Chapter 15. Korea
Support to agriculture
Korea has gradually reduced its support to agriculture over the long term, with modest progress towards more market-oriented policies. Since 2015, all import restrictions on agricultural products are in the form of tariffs and tariff rate quotas. Along with reducing price support, the government has introduced a range of direct payment programmes from the late 1990s, an agricultural insurance scheme from 2005, and a variable payment for rice from 2003.
Total support to agriculture (TSE) as a percentage of GDP has significantly declined from 8.6% in 1986-88 to 1.8% in 2015-17. However, producer support accounted for 52% of gross farm receipts (% PSE) in 2015-17, which is almost three times the OECD average. Most support to farmers is in the form of market price support (MPS), which accounted for 90% of the PSE in 2015-17. The ratio of producer price to border price has declined from 3.3 in 1986-88 to 2.0 in 2015-17. Transfers to individual farmers represented 89% of the TSE in 2015-17. Support to general services (GSSE) accounted for 9% of the Gross Value Added of agriculture. The expenditure on the development and maintenance of infrastructure accounted for 52% of the GSSE.
Main policy changes
Direct payments for farms in less-favoured area per ha were increased in real terms. Variable payments for rice more than doubled compared to the previous year as rice prices declined. A Complementary plan to the 2015 plan was introduced to balance the supply and demand of rice. It includes a reduction in the area of rice paddies, measures encouraging diversification of activities, and measures stimulating demand.
The Agriculture, Rural Community and Food Industry Development plan 2018-22 foresees further adjustments in direct payments programmes along the same lines, in addition to lower coupling of direct payments for rice, stronger cross-compliance in the direct payment scheme, and further expansion of crop insurance programmes. The plan also includes investment support to young farmers, for the integration of digital technology into food and agriculture, and for the promotion of renewable energy generation.
Measures were implemented in 2017, to strengthen procedures for certification of agricultural products, the labelling of products and pest and disease control. The Development plan 2018-22 includes further measures to enhance food safety and traceability in the supply chain.
The Development plan 2018-22 also includes measures to improve rural well-being, such as income support for farmers' retirement and support to infrastructure and access to rural services. Bottom-up policy participation will be strengthened.
Assessment and recommendations
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Reforms of the rice policy should be a priority. The plan to balance the supply and demand of rice is a first step towards a more efficient and sustainable system. Efforts to change production and trade distortive measures that prevent producers from receiving market signals, including a gradual reduction of border protection, should be strengthened.
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The highly fragmented land ownership structure hinders farm consolidation. Inheritance and farmland regulations should be revised to facilitate farm-scale adjustment (OECD, 2018).
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Recent efforts to improve traceability along the food chain and information to consumers should continue as they contribute to a better functioning of the market.
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Further decoupling of direct payments from production decisions and strengthened cross-compliance in the Development plan 2018-22 are expected to reduce distortions and improve environmental performance. For the benefits to materialise, careful design and implementation parameters are required.
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Direct payment schemes targeting explicit societal objectives, such as the provision of environmental services including water management, flood buffering and biodiversity, should be promoted as there remains room for improving the environmental performance of the sector. At the same time, environmental policies should increasingly build on the polluter-pays principle. A multi-dimensional approach to manure management, including regulation, incentive to invest in developing new technology, capacity building and building partnership between stakeholders, would also help reduce the high nutrient surplus per hectare.
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The development of livestock farming increased greenhouse gas emissions from animals and strengthened the need for formulating a roadmap with emission reduction goals and detailed measures to implement the 2030 emission reduction target for the main emission sectors (rice and livestock). Agriculture is expected to contribute to Korean commitments to reduce Greenhouse Gas emissions by 2030..
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The subsidised insurance scheme is being expanded as a tool to help farmers manage risks. It would be useful at this stage to evaluate the performance of the system.
