Chapter 5. Agricultural policy in Korea

This chapter provides an overview of developments in agricultural policies in Korea. It also reports on trends in the level and compositions of support and discusses the likely impacts of agricultural policy measures on structural change, environmental performance and innovation in the sector.

    

5.1. Agricultural policy objectives

The focus of agricultural policy in Korea has evolved over the past sixty years. From the 1950s to the 1970s, efforts were concentrated primarily on increasing productivity of crops as well as achieving self-sufficiency in rice. Since the 1980s, the issue of income disparity between farm and urban households has emerged following the rapid economic growth through industrialisation. In the late 1980s and through the 1990s, the focus shifted to structural adjustment and competitiveness to cope with the opening of agricultural markets. In the most recent decade, the emphasis has shifted to a broader set of objectives including vitalizing the rural economy, exploring the export market, enhancing the environmental performance of agriculture and promoting the food industry.

From the mid-1980s, the Korean government has developed policy plans to improve the competitiveness of agriculture in response to increasing agricultural imports, termination of the exemption from the GATT Balance of Payments provision and the Uruguay Round Agreement on Agriculture. The Agricultural and Rural Basic Law of 2000 established a legal framework for Korean agriculture and rural policies, mandating the government to prepare a development plan for agriculture and rural areas. In 2007, the Basic Law was replaced by the Framework Act on Agriculture, Rural Community and Food Industry. The Framework Act introduces basic policy directions namely: 1) Stable supply of agricultural products; 2) Restructuring and sustainable development of agriculture; 3) Promotion of public functions of agriculture and rural communities; 4) Development of local agriculture and promotion of welfare of residents in rural communities.

To formulate and implement the policy, the Act mandates MAFRA to draw up an Agriculture and Rural Community and Food Industry Development Plan every five years. The previous plan (2013-17) emphasised adding value to agricultural products in an innovative way and improving agricultural productivity by integrating agriculture with other industries such as manufacturing, processing, or ICT. The Act requires the Plan to set self-sufficiency targets in food and staples, and action plans for their achievement. The targets cover calorie-based self-sufficiency and volume-based self-sufficiency in rice and barley, grains, livestock products and forage. The target of the volume-based self-sufficiency ratio of grains (including animal feed) was set as 30% in 2017, from 23% in 2013; this was to be achieved by measures such as expanding the agriculture production infrastructure and encouraging economies of scale for rice production and distribution (WTO, 2016).

The most recent policy plan for 2018-22 set four main policy targets: strengthening the income safety net; innovation for sustainable agriculture; enhancing food safety in the supply chain; and improving rural welfare. Strengthening competitiveness and growth of agriculture by enhancing agricultural productivity has been a core goal of agricultural policies in Korea. The most recent five-year policy plans diversifies the objective of agricultural policies to address more varieties of societal demands towards agriculture and rural areas (Box 5.1). The new policy plan shifted the orientation of agricultural policies further to ensure income stability and quality of life of farmers as well as the balanced development between agricultural production and environmental conservation. It also foresees a strengthening of bottom-up participation in policy.

268. To achieve these policy objectives, Korea plans to strengthen agricultural innovation capacity to produce environmentally friendly and safe foods. Key policies include introducing environmental cross-compliance conditions to direct payments and a new agricultural environment preservation programme. The government also aims to improve the environmental performance of livestock production by supporting the modernisation of cattle sheds. In addition, the government aims to revitalise the rural economy by promoting returning of people to rural areas and engaging in agriculture.

Box 5.1. Public perception on the role of agriculture and rural areas in Korea

Since 2006, KREI has been conducting an annual survey on the perceptions of urban residents and farmers towards agriculture, rural areas, and agricultural policies in Korea. The 2017 survey was conducted on samples of 936 farmers and 1 500 urban residents. The survey results show that both farmers and urban residents have a high recognition of the role of agriculture and rural areas as a stable supplier of foods, contributor to balanced development of the nation, creator of jobs and providers of places to inherit traditional culture and recreational time. Both farmers and urban residents perceive agriculture as preserving the environment and the ecosystem, but farmers have higher recognition on this point. The negative perception of urban development to harm balanced development or rural landscape was also found to be higher among farmers. On the other hand, more urban residents perceive that agriculture relied on excessive government support of rural areas than farmers. The distrust in food safety is also more common among urban residents than farmers (Figure 5.1).

Figure 5.1. Survey results on the role of agriculture and rural areas in Korea, 2017
picture

Note: Higher score indicates a higher rate of agreement on the item.

Source: KREI (2018).

 StatLink https://doi.org/10.1787/888933851837

The survey also asked urban residents if they are willing to pay additional taxes to maintain the functions related to the public functions of agriculture and rural areas. The result shows that 53.8% of urban residents were willing to pay an extra tax, while 41.4% of them did not agree with additional taxes for this purpose.

5.2. Overview of domestic agricultural policy portfolio

The OECD’s Producer and Consumer Support Estimates (PSE; CSE) database show that the overall portfolio of support to agriculture is largely dominated by direct support to producers. The share of support for general services (GSSE) in total support to agriculture increased from 8% in 1986-88 to 12% in 2014-16. In particular, the share of GSSE directed to long-term productivity growth such as support to knowledge and innovation, and to infrastructure increased from 53% in 1986-88 to 82% in 2014-16, reflecting the policy emphasis on competitiveness and sustainability of the agricultural sector. However, this type of support constitutes less than 10% of overall support to agriculture (Figure 5.2).

Figure 5.2. Composition of support to agriculture in Korea, 2014-16
picture

Source: OECD (2017a), “Producer and Consumer Support Estimates”, OECD Agriculture statistics (database) http://dx.doi.org/10.1787/agr-pcse-data-en.

