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Food price increases; is a practical, comprehensive government response possible?
By : Josephilda Nhlapo-Hlope , Chief Policy Analyst , Policy Advisory and Coordinating Services Unit, Presidency, South Africa
Introduction and Background
This paper discusses the food price crises of the first/second/third quarter of 2008. It briefly outlines trends and reasons for the rising food prices, the impact and then suggests appropriate practical measures to alleviate the impact on the poor and generally increasing food security at a household and country level.
Whilst this is a food price crises impacting negatively on access especially for the poor, the response for South Africa is three fold, enhancing job creating/inclusive economic growth, cushioning the poor and enabling the agriculture sector within South Africa to be more productive. This paper concentrates on the two latter responses because the government of South Africa has a program called Accelerated Shared Growth Initiative of South Africa (ASGISA), a set of concrete economic proposals aimed to tackle directly constraints to inclusive growth. According to its 2009 annual report much has been achieved since ASGISA was launched in 2006.
The unsaid thesis of the paper is that it is the poorest that suffer most from price shocks and that global trade cannot be relied upon completely for food security for all the country’s citizens in spite of rules and institutions put in place. It therefore is important for countries like South Africa to:
The paper draws heavily from research done by the South African Government Departments such as the Department of Agriculture, the National Agriculture Marketing Council and quasi government bodies such as the Competition Commission and various other briefs written by international organisations such as the World Bank and the Food and Agriculture Organisation (FAO).
Profile of food price increases
Food price inflation at a global level reached crisis proportions with high food prices leading to unrest in countries such as Egypt, Cameroon, Ivory Coast and Haiti as well as demonstrations in South Africa, Kenya, Bolivia etc. The World Bank puts food price increases from January 2002 to third quarter of 2008 at 140%, with a 45% increase in the latter 9 months alone (FAO). At that time FAO further forecasted that the cereal import bill of the world’s poorest countries would rise by 56 percent or more in 2007/2008 due to the sharp rise in international cereal prices, freight rates and oil prices.
As seen from the graphs below food prices increased and peaked in 2008.
Maize from which the South African staple food “porridge” is made, peaked at US$ 294.18/ton in June 2008, decreased to US$ 158.36/ton in December 2008 only to increase again to US$176.42 in January 2009. (NAMC 2009).
Wheat the main ingredient for bread, peaked at US$ 481.50/ton in March 2008, decreased to US$ 235.25/ton in December 2008, i.e. a decrease of 51.14 %, only to increase to US$ 256.4/ton January 2009. (NAMC 2009)
Rice price peaked at US$ 962.60/ton in May 2008; by December 2008 prices had decreased steeply by 39.54% to increase again in January 2009 to reach US$176.42. (NAMC 2009).
Though there has been a decrease in food price and food price inflation, food prices are sticky downwards. Conceicao and Mendoza (2009) show that for cereals, 2009 prices are way above their 10 year averages. As of March/April 2009:
Indeed in spite of the decrease in food price inflation, for many countries as table one below shows, food inflation is still above ordinary inflation. We therefore dare not be complacent, policies and programmes should be put in place now to enhance food security at a household level and country level.
Table : Country Comparison of Food Inflation v.s Overall Inflation
Source: NAMC adapted from Central banks and statistics reporting institutions of these countries, as well as press
Meat prices did not behave differently and prices today are still above 2007 price levels.
Many countries responded to the high food prices by either banning food exports, or increasing tariffs on imports of food thereby worsening the food price crisis by reducing the supply available. Experts wrongly projected that there will be little relief from high commodity and food prices in the short to medium term. However with the sharp decline in raw commodity prices, generally lower transportation costs, a softening demand for more expensive food items, and the lower demand for bio fuel food crops as crude oil price fall, price inflation has fallen.
How global trends are transmitted to South Africa
These global trends impact directly on South Africa because South Africa deregulated and liberalized its agricultural and food sector in the mid 1990s, and introduced trading in the futures market i.e. South African Futures Exchange SAFEX. Factors that determine the price in SAFEX include:
Price increases for the commodities (except vegetables) that make up a large percentage of the food basket of the poor are summarised in table 1 below. As shown below the three main items driving inflation are wheat, sunflower (oil and fats) and to some extent dairy.
Table : Price changes in food mostly consumed by the poor.
