[Analysis] Why are food prices in Korea soaring?

A low food self-sufficiency rate and poor distribution structure are fueling food inflation in Korea.

Emerging economies have suffered from steep consumer inflation that even caused political unrest this year, but advanced economies have seen little or no hikes in food prices. Korea is an exception, however.

In Korea, food prices including those of agricultural, processed and drink products rose 12 percent in the fourth quarter last year, second only to Turkey (12.1 percent) among member countries of the Organization for Economic Cooperation and Development. Korea`s figure is also nearly 10 times that of Japan (1.8 percent) and the Netherlands (1 percent), two countries that are also highly dependent on imports for food consumption like Korea.

The steep increase in food prices in Korea is due to the decline in the food self-sufficiency rate and a poor structure for food imports and distribution.

○ Skyrocketing food prices

The OECD ranked Korea seventh among its 34 member countries in the consumer price hike with 3.7 percent in the fourth quarter last year. In particular, Korea saw the lowest inflation among countries that showed rapid economic recovery after the global economic crisis by ranking 10th in core inflation, a measure of inflation that excludes the more volatile categories of food and energy prices, with 1.8 percent.

Despite this, the Korean government took comprehensive anti-inflation measures because food prices, which directly affect the livelihood of the working class, rose more rapidly than those in other advanced economies.

Korea`s food prices have grown more than 10 percent every month since September last year, ranking first or second in the OECD. The average food inflation of OECD member countries has remained at the mid-2 percent level since September last year, when international food prices soared.

The most recent food inflation is different from that of 2008, when the prices of food imports rose due to a weakening won that fell to more than 1,300 against the U.S. dollar.

The won has since rebounded to the 1,100 level so the prices of food imports have fallen, but domestic food prices keep rising day by day.

When food prices skyrocketed in 2008, food inflation reached 5 percent in dollar terms, lower than the OECD average of 6.2 percent.

○ Learning from Japan

Food prices are rising faster in Korea than in other advanced economies due to a falling food self-sufficiency rate, or the share of domestically produced agricultural, livestock and fisheries products in the yearly consumption of such products. The rate fell from 70.5 percent in 1990 to 55.6 percent in 2000 and 51.4 percent in 2009.

Worsening food self-sufficiency means more imports of food. With agricultural, livestock and fisheries producers banning exports due to unusual weather, however, the prices of food imports are skyrocketing.

A poor distribution structure for agricultural, livestock and fisheries products is also to blame. According to Korea Agro-Fisheries Trade Corp., distribution costs for the three types of products were 40.6 percent of retail prices in 2000, but the figure rose to 44.1 percent in 2009.

Unlike in advanced economies that have a two- or three-stage distribution structure, agricultural products in Korea requires a multi-stage distribution process including wholesalers, large-scale distributors and retailers. This raises consumer prices further.

To curb food inflation, experts urge Korea to learn from Japan. Food inflation in Japan, whose food self-sufficiency rate is lower than Korea`s at the 40-percent level, was 1 percent in December last year, the eighth lowest among OECD countries.

Such low food inflation is because of Japan`s stable import structure for agricultural products and collaboration with the world`s largest grain producers, Brazil and Argentina.

In addition, Japan set up a grain storage system in the 1970s to prepare for hikes in grain prices and direct trade markets for agricultural products in cities and provinces to cut distribution costs.

Kim Hwa-nyeon, a researcher at Samsung Economic Research Institute in Seoul, said, "Relatively steep rises in food prices in Korea show the country`s weak supply structure for agricultural products," adding, "We need to take mid-and long-term countermeasures, such as the securing of stable overseas sources, like Japan did."

weappon@donga.com