What’s Happening to North Korea`s Rice Price?

In the Lean Spring Season, Rice Price is Falling?

The Inter-Korean Ministerial meeting will be held from February 27 for three days in Pyongyang. The main topic of this round of talks, scheduled to be held seven months after the last round, will be on aid of up to one million ton of rice and 450,000 tons of fertilizer for North Korea. The North has been short of food aid since the South, the largest aid supplier to the North, stopped assistance as a result of the North`s nuclear test last year. Accordingly, North Korean observers predicted a large scale starvation, deaths, and also flight from North Korea during the lean times of the spring season. But quite the opposite is true for North Korea. What is the cause behind this unexpected phenomenon?

Falling Food Prices-

As of the end of February, food prices in North Korea have been falling compared to those of last December. According to sources in North Korea, the price of rice in North Hamgyong Province has declined to the range of 850 won from the usual 1,000 won per kilogram. Corn prices, too, have declined to around 350 won from around 430 won for the same period of time. It is odd given that rice price in the second half of last year was around 1,000 won and that the price has begun to fall as the spring season approaches.

Regarding this, Mr. Choi, the person involved in trade with the North, said, "They couldn`t thresh grains because of a shortage of electricity. Recently they have been seeing them threshed, resulting in a supply of food in the marketplace." He added, "But most farms have crops that are still not threshed." If the South starts food aid to the North, prices in the North are expected to further go down, which means a lower possibility of mass starvation or escape from the North unlike what experts had anticipated.

However, nobody knows until the food prices keep falling. Furthermore, it seems that sooner or later the prices will go up again since crop production in the North cannot satisfy the domestic food demand. But, the price will not skyrocket. The rice price has never exceeded the 1,100 won mark even in the second half of last year when the international food aid ceased. In theory, prices rise when demand increases. Then why is such an anti-market phenomenon happening?

Secret Behind the Rice Price in the North; Answers can be Found in the Food Trade with China-

As of the end of February, in the border village of Yanbian, China, low quality rice, unsuitable for consumption, has been trading at 1.8 yuan (approximately 220 won) per kilo and high quality rice has been trading at 2.3 yuan (approximately 280 won). If you import rice for 1.8 yuan per kilo, the rice price in the North Korean market will end up being 1.17 times the original price after factoring an additional 10 percent for merchandise profit, five percent for trade certificate, and two percent for logistics. Given that a yuan is equal to 385 won in the North Korean black market, low quality rice will be priced at 800 won and high quality rice at 1,000 won in the North Korean market.

The formula of "the original price of the rice times 1.17 times the exchange rate equals the rice price in the North" has remained true for a few years.

Now the bilateral rice trade has stopped because rice in the North is cheaper than in China. But if the price increases in the North (up to the level of imported rice from China) can generate profits, trade will be resumed. It is also the reason why the rice price does not exceed the 1,100 won mark.

North Korea Economy Heavily Dependent on China-

After you learn the secret behind the price of rice that determine other prices in North Korea, you can easily figure out the going value of other goods in the North with comparison to the Chinese prices. The North has been heavily dependent on China for necessities because most of the North`s factories are not operating due to the energy shortage. A survey on North Korean defectors reveals that Chinese products account for 70 percent of the North Korean market compared to 20 percent of North Korean-made products and 10 percent from others.

High profits are guaranteed for low turnover-ratio goods compared to high turnover-ratio ones such as rice and oil. Up to a 20 percent profit margin can be made for merchants in necessities, home appliances, medicines, early bruised fruits, and meat, which means 1.27 higher prices in North Korea than original prices in China. Merchandise profit margin even climbs to 30 percent in the case of second-hand goods whose sales are not easy and specific machines.

The North is selling minerals and fisheries to China in return for buying the entire range of basic commodities.

Prices in the North are purely reflected in prices in the Chinese market because the North fully opened its markets to China. Though rice in the South is 10 times more expensive than China’s, we don`t see a massive inflow of Chinese rice because of protective trade measures such as tariffs and subsidies.

But the North, a country short of almost everything, cannot come up with protective trade measures against China. The bilateral trade between the North and China is virtually a free trade. In circumstances as when the North Korean economy is almost collapsing, such a free trade can lead to subjugation of North Korea to China, a worrying situation.

So far, the academic circle has raised its concerns that North Korea is being reduced into a northeastern province of China. But no substantial analysis has been made to confirm that North Korea was included in China`s free trade zone and analyses only North Korea`s heavy trade dependency on China.

Given that, South Korea`s food aid to North Korea will only play a role to temporarily bringing down food prices in North Korea. How much and how long the aid will affect the prices depends on the volume of the aid.

zsh75@donga.com