Required Report - public distribution

**Date:** 10/13/2004

**GAIN Report Number:** KS4055

KS4055

**Korea, Republic of**

**Dairy and Products**

**Annual**

**2004**

**Approved by:**

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

Agricultural Trade Office

**Prepared by:**

Oh, Young Sook and Susan Phillips

**Report Highlights:**

Korea imported \$178 million of dairy products in 2003. It is expected
that total imports in 2004 will reach \$200 million. Even though the
U.S. has only an 18 percent market share by value, cheese products
accounted for slightly more than half of all dairy imports from the U.S.
and are expected to continue showing strong growth in the future.

Includes PSD Changes: Yes

Includes Trade Matrix: Yes

Annual Report

Seoul ATO \[KS2\]

\[KS\]

***SECTION I. SITUATION AND OUTLOOK***

Korea imported \$178 million of dairy products in 2003. It is expected
that total imports in 2004 will reach \$200 million. Although the Korean
economy is likely to remain one of the fastest growing economies among
OECD nations, it is predicted that consumption will remain sluggish in
the 2^nd^ half of 2004 and in 2005.

Cheese imports from the U.S. reached \$13.8 million through the first
eight months of 2004, an increase of 35 percent compared to last year.
Even though the U.S. has only an 18 percent market share by value,
cheese products accounted for slightly more than half of all dairy
imports from the U.S. and are expected to continue showing strong growth
in the future. U.S. cheese products are considered high quality compared
to other competitors.

Whey imports from the U.S. were \$6.6 million, a seven percent increase
compared to the first eight months of last year. The U.S market share in
2004 is expected to remain steady.

Imports of ice cream from the U.S. were \$1 million through the first
eight months of 2004, a decrease of 53 percent. Imports from the U.S.
took a major hit when Häagen Dazs started imported more French ice cream
instead of U.S. ice cream.

Korea does not import raw milk, as there is currently a surplus in
domestic production. However, limited domestic production facilities and
unreliable local supplies will likely result in continued growth in
imports of other dairy products.

# Table 1: Major Dairy Products Import to Korea

(Metric Tons)

+-------------+----------+-------+-------+-------+-------+------+-----+
| Products    | Current  | 2002  |       | 2003  |       | \%   |     |
|             | Tariff   |       |       |       |       | Ch   |     |
| (HS Code)   |          |       |       |       |       | ange |     |
+-------------+----------+-------+-------+-------+-------+------+-----+
|             |          | U.S.  | Total | U.S.  | Total | U.S. | To  |
|             |          |       |       |       |       |      | tal |
+-------------+----------+-------+-------+-------+-------+------+-----+
| Cheese      | 36%      | 3,910 | 3     | 4,559 | 3     | 17%  | 12% |
|             |          |       | 1,984 |       | 5,782 |      |     |
| \(0406\)    |          |       |       |       |       |      |     |
+-------------+----------+-------+-------+-------+-------+------+-----+
| NFDM        | (20%     | 0     | 4,150 | 0     | 4,554 | 0    | 10% |
| (0402.10)   | -        |       |       |       |       |      |     |
|             | 176%)^1^ |       |       |       |       |      |     |
+-------------+----------+-------+-------+-------+-------+------+-----+
| Whole Fat   | (40% -   | 0     | 1,071 | 0     | 1,660 | 0    | 55% |
| DM          | 176%)^2^ |       |       |       |       |      |     |
| (0402.21)   |          |       |       |       |       |      |     |
+-------------+----------+-------+-------+-------+-------+------+-----+
| Mixed Milk  | 36%      | 0     | 1     | 1     | 6,312 | 1%   | -   |
| (0404.90)   |          |       | 3,946 |       |       |      | 55% |
+-------------+----------+-------+-------+-------+-------+------+-----+
| Butter      | (40%     | 20    | 1,000 | 11    | 1,255 | -82% | 26% |
| (0405.10)   | -89%)^3^ |       |       |       |       |      |     |
+-------------+----------+-------+-------+-------+-------+------+-----+
| Whey Powder | (20% -   | 1     | 2     | 1     | 2     | 13%  | 10% |
| (           | 4        | 5,754 | 6,487 | 7,819 | 9,174 |      |     |
| 0404.10.10) | 9.5%)^4^ |       |       |       |       |      |     |
+-------------+----------+-------+-------+-------+-------+------+-----+
| Ice Cream   | 54%      | 1,701 | 2,785 | 833   | 2,091 | -51% | -   |
| (2105)      |          |       |       |       |       |      | 25% |
+-------------+----------+-------+-------+-------+-------+------+-----+

