SA has become increasingly dependent on wheat imports over the past five years, but the current international wheat shortage is sending import prices soaring – and the bread price through the roof. Yet Glenneis Erasmus finds we do have the capacity to supply local wheat demand, if our macroeconomic policy is drastically revised.
The international wheat shortage is cutting into the pockets of most South Aafricans, as bread becomes increasingly expensive. Last year imports couldn’t arrive fast enough for supply to satisfy demand. In the end, we had a shortage of 238 000t of wheat even though local production rose from 1,9 million tons to 2,05 million tons this season. Only 632 000ha were planted to wheat in SA last season, a 50% drop since 1997/98. Production is expected to drop to only 1,8 million tons in 2007/08. SA therefore has to import an estimated 1,4 million tons to supply this year’s demand. We’ve already imported 519 367t for the 2007/08 season, which ends in September, compared to a total 782 258t for the entire previous season. At the regional Grain SA meeting recently held in Eelsenburg in the Wwestern Cape, Neels Ferreira, chairperson of Grain SA, claimed SA producers have the capacity to supply local wheat demand, and are eager to do so. Unfortunately, wheat prices, combined with high input costs, don’t justify such an expansion.
Lack of protection
Ferreira feels dependency on imports could have been prevented if government had more actively protected the local industry: “We’ve been approaching government since early 2005, when prices started to drop, to increase the import tariff to 72%, the highest tariff allowed by the World Trade Organisation. Unfortunately the International Trade Administration Commission one-sidedly decided to implement a 2% ad valorem tariff instead, leaving SA producers to compete with relatively cheaper imported products. Due to reduced earnings, farmers downscaled wheat production.” But now that there is an international wheat shortage, prices have sky-rocketed, making it more expensive to import wheat. The 2% ad valorem tariff doesn’t seem to make much difference to the price. Sakkie van Zyl, market researcher and economist at Grain SA says the wheat supply is at a historic low. Due to climatic conditions, international production was hampered in three of the five major exporting countries (Australia, the EU and Canada), so production expansion amounted to only 602,5 million tons in 2007, compared to 591,5 million tons in 2006. At the same time international consumption rose from 610 million tons to 620 million tons, decreasing supply levels by 110 million tons and resulting in a supply/consumption ratio of only 18% compared to 20% in 2006.
Area under production is expected to expand from 214,8 million hectares to an estimated 220,5 million hectares this year, which should increase production by 40 million tons, to a total 642 million tons. But there are still indications that the international wheat and grain shortage will continue, due to increased demand for protein, especially in emerging countries. Dr Kobus Laubscher, general manager of Grain SA, warns that much still needs to happen before this expansion and its coinciding increased yield would be realised.
An international issue
So far winter wheat production has expanded in most of northern hemisphere countries. However, expansion was less than expected in the US, and there’s concern over possible frost damage in Russia and the Ukraine. A better season is expected in Australia, but there’s been flood damage in some areas. Climatic conditions in South America also aren’t optimal, with drought in parts of Argentina and Brazil. In 2006/07 most of SA’s imported wheat came from the US (236 266t), Argentina (310 524t), Germany (80 649t) and Canada (154 819t). Wheat was also imported from Australia, the UK, France and the Ukraine in previous years. The free on board price for US Hard Red Winter wheat at the end of January this year was around the R3 718/t, Argentinian wheat around R3 215/t, German wheat R3 629/t and Canadian wheat R5 146/t.
But what would government’s incentive be to change the economic environment to motivate increased local wheat production? Firstly, by reducing logistics costs using local wheat, would make bread and other products much cheaper. “The cost of imported wheat is much more than just the import tariff,” explains Ferreira. “SA’s lack of infrastructure means many ships have to lie at the dock for more than one day while waiting to be off-loaded. Having a ship at the dock currently costs around US 000 (R704 202) per day. Distribution costs are relayed into the bread price, which the consumer pays.”
There’s also the issue of quality, as local millers and bakers have set specific standards for local wheat. “Argentinian wheat, for example, isn’t of the same high standard as SA wheat,” says Dr Laubscher. “Even so the price paid for local wheat is in line with that paid for Argentinian wheat, although our wheat quality is more comparable with Hard Red Winter from the United States.”
SA’s increasing dependence on imports accordingly means millers and bakers have less control over the quality of the product they buy. “As SA produces less wheat, millers have to find other suppliers willing to supply the same high quality as local producers,” explains Dr Laubscher. “The question is whether we’d still be able to afford this quality at high volumes.”
How to boost production
Increasing local production won’t happen overnight. “Many farmers have lost their faith in the wheat industry and have restructured their enterprises around stronger livestock components,” Dr Laubscher explains. He adds the market environment would have to be definitively addressed to ensure the risk is worth their while. First, government would have to help ensure the industry operates in a free-market environment and wheat prices are profitable for farmers. The tariff system would need to protect farmers from cheap imports when wheat prices fall again. “The whole tariff estimation mechanism needs to be revised to ensure it protects both consumers and our wheat industry,” says Ferreira. Agricultural input costs have also increased astronomically, in some cases by up to 700%. “There’s a misperception that higher consumer prices are due to farmers making huge profits,” Ferreira says. “This is not true. Distribution costs have had a much greater impact on the wheat price over the past year than producer prices. We’re currently evaluating the whole supply chain to identify exactly where the money is going. We need to ensure the whole industry functions in a free-market environment.”
Compensate producers
The price-determination mechanism and grading system for wheat also needs to be revised to ensure farmers are compensated for the quality of their product. Dr Laubscher feels this would especially be important if SA production is expanded to supply the country’s entire demand. “Producers who want to produce very fine quality wheat must be rewarded for it, and those who’d rather aim at mass production must be rewarded for that,” he says. Government could also intervene in the bread price by removing the tax on white bread. Ferreira points out this could reduce the price by up to R0,80 and would also force down the price of brown bread. However, everything depends on government revising its macroeconomic strategy, so farmers will again have enough faith in the economy to expand wheat production, Ferreira concluded.
Contact Héleen Leather of Grain SA on (056) 515 0918, or visit www.grainsa.co.za.