Source: Adapted from STATSA, NAMC and AC Nielson
Reasons for high food inflation especially of wheat
The high food spikes were due to a combination of factors which alone would not have fuelled the price increases but because they happened simultaneously, they together set the conditions for “a perfect storm” in terms of food price increases. The increases in agricultural commodity prices on the international market can be attributed, but not necessarily restricted to (i) competing demands; the lower availability of grains for human consumption because of biofuel production and animal feed (ii) unfavourable climatic conditions for the production of grain in major grain producing and exporting countries, (iii) trade restrictions that were imposed by major grain exporting countries, such as Argentina, (iv) increasing energy and fuel costs making transport of grains more expensive, and (v) potential misuse of market power on the input and output sides of the agro-food chains. Each factor is discussed in detail below.
South Africa does not use food crops to produce biofuel, but at a global level according to the World Bank, 11% of global maize production and 7% of global vegetable oil supplies were used to produce bio fuel. The high and increasing demand for biofuels, was fuelled by high crude oil prices, legislation, and incentives pertaining in many of the major grain producing countries and this has negative effects on the production of grain for human and animal consumption in two ways. (i)Less land is available for ploughing grain as farmers re enticed to switch to alternative biofuel crops. (ii) Maize and oil seed is used to produce bio fuels instead of being made available for humans. So in spite of the fact that there is an increase in maize production globally, the increase is offset by the even greater demand for biofuel. “Global maize production increased 55 million tons from 2004 to 2007 according to the USDA and biofuel use in the U.S. increased 50 million tons. Global consumption for all other uses increased 33 million tons, which caused global stocks to decline by 27 million tons and maize prices to more than double” (World Bank note on rising food prices pg 5.)
Another competing demand is the use of oil seed for animal feed. The increase in prosperity mainly in India and China has increased the demand for animal protein and thus may have contributed marginally (according to the World Bank) to the increase in prices of oilseed from which both cooking oil for human consumption and oil cakes for animal feed are produced.
Reduced food availability at a global level
According to the International Food Policy Research Institute (IFPRI) in 2006, global cereal stocks—especially wheat—were at their lowest levels since the early 1980s. The reduction in food stock available for trading in international markets was a product of unfavourable weather patterns and a reduction in land available for planting wheat. For example the combination of the 2006 and 2007 Australia drought and poor cropping season in the European Union and the Ukraine reduced exports by 19.2 million tons at a global level. It was however the policy responses of major food exporters that fuelled the increase in food prices. Trade restrictions that were imposed by major grain exporting countries, such as Argentina who early last season closed registration for new export orders of grains and oilseeds as well as increased their export taxes (from 10% to 35% on various grains) to curb food inflation in the run up for the elections. In June 2007 Australia changed the Wheat Marketing act to include the right to veto bulk wheat export applications. Australia established a new company AusWheat to oversee and control bulk wheat exports in a single desk arrangement that operate a pool system. China introduced value-added tax as well as temporary taxes on wheat exports during December and January 2008 to restrain exports. Export restrictions were also exercised by India, Kazakhstan, Pakistan, Russia and the Ukraine. Even Zambia in March 2007, put an export ban on grains to ensure that it has enough grain for the season. Brazil and the USA livestock producers have lobbied for export taxes to counter their local rising feed costs.
The shortage and rise in global prices has impacted directly from South Africa directly since domestic prices are a function of global prices (see section 2) and indirectly as South Africa animal feed buyers faced difficulty this past season in sourcing grain from its traditional supplier, Argentina, to prevent potential grain shortages
Increased input costs
The production of food requires a range of fertilizers. The price of natural gas and petroleum is one of the biggest components in the production of ammonia and potash (fertiliser components). Crude oil prices had at some points soared nearly 70%. This means that not only the cost of producing the inputs has risen, but in addition the costs of transporting these input to farms and the grains from where they are farmed and stored to where they are processed and sold has increased.
Potential abuse of market power on the input and output sides of the agro-food chain (mainly a South African phenomena).
A study done by the competition commission on grain point to that farmers’ margins are squeezed as they face buyer power from processors and also face high input costs. Thus in spite of the high prices, farmers are not necessarily the beneficiaries and thus not incentivised to increase production and thus increase food availability. Consumers on the other hand, face prices that are not necessarily determined by the market, but through anti competitive behaviour such as price fixing, market allocation and speculation. The high concentration and vertical integration pertaining to the entire value chain of the grain industry facilitates anticompetitive behaviour. While a concentrated market structure does not necessarily mean anticompetitive behaviour, the classic case where Tiger Brands was fined millions for collusion and price fixing is proof that there is anticompetitive behaviour post the farm gate and it is contributing to the high prices and asymmetric price transmission.