 StatLink https://doi.org/10.1787/888933851856

Korea has gradually reduced its support to agriculture relative to its gross farm receipts and modest progress has been made towards more market-oriented policies. The level of PSE has gradually declined from 70% to 49% of gross farm revenue between 1986-88 and 2014-16 (Figure 5.3). However, the level of PSE is still 2.5 times higher than the OECD average, making Korea one of the countries with the highest level of support to producers. Among transfers to individual producers, the government introduced a range of direct payment programmes since the late 1990s, but market price support (MPS) continues to be the dominant element. Even though the ratio of producer prices to border prices (the Nominal Protection Coefficient) has declined from 3.3 in 1986-88 to 1.9 in 2014-16, the share of the MPS in the PSE shows only a moderate decrease – from 99% to 92% for the same period. Taking into consideration the commodity-specific budgetary transfer, 93% of producer support was dominated by transfers to specific commodity production in 2014-16 (Figure 5.4). This contrasts with a general reform direction in the OECD away from single commodity production support. Such support constrains farmers’ responses to market signals and hinders structural adjustment of the sector.

Figure 5.3. Evolution of support for Korea’s agricultural producers, 1995 to 2016
As a percentage of gross farm receipts
picture

Source: OECD (2017a), “Producer and Consumer Support Estimates”, OECD Agriculture statistics (database), http://dx.doi.org/10.1787/agr-pcse-data-en.

 StatLink https://doi.org/10.1787/888933851875

Figure 5.4. Share of single commodity transfer, 1986 to 2016
As a percentage of Producer Support Estimate
picture

Note: European Union refers to EU12 for 1986-94, EU15 for 1995-2003, EU25 for 2004-06, EU27 for 2007-13, EU28 from 2014 onwards.

Source: OECD (2017a), “Producer and Consumer Support Estimates”, OECD Agriculture statistics (database), http://dx.doi.org/10.1787/agr-pcse-data-en.

 StatLink https://doi.org/10.1787/888933851894

In Korea, support to single commodity production is concentrated to certain upland crops (soybean and barley), rice, pig meat and milk (Figure 5.5). MPS accounts for all single commodity transfers except for rice, which receives an area-based counter-cyclical payment.

Figure 5.5. Support to specific commodities in Korea: Single Commodity Transfer, 2014-16
As a percentage of gross farm receipts for each commodity
picture

Source: OECD (2017a), “Producer and Consumer Support Estimates”, OECD Agriculture statistics (database), http://dx.doi.org/10.1787/agr-pcse-data-en.

 StatLink https://doi.org/10.1787/888933851913

Korea’s grain procurement policy had made expenditure for public stockholding the largest component of GSSE. However, as the public procurement policy scaled down, the share of public stockholding in GSSE declined from 44% in 1986-88 to 8.5% in 2014-16. In parallel, the share of investment in Korea’s agricultural knowledge and innovation system has increased from 7% in 1986-88 to 28% in 2014-16, reflecting increasing policy emphasis on the enhancement of productivity in agriculture. For example, the fiscal expenditure for R&D in three public institutions (MAFRA, RDA and KFS) increased at 7.7% annually in 2008-14 (KREI, 2015).

The development and maintenance of hydrological infrastructure has been by far the largest component of GSSE in the OECD’s PSE/CSE database, accounting for 48% of Korea’s GSSE in 2014-16. This reflects Korea’s agricultural structure, which is dominated by paddy farming. By 2013, 80.6% of total rice paddy area was already equipped with irrigation facilities (KRC, 2014). The focus of irrigation investment should shift to the maintenance of existing infrastructure, increasing other types of investments to diversify agricultural production and to enhance the long-term growth potential of the sector.

5.3. Agricultural trade policy

Tariff continues to be the main instrument of protecting domestic producers. Korea maintains a total of 63 tariff rate quotas (TRQ), including for rice, barley, red pepper and garlic. In-quota rates range from 0% to 50% while out of quota rates fall between 9% and 887% (Figure 5.6). With the conclusion of the GATT Uruguay Round, trade restrictions on all agricultural products were converted to tariffs except for rice. Because rice is its most sensitive agricultural product, Korea suspended rice tariffication from 1995 to 2014 and established a minimum market access (MMA) quota at a 5% tariff rate, in accordance with a special treatment provision in the WTO Agreement on Agriculture. The minimum market access volume increased from 51 307 tonnes in 1995 to 408 700 tonnes in 2014. As non-tariff measures on rice were transformed into a tariff system from 2015, all import restrictions on agricultural products are currently in the form of tariffs and tariff rate quotas.

Figure 5.6. Tariffs for 63 tariff rate quota products in Korea
picture

Source: MAFRA (2014a).

 StatLink https://doi.org/10.1787/888933851932

Rice is imported exclusively by state trading enterprises.1 TRQ of table rice is managed by the Korea Agro-Fisheries and Food Trade Corporation (AT), while TRQ for rice for processing purposes is imported by MAFRA. Imports of ginseng and chestnut are administered by auction. The license-on-demand method, for either historical importers or applied on a first-come, first-served basis, governs imports of 48 products. Imports of the remaining 12 products are implemented by a mix of two or at most three quota administration methods. The AT sells table rice through auctions whereas processing rice is sold at a set price (GAIN-KS1613, 2016). MAFRA exclusively controls the country's rice imports (WTO, 2016).

