What’s the deal with food prices?

Farmers and producer organisations have expressed concern that while food prices are increasing at retail level they aren’t receiving more for their products.
Issue Date: 16 February 2007

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Farmers and producer organisations have expressed concern that while food prices are increasing at retail level they aren’t receiving more for their products. Michela Cutts, an agricultural economist from the Department of Agricultural Economics, Extension and Rural Development at the University of Pretoria, talks to Wilma den Hartigh about the effect of higher food prices and the pros and cons of government policy on food prices.

To what extent does food inflation affect overall inflation?
It does and it doesn’t. Increases in food prices occur as a result of cost push inflation. Wherever costs increase there’s a chance that it will push up food prices. I wouldn’t say food price inflation causes other inflation. Increases in food prices don’t increase the prices of other goods because they are what the consumer purchases (they are not intermediate products that form part of a production process), whereas increase in the price of fuel, transport, electricity and labour can increase price of food as these factors are directly related to production costs.

What do you think the Reserve Bank will do?
Tito Mboweni can do one of two things to stop people from spending so much money. One is to push up interest rates and the other is for banks to increase their fractional reserve. It’s a balancing act. If too much of the money in circulation is reduced, it reduces growth. And we also want the economy to grow at 6%. That’s why he has been increasing interest rates at such a slow rate. Much of the inflation is not demand-pull inflation. Demand-pull inflation can be slowed down by increasing interest rates, but it can’t be done if it is cost-pull inflation. If the cost of maize goes up on the world market because there’s a smaller crop or an increase in demand due to the ethanol market – what can you do? F armers get less at farm level, but the retail prices are increasing.

What should farmers do?
There’s a reason why the prices have gone up. Many things happen to a product from the farm gate to the retailer. You have costs such as transport, storage, cost of capital and advertising. Some increase faster than others so unless you actually take a specific commodity and follow the prices, it is very difficult to say retailers are pushing up prices and farmers are suffering. Remember the level of processing that a product goes through now is much higher than 10 to 15 years ago. Previously, you only had potatoes in a brown bag and they weren’t washed. Now they get repackaged into smaller quantities and washed, and that costs money. A re certain products more susceptible to price manipulation? It depends on the product. Take fresh milk as an example. The amount of processing from farmer to retailer is minimal. So, I wonder why the farm price for milk is not increasing, but the retail price goes up. That is something to investigate and I believe the Competition Commission is looking into it.

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Will the Competition Commission also investigate other products?
They are going to, but this kind of analysis is tricky because market power is like the wind – you can feel it, but you can’t see it. Various companies have market power, but how do you prove it? If we monitored prices earlier, would it work like a permanent speed camera where prices are kept at a certain level because retailers know someone is watching them? If the Competition Commission were to prove something and someone got rapped over the knuckles, food price monitoring will make a difference. After disbanding of the marketing boards everything was left to the free market system and it was presumed that there would be enough competition to stop any collusive or monopolistic behaviour. However, the trouble with the marketing boards is that large companies were managing the largest part of what was produced and this legacy made it more difficult for smaller players to enter into the market.

Does government have any policy on food?
At this stage there is no government policy regulating food prices, except whether a product has VAT or not. o you think a government policy is needed? The minute you interfere with the market there is a cost. Someone has to pay because ultimately we live in a global market and supply and demand forces dictate prices. So if you manipulate the price to stabilise it at a certain level someone will pay. I wonder if the cost of doing that in terms of bureaucracy and physical cost of stabilising that price is worth the outcome and if this money shouldn’t rather be spend on school feeding schemes or food stamps.

Will farmers accept price stabilising or will they lose out the most?
It depends where the price is stabilised. If it is stabilised at retail level and farmers still have to ride the ups and downs it will make no difference to them. If it is stabilised at farm level it creates inefficiencies because some farmers will know what they are going to get and the inefficient farmers will still survive. I think the cost benefit ratio is not suitable. I think the social welfare programmes are a better way to spend the money.