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The Development plan 2018-22 for agricultural policy covers measures to improve rural incomes. It would be more efficient and equitable to adopt a more comprehensive policy approach beyond agricultural policy to address the low-income problem of farm households. Steps could be taken to induce farmers to declare income situation to allow the government to design better-targeted policies to the household income.
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The plan also includes measures to foster the adoption of innovation for sustainable agriculture. Efforts should be made to improve the functioning of the agricultural innovation system as suggested in OECD (2018).
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Finally, it would be timely to review existing agricultural policy instruments to improve their coherence with policy objective to reduce the conflicting incentives generated by different programmes.
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Source: OECD (2018), “Producer and Consumer Support Estimates”, OECD Agriculture statistics (database), https://doi.org/10.1787/agr-pcse-data-en.
Support to farmers (%PSE) has declined gradually over the long term. Despite this reduction, support has averaged about 52% of gross farm receipts in 2015-17, almost 3 times the OECD average. The share of potentially most distorting support (based on output and variable input use – without input constraints) still dominates at 91% of total support to farmers in 2015-17, well above the OECD average (Figure 15.1). In 2017, the level of support has increased due to higher budgetary payments and MPS; the latter is due to a larger price gap as domestic prices increased more than world prices in absolute terms (Figure 15.2). On average, prices received by farmers were twice the level on world markets as measured by the NPC in 2015-17. The highest NPCs are for soybeans, barley, pig meat garlic and red pepper. Transfers to specific commodities, mainly from MPS, represented 93% of total support to farms in 2015-17. The share of the Single Commodity Transfers (SCT) in commodity gross farm receipts is over 60% for soybeans, barley, pig meat, garlic, red pepper, and milk (Figure 15.3). The expenditures for general services (GSSE) were equivalent to 9% of the agricultural value added in 2015-17, almost 70% higher than the OECD average. More than half the GSSE was spent on the development and maintenance of infrastructure. Total support to agriculture (TSE) as a share of GDP has declined significantly, mainly due to fast growth outside the agricultural sector. At 1.8% in 2015-17, however, it remains 2.5 times higher than the OECD average.
Source: OECD (2018), “Producer and Consumer Support Estimates”, OECD Agriculture statistics (database), https://doi.org/10.1787/agr-pcse-data-en.
Source: OECD (2018), “Producer and Consumer Support Estimates”, OECD Agriculture statistics (database), https://doi.org/10.1787/agr-pcse-data-en.
Contextual information
Featuring a relatively high GDP per capita, Korea is a land-scarce country with the highest population density among OECD countries. Moreover, only 18% of the land area is used for farming, and this area has been reduced by 15% over the period 1995-2016. Close to 85% of agricultural land is arable. Crops account for about 60% of the total value of agricultural production, a declining share compared to the mid-1990s as the livestock sector expanded rapidly to meet a growing domestic demand. Most farms are small family farms with less than 2 hectares of agricultural land. Land consolidation is very slow with the share of land cultivated by farms with more than 10 hectares below 15% in 2015.
The importance of agriculture in the economy has been decreasing rapidly, its share in GDP and employment more than halving since 1995 to reach 2.2% of GDP and 4.9% of employment in 2016. Agro-food products accounted for 5.9% of total imports and 1.2% of total exports.
Since 2000, the Korean economy has enjoyed dynamic growth and low levels of unemployment. Annual inflation rates have decreased to levels below 2% since 2013. Korea is one of the largest net agro-food importers in the world. Since 2011, however, the agro-food trade deficit has declined as exports increased while imports remained relatively stable. While over 80% of agro-food exports are products for final consumption, about half of imports are for further processing by the industry. Imported agricultural commodities include maize, soybeans and wheat for animal feed.
Source: OECD statistical databases.
Note: Numbers may not add up to 100 due to rounding.
Source: UN Comtrade Database.
