Summary - Korea has gradually developed a private market system for beef through its Simultaneous Buy Sell system (SBS), which allows authorized groups (super groups) to purchase beef independent of government control. The increased liberalization of the market, plus the introduction of imported chilled beef into Korea is expected to greatly benefit U.S. suppliers.
Beef consumption in Korea is constrained by tight domestic supplies and restrictions on beef imports. However, over the last 15 years--as import restrictions were relaxed--domestic consumption of beef in Korea soared, from 138,000 tons in 1980 to an estimated 450,000 tons in 1996, a 226-percent increase. This rapid growth in consumption was primarily the result of rising consumer incomes, with growth met largely by imports, as domestic production during the same period only went from 127,000 tons to 230,000 tons.
The United States benefited greatly when Korea allowed beef imports. In the 1980's, Korea was our 5th largest market despite being dependent on the policy actions of the Korean government. Today, Korea is our third largest market. The United States is also the largest supplier to Korea with a 50-percent share, followed by Australia, 33 percent share, and New Zealand, 15 percent share.
As impressive as these statistics seem, there remains large untapped demand for beef in Korea due to import quotas still limiting available supplies. However, market reforms are gradually opening up the Korean market further to foreign beef. And at current growth rates, Korea is projected to approach per capita consumption levels in Japan by the year 2000, which coincidently, will be when the Korean market is completely liberalized. By 2000, Korea may even surpass Canada to be our second largest export market for beef.
In attaining its number one beef supplier status in Korea, the United States had to function within a government regulated-import regime, whose primary goal was to protect its domestic livestock producers. The importance of this market to the United States warrants an understanding of how Korea's import system works. Thus, the purpose of this paper is to provide the reader with a general overview of Korea's system and how it has affected the United States.
During the early 1980's, the Korean government instituted a number of very controversial policies to promote cattle herd build-up, with beef cattle inventory nearly doubling between 1982 and 1986. This intensive build-up of cattle inventories eventually led to falling cattle prices, and reduced profitability for beef producers by 1985. Reportedly, Korean farmers could not pay their debts and many went bankrupt, partly blaming cattle imports for their economic woes. So Korean farmers petitioned the government for protection. Under pressure from Korean cattle farmers and the domestic beef industry, the Government suspended beef and cattle imports in 1985.
In 1988, the United States, Australia, and New Zealand petitioned the GATT that Korea's ban on beef imports was illegal. At the same time, the Seoul Olympics and anticipation of increased beef demand prompted the Korean government to announce a 14,500-metric ton beef import quota in July 1988 and to allow the National Livestock Cooperatives Federation (NLCF)--a producer organization--to handle the distribution of imported beef. Korean livestock farmers protested furiously against reopening imports, while beef exporting countries voiced suspicion over NLCF's involvement.
In response to protests from farmers and beef exporting countries, the government established the Livestock Product Marketing Organization (LPMO) in 1988 as an independent group, with neither producer nor consumer affiliation to administer the global import quota set by the Ministry of Agriculture, Forestry & Fisheries (MAFF).
While independent of the producers, a function delegated to LPMO is to insure that import prices do not undercut domestic beef prices. LPMO sets a wholesale base price for imported beef below which it will not accept bids, and adds to this a surcharge above the import tariff, raising the price of imported beef to that of domestic beef. LPMO also determines the composition of (grass-fed vs. grain-fed) beef imports and the timing of the release of imported beef. Secondary, but important functions of the LPMO are to expand the demand for livestock products and to facilitate dialogue on international trade matters.
The limited beef quota did not deter the United States and others from pursuing greater market access for beef. By the fall of 1989, the GATT committee voted in favor of the petitioners (United States, Australia and New Zealand) that Korea's import restrictions were illegal. Korea agreed to negotiate for change. And by May 1990, Korea agreed to a progressive guaranteed increase in the import quota, the establishment of a committee to study restructuring of the Korean beef sector, and to the establishment of a "Simultaneous Buy/Sell system (SBS) for tourist hotels and restaurants. The SBS system would be granted a portion of the general quota and allow restaurant and hotel buyers to negotiate directly with packers and exporters on product specifications and price. The establishment of the SBS system marked the beginning of the evolution of a liberalized market, as it allowed buyers and sellers to have direct contact with each other and to negotiate contracts. Furthermore, the United States was a primary beneficiary of this new SBS system as will become clear in the following discussion on the two import mechanisms currently operating in Korea.