The government plans to simplify the existing administrative methods to reduce the involvement of STEs or to ensure greater use of the auctioning and applied rates method. In addition, the country manages voluntary TRQs that are mainly applied to feed grains. This temporary measure is announced and implemented each year. Adjustment tariffs on certain agricultural goods are also updated each year in consideration of price differences between domestic and imported products, market share and tariff differentials among similar products.

In addition to the TRQ for multilateral agricultural market-access commitments, country-specific TRQs were established, including Chile (7 products), EFTA (1 product), ASEAN (3 products), the European Union (10 products), Australia (7 products), Canada (7 products), the People’s Republic of China (6 products), New Zealand (4 products), Columbia (1 product) and the United States (16 products). All quotas are agreed to be administered by auctioning methods.

Since its first FTA ratification with Chile in 2004 to 2016, Korea has concluded 15 FTAs with a total of 52 countries.2 Korea’s tariff concession across partner countries ranges from 55% with India to 98% with the United States. Rice is excluded from tariff concession in all existing FTAs, but significant tariff concessions for livestock and fruit products are included in some of the FTAs (Table 5.1). Tariffs on beef from the United States, Australia and Canada will be completely eliminated within 15 years of implementation. Tariffs on pork originating from the European Union, the United States, Chile and Canada will also be eliminated over a maximum of 10 years. Tariffs on chicken meat mainly coming from the United States, Brazil and the European Union will be abolished over 10 to 13 years of implementation. Other sensitive products are protected by maintaining current duties, setting up new country-specific TRQs, allowing seasonal tariffs or introducing Agricultural Safeguard measures (ASG).3

On the export side, the government is increasing its efforts to expand agri-food exports to reach USD 10 billion. The government selects competitive exporters and provides consulting and overseas marketing services. Diversification of export markets is promoted through the operation of export market-pioneering groups and quarantine negotiations. The government also promotes the exports of agriculture-related industries such as agricultural machinery through improving export statistics of agriculture-related industries and preparing a market information system to support exporters. Korea has been a net exporter of agricultural machines since 2009. Tractors account for around half of export and the United States is by far the largest export destination (KREI, 2015).

Table 5.1. Korea’s tariff concessions on beef, pork and poultry meats with FTA partners

Products

Base tariff (%)

FTA Partner countries

2017 tariff (%)

Periods of tariff elimination after ratification

Beef

40

United States

24.0

15 years with ASG

Australia

29.3

Canada

32.0

Pork, fresh (bacon)

22.5

European Union

8.1

10 years with ASG

United States

9.0

Australia

13.5

Canada

17.3

Chile

0.0

Pork, frozen (bacon)

25.0

European Union

9.0

10 years

United States

0

By 2014

Australia

25.0

Excluded

Canada

19.2

13 years with ASG

Chile

0

10 years

Chicken, frozen (legs/breast)

20.0

European Union

7.2/10.0

10 years/13 years

United States

8.0/10.0

10 years/12 years

Chile

20.0

TRQ of 2 000 tons

ASEAN

20.0

Excluded

Chicken, fresh

(cuts/ginseng soup)

18-27

European Union

6.5/10.9

10 years

United States

7.2/12.0

10 years

Chile

18.0

10 years/TRQ of 2 000 tons

ASEAN

18.0

Excluded

Source: Park et al. (2015).

 StatLink https://doi.org/10.1787/888933852407

5.4. Domestic agricultural policy

The domestic price support programme

Korea had a government procurement programme for rice until 2004, with a procurement price higher than the market price. In 2005, the rice procurement programme was replaced by a public stockholding scheme and direct payment programmes. Government procurement programmes (operated by NACF) were also in place for barley, maize and soybeans.

The purpose of the public stockholding scheme is to secure the supply of major staples in the event of natural disasters or other unexpected circumstances which lead to a temporary grain shortage. The target amount of public stockholding for rice is around 17% of annual consumption (720 000 to 780 000 tonnes on a milled rice basis). To keep the stock in good edible condition, the government purchases half of the target amount during the harvest season and releases the same amount during the non-harvest season each year. Purchase quantities for public stockholding are determined through a cabinet meeting and the result is announced to the public (OECD, 2017c). In 2014 and 2015, public stock purchases of rice from domestic farmers amounted to 370 000 tonnes and 360 000 tonnes, which represented around 8.7% and 8.3% of domestic production, respectively. The quantity of the government purchase programme for soybeans has increased in recent years in line with efforts to increase self-sufficiency in soybeans and to encourage crop diversification away from rice.

The high level of commodity-specific support to rice boosted its production, but dietary change in Korea is reducing its consumption. To address the oversupply problem, in 2017 the government announced a supplemented plan to balance supply and demand of rice by 2019 through a range of policy measures, adjusting its initial plan of 2015. Under the plan, the area of rice paddies will be reduced from 799 000 ha in 2016 to 711 000 ha in 2018 while encouraging crop diversification and the planting of high-quality instead of high-yield variety seeds. To expand rice consumption, the government intends to strengthen R&D investment in rice food processing industries and reinforce dietary education on the nutritional value of rice. It increased the release of public rice stocks for feed use from 90 000 tonnes in 2016 to 410 000 tonnes in 2017. The government also plans to provide rice to ASEAN countries through the ASEAN Plus Three Emergency Rice Reserve. Additionally, current rice policies, such as direct payments, the public stockholding scheme and farmland use regulations, are to be re-examined to optimise the level of production.

While Korea faces an oversupply of domestic rice, the supply of upland crops such as barley, soybeans and wheat is mostly based on import. In 2015, the self-sufficiency ratio of rice was 101%, but that of upland crops was only 10.6%. In 2016, the government established a long-term plan to increase the self-sufficiency ratio of upland crops to 15% by 2020. To increase production of upland crops, the plan promotes diversified cropping in rice paddy and mechanisation of upland farming; it also increases the quantity of government purchase for soybeans. Additionally, the plan includes measures to expand demand for upland crops by promoting the transfer of technologies and commercialisation using processing technology developed by public research institutes.