Total factor productivity (TFP) growth in Korea was slightly higher than the global average over the period 2005-14. It helped maintain production with lower input use, in particular land and labour. Nutrient surplus results from high fertiliser use and livestock density linked to land scarcity. Although the level of nutrient surplus per ha has declined over the last two decades, it is still much above the OECD average and among the highest in the area. Greenhouse gas (GHG) emissions from agriculture slightly decreased as the decline of lower methane and nitrous oxide emissions due to lower rice area and associated fertiliser use, partly offset higher emissions due to an increase in livestock numbers. The share of agriculture in water consumption is higher than the OECD average since rice paddy fields account for close to 55% of agricultural land area.
Note: Primary factors comprise labour, land, livestock and machinery.
Source: USDA Economic Research Service Agricultural Productivity database. Available at: www.ers.usda.gov/data-products/international-agricultural-productivity/documentation-and-methods.aspx#excel.
Description of policy developments
Main policy instruments
Tariffs and a wide range of tariff rate quotas (TRQs) are the main instruments to support domestic prices. Market price support accounted for 88% of the producer support estimate, and 47% of the value of gross farm receipts in 2017. In-quota rates range from 0% to 50% while out of quota rates fall between 9% and 887%. With the conclusion of the Uruguay Round, trade restrictions on all agricultural products except rice were converted to tariffs. Non-tariff measures on rice were replaced by a tariff scheme from 1 January 2015, with a tariff rate of 513% on imported rice (this tariff rate is still under process of verification by the WTO). A volume of 408 700 tonnes is maintained at a 5% tariff rate. Rice is imported exclusively by state trading enterprises (STEs).
Domestic market price support measures apply to rice and soybeans. A public stockholding scheme for rice, also known as the Public Storage System for Emergencies, was established in 2005. Under this scheme, the government purchases rice from farmers at the market price during the harvest season and releases the stocks during the non-harvest season at the market prices. The government purchase programme for soybeans was introduced in 1968. Purchased quantities have increased in recent years due to efforts for encouraging crop diversification from rice to other commodities.
Direct payment programmes have been implemented from 1997 including early retirement payments, a rice income compensation, and payments for the promotion of environmentally-friendly agriculture, for maintaining agriculture in less-favoured areas, and for rural landscape conservation.
The most important direct payment programme is the rice income compensation scheme introduced in 2005. This scheme includes both fixed and variable payments. While the fixed payment is a decoupled income support, 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, after deduction of the fixed payment. The target price is set every five years based on the five-year price change. It was set at KRW 188 000 per 80 kilogrammes (USD 2 078 per tonne) of rice for the period 2013-17, which is an increase from the previous period.
The agricultural disaster insurance scheme, initially introduced for apples and pears in 2001, was gradually extended to 58 crops and 16 livestock categories by 2017. The government subsidises 50% of the insurance premium. A pilot project of an agricultural revenue insurance scheme was introduced for onions, soybeans and grapes in 2015, and the number of commodities covered increased to six by adding garlic in 2016, and potato and sweet potato in 2017.
The 2007 Framework Act on Agriculture, Rural Community and Food Industry lays out the basic policy principles in agriculture, on which five-year implementation plans are established. The Agriculture and Rural Community and Food Industry Development Plan for 2013-17 emphasises adding value to agricultural products in an innovative way and creating jobs by integrating agriculture with other industries such as manufacturing, processing, or information and communication technology. The Agriculture and Rural Community and Food Industry Development Plan for 2018-22 has four main policy targets: strengthening income safety net; innovation for sustainable agriculture; enhancing food safety in supply chain; and improving rural welfare. Specific measures to pursue these objectives are included in Box 15.1. The Plan also foresees a strengthening of bottom-up participation in policy.
1. Strengthening income safety net
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Reduction of the area of rice paddy fields by 100 000 ha in 2018-19.
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Direct payments for rice less coupled with production.
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Strengthened cross-compliance in the Direct payment scheme.
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Expansion of Crop insurance programmes.
