FOOD SECURITY - THE PROBLEM OF RISING FOOD PRICES

This article is an edited version of a presentation by Cosatu to Nedlac's Executive Council

The food price index rose 11,4 per cent in the year to December 2001, compared to a rise in non-food prices of 3,0 per cent. The prices of maize and other basic foods have risen even further since then. Altogether, the maize meal price to consumers has more than doubled in just over a year.

In that food makes up a high share of spending for poor people, rapid food price increases mean that the price index for the low-income groups rises far more rapidly than the overall CPI. For households earning under about R2500 a month, the CPI in the year to December 2001 rose by between 8 and 9 per cent, compared to 6 per cent for the very high-income group, and 6,5 per cent for the overall CPI. According to the 2001 Labour Force Survey, 57 per cent of formal workers and 92 per cent of informal and domestic workers earn under R2500 a month.

South African households purchase over 90 per cent of the food that they consume. (National Food Consumption Survey, 1999). According to the Labour Force Survey, 85 per cent of households depend entirely on purchased food, and only 5 per cent - predominantly in the Northern Province and Eastern Cape - grow most of it.

Causes for the food price increases

Investigation of the maize price suggests that the main problem lies in unjustified import-parity pricing based in part on persistent official underestimates of crops.

Contrary to perceptions created in the press, there is no maize shortage in South Africa this year. Last year saw a bumper harvest, at over 6 million tonnes. As this led to prices as low as R500 a tonne, farmers reduced planting. Combined with inclement weather, the result was a crop of around 4,4 million tonnes in 2001/2. Nonetheless, South Africa still does not need to import maize this year.

Despite the reasonable maize crop this year, speculative estimates appear to have exaggerated regional maize needs and underestimated the overall harvest. These estimates of high demand relative to local production led to an increase in futures prices and were used to justify import-parity pricing.

According to a press release by the National Chamber of Milling (NCM), for every 1 per cent underestimation in the maize crop there is a 0.71 per cent increase in the maize price. The NCM goes on to say that "statistical work carried out by the Agricultural Research Council in November 2001 confirmed with 97% accuracy that the white maize crop is always underestimated."

It does not seem that the depreciation of the rand could have directly caused much of the current price increases in maize production. First, as noted, South Africa is not importing much maize, despite earlier predictions. Second, South African farmers are not highly import dependent, and receive a special concession on diesel levies.

There appears to be inadequate flexibility in the maize tariff, aggravating price increases. The maize tariff is currently around R137 a tonne, or about 6 per cent of the price. Despite requests to the BTT by the millers based on the initial crop estimates, this tariff has not been reduced.

COSATU is also concerned that the benefit of VAT zero rating on basic foodstuffs is not being passed on to consumers. That means producers and retail chains are profiteering at the cost of the poor. This situation emerges from the fact that in most shops, brown bread, which is VAT exempt, costs the same as or more than white bread. It is not clear which part of the industry chain is responsible for inflating brown bread prices.

In the longer term perspective, high food prices are in part associated with lower investment in agriculture and stagnant production. They are also related to concentration of ownership in production and processing as well as formal retail, and inefficient retail in the townships and rural areas.

Since the mid-'90s, there has been a substantial decline in agricultural investment. The decline in agricultural investment has been more severe than in the economy as a whole.

The agricultural decline has been associated with growing differentiation within commercial farming, as less successful farmers go under, while larger ones become increasingly successful. Large producers are well organised in most subsectors, notably wheat and maize (through Grain SA for farmers and the SA Chamber of Milling for millers). This situation, combined with an active futures market, support price rigidities.

The formal retail sector is also highly concentrated, with effective domination by three supermarket chains. This level of concentration in production and distribution gives rise to concern about price collusion and profiteering.

Proposals

Overall, government should develop a clearer vision for the role of agriculture and the food industry in the economy. For this purpose, COSATU proposes a tripartite Food Security and Jobs Summit by the end of 2002.

The Summit should decide how the Agricultural Debt Management account is used. There is now R1.2 billion in the Agricultural Debt Management Account that was collected from indebted white farmers, many of whom have liquidated. A proposed Food Security Bill will set up an administrative structure for disbursing the money to approved food security projects.

In addition, to deal with current price hikes for basic foods, we propose that the NEDLAC constituencies agree on ways to support food security at the household levels.

In the longer run, South Africa must support more regional and domestic maize production in order to reduce the foreign-exchange risk.

1. We should develop vigorous and effective programmes to support maize production in neighbouring countries.
2. Government must establish programmes to ensure more stable and increased maize production in South Africa, especially by smallholders.
3. The NEDLAC constituencies should initiate an investigation into food safety and food quality monitoring systems and report on progress with staple food fortification initiatives.

Nedlac is to set up a task team to look into the issues raised by Cosatu, as well as the proposals that Cosatu has tabled to deal with the problems it has highlighted.