The price stabilisation activities for vegetables are funded by the government-financed Agricultural Products Price Stabilisation Fund as well as revenue from two activities managed by the Korea Agro-Fisheries and Food Trade Corporation: the sales of products purchased domestically for buffer stocks and the mark-up on imports of state traded items such as beans, soybeans, potatoes, onions and garlic. Price stabilisation operations are sporadic, and the main crops affected have been dried red pepper, garlic and onions.

The dairy sector employs a production quota system. The current dairy policy was instituted in 2002 after the creation of the Korean Dairy Committee (KDC) in 1999. The KDC was put in place to handle the marketing of milk between producers and processors. Producers of milk were assigned a quota for milk production based on their production in a base period. Deliveries within 106% of the quota amount receive an in-quota price, with production between 106% and 117% of quota receiving 70% of the in-quota price. Deliveries over 117% of quota receive a price close to the import (world) price. In 2016, 24% of milk deliveries were made through the KDC, with the rest made through a number of different marketing organisations. These other marketing groups typically have a pricing structure that is similar in nature to that of the KDC.

Programmes to support farm income or reduce cost

Korea implemented its first direct payment programmes in 1997. The early retirement payment is a lump-sum payment for farmers between 65 and 74 years of age who are willing to sell or rent their land to full-time farmers below 64 years old or those under the age of 50 who have been working as farmers for more than three years. The rate of the payment is calculated as the difference between annual farming income and rent for the latest three years. From 2018, the rate of the payment will be differentiated between sale and rental of land (KRW 3.3 million (USD 2 915) and KRW 2.5 million (USD 2 211) per ha up to 4 ha, respectively). The period of payment is two to ten years, depending on the age of the retiring farmer.

The most important direct payment is the rice income compensation scheme, introduced in 2005 as a consequence of rice negotiations to allow more rice imports in the previous year. This scheme includes both fixed and variable payments. While the fixed payment is decoupled from current rice production and prices, the variable payment is determined according to the difference between a target price and each year’s harvest-period price. If the harvest-period price is lower than the target price, farmers receive 85% of the difference, with a deduction of the fixed payment. The target price is set every five years based on the five-year price change; for the period 2013-17 it is KRW 188 000 per 80 kilogrammes (USD 2 025 per tonne) of rice, which is an increase from KRW 170 083 (USD 1 832) for the period 2005-12.

The government also supports rice processing complexes (RPCs) to encourage product differentiation and quality improvement in the rice market. For an RPC larger than 10 000 tonne/year, the government subsidises KRW 3 billion (USD 2.6 million) when it modernises its processing facility. In addition, the government provides an extra subsidy for 1) constructing storehouses and a drier, and 2) consolidating two or more RPCs to induce the gains from economies of scale (MAFRA, 2017).

Direct payments for upland farming were introduced in 2012 as a result of the FTA with the United States. The goal of the policy is to support the income of upland crop farmers and increase the self-sufficiency rate. The number of upland crops covered in the programme increased from 19 in 2012 to 26 in 2013, expanding to all upland crops in 2015. In 2016, KRW 161.1 billion (USD 138.8 million) was paid to 614 000 farmers. The amount paid per unit area differs depending on whether or not the area is an agricultural promotion area. In 2017, KRW 575 530 per ha was provided for agricultural promotion areas, and KRW 431 648 for non-promotion areas.

In general, the production scales of non-rice field crops are small, and many of them are marketed without any brands. The Upland Crop Joint Management Body Support Project provides subsidies for groups of producers who have merged into a jointly managed corporation that jointly produce and manage farmland of 50 ha or larger. The government provides an additional support for education, consulting, equipment and machinery and facility construction under the project (MAFRA, 2017). The Korean government is also implementing upland infrastructure maintenance projects to increase the competitiveness of crops such as fruits and vegetables, and to diversify agricultural production. The investment includes water source development, road building and management.

To mitigate the adverse impacts of trade opening in agricultural products through FTAs, Korea introduced a series of measures to assist farmers to adjust to the new market environment. Major programmes set up in 2008 under the Special Act on Assistance to Farmers and Fishermen comprise income compensation payments and payments for exiting farmers. The income support payment is contingent on three parameters: domestic market price, total imports and imports from FTA partner countries. First, the domestic average price of the particular product must be lower than 90% of the last five years’ Olympic Average price. Second, imports of the product must exceed its base total import calculated on a 5-year Olympic Average basis. Finally, imports of the product from FTA partner countries must exceed the base import estimated by multiplying the 5-year Olympic Average import by the so-called import damage-triggering parameter (which is 1.05, 1.10, or 1.15 depending on market shares). The compensation payment scheme covers 95% of a price gap between the reference price and the current average price. Payment ceilings are KRW 35 million (USD 30 000) for individual farmers or KRW 50 million (USD 43 000) for agricultural enterprises.

Eligibility for exit payment includes not only requirements for income compensation payments, but an additional criterion, namely irreparably high investment costs or a period of two years or more of farming to generate profits. Support for exiting farmers amounts to three-year net income earned from the eligible items. Both income support payments and the exit payment are time-limited measures, running up to 2025 and 2020, respectively. In 2016, the government provided direct payments for carrots, grapes and blueberry farms and support of exit for grapes and blueberry farms (Table 5.2).

