700       2,752        81.5%           3.6

  **2000**   2,253            640          2,893       2,807        80.2%           10.7

  **2001**   2,339            653          2,992       3,046        76.8%           5.8

  **2002**   2,537            646          3,183       3,060        82.9%           13.6
  ---------- ---------------- ------------ ----------- ------------ --------------- -------------

Source: 2003 Korea Livestock Yearbook by Agriculture Fishery & Livestock
Newspaper

Notes:

1: All dairy products were converted into raw milk equivalent units.

A growing niche market in Korea for beverages is that of 'functional
milk:' milk with added nutrition, such as fruit flavored, soymilk,
calcium, iron or vitamins. The consumption of these niche milk products
has been growing at the rate of 10 percent per year.

Of total local milk production in 2002, 66 percent was consumed as fluid
milk and the remaining was further processed. In the first half of 2003,
domestic (drinking) milk consumption decreased by 3.8 percent, due to
the falling birthrate, increased breast-feeding and the development of a
wide variety of competing beverages, including the functional and health
beverages mentioned above. The demand for functional drinking yogurt
increased 5 percent annually and flavored milk increased 16 percent
annually during past four years.

**2. Cheese**

Total imports of cheese products were \$85 million (32,000 metric tons)
in 2002, a decrease of 7 percent from the previous year. Imports of
cheese products in 2003 are forecast to reach 33,600 metric tons.

Total cheese imports are expected to increase 5 percent in 2004 due to
the lack of domestic production facilities and the increase in consumer
demand for cheese products. The changing tastes of younger consumers and
the continuing growth in fast food and "family style" restaurants,
serving western foods, such as pizza and cheese burgers, are expected to
contribute to the increase in demand for a wide variety of cheese
products in 2004.

Local cheese production is constrained by the lack of manufacturing
facilities. In 2003, however, the Korean government implemented a
program to support the development of individual farm cheese plants.
This "Ranch Style Dairy Processing Plant" will enable farmers to utilize
their surplus raw milk to make cheese and other value-added cheese
products, a program patterned after a Japanese program. This program,
while supporting the local farmer, is not expected to impact cheese
imports in 2003. The slight increase in local production expected in
2004 will, likewise, not have a noticeable impact on import demand.

While imports of U.S. cheese are benefiting from the general increase in
cheese consumption, there is strong competition from Australia and New
Zealand. The average price of imported U.S. cheese (\$3.72/kg) was
\$1.31 higher than its competitors. Despite this difference, U.S. cheese
has a good reputation among Korean consumers for taste and quality.

**3. Nonfat Dry Milk (NFDM)**

Imports of NFDM are forecast to decrease 7 percent in 2003 because there
is a surplus of raw milk production and locally produced NFDM. The
retail price of locally manufactured NFDM is only \$2 - \$2.50 per
kilogram due to the current surplus of NFDM while the manufacturing cost
is \$5.20 per kilogram.

There is an import tariff quota of 988 metric tons for NFDM, within the
quota the tariff is 20 percent and out of the quota is 180.4 percent.
From January to July 2003, imports of NFDM were 2,338 metric tons, a 13%
decrease compared to same period of last year. The average cost from the
EU, Australia and New Zealand was \$1.65 per kilogram based on CIF
value.

Local food processors import NFDM for the purpose of reexporting to
other countries including Saudi Arabia, Taiwan, China and Bangladesh
after having processed it into infant formula. The Korea Customs Service
reimburses the high tariff of 180.4 percent to importers when they have
reexported the processed dairy products made from imported NFDM.

Most of NFDM is imported from Australia, New Zealand and the EU. There
were no imports from the United States in 2002 nor to date in 2003,
importers complain the U.S. price is too high.

The continuing decline in Korea's birth rate and the increasing
popularity of breast feeding is leading to a decline in the local infant
formula market. Domestic infant formula sales decreased 30 percent over
the past two years. Last year's birth rate was only 1.17, which is the
lowest in the world. The industry has been releasing premium quality
formula although the strategy is showing big growth; the infant formula
market is downsizing. In 2002, the domestic infant formula market
decreased 9 percent from the previous year, however, the premium market
with price range at over \$16.7 (20,000 Korean Won) per 800 grams
increased by 20 percent.

**4. Other Dairy Products**

# Ice Cream

In 2003, the ice cream market in Korea is expected to grow 15 percent
and the functional ice cream market will increase 260 percent.
Functional ice cream is low fat, low sugar and green tea ice cream, and
it has been launched into the market targeting adults as well as
teenagers highly interested in health and beauty. In 2002, the ice cream
market recorded \$650 million (780 billion Korean Won) in sales. The
sales of functional ice cream's accounted for \$5.8 million (7 billion
Korean Won), about 0.9 percent market share.

