Food prices have increased sharply since last year. In its latest Monetary Policy Review, the Reserve Bank isolated food prices as a major factor that will drive inflation in future. The other factors are oil prices and administered costs. Food prices are an emotional issue. The same consumers who readily accept huge petrol price hikes get very excited when food prices increase. As soon as food prices rise, voices call for the abolishment of import tariffs in the misguided belief that this would lead to lower prices.
A decrease in import tariffs will only result in lower consumer prices in a perfectly competitive market. There are examples where lower priced imports did not lower consumer prices. When the retail chains imported dumped Irish cheese a few years ago, the cheese was sold to the consumer at about the same price as local cheese. According to a recent statement in the press, National Agricultural Marketing Council agricultural economist André Jooste calculated that the import tariffs on meat cost the consumer R1,2 billion, while farmers got a benefit of R600 million out of it. This may be correct if one uses the so-called computable general equilibrium models used to model this type of problem.
The meat market does not qualify as a perfectly competitive market, and a reduction in import tariffs will result in higher profits for importers and retailers. Neither the consumer, nor the farmer will benefit.
Lower import tariffs not the answer
Any decrease in import tariffs on meat will have a disastrous effect on SA meat producers as it will result in lower producer prices. The bioethanol and biodiesel projects in the US have shifted world grain prices to a new level. Any decrease in producer prices at this time will severely injure local meat producers. Although it may be true that the current level of world prices does not justify current tariff levels, this is not a permanent situation as world prices will increase again. The wheels of government, and especially the wheels of the International Trade Administration Commission (Itac), run slowly.
Itac must also confer with trade policy specialists in other Southern African Customs Union countries before it can change a South African tariff. Thus, if tariffs are lowered it will take a long time before producers can get higher tariffs again. It is government’s goal to establish emerging farmers. If commercial producers can’t make it, there’s no way emerging producers will. Government would do well to look at the SA automobile industry that, with government protection, became a success. Import protection and protection against the importation of used motor vehicles cost the taxpayer millions. But the benefit to SA in job creation, foreign direct investment and foreign exchange earning exceeded any detrimental effect on the consumer. SA agricultural industries should engage government in talks to get industry strategies going that can result in export-led growth needed to get to the president’s 6% growth in GDP .
Farmers will have to play the leading role in this. Creating an export market is not high on food processors’ agendas. To quote a prominent milk buyer, “Why create an export market if it will only result in higher producer prices?” Academics must be careful when interpreting model results. The press has a way of publishing the sensational parts of research reports.
Well-meaning comments that emphasise the positive and negative aspects of agricultural tariffs are easily published out of context to imply that the farmer grows fat while the consumer suffers. Farmers have faced a few difficult years. If government pulls the plug on them before they start making small profits again, the total effect on consumers and the economy will be disastrous. Dr Koos Coetzee is an agricultural economist at the MPO. All opinions are his own.