Another high profile case of anticompetitive behaviour is the Dairy case. Milk processors are being investigated for market allocation and price fixing as well as playing a “supply stabilising role”. Dairy prices last peaked in the period July-Oct 07. Since then, they have been declining by over 30% on average. However at a retail level dairy products showed a September 07/08 year on year inflation of 10%.
The USA had surplus yellow maize grain stocks but SA suppliers could not procure from the US because of the present limitations put by the SA GMO legislation. South Africa Industry was then forced to use white maize for animal feed and processing. This situation almost led to an absolute shortage on maize in the country during January and February 2008.
Electricity is vital for the maintenance of the cold chain and for irrigation. Farmers lost crops in early January when the crisis was at its highest and irrigation could not be done. (Load shedding was erratic and at its maximum as ESKOM attempted to stabilise the system) A lot of perishable food had to be discarded. Both these factors led to shortages and an increase in the price.
It must be emphasized that none of these factors on their own would have led to the price spike we see. The good crop in USA, Kazakhstan and Argentina offset the decline brought about by the drought in Australia and the bad cropping season in Ukraine and the EU. What caused the price hike therefore is a combination of all these factors. An additional factor being debated amongst analyst is the impact of increased population, urbanisation and increase in wealth. There is the IFPRI school of thought which suggests that urbanization and increase in global incomes contributed to the price increase by increasing demand for food. This thesis is also supported by some leading analysts in South Africa who assert that population growth and a rising middle class increased demand and because of the constraints in supply both domestically and globally, this also contributed to the price spike. However there are other statistics that point to the fact that demand especially for grain remained relatively stable in South Africa, and therefore the increase in wealth and population could not have necessarily caused an increase in price. The World Bank which has gone even further and attempted to quantify the contribution of each of these factors to global price increases seems not to support the thesis that increased global incomes led to an increase in price of food. “Rapid income growth in developing countries has not led to large increases in global grain consumption and was not a major factor responsible for the large grain price increases” (World Bank note on rising food prices pg 10).
Impact of high food prices
As table below shows lower income levels spend a greater proportion of their income on food and thus are impacted the most by high food prices. As table 3 shows, LSM1 1 spend over 71% of their income on food, compared to the 11% of LSM 10.
Table : % expenditure on food by LSM
(Adapted from Food scoping exercise: competition commission)
Food items most consumed by the lowest income quintile are grain products maize meal and bread, meat, vegetables, sugar, fats and cooking oil and dairy and eggs. (see table 4)
Table : types of food spend by LSM category
(Adapted from Food scoping exercise: competition commission)
As discussed earlier the main drivers of food inflation are grain (wheat and maize) as well as oil. According to table 3 above, these three food items alone constitute about 36% of the entire food bill of the poorest households.
It is these households that are challenged in terms of access to food even before the food price crises and the crises made it worse. According to the National Agriculture Marketing Council households in poorest households needed 22% additional income to maintain status quo whilst the richest household only .5% of their income.
Chronic hunger is still prevalent as exhibited by the high wasting and stunting incidence (see table 4). “Children most affected are those living in rural areas and African children are 5 times more likely than white children to exhibit signs of malnutrition and inadequate access to food……Children from the poorest 10% of households are 3 times more underweight and 8 times more stunted than children from the highest 10% income households.2
Table 5: Provincial stunting rates3
Source: food scoping exercise competition commission)
South African children also suffer from a lack of micro nutrients deficiencies with average daily intake of energy, calcium, iron, zinc, selenium, vitamin A, vitamin D, vitamin C, vitamin E, riboflavin, niacin, and vitamin B6 below 65% of the daily recommended allowance. So whilst basic food stuffs are fortified, the high food price of bread for example means the impact of efforts will be minimal.
Studies show that when the poor are faced with high price increases they either eat less or move to less value more bulky food items, thus increasing general morbidity as poor nutrition compromises the immune system even of a healthy individual. Chronic malnutrition retards growth (physically and intellectual) and hunger makes it impossible for children to concentrate at school and for adults to be productive at work, in addition a healthy diet is an important prerequisite to antiviral medication or even living positively.
Impact of high and rising food prices on inflation and various anti poverty strategies
Food contributes about 20% to the CPIX. High inflation (above the 4%-6% target range), forces the reserve bank to increase interest rates, an instrument at the Bank’s disposal for curbing inflation, it also puts an upward pressure on wages as workers attempt to maintain constant real wages and living standards. High interest rates have the negative effect of reducing aggregate demand and growth.