Table 5.2. Beneficiary agricultural products of the FTA compensation programmes

Year

Income compensation payments

Exit payment

2004-08

-

Greenhouse grapes, peaches, kiwis

2013

Korean native cattle and calves

Korean native cattle

2014

Sorghum, potatoes, sweet potatoes, Korean native calves

Korean native calves

2015

Soybeans, potatoes, sweet potatoes, melons, cherries, outdoor grapes, greenhouse grapes, chestnuts, chicken meat

Cherries, outdoor grapes, greenhouse grapes, chestnut, chicken meat

2016

Carrots, outdoor grapes, greenhouse grapes, blueberries

Outdoor grapes, greenhouse grapes, blueberry

2017

Balloon flower root

-

Source: Song et al. (2017).

In 2016, the Act was amended to introduce a co-operation fund to support the agriculture and fisheries sectors that could be adversely affected by trade liberalisation through FTAs. The fund will be financed by the industries that are likely to benefit from it. The Act aims to raise funds up to KRW 100 billion (USD 86 million) annually through voluntary contributions of private companies, which can receive tax benefits in return. The fund will be used to provide education to youths from farm households and to improve rural welfare and development.

Programmes to support risk management of farms

The agricultural insurance scheme, introduced for cattle in 1997 and for apples and pears in 2001, has increased its product coverage to 69 items: 53 crops and 16 livestock products (Table 5.3). Subsidising 50% of the insurance premium, public spending on the insurance scheme has increased from KRW 9 billion (USD 8 million) to KRW 287 billion (USD 247 million) since 2001. Currently, several private companies – NongHyup, KB and Hanwha, Dongbu and Hyundai – offer livestock insurance. The central and local governments co-finance premium subsidies at 70-85% (50% by central government and up to 35% by local government).

The coverage of livestock insurance includes dead animals and those slaughtered in emergencies, damage to facilities accommodating livestock and related buildings including peripherals. The highly concessional terms led to a considerable expansion of livestock insurance. Between 2011 and 2015, its penetration increased from 55% to 91% of total livestock numbers (of 16 types covered by insurance) (OECD, 2017b). Over the same period, the claims-to-premiums ratio rose from 60% to 98%. The majority of claims concerned animals lost to disease and emergency slaughter; these claims amounted to 90% of the total value of claims made in 2012 and 86% in 2015. The livestock insurance scheme covers the risk related non-notifiable diseases, but Korea also provides various types of support to producers, and in certain cases also to upstream and downstream businesses in the event of notifiable disease outbreaks (Box 3.3).

Table 5.3. Agricultural insurance in Korea

Disaster insurance for agricultural crops

Disaster insurance for livestock

Applicable Act

Agricultural and fishery disaster insurance act

Introduction year

2001

1997

Target item (2017)

Apples, pears, rice, and others (53 item)

Cattle, pigs, chickens, and others (16 item)

Main contract

Hurricane (strong wind), hail, etc.

Wind, flood, snow damage, disease, fire

Special contract

Freezing and frost injury, heavy rain

Housing (wind, flood, sea damage), electrical equipment risk

Comprehensive risk method

Natural disasters

-

Compensation level

Guaranteed 60% to 90% of the purchase amount

60% ~ 100% levels of market price

Support of national treasury

Premium 40~60%

Operating expenses 100%

Premium 50%

Operating expenses 50%

Supported budget

KRW 216.2 billion

KRW 62.8 billion

Source: MAFRA (2014b), Strategies for the Development of Prevent and Respond to Agricultural Disasters Caused by Climate Change, p.12.

As the existing agricultural insurance scheme covers only production risk, a pilot project for an agricultural revenue insurance scheme which also covers price risk was introduced for onions, soybeans and grapes in 2015. The number of commodities covered subsequently increased to six, with garlic added in 2016 and potato and sweet potato in 2017.

Box 5.2. Taxes on Agricultural Income in Korea

Agricultural income has an exceptional status in the Korean taxation system. Income from plant growing was subject to agricultural land tax until 2000 and to agricultural income tax between 2000 and 2009, both of which were local taxes. However, neither tax generated notable revenue after the revision of the former in 1985 and the suspension of the collection of the latter for five years from 2005 (Kim, 2013). The agricultural income tax was abolished in 2010 on the grounds that revenue from it was too low even to cover the costs of its administration. By contrast, income from livestock holding has always been subject to general income tax, which is a national tax.

After the abolition of agricultural income tax in 2010, income from plant growing was categorically exempted from income taxation until the end of 2014.The income tax code was amended in 2013 so that income from plant growing is to be taxed if the revenue is equal to, or more than, KRW 1 billion (USD 0.9 million). This taxation was applied for the first time to income of 2015. However, income from the production of grains and other human food crops is still categorically exempted from income taxation.

Another important tax treatment for agricultural income is provided to agricultural enterprises. Although most agricultural production is carried out by family farms in Korea, the government is also applying policy measures to foster corporate enterprises which could contribute to specialisation, professionalisation, and economies of scale in the sector. The income of these enterprises from edible crops for human consumption is exempted from corporate income tax. Furthermore, the dividend from such enterprises is fully or partially exempted from personal income tax and the part of the dividend that is not exempted is taxed separately from other types of income.

5.5. Agri-environmental policy

Currently no environmental regulations are imposed specifically on agricultural production except for the regulations on livestock manure. The majority of regulations in the agricultural sector are regulations on products and processes such as regulations on food safety, labelling of origin, and traceability (see Chapter 3.2). Compared to the United States and the European Union, environmental regulations in Korea have a relatively short history. However, Korea has gradually developed a comprehensive environmental regulation system which includes both command-and-controls and incentive systems. Environmental regulations have effectively contributed to internalizing pollution externalities, although some areas continue to require substantial improvements. The agricultural sector also has been under the general environmental regulation system, but not under stricter regulations than other sectors. Indeed, the polluter pays principle has been applied less rigorously to the agricultural sector, one reason being that the production scale of the average farm household is small, and most farms are earning a smaller income than urban workers. Thus, subsidies rather than regulations are preferred as environmental instruments for controlling agricultural source pollutions (Kwon, 2013).

