Neva Makgetla makes an important observation in her most recent Business Day column (“Longer-term measures needed to reduce prices of staple foods“, February 7). She notes that while SA’s agricultural sector has performed well, producing an ample grain harvest, prices did not moderate sufficiently in response to increased supplies.
Consumers carried this burden, which is evident in food price inflation having averaged 9.5% in 2022 (compared with 6.5% in 2021 and 4.8% in 2020). Broadly, the high prices of grains, vegetable oils and meat for much of 2022 were the primary drivers of consumer price inflation. But this was not unique to SA, it was a global challenge that mirrored the surge in agricultural commodity prices in the first three quarters of 2022 and the year before.
These agricultural commodity price increases were caused by various factors, including drought in South America, higher shipping costs, strong agricultural product demand in China and the Russia-Ukraine war.
The cost of farming inputs such as fertiliser, agrochemicals and fuel also increased markedly, adding to pressure on farmers. We cannot underplay the impact of the Russia-Ukraine war on these input costs, although before the war China’s decision to limit fertiliser exports had already started to push up prices. All this came on top of our domestic logistical challenges.
I’m afraid I have to disagree with Makgetla’s policy proposition that “an export tax on maize, at least during price surges, would help. In addition, a windfall profit tax on producers could generate revenues to cushion low-income households from the effects of higher prices, for instance, through a matching increase in social grants.”
This seems like a reasonable and empathic step, but it ignores the fact that SA agriculture is highly exposed to global markets through both commodity prices and inputs. As a country we import over 80% of our annual fertiliser usage and 98% of agrochemicals, fuel and equipment. We have almost no control over the prices of these inputs.
As such, if policymakers were to consider imposing an export tax, however good their intentions, the result would be a reduction in competitiveness in maize production and, ultimately, lower plantings and output as farmers opt for more profitable crops. The long-term effects of such an approach would be the higher prices policymakers aimed to control.
One should also be careful not to draw any policy conclusions from price swings in commodities between 2020 and 2022, since the fundamentals were affected during this period by Covid-19-related supply chain disruptions, higher energy prices and unfavourable weather conditions in South America and Indonesia.
These factors led to elevated consumer food price inflation in SA and globally. Countries like the US, EU, Kenya and Brazil saw far higher consumer food price inflation rates than SA, although some also had decent agricultural production conditions.
The SA government or its entities, such as the Competition Commission, should not react to these temporary price swings. Instead, they should continuously monitor key staple food markets to understand trends and police bad behaviour if it shows in the future. For now, the SA grain markets are operating reasonably well.
The factor that remains an upside risk to SA’s consumer food price inflation is the ongoing load-shedding and high fuel costs for generators. We should focus on resolving these domestic challenges rather than intervene in agricultural markets.
Written for and first published in Business Day.
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