Report Highlights:

In 2014, $56 billion in local dairy product sales were one-percent higher than 2013. Domestic raw fluid milk production increased 5.8 percent; however total raw fluid milk consumption increased by only 2.1 percent, which was satisfied by a 12.2-percent increase in imports. Drinking milk products by value decreased by 2.7% in 2014 to reach 1.64 million metric tons. New government price controls pushed average drinking milk prices higher in 2014. The value of drinking milk products are expected to increase at a rate of 3% between 2014 and 2018, at constant 2014 prices. The local raw fluid milk price jumped13 percent to $1 per liter since January 2015, recording the highest raw fluid milk price in the world. Cheese sales increased by 9% in current volume terms to reach 118,000 metric tons in 2014. Unprocessed cheese sales increased by 12% in 2014, contributing 80% of overall sales volume for cheese in the year.

Executive Summary:

With the growing interest in higher quality cheese, the cheese products market is expecting to grow. U.S. and European manufacturers are keen to export their cheeses to Korea, with both the Korea-U.S. and Korea-EU free trade agreements. By 2026, there will be a 0% tariff on cheese from the U.S. and European countries. Due to the high price of domestic raw fluid milk, the local cheese industry is in an unfavorable position and suffers from the threat posed by imported cheese. Korea is still at a beginning stage in terms of product variety and consumption patterns. Local manufacturers continue to develop new products to induce additional purchases and to create new demand. Also, the importation of premium products is likely to accelerate due to favorable free trade agreements. Drinking milk products posted current value growth of 3% which was driven by demand for healthier premium products despite a decline in volume sales. Due to the consciousness of nutritional benefits of milk, many consumers traded up to products with more health benefits. Currently, the majority of local drinking milk products are pasteurized at very high temperatures in order to maximize efficiency against cost. The drinking milk product is pasteurized at 63 degrees and is available in both full fat and reduced fat versions. The rapid growth of lower-temperature pasteurized milk has a higher average unit price as it is characterized as a type of premium-ization. Probiotics has become the new buzzword in the health food industry in Korea. In 2014 yoghurt posted current value growth of 8% to reach sales of U.S. $ 2.5 billion. Drinking yoghurt was the best sales product in 2014 with current value growth of 10%, mainly due to the popularity of functional variants.

Ice cream product showed a modest recovery, with retail volume and current sales value growing by 2% and 3% respectively. Retail volume sales of ice cream grew by 2% in 2014 to reach 222,800 Metric Tons; current sales value grew by 3% to reach U.S. $1.8 billion. After three consecutive years of decline through 2011 – 2013, the hot summer weather and increased demand during the FIFA World Cup supported a recovery in ice cream consumption for 2014. Frozen yoghurt was the most dynamic ice cream product in 2014, with retail volume and current value sales growing by 21% and 24% respectively.

Dairy, Milk, Fluid

Production:

In August 2013, the Korean government established a new guideline to resolve the continued conflict between dairy farms and dairy manufacturers regarding raw fluid milk prices. A raw fluid milk price sliding system was devised to adjust the final raw fluid milk price based on the production cost of milk the previous year and the inflation rate. Under this new guideline, the price of raw fluid milk was raised to KRW940 per liter (U.S.$ 0.9), equating to a 13% increase. In July 2014, a raw fluid milk price increase was postponed for the time being and discussions are likely to take place on whether the current solution is workable for both sides of the industry.

Consumption:

Semi-skimmed fresh/pasteurized milk is expected to record the strongest value of 4% at constant 2014 prices. More adults have converted to reduced-fat milk for health reasons and this has led to the greater availability of such products, including private label. Following the example of hypermarkets, major convenience store brand CU also added a reduced-fat version to its private label milk line in mid-2013 soon after the launch of its regular white milk products.

The strong growth of soy milk over 2011/2012 was closely linked to the nationwide issue of foot and mouth disease, which occurred in late 2010. As a milk alternative, demand for soy milk then fell as the situation returned to normal. Soy milk, when viewed as a sizeable category within drinking milk products, started to post a decline in 2013. As a result, the sales share of soy milk within this wider category, which stood at 11% in 2012, fell to 9% in 2014. Due to the declining child population and increased variety of other alternatives, milk consumption is falling.

