In an attempt to save face and recover sales volumes, elements in the maize industry chain are trying to reap additional profit from gradual reductions in maize-meal prices.
The South African Futures Exchange (Safex) grain prices declined by 23% between March and June last year; about three months later unofficial maize-meal prices went down by about 10%. From June 2002 to March this year, Safex prices declined by a further 43% and so far maize-meal prices have only declined by another 19%.
This reflects our argument that food prices are “sticky upwards”. In other words, the pace at which prices increased when the exchange rate devalued is not matched by the pace of price decreases following a similar level of currency revaluation.
According to the South African Grain Information Service, the volume of maize grain milled for human consumption dropped dramatically from well above 300 000 tons a month before December to around 250 000 tons a month from January this year onwards. After more than a year of excessively high food prices, debt and some government income and food relief, many poor consumers now appear to be cutting back on unaffordable maize.
With maize-meal sales showing signs of slackening and more than a million tons more white maize held in storage this February compared to a year before, conservative maize-meal price decreases should be interpreted as an attempt to restore sales volumes while maintaining high margins.
To legitimise this pricing strategy in the eyes of the public, the industry argues that there are blockages and lags in its system. First, it claims that there is a minimum lag of three months between Safex grain prices and the price of maize-meal stock at retail level. Second, when price decreases do occur, consumers should not expect too much because “millers did not pass on all their input price increases last year”.
In summary, this pricing strategy is based on the recognition that maize and other staple food items are largely price inelastic. In other words, even if prices skyrocket, poor and working class families will first cut their expenditure on other items (including electricity bills) and get deeper into debt in order to survive.
However, as research by the Human Sciences Research Council has warned, by November last year some households entered into such dire straits that they had no choice but to buy and eat much less.
Clearly there is a fundamental difference of opinion between the Congress of South African Trade Unions (Cosatu) and its affiliates on the one side, which have argued consistently that prices for maize meal reflect costs of production plus an abnormal rate of profit, and the industry on the other, which holds that prices reflect costs of production plus a normal profit rate.
To resolve this impasse, the Competition Commission and Competition Tribunal will have to rule on a complaint in terms of the Competition Act of 1998.
To ensure that maize-meal prices fall at a faster pace, to prevent a repeat performance of volatile price swings in the future and to play a positive role in the region, we encourage the Competition Commission to give urgent consideration to the following indications of serious market failure in the maize chain.
The first concern is the loose ends on Safex. South African companies have already responded to market perceptions that one international trading house has come to dominate the commodity trade in South Africa. However, in the next few months, the futures exchange will also, as part of its gradual progression to a fully-fledged United States-style exchange, introduce “position limits” on speculators. If implemented, this may “narrow opportunities for speculators to dominate the market”.
Trading on Safex is currently shared among five to six brokers and their clients. To rapidly reveal any problems with dominance and concentration of ownership over maize stock, the Safex system should urgently be complemented by a state-sanctioned system of centralised registration of maize owned by different participants in the industry chain.
Information on maize stock ownership should then be disclosed to the public in an appropriate format. This should bring an end to hoarding, which is explicitly an abuse of dominance in terms of the Competition Act.
The second issue is guaranteeing the integrity of silo receipts and audits of physical stock. Safex is a complicated financial instrument that allows buyers and sellers of maize to trade. But in order to maintain its integrity, some basic conditions must be met.
The Safex system relies on tradable silo receipts, which provide proof of ownership of a quantity of maize in storage. After long-standing problems with fraud, the exchange has now made sure that only recognised individuals who have provided sample signatures can issue Safex silo receipts. The receipts now supposedly secure documents that are tradable in a similar fashion to money.
However, the validity of what is written on silo receipts currently depends on irregular audits of individual silos as performed by the South African Grain Information Service. We urge the Competition Commission to ascertain what information is collected by the service; how it is used and whether this is an appropriate function for a private-sector company comprising board members from various commodity trusts, including maize.
Of further concern is the cost of production and the exchange rate. It seems reasonable to propose that actual cost increases along the maize chain were mostly less than 40%. Grain South Africa openly admits that despite a 40% depreciation of the rand from one planting season to the next, overall production costs only increased by between 20% and 25%. Millers have also stated publicly that they are consistently able to purchase maize at prices well below the Safex price.
It is in this context that a 112% increase in maize-meal prices and gradual price declines should be attributed to speculative profiteering by some or all players in the maize chain.
Pricing above import parity and the regional food crisis is a further issue. The case where Safex prices shot above the price of foreign import competition at Randfontein (or the import parity price) should not be regarded as a once-off phenomenon.
Apart from the fact that pricing above import parity indicates problems with market imperfection, Safex brokers are also especially sensitive to information on crop estimates, weather forecasts and predictions of supply and demand in the region.
Overestimates and biased information from one or two sources must therefore be corrected.
Cosatu has already pointed out that Safex prices rose on press statements that South Africa would export an additional one million tons of maize to address famine, but the private sector now admits that the exchange priced South Africa out of the aid market relative to China, the US and other producers.
The white maize harvest from May onwards is expected to result in a very large surplus in South Africa. It will be a massive embarrassment if unprecedented maize stockpiles are not accessible to those who demand it within South Africa and the region.
Finally there is the question of abnormal rates of profit and vertical integration. Many of the largest companies involved in the maize chain (like Premier/Genfood) are not listed on the Johannesburg Securities Exchange and their rates of profit are a mystery. Listed food companies like Afgri, Senwes, and Tiger Brands all reported overall rates of profit increase in excess of 20%.
Many companies involved in the maize chain are also vertically integrated across many parts of the food industry chain, including input supply, handling and storage, milling, other processing, distribution, wholesaling and retailing.
The competition authorities have an important role to play in clarifying the causes of price increases within the maize chain and proposing remedies.
However, a broad-based campaign on the constitutional “right to food” will ensure that the voice of those most directly affected by food price increases is also heard.
Eric Watkinson is a researcher at the National Labour and Economic Development Institute and Katishi Masemola is national bargaining secretary for the Food and Allied Workers’ Union