Nevertheless, controlling the environmental impacts of agriculture and the sector’s effects on natural resources is still important because it occupies 20% of total land of the country and accounts for almost half of total water withdrawal. The government first launched the Environment-friendly Agricultural Development Plan in 2001. The plan, which introduced the sustainability paradigm of the Rio Summit to Korean agricultural policies, has been updated and revised every five years. A new five-year (2016-20) promotion plan for environmentally friendly agriculture aims to expand market size for environmentally friendly agricultural products from KRW 1.4 trillion (USD 1.2 billion) to KRW 2.5 trillion (USD 2.1 billion) between 2015 and 2020. The government plans to increase the share of pesticide-free (including organic) cultivation area from 4.5% to 8% and more generally to reduce the input of chemical fertilisers and pesticides in crop production by 1.5% per year. It will do so through measures including organic fertiliser support and strengthening the current direct payment for the promotion of environmentally-friendly agriculture. From 2017, only the private sector can provide certificates for environmentally friendly agricultural products – these had previously been provided by both public and private sectors. In addition, agricultural environmental protection programmes will be introduced for soil conservation and water quality improvement.

Promotion of environmentally friendly agriculture

To respond to increasing consumer interest in environmentally friendly agriculture, the Environment-friendly Agricultural Product Certification System was introduced in 2001. This system certifies agricultural products with minimum use of or without pesticides, chemical fertilisers and antibiotics and antimicrobials. The NAQS runs the system with the assistance of private inspection agencies. Certified products are classified into organic agricultural products and pesticide or antibiotic-free agricultural products.

Organic agricultural products have to be produced without using any pesticides or chemical fertilisers while pesticide-free products are produced without using pesticides but with the use of less than one-third of the recommended amount of fertilisers. Organic livestock products and antibiotic-free livestock products have to be produced without using antibiotics, synthetic antimicrobials, and hormones. Organic livestock products must satisfy the additional requirement of using only organic feed.

Korea introduced the Environment-friendly Agriculture Promotion Act in 1997. This programme introduced direct payments for environmentally friendly farming in 1999 to temporarily compensate for the reduction of yields brought by the adoption of environmentally friendly farming practices in both crop and livestock production. In 2017, 30 453 crop farms and 1 485 livestock farms that produced organic and pesticide-free products received total payments of KRW 32.4 billion (USD 28.7 million). The programme is linked to the Environment-friendly Agricultural Product Certification System, as only farm households or farm corporations certified by the system can be the recipients of the payment. The payment is given up to five ha and limited for five years for certified organic production and three years for pesticide-free production. The payment to an organic farm can be extended at a lower rate provided that the farm continues its organic production.

The Environment-friendly programme was expanded to organic or antibiotic-free livestock product farms in 2009. Producers with a Hazard Analysis and Critical Control Points certification and a certification of organic or antibiotic-free animal production are included in the payment system. The payment is limited for five years for organic livestock production and three years for antibiotic-free production.

Promotion of biodiversity and rural amenities

The Biodiversity Management Contract Policy supports contracts between local government and rural residents under which the government pays for residents’ ecosystem conservation activities. The policy is composed of two programmes. The Cultivation Management Contract pays for a farmer cultivating barley or other crops under the contract and feeding migratory birds. The Conservation Activity Management Contract pays for farmers leaving grains and straw on fields and making animal shelters. In 2016, 24 cities and towns participated in the programmes.

The amenity value of Korea’s rural areas is increasingly recognised. The Direct Payment for Landscape Preservation was introduced in 2005 to enhance rural amenity value by increasing cultivation of amenity crops and stimulating rural village amenity-preservation activities. The payments compensate for the services that rural residents provide under a contract between a group of farms and a local government to cultivate amenity crops collectively. The programme pays KRW 1.7 million (USD 1 460) per ha for amenity crops (KRW 1.0 million (USD 860) per ha for similar crops) and MAFRA and local governments share the cost evenly. In addition, KRW 0.15 million (USD 130) per ha is paid for the other activities of village landscape preservation. The programme paid KRW 9.8 billion (USD 8.66 million) for 10 141 ha in 2015.

A direct payment programme for less favoured areas was introduced in 2004 on a pilot basis to support producers in geographically handicapped areas with low productivity and poor living conditions, and became a national programme in 2006. Its budget increased from KRW 10 billion (USD 8.7 million) in 2004 to KRW 39.5 billion (USD 34.1 million) in 2016 and the participating areas increased from 29 507 ha to 104 931 ha over the same period. The programme pays KRW 0.55 million (USD 470) per ha and KRW 0.3 million (USD 260) per ha for cropland and grassland, respectively.

As a result of introducing a series of agri-environmental payments, the share of producer support with voluntary or mandatory agri-environmental constraints in Korea has increased from 0.4% in 1995-97 to 3.9% in 2014-16, but it is still much lower than that of the European Union and the United States, in which a majority of the payments have such environmental conditionality (Figure 5.7).

Figure 5.7. Support linked to agri-environmental constraints, 1995-97 and 2014-16
As a percentage of Producer Support Estimate
picture

Note: Countries are ranked according to 2014-16 levels.