Marketing:

Strong interest in health and wellbeing continued to influence the drinking milk products in 2014. Within fresh/pasteurised milk, the growth rate of reduced fat milk overtook that of full fat milk in 2010. Unlike other countries, reduced-fat milk is higher in price than full fat milk due to the increased cost of eliminating milk fat. Despite this fact, the preference for low-fat products continues to increase as consumers seek to maintain a slim physique.

Seoul Dairy Cooperative remained the leading player in drinking milk products in 2014 with sales approaching U.S.$ 1.5 billion. With conflicts surrounding the raw fluid milk supply and price increases, the industry will strive to find an optimal solution for the stable supply of raw fluid milk at reasonable prices. Domestic drinking milk products are heavily reliant on raw fluid milk production from dairy farms and the price increase in raw fluid milk will be directly reflected in final retail prices.

Dairy, Milk, Fluid

2014

2015

2016

Market Begin Year

Jan 2014

Jan 2015

Jan 2016

Korea, Republic of

USDA Official

New Post

USDA Official

New Post

USDA Official

New Post

Cows In Milk

204

208

203

207

0

206

Cows Milk Production

2073

2214

2065

2200

0

2193

Other Milk Production

0

0

0

0

0

0

Total Production

2073

2214

2065

2200

0

2193

Other Imports

0

0

0

0

0

0

Total Imports

0

0

0

0

0

0

Total Supply

2073

2214

2065

2200

0

2193

Other Exports

0

0

0

0

0

0

Total Exports

0

0

0

0

0

0

Fluid Use Dom. Consum.

1575

1540

1569

1530

0

1529

Factory Use Consum.

498

674

496

670

0

664

Feed Use Dom. Consum.

0

0

0

0

0

0

Total Dom. Consumption

2073

2214

2065

2200

0

2193

Total Distribution

2073

2214

2065

2200

0

2193

(1000 HEAD) ,(1000 MT)

Dairy, Cheese

Production:

In 2014, Korea produced 23,779 MT of cheese, an increase of 6 percent from 2013. Fresh cheese production of 8,582 MT was an increase of 34 percent and processed cheese accounted for the remaining 15,197 MT, a decrease of 10 percent. Cheese imports increased by 10 percent to 97,216 MT while consumption was 9 percent higher than the previous year. U.S. market share was 66 percent with shipments of 63,848 MT out of total imports by Korea. In 2014, the production cost of dairy products including cheese, jumped due to the increase of the raw fluid milk price and the increase in labor cost. Despite a slow economy the market the higher domestic dairy products consumption still had to be satisfied by increased imports. Most major cheese manufacturers produce several unprocessed soft cheeses to have as a dessert along with wine. Manufacturers are trying to introduce a new soft cheese slice that is convenient for children. Also plans are for a squeezable format to use in cooking or as a salad dressing.

Consumption:

Current cheese value growth posted an increase of 9% to reach sales of U.S. $505 Million in 2014. Cheese remained one of the most vibrant within the overall dairy sector, and manufacturers are competing to gain a stronger share of sales. Packaged cheese dominates sales in Korea.

As hard cheese is still a marginal product in Korea, soft cheese accounted for the entirety of overall unprocessed cheese value sales. Preference for unprocessed cheese continues to rise among local consumers, resulting in a wider range of products in the marketplace. Soft cheese was the best sales performer, maintaining a value growth of 14% in 2014. The popularity of topping food with cheese was the main reason behind a strong increase in sales of mozzarella, commonly labelled as shredded pizza cheese by local brands.

Other types of soft cheese are most often purchased as an accompaniment to wine. The growth of soft cheese is also closely related to the positive trend for wine consumption in Korea. Wine drinking is expanding widely among the younger generation and the variety and price range of imported wines have greatly increased in recent years.

