The Karoo lamb we loaded on August 9 is now being slaughtered at the abattoir. There, it will be classified according to the meat regulations. It may either be an A1, A2, A3, or A6 lamb – depending on the fat quality, amongst other attributes of the meat. In addition, for Karoo Lamb, the abattoir must verify that the lamb is from a registered farm in the Karoo (in alignment with the Karoo Lamb Geographical Indication regulations published under the Agricultural Products Standards Act).
In the agricultural industry, there are also many private standards that retailers and processors introduced, which must be paid for by the private role-players. These include things like certified organic, natural, free-range, environmentally friendly, etc.
Most of the general standards and classifications specified for different products under the Agricultural Products Standards Act, including the new regulations for Karoo Lamb, are all in the public interest.
Today’s dispatch will highlight some economic principles underlying the critical government function of setting public standards for agricultural produce.
Agricultural markets cannot function without institutions or what is commonly known as the ‘rules of the game’. The State, therefore has an important duty to ensure that institutions (the rules) are in place and enforced. In agricultural produce and food products in general the most important ‘institutions’ include grading systems, food safety legislation, and sanitary and phytosanitary systems. Other examples include the bylaws and rules on municipal markets, information systems in agricultural markets in general and the futures markets in particular.
Grades and standards in agricultural commodities and food products are absolutely vital for efficient price discovery and efficient functioning of markets. Setting grades and standards jointly between industry associations and government is one matter but more important is the effective regulation, application and enforcement of grades and standards by government. In the recent past, it has become clear that enforcement and coordination as well as the mechanism of enforcement are problematic and costly to farmers, food processors, retailers and consumers.
Why are grades and standards in agricultural and food products important? We all know that agricultural and food products have specific attributes – you only know the quality and taste of the product when you consume it. This is typically referred to as ‘credence attributes’. In essence it implies that the information about the quality (or weight, size or grade) of the product is not evenly distributed between producer and consumer. The consumer will only know about the quality (and taste) after consumption and therefore needs to be guided by some classification standards or labelling to make the purchase decision. Hopefully the Class 1 or A class or Free-range product will carry the quality or taste of the product that the consumer anticipated.
In addition, there are critical areas where consumers can be short changed. The 7kg of potatoes only weigh 6.6 kg, the animal carcass is graded as A1 but it should actually be A3, the sizes are incorrect and not according to the label when it says small potatoes.
In South Africa the Agricultural Products Standards Act (Act 119 of 1990) regulates most agricultural produce from dairy, to meat, to fresh produce, etc. For each product there is a set of regulations that specify the product definition, the classification and the various grades within each product. Even claims on labels and packing that relate to origin and production practices (such as West Coast or Free Range) need to be clearly defined by production protocols and be audited.
In most countries of the world these regulations are enforced by a well-staffed ‘agricultural inspection services’ within the Ministries of Agriculture. However, in South Africa these inspection, auditing and enforcement functions are outsourced to so-called ‘assignees’ who are appointed under the APS act.
No one disputes the importance and role of the “assignees” and their functions but over the course of the last few years there has been increasing discomfort within the agricultural industries about them. It sometimes relates to the qualification of the staff, the way the assignees got appointed but most importantly it resolves around the fact that the role players in the food supply chain must pay for the inspection and auditing services of the assignees. In essence the cost of inspection and auditing services inflates the price of the final product at the retail end and at the same time the producer earns less.
Many of our colleagues that are concerned with the increases in retail price of food, often forget about the large costs passed on to retailers, processors and farmers in order to comply with agricultural product standards. We estimate that the total cost added to the food supply chain in South Africa by these assignees exceeds R500 million. Why must the role players in the food supply chain cover these costs when in fact it should have been the task of the State? This is a fundamental flaw in our agricultural system!
Let us illustrate how bizarre this situation is. The assignees will perform an audit or inspection at the various critical points of control in the supply chain. Then they send an invoice to the retailer, packer and fresh produce market for the services performed. If they do not pay the invoice, they will be delisted as traders in the product. More interesting – it will be not in any of the assignees’ interest to let the specific role player fail the audit because they will be delisted and therefore not a client in the next inspection round. So, in essence you would rather do ‘light inspection’ to avoid you losing ‘places for invoicing’. There is a conflict here.
The main point here is that there is no guarantee that the regulations on product standards are properly enforced as the incentives and systems are not aligned and will naturally lead to opportunistic behaviour which ultimately will be to the detriment of the credibility of our product standards. This needs to be fixed by the Department of Agriculture – the Department should relook this process!
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