Corn Prices Rising

As a country lacking natural resources and an importer of agricultural products, Korea is expected to suffer from rising prices in agricultural products and oil.

According the Ministry of Agriculture and Forestry and the Korea Rural Economic Institute, the price of corn produced in the U.S., which constitutes a large part of Korea’s corn imports, rose by 62.5 percent to $144 per ton in May from $88 at the end of last year. Korea imported 9.3 million tons of corn last year, becoming the world’s second largest importer of corn behind Japan.

The price hike is mainly because corn is used in producing bio ethanol. U.S. President George W. Bush said in this year’s State of the Union Address that he would decrease the country’s oil consumption by greatly increasing production of biofuels such as corn ethanol.

It is expected that about 80 million tons of corn will be used for ethanol production, which is about 26 percent of America’s total corn production of 303 million tons. The European Union and China are also rushing to produce alternative fuels using grain.

Considering that decreasing oil demand following the development of alternative energy sources could undermine their profits, oil producing countries, including OPEC countries, are actively dealing with the situation.

OPEC Secretary General Abdalla Salem el-Badri said earlier this month, “We’ll give second thoughts on our investment plan to increase oil production if oil demand is considered unstable,” warning, “(If we cut oil production), oil prices will skyrocket.”

Other grain markets are also suffering.

As farmers began to grow more corn, the prices of wheat, barley and soy, whose production has dropped, are soaring.

This form of “twin inflation,” a joint rise in the prices of oil and grain, has emerged as a major external variable that threatens the Korean economy.

As Korea mainly uses corn as feed, the rising price of corn is likely to bring up the price of stock farm products, including beef, pork, and chicken. Furthermore, Korean food manufacturers that produce instant noodles or cooking oil that use wheat and soy as ingredients are facing a production cost hike.

A director at LG Economics Research Institute said, “As an importer of both grain and petroleum, Korea will face double pressure,” adding, “Given that inflation pressure is already high, inflation fueled by corn prices could lead to an interest rate hike, which in turn could slow down Korea’s economic recovery.”

jarrett@donga.com sanjuck@donga.com