What can we do about high food prices?

Prof Johann Kirsten’s recent report on supermarkets’ market power gives some idea why retail food prices don’t follow farm prices.by koos coetzee
Issue date : 03 July 2009

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Prof Johann Kirsten’s recent report on supermarkets’ market power gives some idea why retail food prices don’t follow farm prices.

Stats SA publishes two price indices – the Consumer Price Index (CPI), based on prices at retail level, and the Producer Price Index (PPI,) based on prices at the first point of trade, thereby measuring the cost of production. If the production cost of a product decreases, one can reasonably expect a decrease in the price the consumer pays. In addition to these two indexes, the Department of Agriculture also publishes a quarterly index of the price of farm requisites. Analysis of these three indices shows how prices develop in the value chains.

Stats SA publishes a PPI for food on the agricultural and processing level. On the agricultural level, food prices decreased from April 2008 to April 2009 by 2% and from March 2009 to April 2009 by 5,3%. On the processing level, prices increased by 8,1% year-on-year and by 0,3% month-on-month. It seems as if the decrease in agricultural prices didn’t affect manufacturing prices over this period. As there’s a lag between the process on-farm and at processing level, a simple comparison of data doesn’t provide full insight.  shows the movement of the PPI on agricultural and processing level.

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There were three periods when food prices on farm level decreased, while food prices on processing and retail level did not. The “stickiness” of food prices on retail level, but not on farm level, is a huge source of concern for policy makers.

Strategies to address high food prices
The National Agricultural Marketing Council recently published a study by Prof Johann Kirsten (also covered in FW 26 June) about the impact of supermarkets’ market power and dominance on agricultural producers in South Africa. He recommends a full-scale investigation into retail food chains. The retail sector is perceived as the friend of the consumer which keeps food prices low. But according to Prof Kirsten, there’s evidence supermarket chains keep prices down at processors’ cost, and this has a negative effect on society in the long term. As food prices are politically sensitive, it’s also difficult to get government to address these practices.

Affordable food in the long term depends on viable local agricultural sectors which receive fair prices for their products and are able to pay fair prices for farm requisites. The recent findings of the Competition Commission against a fertiliser manufacturer showed that all’s not well in the fertiliser supply chain. Chances are that other input supply chains may be just as guilty.The high food prices on retail level make it difficult for poor people to get enough to eat. It’s a social problem that needs a social solution. Grants make up a huge part of government expenditure and according to the Bureau for Economic Research, they do reach the target population. However, farmers can confirm that not all grants are spent wisely.

The long-term survival of local agriculture is endangered by subsidies paid to producers in developed countries. The recent reintroduction of export subsidies in the EU and US clearly show developed countries only pay lip service to trade liberalisation. While South Africa’s strong stand against export subsidies as a member of the Group of 20 is commendable, we also need national protection against the effect of export subsidies on import prices. Dr Koos Coetzee is an agricultural economist at the MPO. All opinions expressed are his own and do not reflect MPO policy.     |fw