Can farmers increase their share of the retail Rand?

‘Well-planned and correctly managed on-farm value adding can become a very lucrative business. Issue date 23 February 2007

Consumer prices increased by 5,8% from December 2005 to 2006. The annual inflation for 2006 was 4,7%. This is 1,3 percentage points higher than average inflation during 2005. Food inflation was higher than the average at 7,2%.

While food prices did increase on both producer and retail levels, farmers’ share of the consumer’s rand actually remained stationary or decreased. Farmers did not fully share in the higher retail prices. This is particularly true for the price of bread where the Safex price of wheat decreased from R1 739 in February 2004 to 265 in October 2006 (down 27%).

Over the same period the price of white bread increased by 9%. Figure 1 clearly shows the widening gap between wheat and bread prices, and that producer price increases were not responsible for the 9% increase in the bread price to consumers. Figures recently released by Absa show that the food sector on the JSE had an average return of 20,5% on total assets during the financial year that ended in 2006.

According to the latest Department of Agriculture review, farmers had an average net farm income per R100 of assets of only 7%. This does not make any provision for a salary to the farmer whereas the average return of 20,5% in the food sector does include the not-unsubstantial remuneration of staff and senior management. Farmers do not get a fair return for their effort. In 1998 Steven C Blank published his book The End of Agriculture in the American Portfolio. In it he concluded that because of globalisation, farmers would no longer be able to make a profit by selling basic commodities such as maize, soya, wheat and cotton. This has already to a large extent happened in SA. Producers are rightly worried about the decreasing share they get out of the consumer rand. Farmers usually get a larger share of basic food prices than they get out of the price of a value-added product. For example, producers’ share of a two-litre bottle of milk is about 40% while they only get 12% of the price of a litre of yoghurt made by a dairy processor.  This makes on-farm value adding a very attractive option.

Various farmers have successfully changed from being only efficient producers of bulk products to manufacturers of value-added products. this way they now also share in the higher prices obtained in the rest of the food value chain. Unfortunately many farmers started with food processing without the proper research and planning. These farmers frequently find that their processing enterprise eats up the small profit they make on the farming part of their business. Well-planned and correctly managed on-farm value adding can become a very lucrative business – unplanned it can lead to a lot of misery. Economy of scale plays an important role in food processing. For the majority of smaller producers it is not a viable option.

A 1987 USDA report stated “ … to be successful in fulfilling the needs of farmers, cooperatives must be able to provide an appropriate economic response to marketplace situations faced by members. This response generally involves provision of competitive goods and services, or adoption of actions that balance or counter forces present in the business environment.” In an environment where food processors and retailers grow stronger, farmers need an organisation to counter this power. In SA the traditional cooperative no longer plays this role. fact in some cases the cooperative limits producers’ chances of making a fair profit.

Producers do not share in the growing prosperity in SA.  Their share of the consumer’s rand will continue to decrease over time. most developed countries the cooperative movement plays a major role in the processing and sale of agricultural products. In farmers are, with a few exceptions, no longer in control of the former cooperatives turned companies. These former cooperatives are more worried about the profit to shareholders than the survival of farmers. movement to redesign the cooperative has started in the US. various groups of producers are currently planning small processing and marketing cooperatives. For smaller farmers who cannot compete on their own the formation of a farmers’ cooperative remains the only viable alternative.

Farmers who add value to their produce, either individually or jointly with others on cooperative structures will increase their share of the very lucrative retail trade. In the past, the Cooperative Chamber of the Agricultural Union actively promoted the formation of cooperatives. The University of Potchefstroom provided technical support and training to the management and directors of cooperatives. This help is no longer available and farmers who want to form cooperatives are largely left to their own devices. However, some retired experts can help farmers to plan and develop a cooperative. Farmers should take the plunge before it is too late.

Dr Koos Coetzee is an agricultural economist at the MPO. All opinions expressed in this column are his own. |FW