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South Korea's Food Prices Don't Add up

 
 

South Korean egg prices have been high since the recent bout of avian flu that began last year. About 22 percent of all South Korean farm birds have been culled, sending the average price of 30 eggs skyrocketing to a peak of ₩9,543 (roughly $8.50) in January. Even now, the price hovers above ₩8,000, an increase of 42 percent from pre-outbreak levels. Given that a third of all egg-laying birds were culled, the increase is not outlandish. Government efforts have been made to import replacements but these attempts have been complicated by a separate outbreak in the United States, prompting a temporary import ban and further disrupting supply. Since egg-laying chickens usually require six months of growth before being able to produce, it seems reasonable to imagine stock replenishing and relief from high prices will take hold later this year. Or will it?

One of the chief concerns many consumers have is that the high prices will come down some but not enough to return near pre-outbreak levels. “They always do this,” remarked a homemaker I met at the grocery store. “They find an excuse to raise the price and then keep it raised.” An elderly lady was more pointed, suggesting poultry companies probably caused the outbreak on purpose to manufacture a reason to raise prices.

Unfortunately, such concern and suspicion is not born purely of creativity but from some amount of real experience. There has been a steady increase of food prices in South Korea, a movement that has worsened the last four years despite global trends to the contrary.

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Back in 2010, food inflation in South Korea was near crisis levels. During that year, food inflation was about 10 percent. From 2010 to 2013, the food inflation rate decreased steadily to -2 percent. Since then, the rate has increased back to about 5 percent. To be clear, a food inflation rate of 5 percent means average food prices increased 5 percent for that year compared to the previous year. This means food prices in 2010 increased by 10 percent in a single year. This makes the actual price a compounding, cumulative affair over time. From 2010 to 2013, for example, actual food prices in Korea increased by about 15 percent, despite the negative inflation rate in 2013. From a consumer’s perspective, sustained positive rates can be very damaging. In fact, many are surprised to learn South Korea now has a higher consumer price index than Japan, with Korea having experienced a 22 percent increase since 2007 and Japan only a 10 percent increase.

So what makes food inflation go up? The most basic element is the cost of production and transportation. The selling price of wheat will be affected by expenditures such as fertilizer, labor, and water. The price of flour will be affected by the price of wheat and the price of a cake will be affected by egg, flour, and milk prices. In this way, there are a lot of interdependencies, especially for processed foods. Oil and gas prices also have an effect because they have a direct relationship to transportation and sometimes electricity costs (especially in South Korea, where over a third of all electricity is derived from oil and gas). However, it becomes obvious rather quickly that South Korea’s recent revival of high food inflation has little to do with these production costs, which have, in most cases, actually decreased.

Take, for example, the Korean staple ramen, the average price of which has increased by about 12 percent since 2010. The two main ingredients in ramen are wheat flour and soy meal, both imported for use by Korean ramen companies. From 2010 to 2011, the international price of wheat flour jumped from $200/ton to about $260/ton. The price of ramen increased accordingly by about 6 percent during this period. What most consumers fail to realize, however, is that the price of wheat flour has since decreased by over 50 percent, down to $122/ton by last December. The price of soy meal has also decreased by a quarter during the same period. Despite these favorable market conditions, ramen prices never returned to their pre-crisis levels. Instead, they have continued to rise, with the most recent hike taking place just this December.

For imported ingredients, currency exchange rates can have a profound effect, especially given currency values fluctuate a lot more than commodities over shorter periods of time. But here too, one cannot find the answer. In January of 2010, the South Korean won exchange rate was ₩1,186 per U.S. dollar, very similar to the ₩1,178 per dollar rate in January of this year. If anything, the exchange rate was lower than these values for most of the period between 2010 and 2017, meaning South Korean money enjoyed slightly more buying power. Despite this, food prices have increased substantially.

This pattern of disconnect between market conditions and consumer prices can be observed in domestic products as well. In 2012, domestically-grown Chinese cabbage was hit by a drought, dropping output to 68 percent of the previous year. This damage resulted in an 11 percent price increase. In 2013, the agricultural output recovered to about 82 percent of what it was in 2011 yet prices continued to rise an additional 6 percent. Again, labor rates, currency values, and production factors failed to explain the increase.

From 2013 to 2016, domestically-grown cabbage prices increased another whopping 41 percent, influenced in part by declining demand (fewer people making their own kimchi) and another, more recent drought. A slew of investigative reporting last year showed many prices were often artificially high with farmers selling cabbage at around ₩1,000 per head to retailers and the retailers selling it to consumers at ₩10,000 per head. This is despite oil prices that have remained low and virtually unchanged labor rates from year-to-year. In short, market circumstances fail to explain the increase.

A piece of terminology used when describing situations like this is “consumer tolerance.” Simply put, companies have a tendency to market their products at the highest possible price while maintaining a desired level of sales in order to maximize profits. A wide range of market and psychology research goes on behind the scenes to determine what these tolerances are. In the case of foods, the tolerances are particularly easy to take advantage of because eating is universal and always in demand. The use of food crises like avian flu or drought to create and then maintain a higher consumer price is common practice throughout the world, one perpetuated by the unaware consumer and governments unable or unwilling to protect consumer wallets. Energy is another area where such crises can be taken advantage of: the Enron-perpetrated California blackouts in the early 2000s are perhaps the most famous example.

Most modern food companies are owned by investors who buy company stock. These investors expect companies to display a powerful drive to maximize profits. It is unfortunate truth that turning a profit in of itself is no longer enough for investors: they need to make more profit than the previous year. Success in the world of modern capitalism is about being able to increase profits, regardless of whether these profits may already be substantial. Pushing the limits of consumer tolerance is one of the easiest ways to achieve this goal, with consumers feeling the pinch. If too expensive, the consumer can make a conscious choice to avoid luxury brands like Channel and Gucci, but avoiding food is not so easy.

The sharp decrease in South Korean food inflation rates observed from 2010 to 2013 showcases an interesting example in which government intervention can protect the consumer. This period coincided with former President Lee Myung-bak’s “war on inflation,” which involved a series of regulation policies coupled with free trade agreements (FTAs). The new policies created government bureaus to enforce fairer pricing practices and awarded subsidies to targeted industries, lowering prices. The FTAs reduced tariffs on imported goods, especially food imports from China and the United States. As one can imagine, the unraveling of many of these practices by the Park Geun-hye administration contributed directly to the renewed rise in food inflation rates observed since 2013. Some speculate the recent ramen price increase in December was purposely timed to avoid oversight by the new, incoming Moon Jae-in administration.

Although many economists argue (correctly) government price control is inevitably futile (since international market forces tend to inundate domestic efforts), controls on unfair pricing in-country are an issue frequently ignored in the debate. Another related area requiring renewed attention in South Korea is the illegal labeling of imported goods as domestic product. This practice takes advantage of the higher prices commanded by domestic goods, again increasing profit margins for food companies, albeit illegally. Although it is difficult to ascertain the exact prevalence of this problem given past efforts to crackdown on it, illegal labeling is likely to increase domestic prices indirectly since legitimate domestic producers lose business to the fake alternatives. Whatever the case, consumers will be watching closely to see if the new administration puts any effort into bring down those egg prices.

Justin Fendos is a professor at Dongseo University in South Korea and the associate director of the Tan School at Fudan University in Shanghai.

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