Spikes and Pass-Through of Global Grain Prices on the Korean Agricultural and Food Markets

Abstract

The trends of slower growth in production and more rapid growth in demand have contributed to a tightening of the global balance of grains. Furthermore, the shortage of grain stock means that global market prices of grains have risen to more than 60% above levels of 2 years ago. Rising global grain prices have caused riots in some countries and led to eliminating grain export subsidies and restricting export quantities in other countries. Korea has a heavy dependency on grains such as wheat, corn, and soybeans acquired from the global market. The amount of imported grains has continuously increased. The imports of corn and wheat sharply increased after the market opening in 1995. However, the domestic production of grains has decreased from about 7 million tons in 1970 to 5 million tons in 2007. The self-sufficiency ratio of grains in 1970 was 80.5%, but it was 27.2% in 2007. It has decreased about 66% over time. The expansion of market liberalization would increase the amount of imported grains and directly affect imported grain and food markets in Korea. Therefore, it is crucial to analyze the pass-through effect of global grain prices on the domestic food market. Recently a number of economists have become interested in the study of the causes and the effects of price spikes in the global grain market on the domestic market. However, there are few studies on the dynamic responses and the pass-through effects of global grain prices on domestic agricultural and food prices. Several studies have investigated the passthrough effect of the exchange rate on domestic infla-