Source: 2004 Korea Customs & Trade Institute

Notes:

1: 20% tariff within the quota of 1,034 metric tons, 176% tariff out of
the quota

2: 40% tariff with the quota of 573 metric tons, 176% tariff out of the
quota

3: 40% tariff within the quota of 420 metric tons, 89% tariff out of the
quota

4: 20% tariff within the quota of 54,233 metric tons, 49.5% tariff out
of the quota

Historically, Korea has produced a surplus of milk as consumption has
relatively low. In order to assist the Ministry of Agriculture and
Forestry (MAF) with this problem, a subsidiary organization, the Korean
Dairy Promotion Association (KDPA) was formed. Since 1999, dairy farmers
have voluntarily paid one won (1,150~~W~~=1\$) per kilogram of
production to promote milk consumption. KDPA administers this fund to
pay for television and radio commercials and other similar types of
public relations and educational campaigns encouraging domestic
consumers to drink milk. In addition, KDPA played a role in negotiating
production and price levels between dairy farmers and the dairy
industry.

However, the government and industry think that KDPA's role is not so
relevant these days as the herd size has been sufficiently reduced and
there has been a recent jump in dairy prices received by farmers. In
addition, there is the Korean Dairy and Beef Farmers Association
(KDBFA), which is also promoting dairy consumption. In the future, it is
likely that KDPA will be dissolved and dairy farmers will work directly
with the dairy industry in negotiating a price.

### Table 2: Dairy Herd Information

+------------------+---------+--------+--------+----------+----------+
|                  | D       | March  | June   | S        | December |
|                  | ecember | 2003   | 2003   | eptember | 2003     |
|                  | 2002    |        |        | 2003     |          |
+------------------+---------+--------+--------+----------+----------+
| Total Dairy Cows | 544,000 | 5      | 5      | 526,000  | 519,000  |
| (% Change from   |         | 52,000 | 41,000 |          |          |
| 2002)            |         |        |        |          | (-4.6%)  |
+------------------+---------+--------+--------+----------+----------+
| Milking Cows (%  | 252,000 | 2      | 2      | 244,000  | 241,000  |
| Change from      |         | 62,000 | 54,000 |          |          |
| 2002)            |         |        |        |          | (-4.4%)  |
+------------------+---------+--------+--------+----------+----------+
| Dairy Farms (%   | 11,700  | 11,700 | 11,300 | 10,800   | 10,500   |
| Change from      |         |        |        |          |          |
| 2002)            |         |        |        |          | (-10.3%) |
+------------------+---------+--------+--------+----------+----------+
| Dairy Cows Per   | 46.4    | 47     | 48     | 49       | 49       |
| Farm             |         |        |        |          |          |
+------------------+---------+--------+--------+----------+----------+

Source: 2004 Korea Livestock Yearbook

The European Union (EU), Australia and New Zealand are the main foreign
competitors for U.S. product in Korea. The EU is price competitive in
milk powder preparations, while Australia is a competitive cheese
provider. Australian cheese is mainly imported in bulk and then
processed by local Korean processors. Furthermore, the current trend for
"slow food" is benefiting European products, which are viewed as
products produced with great care as compared to "fast food" which are
thought to be unhealthy.

Per capita consumption of dairy products decreased 3.4 percent in 2003
to 62.4 kilograms from 64.2 kilograms in 2002. However, the consumption
of cheese and yogurt has shown positive growth in 2003, which is
expected for the foreseeable future. The expanding younger generation
(the under 20 crowd) and their penchant for western foods, such as
pizzas, cheeseburgers and sandwiches, has been a boon to cheese sales.
Koreans also believe drinking yogurt aids digestion problems, resulting
in many people drinking yogurt, especially probiotic yogurt every day.

The current "well-being" trend emphasizes the consumption of healthy
foods or functional foods\--everyday items that can claim a health
benefit, such as functional ice cream with ingredients such as aloe,
black beans, black sesame or vitamins\--are being introduced. Green tea
milk and black bean milk are other examples of popular functional dairy
foods. Green tea is known to prevent hypertension, sclerosis of the
arteries and diabeties.

