LETTER: Makgetla is wrong about food prices and tariff formulation

12 May 2017

Business Day, 12 May 2017
By Tinashe Kapuya and Wandile Sihlobo

The issue of rising food prices has been at the core of policy discourse for some time, particularly, over the past year when the country experienced a perfect storm of a severe drought, and a volatile and depreciating rand. SA became a net importer of staple grains — such as maize and wheat; we imported almost a third of our annual maize consumption and half of our wheat. The high level of staple grain imports exposed the market to the exchange rate shocks, which reinforced the impact of rising food prices.

As food security is an issue of national interest, all citizens are naturally inclined to understand the fundamental drivers of the significant price increases we have witnessed so far. But in our desire to understand the subject matter, it remains important to appreciate the complexity of food markets, particularly as they relate to price discovery and tariff formulation.

In that spirit, we want to address the fundamental flaws of Neva Makgetla’s argument contained in a recent column (Poor foot the bill for food trade protection, May 9). Makgetla accuses government, farmers, farmer and trader organisations, and private companies of being complicit in authoring and sustaining food price increases through price collusion and the setting of exorbitant import tariffs.

This is, of course, a serious allegation, and if it were in fact the case, or if Makgetla had evidence of large grain traders having considerable influence on prices, surely the Competition Commission would have noticed and launched an investigation. Since that has not happened, Makgetla’s assertions are unsubstantiated.

With regards to tariffs, it is important to note that this is a matter of global significance and SA is not the only country that has used tariffs to ensure sustainability of domestic production.

There is a clear lack of appreciation of the tariff formulation process itself. The government does not wake up and decide to implement a particular tariff level. There is an intensive, evidence-based, and transparent public consultation process conducted by the International Trade and Administration Commission (Itac), which ensures that all views of the role players in the food value chain are captured in the tariff decision.

The process can take months, or even years, to complete, and all decisions are carefully crafted to ensure a balanced outcome of consumer and producer welfare. Moreover, decisions related to trade instruments, such as tariffs, are subject to compliance with World Trade Organisation (WTO) rules, and anyone who is familiar with the process will know that Itac does not just give favourable decisions to commercial farmers.

There have been many reviews in the past in which tariff applications have either led to lower-than-requested tariffs or even rejected outright.

For Makgetla to suggest that these tariffs are put in place to favour farmers at the expense of the poor is not only a blatant disregard of the enormous and complex work done by Itac, is an attack on the integrity of state institutions that are playing a vital function in our society.

Makgetla furthers her theory by questioning the integrity of agricultural markets in price discovery, and indirectly alleging that the South African Grain Information Service (Sagis) is selectively concealing domestic price information with the sole intent of covering up the grain price increases.

If Makgetla had checked the Sagis website, Grain SA, and the primary source, the JSE, she would have known that this statement is incorrect. Makgetla also makes an inaccurate statement when she says tariffs are sustaining trading companies. Tariffs add no value to their businesses, as these tariffs (taxes) are collected by the government, and not by traders.

To suggest that SA should give up its right to protect its own productive capacity and food self-sufficiency is absurd. Without tariffs, the wheat, chicken and sugar industries would collapse, not because we cannot competitively produce, but because there is so much distortion in the global market — everyone else is protecting their own and there is no reason why SA shouldn’t too.

Given the nature of global agriculture and food markets, the conversation about tariffs should not consider food prices in isolation, but rather, should take into account the number of jobs and productive capacity lost if we do not have a balanced tariff decision.

• Kapuya is a trade economist and Wandile Sihlobo is an agricultural economist