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Farm Size and Structural Reform of Agriculture I. Korea
So-Hyun Kim
Farm Management Research Division
Research Department
National Agricultural Cooperative Federation
75, 1-Ka, Chungjeong-Ro, Jung-Ku,
Republic of Korea, 1992-04-01

Introduction

Korea's modern agricultural system was established by the Land Reform Program of 1950. Previously, most of the farmland was owned by a small number of landlords, while most farmers were tenants using traditional technology and paying rent amounting to more than 50% of gross revenue. Most tenant farmers were dominated by their landlords in terms of economic status as well as social position.

The important measures of the Land Reform Program were as follows:

  • The government bought farmland owned by non-farmers, according to the principle of land-to-the-tiller.
  • Maximum farm size was set at 3 ha, and any farmland in excess of this limit had to be sold to the government.
  • Farmland sold to the government was distributed to small farmers and former tenants who wished to continue farming.
  • Farmers who received land from the government were to pay back the cost of the land to the government within five years.
  • The government was to compensate landlords for their farmland.

The major points of the new system were the maximum limit in the size of land holdings, and the institutionalization of the land-to-the-tiller principle. The maximum farm size of 3 ha is now being questioned by many policy makers and farmers' organizations, and has recently come under debate.

Land Holding Per Farm Household

The largest number of farm households recorded in Korea was in 1967, when there were 2,589 thousand farm households, 50.8% of all households in the country and 54.5% of the total population. Soon afterwards, the farm population became outnumbered by those employed in urban areas, as industry grew and the agricultural labor force moved to the cities.

Out of Korea's total land area of 9,926 thousand ha at the end of 1990, farmland comprised 2,109 thousand ha, or 21.2%. This can be compared to 2,298 thousand ha in 1970, a decrease over the past two decades of 8.2%. Of this arable land, 63.8% was paddy land, and the remainder upland. The rate of land utilization is only 113%, because Korea has a long, cold winter during which most land is left fallow. At present, the number of farm households is 1,743 thousand, representing 15.6% of the nation's total. The average size of land holding per farm household is only 1.21 ha, comprising 0.77 ha of paddy field and 0.44 ha of upland ( Table 1(1466)).

Another factor which has accelerated the structural change of agriculture is trade liberalization, which has opened Korea's domestic market to imported products. Policy measures to cope with this have emphasized improvements in the quality of domestic produce (especially fruit and vegetables), and more competitive prices (particularly for grain crops, to be achieved by larger farms and more farm mechanization).

In spite of a fall of 8.2% in the total area of farmland between 1970 and 1990 as a result of the increased demand for land by the non-agricultural sectors, there was a fall in the number of farm households of 27% over the same period. As a result, the average area of farmland per household increased by 30%, from 0.93 ha in 1970 to 1.21 ha in 1990.

Changes in the Distribution of Farm Size

As well as an average increase in farm size over the last two decades, there has been a structural change in terms of the various proportions of different sizes of farm. Table 2(1333) shows the fall in the percentage of farms of less than 0.5 ha, from 32.6% in 1970 to 17.7% in 1989. Land holdings of 1-2 ha increased from 26.5% to 30.8%, and those above 2 ha showed a slight increase from 6.8% to 7.4% over the same period. The proportion of land holdings between 0.5 and 1.0 ha in size did not change. This indicates that farm size has expanded primarily among those who originally had larger land holdings.

Source of Increased Land Holdings

Changes in the area of cultivated land per farm household mostly came from an increase in borrowed farmland (see Table 3(1098)). The average land holding owned by each farmer fell from 0.81 ha to 0.77 ha, while the area of borrowed land increased from 0.17 ha to 0.44 ha during the same period.

In the year 1989, out of the total of 2,127 thousand ha of cultivated land, 36.5% was borrowed or rented. Of this borrowed land, 40.5% was owned by farm households, 17.5% by non-farmers living in rural areas, and 42.0% owned by those living in urban areas.

The Status of Tenancy in 1989

The farmland owned by urban residents can be divided into three categories.

  • Farmland left behind by those who migrated from rural areas without selling their land;
  • Farmland inherited from farmer parents by sons living in urban areas;
  • Farmland bought by urban residents who have violated the regulations for farmland purchase.

Because of the increase in the area of farmland purchased by both non-farmers and urban residents, the proportion of farmland not under cultivation by the landowner is now 37% of the total area of farmland.

