Why food prices are high

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Farmers are frequently blamed for high food inflation. This ignores the fact that farmers are price-takers on both the input and output side. Food prices at retail and manufacturing level usually increase at a faster rate than product prices at farm level. Processor and retail prices also follow farm prices in upwards phases and not in downwards phases. Figure 1 tracks the movement of food price indices at farm, factory and retail level from 2008.

While prices at factory and retail level continued to increase, prices at farm level decreased periodically. On the input side, a weak rand is frequently blamed for high input prices. However, when the rand strengthens, prices remain at previous higher levels. The price of mixed rations also tends to follow increases in Safex grain and oilseed prices closely when these move upward, but not when they move downward.

Market power

Price formation only takes place fairly in ‘perfectly competitive’ markets, where buyers and sellers have equal marketing power. If, however, four major retail chains buy products supplied by 43 000 farmers, the market power clearly lies with the retailers.

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In 2008, a National Agricultural Marketing Council report prepared by Prof Johann Kirsten investigated the impact of the retail sector’s dominance of agricultural producers in South Africa. He used a combination of anecdotal evidence and empirical analysis to determine whether there were grounds for complaints against the actions of the retail sector, particularly as regards claims they misuse their dominant positions in the food value chain.

Serious impacts
He concluded that there was evidence of the misuse of market power and recommended that the Competition Commission investigate the retail sector. After a lot of initial attention, the proposal died a very quiet death. In the UK, meanwhile, a similar investigation resulted in specific rules to limit the retail sector’s market power. Concern about the impact of huge retail chains on the community is widespread in countries like the UK and Australia. In the UK, a fair trade commission was established to monitor the relationship between retailers and suppliers.

In SA, the retail sector continues to grow, with Walmart entering the market in 2012. This has serious social implications. Suburban shopping centres all have supermarkets as anchor renters. While these are able to negotiate very favourable rates with the centre owners, smaller enterprises have to pay more for their rented space to fund the rebates given to the retailers. This makes it very difficult for small operators to open retail shops in these malls.

The retail chains have convinced the consumer they act in their best interests by keeping retail prices in check. But, while the retailers’ policy of limiting price increases probably benefits the consumer in the short-term, in the long-term it pushes those producers unable to produce at these low prices out of farming. This impacts negatively on SA’s food security, especially during periods of global shortages.

While the growth of the retail sector holds many benefits for agriculture in its ability to formalise markets and provide structured supply chains to the consumer that enable the farmer’s product to reach the consumer’s table, the retailers’ strong position in the market allows them to dictate prices through the value chain. The farmer, as price-taker, is the one to suffer. It’s time to re-evaluate the role of the retail sector and take a page or two out of the UK’s book in the way it limits the misuse of marketing power.

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] with ‘Global farming’ in the subject line.