Delay in signing import tariff changes may hurt wheat millers

18 May 2017

Business Day, 18 May 2017
By Bronwyn Nortje

Uncertainty is a terrible thing. If you are a wheat farmer or miller, it is something you have probably come to live with. Not because of the unpredictability of the weather or the volatile rand, or even the everpresent land or labour issues, but because the finance minister is too busy to sign and gazette the changes to the variable wheat import tariff.

I’ve written before that the review of the variable tariff formula by the Department of Trade and Industry (DTI) and International Trade Administration Commission of SA (Itac) was a positive sign.

The formulae used to calculate the tariff have been little changed since 1999, when they were first implemented.

When the proposed review was announced, the variable tariff had increased by a whopping 34% to R1,224.31 per tonne.

In light of rising food prices and worryingly high food-price inflation, then finance minister Pravin Gordhan sensibly requested that the DTI conduct an “urgent and accelerated” review of the wheat import tariff. He also proposed that a similar review be extended to include the tariff formula used for sugar and maize.

That was in April 2016. Since then, very little has happened. Although Treasury said it would make an announcement regarding the outcome of the review in March 2017, nothing has been forthcoming and the industry is still waiting. To make matters worse, Treasury is once again delaying the time between when changes to the existing tariff are triggered and when they are implemented.

The tariff itself is calculated according to a variable formula that takes into account a reference price derived from the five-year average international wheat price (quoted in dollars), transport costs and a market distortion factor.

Put simply, the price is affected by currency fluctuations and international and local wheat prices. A change is triggered when international wheat prices deviate by from the base price for three consecutive weeks.

As it stands, the wheat import tariff should be increased by about 13% from R1,190 per tonne to R1,371 per tonne, but no one knows when this will happen.

This change was triggered on April 18, yet more than a month later, Malusi Gigaba has yet to sign and gazette the change so it can be implemented, nor have he or his department given any indication of when that might be.

The same happened with the previous change to the tariff, when it took more than seven weeks for the changes to be gazetted. On that occasion, it was a 25% decrease from a record high of R1,591 per tonne to R1,190 per tonne. The updated duty was triggered on February 9 and calculated by Itac on the same day, but was only implemented on March 31.

This is not the first time Treasury has registered its tacit disapproval of the tariff structures by delaying the implementation of a change in duty, but it is exacerbating already difficult conditions for agriculture and related industries, as well as potentially putting SA’s food security at risk.

In December 2015, Treasury was already giving an indication that it was unhappy with the formula and the way it was working.

At the time, it was reluctant to grant another application for a wheat tariff increase as the existing duty of R911.20 per tonne had been introduced only three months earlier to its highest level since the government introduced the regime in 2002, and it looked like it could move even higher.

From a political perspective, it seldom looks good when you enforce something that will probably increase the price of a basic foodstuff.

Treasury bought some time by holding consultations with stakeholders in the hope of getting to the bottom of whether the tariffs were actually working, but in the end, after a delay of more than three months and a threat of legal action if it wasn’t implemented, the duty was implemented. But feet have been dragging since.

The problem is that there is no rule that governs the amount of time between when a change is triggered and when the new tariff is implemented.

The resulting variability and uncertainty around the number of days it will take for Treasury to act has severely affected trading volumes and, in turn, had an effect on the price consumers pay. Already liquidity is down by 20% to 30% in the wheat market and this will probably get worse unless some direction is given soon.

I completely understand the need for changes to the existing policy, but until they come into effect, Treasury has to enforce the existing policy more consistently. This is even more important under conditions where drought and general economic and political uncertainty has already undermined confidence in the sector.

Because SA is not selfsufficient in wheat production and imports about 50% of domestic consumption, certainty in the market is vital.

At the moment, additional volatility and uncertainty is being introduced into a system that is already characterised by high levels of volatility and persistent uncertainty.

There is no question that shifts in global commodity markets and a rapid devaluation of the rand have changed the fundamentals on which the tariff and related policy was initially designed and for this reason, the review is necessary.

The duty has risen from R461 per tonne in April 2015 to R1,190 per tonne today — almost a quarter of the total price of wheat. Put another way, between 2014 and 2016 the tariff increased tenfold from R157 per tonne in October 2014, to R1,591,40 per tonne in August 2016.

I fully support the Treasury’s view that any changes to the tariff structure will need to strike a fine balance between limiting the effect of import duties on the price of bread and other staple foods and the need to ensure policy certainty, food security and the financial health of the farming industry.

At the same time, it is essential they implement the existing tariff structure consistently.

If they continue to drag out the number of days between when a change in tariff is triggered and when it is implemented, there is a risk of total collapse of the derivatives market, which will make it impossible for millers to hedge their risk and eventually knock on to consumers.