Submission to Hearings on Food Security

FAWU/COSATU

March 12, 2003

There is general agreement that, for a middle-income developing country, food security in South Africa is entirely inadequate. Many studies show that poor families frequently go hungry.

South Africa’s particularly bad record with regard to food security emerges from the figures on stunting in children due to malnutrition. According to the UNDP (2002), one in four South African children is under the normal height for their age. The figures suggest that South Africa, which is in the top 25% of developing countries in terms of GDP, ranks in the worst 25% when it comes to food security.

This paper focuses on the impact of soaring maize prices in this context. We recognise, of course, that the root causes of food insecurity in South Africa lie in the unusually great inequalities in the distribution of income and wealth that we inherited from apartheid. These underlying factors have been aggravated by soaring unemployment and the HIV/AIDS epidemic.

Still, there is no question that the massive increase in maize prices since around October 2001 has made the situation much worse for many poor households. We need urgent action to address this situation, which has imposed intolerable burdens on our people.

This input first looks at trends in maize prices and the economic and social impact. It then demonstrates that the soaring prices arise, not out of economic necessity, but from the abuse of market power along the maize chain. By extension, solutions to cushion the poor by improving their incomes and access to food are necessary but not sufficient. Rather, government must intervene to prevent hoarding and profiteering in maize.

In this context, COSATU and FAWU are particularly concerned that the Food Price Monitoring Committee, which was supposed to come up with longer-term solutions, appears to be ignoring its mandate to explore the impact of concentration of ownership in the production of basic foods.

  1. Trends in the maize prices and their impact

The following table indicates key turning points for the maize SAFEX near-contract spot price over the past two years. Figures for actual wholesale grain prices are not published, but the SAFEX spot price provides an approximation. The table shows that the price doubled between January 2001 and February 2002. Although there was some decline toward the end of last year, it remains far above the level of 2000.

Table 1. The maize price and the rand, August 2000 to February 2003

Date

SAFEX near contract spot price

index of SAFEX price

August, 2000

526

1.00

January, 2001

730

1.39

July, 2001

828

1.57

February, 2002

2010

3.82

December, 2002

1870

3.56

January, 2003

1730

3.29

February, 2003

1307

2.48

Source: Calculated from data supplied by SAFEX

The high price of maize-meal has further undermined the already tenuous food security of the poor. Recent focus-group interviews by the HSRC’s Michael Aliber and Salome Modiselle for the Agriculture Department suggested the implications for poor households, especially in rural areas. (Aliber and Modiselle, 2003) These households had already been greatly hurt by rising unemployment, and soaring food prices added immeasurably to their difficulties. The research found:

In short, soaring maize prices in 2002 had a devastating impact on the poor. To develop an appropriate policy response requires an analysis of the factors behind the price rise.

  1. Food price increases and the value of the rand

The press and spokespeople for agricultural companies have generally blamed higher maize prices on the depreciation of the rand. Yet, as the table below shows, the maize grain price rose substantially faster than the rate of devaluation in the rand until the end of 2002, and then fell rather slower. Thus, the maize price in February 2003 was almost 150% higher than it was in August 2000, while the dollar was only around 25% higher against the rand.

Table 2. Index of rand price of maize

Date

Index of rand price of maize

index of dollar/rand

August, 2000

1.00

1.00

January, 2001

1.39

1.09

July, 2001

1.57

1.16

February, 2002

3.82

1.65

December, 2002

3.56

1.33

January, 2003

3.29

1.22

February, 2003

2.48

1.23

We can define three phases in the wholesale grain maize price over the past 18 months, as the following graph shows.

Graph 1. Trends in SAFEX, import and export parity prices, June 2001-January 21, 2003

Source: SAGIS for import and export parity prices, SAFEX for spot prices

  1. Until the middle of 2001, the maize price was about a third higher than the export price. Where the country does not import much maize and markets are not perfectly competitive, the export price will act as the floor under domestic prices, since it is the next-best price for farmers. (In a perfectly competitive market, of course, the price should be equal to the cost of production plus a normal rate of profit.)
  2. Between July 2001 and January 2002, the maize price drifted up to the higher import price. The price rose originally because of reports that there would be a maize shortage. In that case, domestic farmers could charge the same price as imports. In the event, there was a surplus on the maize crop – but the price remained at the import price level, rather than falling back to the export price.
  3. Since January 2002, the domestic maize price has remained at or above the import price. When the rand depreciated, the price rose, leading to substantial increases. More recently, when the rand appreciated the maize price fell – after a few weeks’ lag. But the price still has not come down to the export price.