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Promotion of rural diversification (food industry, tourism) to give more access to non-farm income for farmers.
2. Innovation for sustainable agriculture
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Comprehensive support to young start-up farmers.
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Integration of digital technology into agriculture with regard to production, distribution and risk management.
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Promotion of renewable energy generation, including solar photovoltaic, biomass and geothermal heat.
3. Enhancing food safety in supply chain
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Development of a bio-security system focusing on animal disease prevention.
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Support for environmentally-friendly livestock industry to reduce pollution.
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Development of a comprehensive animal-welfare road-map to provide standards for facilities, maintenance and rearing density.
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Development of a labelling system informing consumers about animal welfare and health in each livestock farm.
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The pesticide registration and traceability management system will be improved.
4. Improving rural welfare
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Enhanced direct payments for retirement, farmland pension and basic pension to encourage aged and low-income farmers to retire from production
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Support to infrastructure including housing, traffic and medical facilities.
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Affordable transportation for the elderly and financially disadvantaged.
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Support for rural rental housing with energy saving facilities and barrier-free design.
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Development of a medical outreach service for health check-ups.
5. Bottom-up policy participation
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Agricultural governance to reflect local and regional characteristics.
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Policy design reflecting the opinion of farmers and customers.
Source: Ministry of Agriculture, Food and Rural Affairs (MAFRA).
The five-year (2016-20) promotion plan for environmentally-friendly agriculture sets targets to increase the share of pesticide-free (including organic) cultivation area and more generally to reduce the input of chemical fertilisers and pesticides in crop production through strengthening current direct payment for the promotion of environmentally-friendly agriculture, and support for organic fertiliser use.
Korea has increased investment on “smart farms”, which can check the situation in real-time using smart phones and remote control. As a result, the number of smart farms is on the rise since 2014.
The government is making efforts to transform agriculture into a 6th industry,1 where agriculture is integrated with manufacturing, processing, marketing and tourism services, based on all the tangible and intangible resources of the agricultural sector, thereby creating new added-value. Each province has established and operates the 6th industry support centres. For stable growth of businesses of the 6th industry, a series of support measures ranging from product development to the establishment of distribution channels has been provided to broaden markets.
Support for people moving to farm villages and rural areas to newly join the agricultural industry has been strengthened, thereby reviving the rural community. Centres for people who return to farm villages and rural areas were created to provide advisory service and information on relocation policies and house availability. Also, these centres run training programmes on farming technology, processing and distribution of agricultural products, and rural lifestyle.
Korea has sixteen bilateral and regional Free Trade Agreements (FTAs) in force. Rice is excluded from tariff concession in all the existing FTAs, but significant tariff concession for livestock and fruit products are included in some of the FTAs (OECD, 2018). Tariffs on beef from the United States, Australia and Canada will be completely eliminated in 15 years of implementation, respectively. It is also agreed to eliminate tariffs on pork originating from the European Union, the United States, Chile and Canada over the maximum 10 years. Tariffs on chicken meat mainly coming from the United States and the European Union will be abolished over 10 to 13 years of implementation. Another FTA with Central American States is scheduled to become effective when both parties complete their domestic approval procedures.
In the context of the Paris Agreement on Climate Change, Korea has committed itself to a reduction of its economy-wide GHG emissions by 37% relative to a Business As Usual Baseline in 2030.2 In December 2016, the Korean government released its Basic National Roadmap for Greenhouse Gas Reductions by 2030. All sectors and all gases are included in the reduction commitment. The Roadmap includes commitment for agriculture, which is expected to achieve a 1 Megatonne (Mt) CO2 eq reduction, or 0.3% of the total reduction commitment. The government is currently undertaking a review of the Roadmap in order to come out with an upgraded version in the course of 2018.. A National Climate Change Adaptation Plan, developed in 2010, is currently being implemented.
