Ocotber 18, 2002
The food security crisis in South Africa and the region is escalating out of control. In response, the Cabinet on October 10 released an announcement of measures to address high food prices. The measures amount to the government "doing little" to address the plight of the poor and a re-endorsement of free market mechanisms in the food industry. The government needs to do more, especially when it comes to serious market failures.
In April this year SG Securities economist Nico Czypionka came out with the outrageous statement that a positive aspect of regional famine was that South Africa could score from the shortages as donor agencies bought maize from South African suppliers. After a dismal beginning to the donor response, food has finally started trickling in. However, South African maize is simply too expensive for it to be of any use to those who are starving. South African maize exports are strictly business as usual. If you can afford it you can buy it, meaning exports have been limited to normal commercial volumes.
Clearly, South Africa is no philanthropist of the region.
South African maize meal consumers may not be aware that ever since the news of famine hit the press they have been paying a "risk premium" on the South African Futures Exchange (Safex). Low-income consumers continue to pay an unknown additional price for the possibility that donors will purchase huge tonnages of maize from South Africa. After all, Safex follows the laws of supply (both current and predicted) and ineffective demand. Famine causes price increases, which worsen famine. If donors were to source large quantities of maize from South Africa, Safex may even justify a second round of price increases as demand becomes real.
Through Safex, South African consumers also paid heavily for the "mistake" of a "shortfall" maize crop estimate early in the season. A shortfall crop estimate elicited the obvious response of an increased price. As usual, what followed much later was a statement that the crop was actually well in excess of domestic requirements. The trick is that the crop gets marketed at a new-found high price and the price does not fall in correspondence with the revised crop figures.
We obviously accept that the exchange rate depreciation affects domestic food prices, but we should remember how delayed repatriation of export earnings and other dealings exacerbated the initial shock.
Maize meal price increases of more than 112% from June to June are far in excess of production cost increases, although farm input costs deserve special attention. From what we can see, the final price of maize meal is really a story of percentage mark-ups. Each member of the chain gets accustomed to a share; as the Safex maize spot price goes up, it is simple arithmetic that the entire chain profits that much more. When it comes to basic foods, consumers have no choice but to absorb the price increase or starve (that is, demand is price-inelastic).
Doubling the maize meal price results in less money available for other protein- and nutrient-rich foods and other household necessities such as clothing and education. This raises urgent questions about the ability of low-income households to keep debt under control and maintain good health.
Market dynamics since agricultural deregulation have led to increased concentration of ownership from farming through to retail. In times of high prices in particular, markets brutalise small businesses that don't have access to credit or bulk purchasing power. Competition on the ground may exist for a while, but then there is consolidation of market power.
By way of example, anecdotal evidence from Soweto reveals that spaza shop owners and street traders are closing down as a direct result of increased food prices. Even well-established small-scale traders of vegetables have disappeared as cash-strapped consumers buy less and opt for larger formal alternatives (with cheaper prices) when they do buy. We also wonder how the government will treat news reports of small mills shutting down because of cash-flow problems or news reports of a small miller who was denied access to grain stored in silos, despite having the money. The time has also come to ask questions about other food price increases, especially potatoes and dry beans. The public needs answers and, more importantly, solutions.
There are two sides to the government's proposals for dealing with the food price crisis. On the demand side, the proposed increase in welfare grants is minuscule and will not offer relief to the poor. A massive number of poor people spend up to 50% of their income on food. In some cases the percentage is much higher. The proposed increases range from a low of 2% for the foster care grant to a high of 8% for the child support grant. The grants will top up the February increase by a percentage well below the latest CPIX -- the Reserve Bank's target inflation measure, which is consumer inflation less mortgage rates -- for low-income earners (14,8%), food price inflation (22%), and maize meal price inflation (112%).
A more reasonable 15% increase in welfare grants will result in an additional R93 for pensioners and R19,50 for child support beneficiaries. Our proposal is to urge the government to move swiftly to extend the child support grant age limit to 18 years. We support the government's proposal to extend the reach of the school-feeding scheme, but would also like to see targeted community feeding schemes in hot-spot areas within villages and townships. Programmes and projects that assist child-headed families and people with HIV/Aids to access food should also receive increased support.
On the supply side, the government proposed investigating strategic grain reserves, promoting food security in the region, expediting tariffs, establishing milling cooperatives and a 10-person food chain monitoring committee. The government also supported a cut-price maize scheme put together by some large companies. While welcoming the proposed measures we propose the following additions:
- We support the work done by the Competition Commission thus far and look forward to its second report. However, the government should ensure that the commission is enabled to: a) monitor Safex and investigate allegations of big trader dominance; b) investigate market imperfections within key food industry chains (from farming through to retail); and c) investigate the information asymmetries involved in unreliable crop estimates. In this regard it would be appropriate to have a National Economic and Development Labour Council-sanctioned multi-partite committee overseeing these investigations.
- The structure of the 10-person monitoring committee will have to be all-inclusive and its power should be to monitor price movements as well as to recommend government interventions.
- The time period for the cut-price maize meal programme spearheaded by Premier Foods should not lapse at the end of 2002, but should be extended to the whole of 2003 to allow time for rolling back prices to tolerable levels.
- Rand-denominated, as opposed to dollar-denominated, reference prices for basic food product tariffs should be given more serious consideration.
- The mechanisms to implement a windfall profit tax on super profits reaped by those benefiting from hunger should be clarified as soon as possible.
As price controls do not seem to be an attractive option for the government, at least for now, "doing little" as the government has proposed is equally unacceptable. The above proposals are a "fiscal sacrifice" that is worth making because the consequences of "doing little" are much greater.
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