The LPMO purchases beef by means of an international open competition sealed bidding system. Contracts are awarded to the lowest priced bidder. The bidder must a bid bond before bid opening and a performance bond to LPMO after being awarded the contract. The LPMO makes the decision on the type of beef to import, takes possession of the beef upon entry at the Korean port, and then distributes the beef through NLCF as buyer orders are received. This has significant marketing disadvantages because the foreign packer sells to an agent (LPMO) at a pre-negotiated price, unaware of who the buyer is or the buyer's packing and cutting needs, and the buyer, unaware of the brand or the seller, must accept what is delivered, regardless of product needs.
NLCF, having beef distribution networks and cold storage warehouses nationwide, is in charge of the distribution of imported beef under the general quota. NLCF was delegated this role because it has responsibility for the development of the livestock sector and the Livestock Development Funds. The majority of the proceeds received by LPMO from surcharges on imported beef goes into the ROKG's Livestock Development Fund, which the NLCF uses to finance domestic livestock development. Given the strategic importance the government puts on maintaining a viable livestock sector in Korea, having NLCF in charge of distributing the imported beef minimizes the impact of imported beef on domestic beef sales.
Imported beef is distributed through different channels than domestic beef. Imported grainfed beef is mainly auctioned off at wholesale markets and supplied to imported beef only shops. All grassfed beef and a small amount of grainfed beef is sliced and packaged at the NLCF and Korea Cold Storage Company (KCSC) beef processing plants and distributed to all types of retail outlets as there is no restrictions on retailing of the packaged beef. Also, packaged (grassfed) beef prices are fixed by the NLCF by first consulting with LPMO, and with approval from MAFF. The price is normally maintained at 50-60 percent of the Hanwoo domestic beef price.
Imported grainfed beef is purchased by registered brokers at the wholesale markets for their respective import shop owners. There are nine livestock wholesale markets located in Korea's major cities. In the provinces, where there are no wholesale markets, the beef is provided to the imported beef shops through NLCF provincial offices. The wholesale market announces the listing of the specifications (grade, cut, country of origin) and previous day awarded prices one hour before opening of the auction. The highest priced bidder is awarded the contract, and the beef is delivered to the imported beef shops the following day from the NLCF cold storage warehouses. Since July 1990, the retail price of grainfed imported beef was liberalized and is determined through the auction process.
The SBS system became operational in the spring of 1991 as a result of successful negotiations by the United States, Australia and New Zealand. Under this system, 7 percent of the annual base quota level for beef imports was allocated through LPMO to the NLCF, the KCSC, and the Korea Tourist Hotel Supply Center (KTHSC). In 1991, the base quota level was 62,000 metric tons which meant 4,340 tons would be allocated to NLCF, KCSC and KTHSC. All imported grainfed high quality beef (HGB) carcasses, along with all grass fed carcasses, deboned and packaged by KCSC or NLCF were marketed in import only stores or retail outlets respectively owned by KCSC and NLCF. Imported HQB boxed beef was distributed through KTHSC to tourist hotels and restaurants. In 1991, hotels and restaurants, through the SBS system, could designate specific suppliers and even negotiate on price, but LPMO and KTHSC was still involved in the importing and distribution of these purchases. Other restaurants, depending on their size, could buy domestic or imported beef at auction, through middlemen, or from any retailer, and HQB cut from carcasses at import only stores.