Possibilities of Increasing Farm Size

Demand for Farmland

An increase in the amount of farmland owned by farmers will be possible if farmers can obtain a larger profit from their farm operations. In other words, capital invested in land purchase must cover the opportunity cost.

The interest rate for loans provided by the government to farmers is 5% per annum, while that of a bank loan is 12%. If a farmer purchases farmland from his own savings, the opportunity cost can be set at the 10% interest which the same deposit would earn in a bank account. According to government statistics, returns from rice farming amounted to US$ 4,810 per ha of paddy field. The purchase price of the same area of land was US$ 68,950. In this case, the capital service cost amounted to US$ 8,270 dollars on the basis of a bank loan at 12% interest. The capital service cost on the basis of 10% interest for a 1-year time deposit in an agricultural cooperative bank can be calculated at US$ 6,900, while that based on a 5% loan for farmland purchase is US$ 3,450 ( Table 4(1116)).

Because the returns are low compared to the price of land, farmers cannot economically purchase farmland with an ordinary bank loan or their own capital. The capital interest will not be covered by the returns from farming. The demand for farmland, however, is likely to increase if there is improved funding for farmland purchase.

Supply of Farmland

The number of farm households has shown a gradual decrease, while the number of employees in agriculture has fallen rapidly. By 1990, the number employed in agriculture and fisheries had fallen by 32% from the number employed in 1970.

It is particularly young people who have emigrated to urban areas. The proportion of farmers in their twenties fell from 18.5% in 1970 to 7.7% in 1989. In contrast, farmers more than 50 years old increased from 20.6% in 1970 to 56.3% in 1990. Thus, the supply of farmland per farm household can be expected to increase in the future.

Possibility of Increasing the Amount of Borrowed Farmland

An increase in borrowed farmland is possible if farmland returns cover the rent paid for farmland. According to government statistics, the gross revenue from rice grown on 1 ha of paddy land in 1989 amounted to US$ 8,330, while rent for the same paddy field was US$ 2,830, representing 34% of the revenue, ( Table 5(1326)). Thus the farmland returns (US$ 4,810/ha) make it likely that the demand for rented farmland will increase. However, it should be noted that if farmland is borrowed from relatives, including parents and brothers, the rent for farmland is very low or nonexistent. If the borrowed land belongs to persons outside the family, the rent is much higher.

The government statistics are based on the average figures calculated from a statistic sample. However, a survey conducted by the National Agricultural Cooperative Federation indicates that the gross revenue from rice is only US$ 7240/ha, but that rent for the paddy field was US$ 2890. Although rent is around 40% of gross returns, farmland returns still amount to US$ 3620/ha.

If such net profits can be achieved, we can expect an increase in the demand for borrowed paddy land. However, demand for upland will not expand in the same way because of difficulties in farm mechanization. Because of economics of scale, rent for paddy land is not compensated by the returns if the piece of land being farmed is less than 0.3 ha in size. On the other hand, farmland returns are 1.5 times higher than rent when farm size is more than 2 ha. The larger the farm size, the more in demand is land which can be leased.

Policies for the Structural Adjustment of Agriculture

Objectives

In Korea, policies to expand the size of farms will emphasize the distribution of farmland to young full-time farmers, and the promotion of group farming. The government plans to increase the maximum size of farm to 20 ha from the present three hectares. By the year 2001, 20% of farm households are expected to own more than 5 ha of land. In order to promote group farming, the government will encourage small-scale farmers to establish cooperative farming corporations, in which they pool their farmland, agricultural machinery and labor. Furthermore farming trusts, which will carry out farm management under contract, will be promoted.

In order to expand the size of land holdings, the government has adopted a new program for leasing land.

New Finance System for Farmland

Since small-scale farmers lack the money to purchase land by themselves, the government has been distributing a Farmland Fund since 1988. The amount of the fund will reach US$ 4,300 million by the end of 1991. The rate of interest is 5% per annum, with a repayment period of 18 years, including a two-year grace period. Farmers receive up to US$ 18,200 per household or US$ 36,400 for cooperative farming corporations. The price of farmland to be financed in this way must be less than US$ 84,000 ha.