The popularity of soymilk has also grown dramatically as Korean
consumers increasingly regard this drink as a health food and an
alternative to dairy milk. Koreans believe milk made from soy is better
than regular cows' milk because it contains less fat and provides other
minerals not found in regular milk. In addition, many Koreans are
lactose intolerant.

**1. Fluid Milk**

In 2003, Korean raw milk production was 2.4 million metric tons, 6.7
percent down from the previous year, and is expected to steadily decline
in the foreseeable future as the government begins to decrease support
and the number of milking cows declines. However, drinkable
(pasteurized) milk consumption increased by 10 percent, this category
includes regular white milk and flavored milks. Regular white milk is
becoming less popular than flavored milks and increased only 1.3 percent
in the past year. In contrast, because of the popularity of flavored
milks, such as black bean milk, overall processed fluid milk consumption
has increased by 43 percent.

Out of total production, 1.6 million metric tons (69 percent) is for
drinking use and 654,000 metric tons (28 percent) was processed. The
remaining surplus of 76,000 metric tons (3 percent) was used for the
production of whole and nonfat dry milk, which is then stored. Despite
this surplus, Korea still needs to import milk powder. 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 3: Overall Milk Supply and Demand

(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

  2003      2,366        604      2,970    3,037     77.9          7.9
  --------- ------------ -------- -------- --------- ------------- -----------

Source: 2004 Korea Livestock Yearbook published by the Agriculture
Fishery & Livestock Newspaper

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

A growing niche market in Korea for beverages is that of specialty milk:
milk with added nutrition, such as black beans, 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.

**2. Cheese**

Total imports of cheese products were \$94 million (35,782 metric tons)
in 2003, a increase of 11 percent from the previous year. Imports of
cheese products in 2005 are forecast to reach 45,000 metric tons.

In 2004, total cheese imports are expected to increase 15 percent due to
the lack of domestic production facilities and the increase in consumer
demand for more and a wider variety of cheese products. The changing
tastes of younger consumers and the continuing growth in fast food and
"family style" restaurants, and the rapid growth of wine consumption,
are expected to contribute to the increase in demand for a wide variety
of cheese products. The Korean wine market increased by 60 percent in
2003, which is likely to result in increased consumption of new to
market and high quality cheeses.

Local cheese production is constrained by the lack of manufacturing
facilities. In September 2004, however, one of the leading dairy
companies, Maeil Dairy, established a new natural cheese manufacturing
plant in a joint venture with German Alphma Company, using manufacturing
techniques acquired from New Zealand and Japan. The purpose of this new
plant is to utilize the surplus local raw milk to make cheese. It is
not, however, expected to impact demand for imported cheese in the near
future.

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 (\$3.75/kg) was
\$1.13 higher than that for competitor products. 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 increase 10 percent in the latter half
of 2004 and 2005 because there has been a 13 percent increase in the raw
milk price since September 2004 and the amount of surplus raw milk for
locally produced NFDM has decreased. The retail price of locally
manufactured NFDM is \$3.50 - \$3.90 per kilogram, an increase of 75
percent over last year, due to the current shortage of NFDM. The
manufacturing cost is \$6 per kilogram.

There is an import quota of 1,034 metric tons for NFDM. The within quota
tariff is 20 percent and the out of the quota tariff is 176 percent.
From January to July 2004, imports of NFDM were 2,100 metric tons, an 11
percent decrease compared to last year. The average cost from the EU,
Australia and New Zealand was \$1.86 per kilogram, CIF value.

Local food processors import NFDM for the purpose of re-exporting to
other countries, including Saudi Arabia, Taiwan, China and Bangladesh,
after having processed it into infant formula. The Korea Customs Service
reimburses the high out-of-quota tariff of 176 percent to importers when
they have re-exported the processed dairy-based products made from the
imported NFDM.

Most NFDM is imported from Australia, New Zealand and the EU. There were
no imports from the United States in 2003, nor to date in 2004.
Importers complain that 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 local infant
formula consumption. Domestic infant formula sales have remained the
same over the past two years. Last year's birth rate was 1.17, with only
470,000 babies born per year for the past 2-3 years, which is the lowest
birthrate in the world. The Korean infant formula market is static and
the retail market price for domestic premium product is over \$16.50
(19,000 Korean Won) per 800 grams.

