South Korea Agribusiness Report Q3 2012

On the heels of the recently implemented Korea-US (KORUS) free trade agreement (FTA) is an announcement between the government of South Korea, together with its two East Asian neighbours, China and Japan, that they aim to seal a trilateral FTA within the next two years. Given that South Koreans are the most subsidised population in the world (63% of revenues are derived from government subsidies), this is likely to receive strong protests from the agriculture sector. However, if the governments steely response to the previous signing of the KORUS agreement is anything to go by, BMI believes that industry consolidation will only grow and gather pace in the foreseeable future.

Key Forecasts

- Corn consumption to 2016: 24.1% to 10.2mn tonnes. Approximately 75% of this demand will be accounted for by the livestock sector. Another important driver of corn demand over the medium term will be the increase in consumption of high fructose corn syrup, which is becoming more popular than sugar in the countrys expanding soft drinks sector.

- Milk production to 2015/16: 2.8% to 2.2mn tonnes. This growth is likely to be supported by improved yields per cow and favourable pricing structures for farmers based on a new agreement to raise the average price of raw milk.

- Pork production to 2015/16: 30.0% to 1.1mn tonnes. Like beef and poultry, South Korea will remain a net pork importer over the medium term. Like beef and poultry, South Korea will remain a net pork importer over the medium term.

- Real GDP growth: 1.9% year-on-year (y-o-y) in 2012 (down from 3.7% y-o-y in 2011 and set to average 4.0% out to 2016)

- Consumer price index: 2.7% y-o-y in 2012 (down from 4.2 y-o-y in 2011 and set to average 3.0% from 2011 to 2016).

Industry Developments

Despite the declining overall domestic consumption of rice, we highlight that there is a growing trend of increased demand for rice processing for the export-oriented food processing industry. According to government data, rice demand for processing has almost doubled in recent years, from 366,000 tonnes demanded in 2008/09 to 650,000 tonnes in 2011/12. Consumption from the food processing (39% of total demand) and liquor processing industries (20% of total demand) are expected to grow strongly in the near term as the government continues its efforts to globalise Korean cuisine, which includes rice cakes and other rice based snacks. China and US rice exporters will benefit the most out of this trend, given that they contributed to 46% and 29% of 2011 total rice imports respectively.

Despite the strong reliance on corn imports, the Korean government has been firmly adverse to growing or importing genetically modified (GM) corn. Indeed, corn processors continue to import only non-GM corn from countries such as the US, Hungary, Serbia and Russia. China-produced corn is also favoured as it is reportedly derived from non-GM seeds. While we believe that this trend should continue to hold in the near term, it would seem unlikely for the government to remain anti-GM for a sustained period, given the growing acceptance even in the likes of traditionally-resistance countries such as China, in growing and importing GM foods.

BMI believes that the national hog herd will not exceed pre-crisis levels any time soon. According to data from the US Department of Agriculture, total expected inventory of hogs in 2012 should come in at around 13.9mn heads. Although this is 4.4% higher on the year, it still stands a way off the peak level of 14.9mn heads in 2009, before the HFMD epidemic in 2010-2011. We foresee the 21 national integrators as playing an increasing role in growing the industry in the near future. As of today, they contribute to 20% of the nations total swine inventory. That said, close to 60% of the total inventory is still being produced by mid-sized farms with 1000-4,999 swine. With the FTA having come into force in recent months, we expect the industry to go through more consolidation before it will grow as strongly as it did before the crisis.

The price of this market report covers 4 quarterly reports on this sector. This quarterly report will be downloadable instantly as a PDF document, with the 3 remaining reports delivered at regular intervals throughout the year.