The SBS system in 1991, however, still hindered trade, resulted in high beef prices, limited supplies, and severely restricted access to the best quality beef to only the KTHSC. Consequently, following five rounds of negotiations, the United States and Korea signed another market access agreement for beef in June 1993. Called the Record of Understanding (ROU), the new agreement would prohibit the Government of Korea from active involvement in the SBS system and allow buyers and sellers to deal directly, without going through NLCF and KCSC on direction from LPMO. However, NLCF and KCSC, as supergroups, could import on behalf of their own customers. End users of KTHSC would also have the right to either import through KTHSC or import directly from foreign suppliers. Other major highlights of the ROU included: addition of new supergroups affiliated with different end-users; reduction of the mark-up on imported beef under the SBS system, beginning with 100 percent in 1993; and optional utilization of bid and performance bonds/or letters of credit by the SBS participants. The 1993 ROU also provided for quarterly consultations to ensure full implementation of the understanding. These consultations were effective in the past to resolve issues and to steer Korea on a path of complete liberalization by 2001.
In December 1993, further modifications were made to the 1993 Beef Agreement during the Uruguay Round which provided for larger import commitments, substantial increases in allowable private sector participation in beef importing and marketing, and scheduled reductions in the government's mark-up on imported beef.
In 1995, another major agreement was reached, resolving the U.S. red meat industry's Section 301 petition that the Korean government imposed severe trade restrictions on red meats because of excessively short shelf-life periods. In October 1995, the government-mandated shelf-life was extended to 12 months for frozen beef and 90 days for vacuum-packed chilled beef. Also agreed to was that by July 1, 1996, manufacturers would determine shelf-life rather than government-mandated requirements. This agreement is expected to have major implications for chilled beef imports, though no significant amounts of chilled beef have been imported so far. The slow start in chilled beef imports is because of a current lack of storage facilities for fresh meat products, fear of government retribution, and fear of negative publicity from producer groups wanting to limit beef imports. However, some major retailers have already begun to invest in chilled storage facilities in anticipation of a gradual acceptance of chilled beef imports.
The SBS system essentially opened the Korean market to high quality beef of U.S. origin. Under the open tender system, customers had no choice but to purchase the types and qualities of generic meats that LPMO purchased. Under the new system, exporters were free to market their product directly, and to utilize market promotion methods to sell their particular brands. These measures plus the increased availability of HQB beef to more end users, and the continuing demand for grainfed HQB beef in Korea, provided the opportunity for the United States to improve its market share in Korea. The United States already claims a majority share in the supergroups KRSC, KTHSC, and KOSCA. The first two represent the restaurants and hotel sector, and the latter represents the large grocery stores in Korea. Hotels and restaurants purchase mainly high quality boxed beef which is exclusively of U.S. origin. U.S. share of KOSCA's quota in the first 6 months of 1996 at 94 percent, is up from 74 percent for the corresponding period in 1995. This majority share of KOSCA partly reflects branded promotions that are convincing consumers that U.S. beef is better. There is little doubt that U.S. share will remain high as Korea expedites the process of market liberalization. Expanding the number of supergroups able to participate in trade, increasing the freedom for supergroups to trade amongst themselves, and gradually eliminating restrictions on the products that supergroups are permitted to handle, will ultimately benefit U.S. beef exporters.
In 1996, MAFF announced allocations for two new supergroups, the Korea Federation of Meat Purveyors, and the Korea Livestock Marketing Corporation, bringing the total to eight supergroups.
|National Livestock Cooperatives Federation (NLCF)||Government and producer affiliated|
|Korea Cold Storage Co. (KCSC)||Government affiliated|
|Korea Tourist Hotel Supply Center (KTHSC)||Tourist hotels and restaurants Korea|
|Restaurant Supply Center (KRSC)||Restaurants not covered by KTHSC|
|Korea Meat Industries Association (KMIA)||Meat processing group|
|Korea Super Chain Association (KOSCA)||Large department and grocery stores|
|Korea Federation of Meat Purveyors (KFMP)||Butcher shops|
|Korea Livestock Marketing Corporation (KLMC)||Consignment of business from NLCF and government|
SBS Quota Allocation for Supergroups (metric tons)
Last modified:Friday, 22-Nov-1996