**4. Other Dairy Products**

# Ice Cream

In 2004, the ice cream market in Korea, including functional ice cream,
is expected to grow 10 percent. Functional ice cream is low fat, low
sugar and green tea ice cream, and targets adults as well as teenagers
interested in health and beauty. In 2003, the ice cream market recorded
\$715 million (858 billion Korean Won) in sales. The sales of functional
ice cream accounted for \$7.2 million (8.6 billion Korean Won), about 1
percent of the total market.

Because ice cream imports grew at an average annual rate of about 20
percent in the past six years, it was anticipated that the trend would
continue at a rate of 10-20 percent in the next five years. However, the
largest importer, Häagen Dazs, since 2002, has used 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 60 percent in
2002 to 34 percent in 2003. Additionally, the Dippin & Dots Ice Cream
Company and the Mini Melts Company are now manufacturing their ice cream
(starting in 2002) locally. Consequently, the U.S. market share has
dropped further to 22 percent so far in 2004 (Jan-Aug) and it is
expected to continue to decline.

The Korean ice cream market is dominated by four Korean ice cream
manufacturing companies, Lotte, Bingrae, Haitai, Samkang, which
accounted for 90 percent of the whole ice cream market in 2003. Out of
the remaining 10 percent, leading premium foreign ice cream companies
such as, Baskin Robins and Dippin Dots (locally produced with imported
ingredients) accounted for 7 percent. Other major premium imported
brands include Blue Bunny, Ben & Jerry's and Aggie.

The ice cream market has been slow this year, despite the warm summer
weather, due to the sluggish economy.

# Whey Powder 

Whey powder imports are forecast to increase 15 percent by volume in
2004 as there are not enough local facilities to produce the whey powder
to meet local demand. Imported whey powder costs an average of \$0.42
per kilogram on a CIF basis. Imports of whey powder should continue to
increase.

Imports of whey powder (HS 0404-10-1010) were \$12 million (29,174
metric ton) in 2003, increased by 10 percent from 26,487 metric ton in
2002. Seventy percent of imported whey powder is utilized for animal
feed. In 2003, \$7.6 million (17,819 metric ton) was imported from U.S.
with a market share of 61 percent. The major foreign competitor for the
U.S. is France.

## Table 4: Imports of Whey in 2003

+----------------+-----------+-------------+------------+--------------+
| Products       | Volume    |             | Value      |              |
|                | (Metric   |             | (U.S.      |              |
| (HS Code)      | Tons)     |             | Dollars)   |              |
+----------------+-----------+-------------+------------+--------------+
|                | Total     | Imports     | Total      | Imports from |
|                | Imports   | from U.S.   | Imports    | U.S.         |
+----------------+-----------+-------------+------------+--------------+
| Whey Powder    | 29,174    | 17,819      | 12,213,764 | 7,624,726    |
| (0404-10-1010) |           |             |            |              |
+----------------+-----------+-------------+------------+--------------+
| Other          | 3         | 0           | 21,736     | 0            |
|                |           |             |            |              |
| (0404-10-1090) |           |             |            |              |
+----------------+-----------+-------------+------------+--------------+
| Demineralized  | 5,422     | 8           | 5,685,828  | 52,370       |
| Whey           |           |             |            |              |
|                |           |             |            |              |
| (0404-10-2120) |           |             |            |              |
+----------------+-----------+-------------+------------+--------------+
| WPC            | 1,399     | 731         | 3,804,940  | 1,933,994    |
|                |           |             |            |              |
| (0404-10-2130) |           |             |            |              |
+----------------+-----------+-------------+------------+--------------+
| Other          | 3,355     | 2,286       | 2,574,759  | 1,129,656    |
|                |           |             |            |              |
| (0404-10-2190) |           |             |            |              |
+----------------+-----------+-------------+------------+--------------+
| Other Mixed    | 6,312     | 1           | 12,696,132 | 63,119       |
| Milk Powder    |           |             |            |              |
|                |           |             |            |              |
| (0404-90-0000) |           |             |            |              |
+----------------+-----------+-------------+------------+--------------+
| TOTAL (0404)   | 45,665    | 20,845      | 36,997,159 | 10,803,865   |
+----------------+-----------+-------------+------------+--------------+

# 

# 

#### SECTION II. STATISTICAL TABLES