1. EU15 for 1995-97 and EU28 from 2014.

Source: OECD (2017a), “Producer and Consumer Support Estimates”, OECD Agriculture statistics (database), http://dx.doi.org/10.1787/agr-pcse-data-en.

 StatLink https://doi.org/10.1787/888933851951

5.6. Policy to promote the food industry

The Korean government is increasing support to foster its food industry. The Food Industry Promotion Act was enacted in 2007 to strengthen the linkage between the food industry and agriculture, to promote the development of the healthy food, and to enhance the competitiveness of the food industry. Policies to promote food industries include strengthening food R&D support, expanding professional workforce training, fostering small and medium food companies, industrialising traditional foods, providing food industry statistics and information, standardisation of food, establishing national food industry clusters, fostering the food service industry, promoting Korean food and food tourism, and expanding exports of agricultural products.

Investment supporting food R&D has continued to expand since 2010, when food R&D became independent of other budgets. By supporting food R&D, the government intends to enhance linkages between agriculture and the food industry, increase export competitiveness of the food industry, create new demands for agriculture through responding to the change of food consumption trends and enhance competitiveness of the food industry. The budget for supporting food R&D increased from USD 16 million to USD 30.2 million in 2010-16.

Since 2010, the government has implemented policies to foster R&D and export-oriented “global hubs for food markets in Northeast Asia” by creating national food clusters integrated with food companies, research institutes, and affiliated companies. The Korea National Food Cluster (Foodpolis), an R&D-focused and export-oriented platform established within an area of 2.32 square kilometres, was completed by 2017. To support food companies that purchased or rented land, the government has been operating specific R&D facilities from early 2017: a food functionality assessment centre, a food quality safety centre and a food packaging centre. Companies in the cluster can benefit from a range of subsidies and tax exemptions. In particular, foreign investment companies are eligible for the reduction or exemption of site rental for up to 50 years if they fulfil certain requirements such as on the size of investment or the level of technology. As of March 2017, 29 Korean food companies and 2 foreign investment enterprises had signed agreements to move into Foodpolis and were in the process of constructing their plants.

Two main programmes are employed to train the professional workforce: customised training programmes and an integrated job information system. In the customised training programmes, step-by-step approaches are applied. The first step is online education which includes general education (management, marketing, etc.), food-related education (industrial trends etc.) and trend education (newly created jobs, etc.) for people who are to be employed in the food industry. The second step is job competency training for food industry employees and job seekers. The third step is education customised to young people, based on a curriculum involving field experience, company participation and active engagement.

The integrated job information system provides jobs as well as specialised job search information for the food sector, customised job analysis, education management, employment and education history management, and job matching. The system manages integration with existing sites such as WorkNet, with other institutional education programmes, and with human resources databases. It establishes employment information and customised job connections for food and restaurant companies such as those in national food clusters and Halal-related food enterprises.

5.7. Summary

With the remarkable economic growth of the last decades, Korea’s agricultural sector has experienced a number of structural challenges in a very short period. Multilateral and bilateral trade agreements have also forced some parts of the agricultural sector to adjust to a more competitive market environment. The objective of agricultural policy in Korea has evolved from a stable supply of staples and self-sufficiency in rice to more diverse objectives: competitiveness along the food chain, the environmental sustainability of agriculture, erasure of the income disparity between rural and urban households, and the qualitative improvement of rural life. The most recent five-year policy plan of 2018-22 emphasised the re-orientation of agricultural policies to ensure income stability and quality of life of farmers as well as the balanced development between agricultural production and environmental conservation, aiming to address varieties of societal demands towards agriculture and rural areas.

According to the OECD PSE/CSE database, Korea grants one of the highest levels of support and protection to its farmers among OECD countries. Although Korea has increased investment in the agricultural knowledge and innovation system and introduced payments that are decoupled from current commodity production, the overall portfolio of agricultural policy in Korea is dominated by policies that are linked to staple production and to supporting farm income. Korea could further reallocate public resources towards investments better geared to increase long-term productivity growth and sustainability in agriculture.

The level of producer support in Korea declined gradually from 70% of gross farm revenue in 1986-88 to 49% in 2014-16. However, the transfer to single commodity production still accounts for more than 90% of transfers to individual producers. This structure of support may constrain farmers’ responses to market signals, hinder structural adjustment of the sector toward production of more value-added products and increase environmental pressure from agriculture. Reform in agricultural policy to move away from intervention coupled with commodity production and towards more flexible support on what to produce would facilitate the structural change toward more market-oriented agricultural production.

Income from the production of grains and other human food crops in Korea is categorically exempted from income taxation, and income from plant growing is not taxed if the revenue is less than KRW 1 billion (USD 0.9 million). In addition to commodity-specific support, this preferential income tax treatment could prevent resource allocation towards more profitable and competitive agricultural sectors. Moreover, such exemptions reduce farmers’ incentive to record and manage their farming business activities through bookkeeping. The lack of an income tax record constrains the government’s ability to design more targeted policy to address low income or income variation issues. For example, low-income farmers find it difficult to benefit from the income safety net programme (the National Basic Livelihood Guarantee). The introduction of more targeted income-contingent payments or tax incentives to smooth income fluctuation is administratively difficult to implement in Korea.

Currently, agricultural policies, in particular the commodity specific support to rice, function as a social safety net for small-scale and aged farmers. While the rural development policy and general social security system should play a major role in addressing the issue of farm households’ low income, agricultural policy should focus more on supporting the improvement of productivity and the sustainability performance of large-size commercial farms. For example, reforms to reduce price support through border protection and domestic measures would increase the role of income support payments targeted to commercial producers. A more open market environment is likely to increase the demand for tools to manage unexpected and unavoidable income shocks. A programme offering payment in the event of a fall in commodity prices is currently in place for rice. Such payments should be gradually decoupled from specific commodity production and more targeted to commercial producers, who have a higher dependency on farm income.