Domestic policy developments in 2017-18
Fixed direct payment rates for upland crop farms and for less-favoured area were increased in 2017, compared to previous year, to reach KRW 450 000 (USD 398) per ha,3 and KWR 550 000 (USD 354) per ha respectively. In both cases, the rate was increased by KRW 50 000 (USD 44) per ha or 12.5% for payments for farms, and 10% for direct payments for less-favoured areas, which is more than inflation.
In response to lower rice prices in a context of declining rice consumption, the government introduced a rice income compensation payment in 2005 to compensate farm revenue losses. The total value of this payment has been multiplied by close to 8 since 2015 to reach about KRW 1 500 billion (USD 1.3 billion) in 2017.
The government also announced a complementary plan in February 2017, which includes adjustments to the initial plan of 2015 with a view to balance the supply and demand by 2019. Among the range of policy measures, the area of rice paddies was reduced from 799 000 hectares in 2015 to 711 000 hectares in 2019, while crop diversification and the use of high quality seeds instead of high yield seeds are encouraged. 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. The release of public rice stocks for the use as feed increased from 90 000 tonnes in 2016 to 470 000 tonnes in 2017. In addition, the government plans to provide rice to developing countries through the APTERR (ASEAN Plus Three Emergency Rice Reserve).
Current rice policies, such as direct payments, the public stockholding scheme and farmland regulations, are to be re-examined to optimise the level of production. Further changes are foreseen in the Development Plan 2018-22, which will succeed the 2015 Plan and 2017 Complementary Plan.
The total value of Direct payments for environment-friendly farming practices and Direct payments for landscape preservation continued to decline in 2017 for the second consecutive year since 2015. The five-year (2016-20) promotion plan for environmentally-friendly agriculture, foresees the introduction of agricultural environmental protection programmes for soil conservation and water quality improvement, but no payment was made in 2016 and 2017.
The scope and coverage of the agricultural disaster insurance scheme were expanded to three additional products (citron, fig, and crown daisy raised in facilities). In addition, the base for compensation of tangerine losses has changed from compensation for falling fruits to reduction in quality.
Agriculture’s productivity enhancement is promoted through R&D investment. Within the Golden Seed Project, KRW 491 billion (USD 434 million) are to be invested during the ten years from 2012 to 2021 by both the government and the private sector in order to develop domestic seeds and promote seed export. By 2017, 386 new varieties were developed. A private breeding research complex, upholding seed companies’ research of varieties and industrialisation, was completed in October 2016. In 2017, the collaborative projects are to promote the development of small automated farm machinery, which can be easily used by aged and female farmers; the upgrade of the farmland observation system by using drones; and the development of a big data-based model to predict the supply and demand of crops.
The Korea national food cluster (Foodpolis), an R&D-focused and export-oriented platform established with an area of 2.32 square kilometres, was completed in December 2017. In order to support food companies that purchased or rented land, the government has been operating specific R&D facilities from end of 2016: the food functionality assessment centre, the food quality safety centre and the food packaging centre. The companies can benefit from a range of subsidies and tax exemptions. In particular, foreign investment companies are eligible for the reduction or exemption of site rents for up to 50 years, if they fulfil certain requirements such as on the size of investment or the level of technologies. As of December 2017, 48 Korean food companies and two foreign investment enterprises signed for moving into the Foodpolis and are in the process of constructing their plants.
From 2017, a single private certification organisation can provide certificates for environmentally-friendly agricultural products, which had previously been provided by both public and private organisations. In addition, products from organic agriculture were integrated into the National Agricultural Products Quality Management system. A system to certify direct transaction of agricultural produce will be adopted, with strengthened support for training, consulting and promotion to facilitate adoption. The scope of the system ensuring traceability in livestock products was expanded to include meat processed for direct sales.
Support is made available for manufacturers of processed products, restaurants and school catering to promote the use of local products. The provision of free milk in schools will be expanded to older students from lower income families.