At a household level, high food prices reduce disposable income i.e. the buying power of consumers including vulnerable consumers that depend on social security grants. It is well documented that grants are used mainly on food followed by fuel and housing. High food costs therefore means that an even higher proportion of income will be used on food, reducing the income available for paying for services such as clean water, reducing income available for investing in income generating activities like job seeking, or even in education.
High food prices impact negatively on government programmes. For example, high food prices inflate the cost of the Integrated School Nutrition Programme meaning less children can be fed, or schools have to resort to cheaper but less nutritious food.
On a positive note however, increased prices can serve as incentives for farmers to produce more impacting positively also on the programmes of government for encouraging the entry and growth of formally disadvantaged farmers. The increased production can add a further boost to the Agroprocessing sector strategies of the industrial strategy. However this assumes a market that is able to respond. Competition issues, inadequate infrastructure (poor agrologistics and irrigation Infrastructure), and increased threat of global warming may mean that farmers may not be able to appropriately respond to the price incentives.
Important principles anchoring the suggested policy response include:
Public-Private Partnerships must be utilized to address the current food price crises. In this way responsibility is shared and the competencies and areas of influence are leveraged optimally.
Innovative response and research into alternative, environmentally sustainable methods of production is called for. With climate change threatening agricultural capacity, it cannot be business as usual. The elasticity of past supply responses may prove to be a poor guide for the future. Scarcity of water and arable land means that the boom in food prices could last longer than most expect. It is impossible to know yet whether the agricultural market was facing a structural or a cyclical change but we are probably up against a long cycle of rising prices. Limitations facing production still aggravate the situation. Water and land scarcity, together with slow improvement in agronomics, would be key factors shaping food production.
As said earlier, this paper concentrates on the two latter responses. The additional advantage of improving the productivity of the agricultural sector is that positive impact on employment and GDP. The agricultural, forestry and fishery sector’s contribution though declining still contributed about 8.1% to employment and 2.4% to GDP in 2006 (Quantec 2008)
Government sponsored safety-net measures and welfare
Given the risks currently facing vulnerable groups due to the high food prices, it is important that safety net programmes be strengthened and expanded. These programmes are currently under the political leadership of the economic and social cluster. These include:
Challenges in implementing all these programmes include administrative inefficiencies in some areas as well as eliminating perceived corrupt practices in the roll-out.
Corporate South Africa can be encouraged to donate and distribute basic foodstuffs to vulnerable groups as part of their corporate social investment. In the previous food price hike, corporate South Africa, branded and sold mealie meal at cost in economically depressed localities. “yiyo lena”
Medium term response
Attempts should be made to improve the productivity, efficiency and profitability of the Agricultural sector. This would include:
Long term initiatives should include
Is a government response possible?
In South Africa, the:
forces the state to play a very big role to try and put in institutions/policies that will level the playing field for all farmers, thus increasing food production and access to food for the poor as well as protect the poor from negative shocks. The African National Congress has been given a resounding mandate by rural voters because of the promise to concentrate more on rural areas and to focus on enhancing food security. Programmes suggested by the election manifesto include:
The Competition Commission has embarked on a massive food study across the value chains to attempt to unearth anti competitive behaviour.
There however is a role for all society. Food production is in the main in private hands.
There still is an answered question why food price decrease does not immediately translate into cheaper prices at retail level i.e. why are prices so sticky downwards? Is someone along the food chain taking advantage of the food price inelasticity of demand? In South Africa is the concentrated food chain structure beyond the farm providing an enabling environment for sticky prices downwards? A food summit in Johannesburg held early in 2009, tried to answer this enigma. No conclusive answer was reached. So the government will continue to invest in agriculture and land reform for increased food production and hope that an increase in supply will lead to increased food security for all.
The Competition Commission and academia will continue conducting research to facilitate evidenced based solution/policies to deal with food price fluctuations and asymmetric food price transmission. Indeed work has begun by academics such as Cutts and Kirsten. “From our analyses it follows that in agro-food industries with some market concentration there is a high level of asymmetric price transmission. This, however, is considerably lower when the retail product is perishable. The results concur with a priori expectations that retailers and/or processors respond more rapidly when their margins are squeezed than when they are stretched. The ability of processors and retailers to “delay” passing on certain price changes depends among other things on their market power.” https://www.up.ac.za/dspace/bitstream/2263/2714/1/Cutts_Asymmetric(2006).pdf
Submitted by storytelling on 4 August 2009 - 12:56pm. categories [ ]