While the wholesale maize grain price has declined somewhat with the appreciation of the rand, the retail maize-meal price has not come down at all. In other words, the reduced wholesale maize price has not benefited consumers at all.

In short, to understand high maize prices we have to ask

The next section attempts to explain these phenomena.

  1. Factors behind high maize prices
  2. In the course of discussions about food prices at NEDLAC in 2002, the parties all agreed that if soaring prices are caused by market imperfections, government intervention is justified. In the event, the available evidence points to strong concentration at all levels of the maize chain from futures trading, to silo ownership through to retail. This has permitted hoarding and manipulation of the price.

    1. Market power
    2. From a long-term perspective, apartheid ownership patterns are still a major factor. In effect, they shape farmers’ access to land, water, equipment, storage facilities, credit and markets. As a result, even in rural areas, poor black communities find it hard to raise food. In Aliber and Modiselle’s study (2003), focus groups pointed to the lack of water and land as a critical obstacle even to growing food for their own consumption.

      In terms of the recent price increase, the main factor behind price hikes appears to be high levels of concentration in storage, futures trading, milling and retail. At each stage of the maize chain, less than ten companies dominate the market.

      In particular, the concentration in storage appears to have permitted a degree of hoarding to hold up the maize price. Since demand for maize, as a staple, is highly inelastic, consumers of maize-meal absorb price increases. As the following chart shows, the amount of maize in storage was generally higher in 2002 than in 2001.

      Chart 2. Maize storage 2001 and 2002 (000 tons)

      Source: SAGIS market information

      SAFEX does not reconcile silo receipts with its transactions. That opens the door to speculation and fraud.

    3. Government policy
    4. We here look at government’s overall strategy toward agriculture and at specific measures to enhance food security in the wake of the food price hikes.

      1. Government’s strategy on agriculture
      2. The rapid increase in maize prices derives, ultimately, from the rapid deregulation of agriculture in the mid 1990s. Free markets were introduced unusually quickly, without first ensuring broader ownership and control throughout the value chain for staple foods. The marketing co-operatives were simply privatised, adding greatly to the power of larger farmers, who entered into storage and trading. Concentration in milling and retail persisted.

        At the same time, household food security seems to have fallen as a priority. In the 2001 Strategic Plan for South African Agriculture (Department of Agriculture, 2001), the list of aims includes food security and employment creation. However, the document does not mention these aims elsewhere, or discuss anywhere the desirability of stable, low prices for staple foods such as maize. Instead, page 7 lists, as one of its "basic premises and values," that "market forces [are] to direct business activity and resource allocation."

        The strategy notes, on pages 11-12, that the shift to free markets has caused a serious fall in investment and employment in commercial agriculture. But it does not explore the possible impact on food security.

        The task team working on the strategy included only business and government representatives, and no one from consumer organisations or labour. The executive summary stresses:

        In all of this the valuable role of the private sector in achieving the goals of participation, competitiveness and sustainability is recognised. Therefore everything will be done to ensure greater collaboration and co-ordination between government and the private sector – implying farmers, farmers’ organisations and agribusiness ... (Page xv)

      3. Measures to address the food price increases in 2001
      4. Following the massive increase in food prices in 2001, government introduced some measures to cushion the impact on the poor. We need to assess these measures against the needs of very poor households, who are most affected by soaring maize prices.

        According to Statistics South Africa’s latest expenditure and income survey, in 2000 over a million households earned under R500 a month, and spent 7% of their household income on maize alone. (Statistics South Africa 2002) Since then, the maize price has more than doubled. Yet the majority of these families will not receive anywhere near enough government assistance to make up the resulting shortfall in their budgets.

        The increase in pensions in the 2002 adjustment budget as well as the 2003/4 budget was obviously very welcome. However, the expenditure and income survey shows that families earning under R500 a month generally did not receive a social grant. On average, social pensions accounted for only 7% of their total income. In contrast, they contributed 36% of income for households earning between R500 and R1000 a month. Furthermore, pension improvement came only around ten months after the initial increase in maize.