Because ice cream imports grew at an average rate of 23 percent in the
past five years, it was anticipated that they would continue to increase
at a rate of about 10-20 percent in the next five years. However, the
largest importer, Hagen dazs, has begun to use ice cream manufactured in
France instead of the U.S. for export to Korea. This switch resulted in
the U.S. market share dropping from 84 percent in 2001 to 60 percent in
2002. Additionally, the Dippin & Dots Ice Cream Company and the Mini
Melts Company are now manufacturing their ice cream (starting in 2002)
via local Korean manufacturing plants. Consequently, the U.S. market
share has dropped further to 42 percent so far in 2003 and it is
expected to continue to decline.

The Korean ice cream market is dominated by four Korean ice cream
manufacturing companies, which accounted for 90 percent of the whole ice
cream market in 2002. Out of the remaining 10 percent, leading premium
ice cream companies such as, Baskin Robins and Dippin Dots (locally
produced with imported ingredients) accounted for 5 percent. Other major
premium imported brands are Blue Bunny, Dryers and Ben & Jerry's.

The ice cream market has been slow this year due to the lackluster
economy and the lack of warm weather during the summer months.

# Whey Powder 

Although whey powder imports are forecast to increase 15 percent by
volume in 2003, value-wise they will be about same as the previous year
due to the lower prices and the weak U.S. dollar. Imported whey powder
costs an average of \$0.41 per kilogram on a CIF basis. Imports of whey
powder should continue to increase as there are not enough local
facilities to produce the whey powder to meet the local demand.

Imports of whey powder(HS 0404-10-1010) were \$12 million (26,487 metric
ton) in 2002, increased by 2 percent from 25,871 metric ton in 2001.
Seventy percent of imported whey powder is utilized for animal feed. In
2002, \$7.1 million (15,754 metric ton) was imported from U.S with a
market share of 60 percent.

## Table 5: Imports of Whey in 2002

+---------------+-----------+-------------+------------+--------------+
| **Products    | **Volume  |             | **Value    |              |
| (HS Code)**   | (Metric   |             | (U.S.      |              |
|               | Tons)**   |             | Dollars)** |              |
+---------------+-----------+-------------+------------+--------------+
|               | **Total   | **Imports   | **Total    | **Imports    |
|               | Imports** | from U.S.** | Imports**  | from U.S.**  |
+---------------+-----------+-------------+------------+--------------+
| **Whey Powder | 2         | 15,754,373  | 12,115,468 | 7,103,189    |
| (04           | 6,487,024 |             |            |              |
| 04-10-1010)** |           |             |            |              |
+---------------+-----------+-------------+------------+--------------+
| **Other**     | 25        | 5           | 2,597      | 244          |
|               |           |             |            |              |
| **(04         |           |             |            |              |
| 04-10-1090)** |           |             |            |              |
+---------------+-----------+-------------+------------+--------------+
| **            | 6,119,660 | 9,960       | 6,685,332  | 63,904       |
| Demineralized |           |             |            |              |
| Whey**        |           |             |            |              |
|               |           |             |            |              |
| **(04         |           |             |            |              |
| 04-10-2120)** |           |             |            |              |
+---------------+-----------+-------------+------------+--------------+
| **WPC**       | 406,708   | 65,183      | 1,585,929  | 783,679      |
|               |           |             |            |              |
| **(04         |           |             |            |              |
| 04-10-2130)** |           |             |            |              |
+---------------+-----------+-------------+------------+--------------+
| **Other**     | 2,336,645 | 1,917,800   | 2,525,129  | 1,092,900    |
|               |           |             |            |              |
| **(04         |           |             |            |              |
| 04-10-2190)** |           |             |            |              |
+---------------+-----------+-------------+------------+--------------+
| **Other Mixed | 1         | 84          | 26,276,637 | 241          |
| Milk Powder** | 3,945,851 |             |            |              |
|               |           |             |            |              |
| **(04         |           |             |            |              |
| 04-90-0000)** |           |             |            |              |
+---------------+-----------+-------------+------------+--------------+
| **TOTAL       | 4         | 17,747,400  | 49,191,092 | 9,044,157    |
| (0404)**      | 9,295,913 |             |            |              |
+---------------+-----------+-------------+------------+--------------+

#  

# 

# *SECTION II. PS&D TABLES*

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