Chinese News Analysis: S.Korea's Consumer Prices May Spike to over 5 pct Amid Milk Crisis

Concerns are spreading that South Korea's consumer prices may accelerate to  over 5 percent this month due to price hikes in dairy products  caused by a so-called milk crisis. 

The country's livestock  farmers suspended supply of raw milk for one day on Wednesday, claiming that the price of raw milk should rise to 877 won (0.83  U. S. dollar) per liter, up 25 percent from the current 704 won.   

Dairy farmers argued that they were saddled with debts as supply prices of raw milk have been frozen for the past three years even  though feed prices have jumped by 30 percent since 2008. 

"Feed  prices have risen around 30 percent since 2008, but raw milk  prices have remained unchanged for the past three years. Demand  for 25 percent hikes are reasonably based on real production costs  for raw milk," an official at the Korea Dairy & Beef Farmers  Association (KDBFA) told Xinhua Thursday.

According to the official, the proportion of feed cost to the total production costs now stands at about 80 percent, sharply up from 65 percent in 2010.

The KDBFA, speaking for livestock farmers, said that dairy farmers will halt raw milk supply indefinitely if their demand is not met until Friday.

Meanwhile, dairy companies have clung to their position that the farmers' demand cannot be accepted as a sharp increase in raw milk prices would lift overall prices of dairy products, which would trigger weaker consumption. They suggested accepting the price rise to 785 won, far below the 877 won that farmers were seeking.

The confrontation came after the supply of raw milk has been unstable since the outbreak of the foot-and-mouth disease earlier this year. The South Korean government culled nearly 150,000 heads of cattle in a bid to curb the spread of the deadly animal disease. Around 36,000 were dairy cows among the total cattle destroyed, triggering disruptions in milk supply.

Back in February, the government increased the import quota for tariff-free powdered milk to 30,000 tons to tackle supply shortages in milk, effective until the end of this year. The tariff rate for dairy products such as butter and cheese fell to zero from the prior 40 and 36 percent respectively.

Despite the anti-inflation measures, price hikes in dairy products are expected to add upward pressures on consumer inflation, which have stayed high since the start of this year. South Korea's consumer prices surged 4.7 percent on-year in July, surpassing the upper end of the Bank of Korea (BOK)'s inflation target band of 2- 4 percent for seven straight months. It was faster than a 4.4 percent on-year gain in June.

"Once milk prices rise, they used to go sharply higher as seen in late-2004 and 2008. Headline consumer inflation may break above the 5 percent level in August due to price increases in dairy products," Yum Sang-hoon, a fixed- income analyst at SK Securities in Seoul, told Xinhua.

According to the analyst, dairy product prices jumped around 20 percent in late-2004 and surged 25 percent in 2008 after supply prices of raw milk were lifted.

If raw milk prices are raised by 173 won as livestock farmers demanded, dairy companies are expected to lift retail prices of dairy goods by around 200 won, strengthening inflationary pressures further. The proportion of dairy products to all items of the consumer price index (CPI) reaches 1.1 percent, meaning 10 percent hike in dairy product prices will raise the CPI growth rate by some 0.1 percent.

"Price hikes in raw milk may have a stronger impact on consumer prices than expected as the price rise effects other consumer products such as bread, cakes and ice cream along with dairy products," Yum said.

Meanwhile, other experts forecast the impact of the price hike will not be sufficient enough to drive consumer inflation above the 5 percent level.

"The price rises in raw milk will have some impact on consumer inflation as milk is used as ingredients for many processed food, but the impact will not be big due to the relatively smaller proportion of dairy products among CPI index," Yoon Chang-yong, a senior economist at Shinhan Investment Corp. in Seoul, told Xinhua.

Yoon noted consumer inflation will be affected by public service fees such as electricity charges and transport fares rather than dairy products as the government plans to raise such fees at a gradual pace in the second half. The country's electricity prices were lifted by 4.9 percent on average starting this month. Consumer prices are forecast to rise by 0.038 percentage points further owing to the electricity rate increase, according to the Ministry of Knowledge Economy.

The economist projected the nation's inflation to peak at August before falling lower in the fourth quarter due to base effect. Last year, consumer inflation accelerated to 3.6 percent in September from 2. 6 percent in August.