Priority in financing the purchase of farmland will be given to:

  • Farmers with at least three years' experience of farming (the more the better);
  • Farmers aged 20-50 (the younger the better).
  • Graduates from agricultural high schools or colleges;
  • Farmers who already own more than 0.5 ha of land (the larger their holding, the better);
  • Cases where the farmland to be purchased is located near where the farmer is already living;
  • Cases where the land to be purchased is owned by a city dweller, or by a non-farming rural residents, or by an aged farmer.
Application Procedures

Farmers who wish for financial support to purchase land apply to the village committee of the Farmland Fund. If this committee approves the application, it sends a recommendation to the Township Committee, which recommends applicants to the county branch office of the Rural Development Corporation*. The final decision is made by the County Committee for the Farmland Fund, which approves applicants within the limits of the available funding. Funding is given through the applicant's agricultural cooperative.

In addition to this program, the Rural Development Administration (RDA) can provide direct financing to farmers who want to sell their land and move to the city.

Effect of the Farmland Purchase Fund

A study of the effect of the farmland purchase fund was carried out in 1989, using data collected from 1,178 farm households. The results can be summarized as follows.

Of the land purchased under this program, 85.3% was paddy land and only 11.1% was upland. The reason why most farmers purchased paddy land is because of the subsidized prices and easy marketing for rice.

The prices of upland crops, however, are fixed by market forces and often fluctuate. In addition, the efficiency of rice farming can be enhanced by farm mechanization, while the mechanization of upland farming is still difficult. The average area of land purchased by each household was 0.33 ha ( Table 6(1037)).

Meanwhile, the proportion of farmers with less than 0.5 ha of land fell to 4.6%, while the number of farmers with land holdings of 1.0-1.5ha or more increased ( Table 7(1122)).

Effect on Land Cultivation

Quantitatively, the farmland purchase fund seems to have had a negligible effect in terms of the average size of land holding per household. However, this program has contributed a great deal to land productivity by encouraging active farmers to purchase more farmland. Most of the farmers who purchased land were young, and both more proficient in modern farming skills and more active than the aged farmers who sold land. This means that agricultural productivity was enhanced by the transfer of land from low-productivity aged farmers to high-productivity young ones.

Most of those selling land were aged rural residents and non-farmers or part-time farmers: 11.5% were non-farmers, and 32.3% were urban residents who inherited their land from their parents. In other words, 43.8% of those selling farmland did not farm the land they were selling.

Of a total of 538 farmers selling land who lived in the same area as those buying it, 28% of the respondents sold land because of old age, 38% sold to discharge their debts, 12% sold because they were moving to urban areas, and the remaining 22% disposed of their land for other reasons ( Table 8(1191)). Interpreting this result, the less productive land previously held by aged farmers (28%), emigrants (12%), and others (22%), a total of 62% of farmland purchased, was transferred to full-time farmers.

Policy Measures for Structural Adjustments in Agriculture

These thus seems to be some possibility of increasing the average size of land holdings cultivated by farm households, partly from renting land, partly by purchasing land with a low-interest loan provided by the government. However, farmers often preferred their own land to be inherited by more than one son. If this happens, farms will tend to divide into smaller holdings down the generations.

In spite of this, since rural populations continue to fall, with migration to cities and smaller farm families, it is probable that the expansion of land holdings will gradually be realized. This can also be promoted by encouraging farmers to combine into cooperative farming corporations.

To accelerate this process, the following strategies are recommended in order to adjust the structure of agriculture to favor a larger scale in farm operations.

Stabilizing the Price of Farmland

The price of farmland has risen rapidly in recent years. The price of paddy land during the period 1988-90 rose by 51.6% for land in the plains, by 48.6% in hilly areas, and by 53.9% in suburban areas. If this upward trend continues, there will be an increase in the capital interest for farmland without any higher returns, which will make farmers less eager to purchase additional farmland.

Land in Korea can be classified into non-farmland, farmland, and semi-farmland used for other purposes. The price of farmland is usually affected by the price of land which is not farmed but used for other purposes. In other words, if the price of non-farmland jumps, the price of farmland is usually stimulated in turn. The Korean government has considered fixing the price of farmland, under the "Pure Farmland Conservation System". However, many farmers have complained that this system discriminates against farmers and is a disincentive for farmers in terms of the low price of farmland as real estate.

