Rice Flood in South Korea: Oversupply in the Korean Rice Market
This article was written by UC Davis ARE PhD student Kyumin Kim. It is the eighth and final in a series of excellent articles written by students in my ARE 231 class this fall.
Historically, rice has been consumed as a staple food in East Asia. Cultivation of rice began in China 80,000 years ago, after which it spread all over East and Southeast Asia. According to the statistics by the Food and Agricultural Organization (FAO), most of the top rice-producing countries are in Asia.
The position of rice on Koreans' tables, however, is not the same as before but is indeed falling. Rice production in South Korea has declined by 35% in the past 20 years, dropping from 7.2 million tons in 2000 to 4.7 million tons in 2020. On average during this period, production dropped by 1.5% per year. Yet rice is over supplied in the South Korean market. How can this be?
Inventories enable the market to reduce price volatility and to avoid running out in low-supply years. The FAO-recommended inventory level for staples is 17-18% of the total annual consumption of that crop. Reflecting the FAO’s recommendation, the appropriate rice inventory for South Korea's economy should be approximately 700,000-800,000 tons. However, the rice inventory stocked by the Korean government was 2.04 million tons on average between 2014 and 2017, which is around three times of the recommended stock by the FAO. Why is there a rice flood in the Korean crop market?
One simple explanation is the dramatic shrinkage in rice demand. In 1990, rice consumption per capita was 120 kg/person, and by 2020 it had dropped to 57.7 kg/person. Thus, rice consumption decreased by 2.4% per year from 1990 to 2020. In contrast, the average production decline rate was 1.5% in the same period.
The reduction of rice demand is attributed to various changes in demographic factors. A 2019 research report by Korean Rural Economic Institute (KREI) identifies three reasons: 1) the increase in 1-person households, which eat less relative to other household groups, 2) substitution effect by other food sources (fruit, meat, and fish, etc.) and 3) westernization in food consumption (consuming other carbo-food such as bread).
However, the dramatic demand reduction does not solely explain the oversupply in rice production. In fact, most of the problems exist on the supply side: 1) the aging of the rural economy, 2) high mechanization in rice production, and 3) governmental subsidies to preserve rice prices.
In terms of demography, rural areas of South Korea in which rice is harvested show a significant speed of aging. In 1990, the ratio of the population above age 65 in rural societies was just 11.5%. During the last 30 years, this ratio has surged up to 46.6%. How is the steep aging trend associated with the rice oversupply in the market? Let's dive into the mechanization rate of crop & vegetable production.
The mechanization rate is an index to show how many mechanical devices (e.g., tractors) are applied relative to human labor. Relative to other crops and vegetables cultivated in South Korea, rice shows a nearly perfect mechanization rate: 98.4% in 2019. On the other hand, other vegetable and crops are much lower than that of rice as shown in the graph. Because of the high mechanization rate, old farmers, who possess limited labor power, have a strong preference to keep producing rice, which leads to oversupply in the Korean crop market.
Rice over production is also attributable to government subsidies that preserve farmers profits. When the market price in harvest season does not reach a government-set goal price, the Korean government pays to farmers 85% of the price gap between the market price and the government-set price. These subsidies incentivize excessive supply in the rice market. Therefore, farmers are half-hearted about reducing the land for rice farming.
The South Korean government recently decided to abolish the policy of setting a rice goal price. However, due to massive backlash from farmers, the government may provide another type of program to make up for their economic loss. If another program to intervene in the rice market price comes up, will we observe a reduction in rice oversupply?
My answer is “nobody knows now, but we will see quite soon”.
You can replicate the plots in this article using this R code.