Average unit price in cheese increased in 2014 as a result of rising demand for higher quality cheese, particularly unprocessed cheese. Soft cheese recorded the strongest unit price growth of 5% in 2014. In unprocessed cheese, the reliance on imported products is very high due to the high cost of producing local products. Therefore, future price movement of cheese product is likely to be closely related to the expansion of free trade agreements.

Traditionally, the local cheese marketplace consisted of un-spreadable processed cheese in slice format. Recently, string cheese made from mozzarella has become very popular. Maeil Dairies introduced a brand of string cheese in May 2013, which quickly proved popular. The convenient format and healthy nature of the product have made it a favorite snack among children and young adults.

Cheese Tariff Phase-Out Schedule under KORUS FTA:

The KOR-USFTA creates a zero-duty tariff-rate quo ta for cheeses covered under tariff lines 0406101000, 0406200000, 0406300000and0406900000.Inthefirstyearthein-quota amount is7,000 MT and rises to10,280 MT in year 2014. All U.S. cheeses will enter duty-free by 2026.

HS

Description

BaseRate

2012

2013

2014

2015

0406101000**

Fresh Cheese**

36%

33.6%

31.2%

28.8%

26.4%

0406102000

Curd

36%

32.4%

28.8%

25.2%

21.6%

0406200000**

Grated or powdered cheese of all kinds**

36%

33.6%

31.2%

28.8%

26.4%

0406300000**

Processed cheese, not grated or powdered**

36%

33.6%

31.2%

28.8%

26.4%

0406400000

Blue-veined cheese

36%

32.4%

29%

25.4%

21.8%

0406900000**

Cheese, NES, including cheddar**

36%

33.6%

31.2%

28.8%

26.4%

TRQ Volume (MT)

7,000

7,210

7,426

7,649

Marketing:

Seoul Dairy Cooperative retained its leadership for cheese products in 2014 with a value share of 39%, followed by Maeil Dairies Co Ltd and Namyang Dairy Products Co Ltd with respective shares of 22% and 17%. The cheese product segment is dominated by domestic manufacturers and their brands, which are familiar to local consumers. Kraft Co Ltd held a value share of just 3% in 2014. Domestic brands are mostly limited to processed sliced cheese and shredded mozzarella cheese.

With the Korea-US and Korea-EU free trade agreements, U.S. and European manufacturers are keen to export their cheeses to Korea. By 2026, there will be a 0% tariff on cheese from the U.S. and European countries. Due to the high price of domestic raw fluid milk, the local cheese industry is in an unfavorable position and suffers from the threat posed by imported cheese.

Korea is still at a beginning stage in terms of product variety and consumption patterns. Local manufacturers continue to develop new products to induce additional purchases and to create new demand. Also, the importation of premium products is likely to accelerate due to favorable free trade agreements. With the growing interest in higher quality cheese, the cheese product's market is expecting to grow.

Consumers value the nutritional benefits of cheese and favor its unique taste which is difficult to be replaced by other food types. Price resistance in cheese is relatively low compared to other dairy products. Cheese has been positioned at the high end of dairy products from the beginning and is perceived as a premium food item. The popularity of cheese will continue to rise among younger generations who are accustomed to Western types of cuisines and wines. Currently, Korea's unprocessed cheese product is entirely accounted for by soft cheese as hard cheese is almost non-existent.

Dairy, Cheese

2014

2015

2016

Market Begin Year

Jan 2014

Jan 2015

Jan 2016

Korea, Republic of

USDA Official

New Post

USDA Official

New Post

USDA Official

New Post

Beginning Stocks

1

1

1

4

0

3

Production

22

24

23

24

0

24

Other Imports

97

97

105

100

0

102

Total Imports

97

97

105

100

0

102

Total Supply

120

122

129

128

0

129

Other Exports

0

0

0

0

0

0

Total Exports

0

0

0

0

0

0

Human Dom. Consumption

119

118

128

125

0

127

Other Use, Losses

0

0

0

0

0

0

Total Dom. Consumption

119

118

128

125

0

127

Total Use

119

118

128

125

0

127

Ending Stocks

1

4

1

3

0

2

Total Distribution

120

122

129

128

0

129

(1000 MT)

