What's driving food prices?

With food price hikes affecting all consumers and particularly the poor, it is crucial to understand the pricing when working out what measures can be taken—and where the Competition Commission fits in.

High food prices must be seen in the context of the liberalisation of agricultural markets in the mid-1990s and the expectation that with competition there would be greater efficiency and, ultimately, lower prices for consumers.

But free competition assumes that no companies are strong enough to control the pricing themselves. In the past year the folly of this assumption has become clear: widespread cartel activity was uncovered in the food sector, in bread, mealie meal and dairy products.
Although some firms contest the allegations, others have come clean and will testify to the conduct.

In effect the firms appear to have decided that, because they preferred regulation to real market rivalry, they would just supplant the previous state regulation with mechanisms of their own. Previous investigations of food prices failed to uncover this collusion. For example, the government’s food price monitoring committee set up to probe the dramatic food price hikes in 2002 and 2003 found that “no profiteering on these basic foodstuffs has occurred”, something the National Agricultural Marketing Council repeated to Parliament earlier this year.

While collusion means prices have been higher than they should have been, the anti-competitive tendency is not new. It is also not what has changed and forced up food prices in the past year. Food prices have increased around the world and these pricing trends have an impact on the local market. For example, the international wheat price at the beginning of May was more than 70% higher than a year previously and South Africa has to import wheat.

But the same is not true across the board. Maize prices in South Africa are no greater than their previous high six years ago. This is largely because we are an exporter of maize. If prices were to move to the import-parity level, where they were set in 2002, we would have an increase in prices of 74%.

There are several implications that can be drawn for food prices in the future and for the importance of competition. If maize prices are no higher than six years ago, the much higher price of mealie meal must be owing to factors further down the processing and retail chain—including collusion by the milling companies.

So it is crucial to uncover collusive behaviour throughout the supply chain. This will not stop prices increasing, but collusion means prices are higher than they would otherwise be under competitive conditions.

In the medium term collusion can be maintained only by keeping out those attracted by the profits being made. New entrants and increased production in, for example, baking and milling, are a part of the solution. This suggests support measures for new entities, coupled with vigilance.

Increased agricultural production is fundamental to address food prices in the longer term. Tackling anti-competitive behaviour in the main inputs to agriculture, led by fertiliser, is a priority. In cases referred to the Competition Tribunal, the commission has highlighted the pricing of the main fertiliser inputs at import parity, collusion between fertiliser suppliers, and attempts to exclude smaller producers. As we have seen, if the maize produced using the fertiliser was also priced at import parity, we would have further huge local price increases, but maize farmers are forced to pay import parity prices for their inputs.

Lastly, what is the Competition Commission’s role? Our greatest strength is in uncovering the behaviour underpinning prices. The ability to enforce penalties is also important—but, as far as remedies go, this is limited. Solutions to food pricing depend on appropriate actions by the different agencies responsible for agriculture and food and the ongoing attention of all stakeholders. The commission will continue to pay attention to anti-competitive conduct that raises barriers to entry in agro-processing and increases costs of agricultural production.

Shan Ramburuth is the Competition Commission commissioner

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