Food price concerns

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Food inflation is still relatively low (+5% in July 2012). However, the sharp increase in grain prices – maize costs 13% more than it did at the beginning of the year – and current concerns about oil prices are indicators that food prices may increase very soon.
Although we’ll probably be spared a full-scale food crisis like the 2007/2008 one, higher food prices will put a lot of pressure on politicians, who will inevitably be tasked with ‘doing something about it’.

However, in our free market system, politicians can do very little to limit food price increases. Their interventions in agriculture through land reform and other actions actually contribute to lower food production, and thus even higher food prices.
And so a common strategy for politicians is to blame farmers for high food prices.

More volatile
This is just not true. In most cases, the farmer gets 30% or less out of every rand the consumer spends. Often, the cost of packaging the product is more than the farmer’s share. Even if farm prices increase, the effect on retail prices is usually very limited. Farm prices are much more volatile than factory and retail level prices. Increases in farm prices are closely followed by increases in ex-factory and retail prices. However, when farm prices decrease, ex-factory and retail prices continue to rise.

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For example, according to Stats SA, farm level food prices grew on average by 5,6% a year from January 2005. Over the same period, the price of food at an ex-factory level grew by 7,1%/year. Furthermore, farmers are price-takers on both the output and input side. While producer prices increased by an average of 5,6% a year from January 2005, the prices of farm requisites increased by 12,6% a year – more than double the rate of increase in farm product prices. Farmers are clearly not the main culprits here. In fact, they absorb a lot of input price increases and don’t pass these on to agribusinesses and consumers.

The wider definition of food security also includes the concept of ‘food affordability’. If food is available on retail shelves, but at prices higher than the average consumer can afford, there will still be dissatisfaction and unrest among poorer consumers. The problem of food affordability can be addressed both from the supply and demand side. Supply-side measures are all those that will increase production efficiency in agriculture and also the curtailment of measures that hinder and limit production growth.
Currently, it’s doubtful whether SA’s growing population can be fed with a commercial agricultural sector severely hamstrung by a plethora of measures limiting farmers’ freedom to farm.

Limiting imports
Also, for most SA-produced food products, import parity is much higher than export parity. It thus makes sense to promote local production and limit imports. First World countries use their trade and tariff policies to prevent imports from damaging the local industry. And a lot of work has gone into the development of an agricultural trade and tariff policy for SA that recognises the special properties of agriculture. Unfortunately, the draft policy document is lying on some desk somewhere.

On the demand side, targeted grants will help to enable the poor to buy food. Currently, people are free to spend grants whichever way they like. Food stamps or a modern debit card-based version of food stamps will definitely result in more food being bought.

Dr Koos Coetzee is an agricultural economist at the MPO. All opinions expressed are his own and don’t reflect MPO policy.
Contact Dr Coetzee at
[email protected]. Please state ‘Global farming’ in the subject line of your email.