Dairy, Milk, Nonfat Dry

Production: In 2014, local NFDM production amounted to 21,395 MT; a 45% increase from the previous year. Due to an outbreak of FMD in 2011, milk production was down until the middle of 2012. In March of 2012, there was surplus of raw fluid milk which resulted in an increase of NFDM production in 2012. The local raw fluid milk price jumped about 13 percent to $1.1 per liter from $0.98 per liter since August, 2013 which recorded the highest raw fluid milk price in the world. Due to a severe cold weather in the beginning of 2013, milk production began with less production, however, production picked up to increase by the government's price control initiative to encourage the farmers to produce.

Consumption: In 2014, inventory of NFDM and amount of duty-free NFDM imports impacted the markets. There was oversupply the fresh milk which led to the significant amount of NFDM production at 21,395 metric tons. In 2014, NFDM consumption amounted to 32,046 MT, an increase of 2 percent compared to the year of 2013. NFDM is used primarily for bakeries, infant formula and as an ingredient in other dairy products. Since NFDM production is largely a result of marketing quota policies, consumption is expected to continue to track closely with production.

In 2014, NFDM import increased by 7 percent to 21,130 MT compared to 2013. Due to the FMD outbreak in November 2010, imports increased to 34,000 MT, jumping by 320 percent over 2010. On March 2011, the Ministry of Strategy and Finance (MOSF) announced temporary a zero duty on 30,000 MT of powdered skim & whole milk powder through the end of 2011 in order to stabilize food prices amid growing inflationary pressures. There was over production of fresh milk which resulted turned in the over production of NFDM in 2014.

NFDM Tariff and TRQ Schedule on Korea-USFTA implementation

HS Code

Description

Base

Rate

2012

2013

2014

0402.10

NFDM–In powder, fat content not exceeding 1.5%

176%

176%

176%

176%

Duty free quota 5,000MT every Year with an additional 3% compound increase

Marketing:

The Korea Customs Service reimburses the high out-of-quota tariff of 176% to importers when they have re- exported processed dairy-based products made from the imported NFDM. Korean dairy manufacturing companies are looking forward to expanding the market opportunities for exporting to China. Local food processors import NFDM for the purpose of processing into infant formula, bakery use and re-exporting to other countries, including China. However, in 2014, most imported NFDM was used for bakery ingredients and infant formula.

Dairy, Milk, Nonfat Dry

2014

2015

2016

Market Begin Year

Jan-14

Jan-15

Jan-16

Korea, Republic of

USDA Official

New Post

USDA Official

New Post

USDA Official

New Post

Beginning Stocks

8

8

8

18

0

25

Production

15

21

16

20

0

20

Other Imports

21

21

21

21

0

21

Total Imports

21

21

21

21

0

21

Total Supply

44

50

45

59

0

66

Other Exports

0

0

0

0

0

0

Total Exports

0

0

0

0

0

0

Human Dom. Consumption

36

32

37

34

0

36

Other Use, Losses

0

0

0

0

0

0

Total Dom. Consumption

36

32

37

34

0

36

Total Use

36

32

37

34

0

36

Ending Stocks

8

18

8

25

0

30

Total Distribution

44

50

45

59

0

66

(1000 MT)

Whey Products

Whey is co-product of cheese and contains lactose, protein, vitamins and minerals which are 50% of the nutrient of the original milk. Diverse whey protein usage across categories such as sports & energy bar, cereals, desserts & ice cream, baby food, bakery, and soft drinks continue to be introduced to the market. Whey protein demands are supported by body builders, extreme athletes, everyday active consumers and weight watchers. Whey/dairy proteins are considered as a key ingredient for satiety promoting products and aid to reduce risk for many adult diseases such as bone health, obesity, diabetes and heart diseases as the health benefits.