The agricultural insurance scheme has increased its commodity coverage to 74 agricultural products. However, the programme is highly dependent on government subsidies. A high level of insurance subsidies may lead to unsustainable choices of production and farm practices in the short term, and to the adoption of maladaptive practices under a changing climate in the long term (OECD, 2016). In general, insurance subsidies risk crowding out market-based solutions and own-farm risk management strategies, and they may transfer to taxpayers a part of the risks that should be borne by farmers (OECD, 2011). The subsidy rate should be gradually reduced for more commercially viable insurance products. The role of the private sector in providing agricultural insurance services can be enhanced by making the existing insurance database accessible to private insurance providers.

Designing agri-environmental policies requires the definition of reference levels, and environmental targets play a crucial role in choosing policy instruments. Reference levels are the minimum level of environmental quality that farmers are required to provide at their own expense, and environmental targets represent a voluntary (desired) level of environmental quality. To establish a solid framework of agri-environmental policies, Korea should further clarify the reference environmental quality and environmental targets which are well adapted to the local ecological conditions.

In this context, Korea can give greater consideration to the promotion of environmentally friendly agriculture and the preservation of the ecosystem in a wider set of policy instruments. So far, Korea has implemented its long-term plans to improve the agricultural environment mainly through producer incentives such as abolishing input subsidies and providing direct payment schemes. However, there remains room for improving the environmental performance of the sector, such as high surplus levels of nitrogen and phosphate and water-use intensity in agricultural production. Environmental policies should increasingly build on the polluter-pays principle. Direct payment schemes should be more decoupled from production decisions and reoriented toward measures to target explicit societal objectives, such as the provision of environmental services including water management, flood buffering and biodiversity.

References

GAIN-KS1613 (2016), “Korea – Republic of: Grain and Feed Annual”, USDA FAS, 30 March.

Kim, Jungki (2013), “Advisory Report on the Proposal by the Government for Revision of Income Tax”, Committee of Strategy and Finance, National Assembly.

Korea Rural Community Corporation (2014), Statistical Yearbook of Land and Water Development for Agriculture.

KREI (2018), 2017 Public Opinion Survey on Agriculture and Rural Areas, Naju-shi, Korea

KREI (2015), Agriculture in Korea, Korea Rural Economic Institute, Naju-shi, Korea.

Kwon, O. S. (2013), Environmental economics, Pakyoungsa.

MAFRA (2017), 2017 Guidelines for Implementation of Projects.

MAFRA (2014a). An On-line Policy Forum for TRQ Administration Methods. Press Release on October 1, 2014,

MAFRA (2014b), Strategies for the Development of Prevent and Respond to Agricultural Disasters Caused by Climate Change.

OECD (2017a), “Producer and Consumer Support Estimates”, OECD Agriculture statistics (database), http://dx.doi.org/10.1787/agr-pcse-data-en.

OECD (2017b), “Case study in livestock disease management: Korea”, in Producer Incentives in Livestock Disease Management, OECD Publishing, Paris, http://dx.doi.org/10.1787/9789264279483-10-en.

OECD (2017c), “The Market Impacts of Policies Related to Public Stockholding of Rice in Asia: Part I”, TAD/CA/APM/WP(2016)28/FINAL.

OECD (2016), Innovation, Agricultural Productivity and Sustainability in the United States, OECD Publishing, Paris, http://dx.doi.org/10.1787/9789264264120-en.

OECD (2011), Managing Risk in Agriculture: Policy Assessment and Design, OECD Publishing, Paris, http://dx.doi.org/10.1787/9789264116146-en.

Park, J.K., Ji, S.T., Han, S.H., Lee, H.K., Yoon, J.H. and Lee, S.H. (2015), “2014 Annual Report of Survey and Analysis for Agricultural Products that are Subject to FTA-Induced Damage Compensation Payments”, Korea Rural Economic Institute, Seoul.

Song, W.J., J.H. Yoo and S.H. Myeong (2017), “An Analysis of Expressed Interest in Crop Switching by Shutdown Farms in 2016”, Current Issue Analysis No. 33, Korea Rural Economic Institute, Seoul.

WTO (2016), Trade Policy Review: Korea, World Trade Organization, Geneva.

Notes

← 1. Korea has declared two state-trading arrangements: MAFRA for the importation of rice within the tariff quota, and the Agro-Fisheries & Food Trade Corporation (AT) for the importation of a number of agricultural products (genus Capsicum, garlic, onions, sesame seeds, soya beans, green beans, small red beans, buckwheat, and ginger (WTO, 2016).

← 2. The fourteen other bilateral and regional FTAs are Singapore (2006), EFTA (European Free Trade Association) (2006), ASEAN (Association of South East Asian Nations) (2007), India (2010), the European Union (2011), Peru (2011), the United States (2012), Turkey (2013), Australia (2014), Canada (2015), China (2015), New Zealand (2015), Viet Nam (2015) and Columbia (2016).

← 3. For example, US fresh oranges face a seasonal tariff until it is gradually reduced and abolished six years after ratification. In the meantime, a TRQ of 2 500 tonnes with a 3% increase per year is offered. Similarly, Chilean grapes are subject to a seasonal tariff of 45% over the harvest period between May and October while an off-season tariff is to be removed over ten years. The tariff on US grapes from October to the following April is to be abolished over four years while the tariff on the other period is scheduled to be eliminated in 17 years.

End of the section – Back to iLibrary publication page