        Proposals to provide food directly to households and school children, while highly desirable, seem to be taking place on a very small scale. The government is providing food packs that will last just three months to 200 000 families. That is obviously only a small share of households in need. School feeding schemes were being downsized before 2001; we would welcome a more detailed discussion of their current extent and plans to extend them.

        The provision of starter packs for home-based production is obviously useful. Again, however, the scale of distribution seems small. Moreover, households that lack land, water and other inputs may not be able to use the packs effectively. Focus groups with the rural and urban poor point to lack of water as a central obstacle to backyard gardening. Even where households can grow their own food, they typically only find relief during the harvest season; the rest of the year their gardens are not much help. (Aliber and Modiselle, 2003)

        Finally, the much trumpeted provision of cheap maize based on donations from millers occurred on much too small a scale to offset the devastating impact of increased prices in normal maize. The vast majority of poor households have never seen the promised cheaper maize.

        A problem with all the measures to provide income support and food to poor households is that it does not deal with the market imperfections that fuelled rising maize prices in the first place. These measures effectively shift the cost from poor households to government – certainly a welcome measure, but one that effectively supports continued profiteering in the maize chain.

      5. The Food Price Monitoring Committee

    In contrast to interventions to support the poor, government presented the Food Price Monitoring Committee (FPMC) as a way to find solutions to the market imperfections. The Committee has clear and strong terms of reference, requiring it amongst others to investigate whether high food prices result from excessive market power. Specific tasks include:

    "4.3 Investigate and map the different products’ supply chains and establish the length of the supply chain against value added;

    4.4 The analyses of each supply chain should include the following aspects:

    4.4.1 Number of producers, processors and traders and the level of concentration;

    4.4.2 Extent of vertical/horizontal integration and competition/concentration in the supply chain;

    4.4.3 Do a gross margin analysis at each node of the supply chain;

    4.4.4 Establish the magnitude of differences between urban and rural pricing structures and the causal factors thereof;

    4.4.5 Identify major cost drivers in each food product’s supply chain;

    4.4.6 Make recommendations on an appropriate environment for optimal food pricing;

    4.5 Report on the pricing structures of specified food products’ supply chains;

    4.6 Determine the ratios of prices to costs and profits…"

     

    To COSATU’s great disappointment, it appears that the FPMC is currently focusing very narrowly on monitoring readily available prices, rather than exploring structural flaws in the production of basic foods. It has not commissioned any research except to monitor retail prices, and has not advertised any tenders for investigations in line with its terms of reference.

    Moreover, the FPMC appears to lack any sense of urgency in the face of the food-price crisis that confronts the poor. It has met only twice since it was formed, with the next meeting planned only for April.

    We urge this Committee to ask the FPMC to explain its failure to live up to its terms of reference. Otherwise government appears to be wasting its resources on an academic exercise that will contribute virtually nothing to food security for the poor.

  3. Proposals

COSATU and FAWU have long proposed that government intervene directly to limit hoarding and profiteering in the maize chain. That requires the establishment of a regulatory framework to track prices, ownership, control, profits and storage of staple foods. As noted above, the FPMC has the powers to undertake these functions, but appears to be ignoring its terms of reference.

In the longer term, food-price stability and household food security require substantial improvements in national and regional maize production, with much broader structures of ownership and control throughout the value chain. A critical step is agrarian reform, increasing the access of the rural poor to land as well as other inputs, including water. Co-operatives provide an important way to support smallholders and enhance their access to capital and markets.

In order to review key strategies on food and agriculture, and to ensure broad public support, NEDLAC agreed in 2002 to prioritise a Food Security and Jobs Summit. This process should be initiated as soon as possible.

 

References

Aliber, Michael, and Salome Modiselle. 2003. "Pilot Study on Methods To Monitor Household-Level Food Security for the National Department Of Agriculture." HSRC. Pretoria.

Department of Agriculture. 2001. The Strategic Plan for South African Agriculture. Pretoria.

Statistics South Africa. 2002. Database for income and expenditure survey 2000. CD-Rom. Pretoria.

UNDP. 2002. World Development Report. UNDP. New York.