Yoghurt Products

Consumption

Probiotics has become the new buzzword in the health food industry in Korea. In 2014 yoghurt posted current value growth of 8% to reach sales of U.S.$ 2.5 billion. Drinking yoghurt was the best sales product in 2014 with current value growth of 10%, mainly due to the popularity of functional variants.

According to statistics from the Ministry of Food and Drug Safety, sales of probiotics within overall functional health foods amounted to U.S. $52 Million in 2012, which reflected a 28% increase on the previous year. As a leading specialist in probiotics, Korea Yakult Corp introduced a new brand of probiotic drinking yoghurt, called Seven, in October 2012.

Functional drinking yoghurt achieved the strongest value growth of 11% in 2014 thanks to probiotic yoghurts. Sales of plain yoghurt are also increasing and this trend is expected to continue.

Marketing

Similar to the cheese category, yoghurts are also positioned as high-value products due to their nutritional content. The yoghurt product is expected to continue to enjoy healthy growth thanks to strong consumer loyalty to probiotic products. Drinking yoghurt will continue to lead sales due to the strong interest in functional products and its convenience in terms of consumption.

Drinking yoghurt is set to post the strongest sales, thanks to strong demand for functional probiotic yoghurt. Unit prices in yoghurt will rise due to ongoing developments in terms of functionality. Consumers place great value on premium yoghurt products which offer more nutritional benefits. Probiotic drinking yoghurt is expecting to lead price increases due to potential innovations and product improvements.

Ice Cream

Consumption

In 2014, ice cream product showed a modest recovery, with retail volume and current value sales growing by 2% and 3% respectively. Retail volume sales of ice cream grow by 2% in 2014 to reach 222,800 Metric Tons; current value sales grow by 3% to reach U.S. $1.8 billion.

After three consecutive years of decline during 2011 - 2013, hot summer weather and increased demand during the FIFA World Cup supported a recovery in ice cream consumption in 2014. Frozen yoghurt was the most dynamic ice cream product in 2014, with retail volume and current value sales growing by 21% and 24% respectively.

Overall average unit prices for ice cream increased by 1% in 2014 due to rising production and raw material costs but, was also an impacted by the government's fixed pricing systems. Retailers frequently offer discounts of up to 50% on popular ice cream brands to boost demand. Ice cream value sales at 2014 prices are expected to decline at about 1% to reach U.S. $1.7 billion in 2019; retail volume sales are expected to grow at about 1% to reach 236,200 metric tons in the same year. Sticks remained the most popular product format in 2014 with a value share of 38%, followed by cones with a 17% share.

Marketing

Lotte Confectionery Co maintained its leading position in ice cream in 2014 with an overall value share of 36%. Domestic manufacturing companies dominate ice cream in Korea with strong consumer loyalty towards their brands. The presence of international brands is largely limited to the premium price segment, particularly in bulk dairy ice cream.

Growth in retail volume of impulse-sales of ice cream is expected to be modest, while sales value at 2014 prices are projected to decline slightly. Aside from rising health awareness among consumers and low birth rates in Korea, retail volume growth will be hampered by increasing competition from on-trade operators such as ice cream fast food chain Baskin Robbins, as well as from homemade alternatives like shaved ice desserts. Sluggish growth in retail volume sales will contribute to the projected decline in ice cream value sales at constant 2014 prices.

Despite challenging conditions, ice cream is expected to perform slightly better in both retail volume and value terms. Retail volume growth will be boosted by increasing price competition, as well as by the longer term trend of rising summer temperatures in Korea. At the same time, trading up to higher quality and more expensive products should help to ensure that ice cream value sales decline at a slower pace than they did over 2009-2014.

Frozen yoghurt will remain by far the most dynamic ice cream product in terms of retail volume growth and value sales growth at 2014 prices. Hypermarkets will remain the leading retail distribution channel for both impulse and take- home ice cream. This is mainly because hypermarkets operators can offer much wider assortments and more competitive prices than other retailers. Supermarkets will continue to be the second most important distribution channel for take-home ice cream, while independent small grocers will remain the second leading channel in impulse-sales ice cream.