The labelling of the rice quality grades was generalised. As of 2018, one of the grades “best, good, average, fail” should be mentioned and the label “non-inspection” is no longer accepted.
Measures concerning the reporting of pest and disease were introduced both at the domestic and the border levels. For example, it became mandatory for plant growers to report the occurrence of pests and diseases subject to quarantine. Border measures for pest and disease control are described in the next section.
As a step towards administrative simplification, farmers applying for assistance no longer need to provide a registration certificate of agricultural business; the business operating agency (NACF) now provides necessary information directly.
Regarding institutional changes in agricultural organisations, following the re-structuring of the National Agricultural Cooperative Federation (NACF) the Nonghyup Business Holding was established. The activities of the two organisations are specified as follows:
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NACF is in charge of training for members’ associations, and of implementing mutual financial projects.
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Nonghyup Business Holding is to focus on business activities such as the sale or distribution of agricultural and livestock products.
Trade policy developments in 2017-18
Korea is currently engaged in a further five FTA negotiations. These include two bilateral FTA negotiations with Ecuador and Israel, and three multilateral FTA negotiations on the Regional Comprehensive Economic Partnership Agreement (RCEP), the Korea-China-Japan FTA, and the Korea-Central America FTA.
The Korean government started negotiations for the improvement of current FTAs with Chile, India, the United States and ASEAN with a view to expand the level of market liberalisation. Three bilateral FTA negotiations with Indonesia, Japan and Mexico and one multilateral FTA negotiation (the Korea-Gulf Cooperation Council FTA) were discontinued and are ready to resume (ARIC, 2018).
In August 2017, the government of Korea lifted its ban on imports of US poultry and poultry products, including fresh eggs, after the United States notified the World Organization for Animal Health (OIE) that it is now free of highly pathogenic avian influenza (HPAI). The ban had been imposed in response to a detection of HPAI (USDA, 2017).
Additional food products were included in the list of food items subject to labelling of country of origin in restaurants, and the labelling is required to be more visible. The country of origin of the three main ingredients in processed food should also be indicated on food labels. Penalties for violating country of origin labelling requirements include mandatory training for the violator in the country of origin and minimum imprisonment sentence in case of repeated violation. Seedlings subject to isolated cultivation need to have mandatory tags indicating the country of origin, the name and the date of import.
Measures were introduced to strengthen border measures for pest and disease control, including the reporting of travel in infected countries for people working in the livestock industry returning to Korea; and the extension of quarantine to a larger range of products. At the same time, new measures aim to facilitate the implementation of the quarantine system. They include the adoption of the quarantine system of consignment; the possibility to have an intermediary agent preparing quarantine plan reports on behalf of the original reporter; the adoption of electronic plant quarantine certificates meeting international standards; and the creation of overseas food certification support centres to provide quarantine information, analysis on prohibited content, and tailored training.
References
ARIC (2018), Asia Regional Integration Center, https://aric.adb.org/fta-country (consulted 15 March 2018).
OECD (2018), Innovation, Agricultural Productivity and Sustainability in Korea, OECD Publishing, Paris, forthcoming.
USDA (2017), “South Korea Lifts U.S. Poultry Ban”, USDA Foreign Agricultural Service News Releases USDA 0085.17, 17 July, www.fas.usda.gov/newsroom/south-korea-lifts-us-poultry-ban.
Notes
← 1. The term 6th industry refers to activities connecting primary industries with the secondary sector such as processing of agricultural products, and the tertiary sector such as marketing and tourism activities.
← 2. Submission by the Republic of Korea: Intended Nationally Determined Contribution. NDC Registry: http://www4.unfccc.int/ndcregistry/Pages/All.aspx#collapseKORFirst.
← 3. Direct payment for farms have different rates within and outside agriculture promotion area, of KRW 575 530 (USD 509) per ha and KRW 431 648 (USD 381) per ha, respectively