To solve this problem, a new policy measure to stabilize land prices is being adopted, on the principle that all land utilization must be in the public interest. Thereby, it has been argued that all land prices should be controlled by the government, in order to have equality in the distribution of land resources, efficiency of land utilization, and normalization in the buying and selling of land. Maximum land holdings for housing and industrial use as well as agriculture have been set, and profits earned from selling land are subject to taxation. Enhancing the efficiency of land utilization includes imposing a tax on idle land, and ordering the cultivation of unused farmland by proxy. Nomalization in land transactions is being controlled by collecting the bills of sale for farmland and forest land. Land cannot be sold without permission, and if the price of the land is more than 120% of the government standard price level, permission will not be granted.

Reduction of Rent Paid for Farmland

In rice cultivation, returns still compensate for the rental fee, so that the area of leased paddy land has increased. However, trade liberalization and increased production is likely to lead to a fall in the prices for agricultural products, so that rents will also have to fall to compensate. Moreover, farmland generally has been leased on the basis of social traditional practices rather than on economic principles. A scheme for reducing the rent for land should be clearly defined by the government, in order to promote the expansion of the scale of farm operations.

Land Consolidation and Collective Cultivation

Small land holdings should be consolidated, and cultivated collectively in order to raise production efficiency. In many cases, the land cultivated by farmers in Korea is divided into seven or eight small pieces located in different places. The first priority should be placed on the consolidation of scattered land holdings. In recent months, the government has set up a large-scale investment plan for implementing the consolidation of farmland.

Conclusion

In Korea, the average farm size is only 1.2 ha, and the farms are operated by family labor. Recently the proportion of farmers with more than 1 ha has gradually been increasing, but this has been achieved by borrowing or leasing land. The reason for this trend is not only the farmers' economic situation, but also because very small land holdings give a lower return than the land purchase cost.

In order to tackle these problems, the government has provided farmers with loans from the land purchase fund, at 5% interest per annum. This has resulted in a gradual increase in farm size, which will probably be accelerated with additional allocations from the fund. On the other hand, increases in the price of farmland and higher rents are a constraint to expanding the scale of farm operations. Therefore, government policy will be an important determinant of farm size, and particularly the extent to which the government is prepared to implement the concept of utilization of land for the public good, including a reduction of farmland rents.

Note: Exchange rate 1US$ = 679.6 Korean Won (1989); 1US$ = 716.4 Korean Won (1990)

Discussion

Comment (R. Villareal)

I was interested in your data that larger farms are increasing in size at a more rapid rate than small ones.

Comment (Mhd. Ghazali)

We have the same situation in Malaysia, where farmers with small land holdings are giving up farming and those with larger holdings are benefitting from economies of scale.

I note that the opportunity cost of land purchase is 10%, while the interest rate of a bank loan is 12%. This means that farmers have no incentive to buy land, so I wonder why they are buying it?

A. Most farmers in Korea have a strong tendency to purchase farmland as a reliable means of maintaining the real value of their property. In searching for possible ways of purchasing, there are two sources of loans for eligible farmers: commercial banks and government loans. However, farmers seldom use bank loans because of the high interest payments (12% per annum), which would not cover the farmland returns.

Instead, they prefer to apply for a government loan at 5% interest. However, government loans can contribute only to extents in increasing farm size, because the funds themselves are limited. Therefore, the farm size in Korea is likely to be increased mainly by rental and leasing mechanisms.

Index of Images

Table 1 Number of Farm Households and Area of Farmland in Korea (1990)

Table 1 Number of Farm Households and Area of Farmland in Korea (1990)

Table 2 Changes in Distribution of Size of Farms in Korea, 1970-1989

Table 2 Changes in Distribution of Size of Farms in Korea, 1970-1989

Table 3 Source of Increased Land Holdings

Table 3 Source of Increased Land Holdings

Table 4 Interest on Capital and from Farmland Returns

Table 4 Interest on Capital and from Farmland Returns

Table 5 Farmland Returns and Rent for 1 Ha of Rice Land

Table 5 Farmland Returns and Rent for 1 Ha of Rice Land

Table 6 Increased Size of Farmland by Financing

Table 6 Increased Size of Farmland by Financing

Table 7 Changes in Size of Land Holdings after Land Purchase

Table 7 Changes in Size of Land Holdings after Land Purchase

Table 8 Reasons for Disposal of Farmland

Table 8 Reasons for Disposal of Farmland

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