Grain price squeezes Botswana

Prices are soaring after the worst drought in the US Midwest in 50 years. (Danny Johnston, AP)

Prices are soaring after the worst drought in the US Midwest in 50 years. (Danny Johnston, AP)

Although  cereal prices eased in 2011, the Midwest of the United States, the maize and wheat basket of the world, has been hit by the worst drought in 50 years. The bad news is the risks are high that the world prices of basic staples such as wheat and maize will increase even more. In July and August, wheat prices rose by as much as 45% above April levels.
Now, with relatively poor harvests in Australia and Russia threatening to cut back on supply, the prospects are that prices could reach levels similar to those in 2008.

The good news on wheat prices … well, there just is none.  

Bad harvests in the US are a problem for all the South African Customs Union countries, although Botswana has a unique problem that will see the price of bread rise even higher – a 15% import duty is levied on all wheat flour entering the country, irrespective of whether it comes from the customs union (that is, South Africa), or elsewhere.

If you are looking for the wheat farmers in Botswana the government might be trying to protect with the levy, you will not find them – they do not exist. What is being protected is the milling industry.

Although there are other producers, it is Bolux, a part of the South African NMI Group, that states publicly that it needs protection.

In 1986 Bolux agreed to establish a milling firm in Ramotswe. The maize and wheat milling industry employs about 800 people.

Protected prices
At the beginning, the Bolux business model did not require protection by the Botswanan government because South Africa, its main competitor, protected wheat prices, which were well above world levels. Bolux could import wheat at world prices, which were considerably below South African prices, and it could produce flour and pasta cheaper than its South African competitors, which not only gave it the Botswanan market, but also potentially a good market in South Africa.

But South Africa liberalised its wheat market in the mid-1990s and set the price at world market levels. This made the Bolux business model obsolete and the company could not compete with much larger South African millers, which were also able to buy wheat at close to the world price. In response, to protect the Batswana jobs in the milling industry, the Botswanan government applied for infant industry protection for eight years, which is the maximum allowed under customs union rules.

For the first five years, the government imposed quotas on imported flour, which was followed by a massive 75% import duty imposed for another three years. In 2003, the government finally imposed a 15% levy  on imported flour, which has stayed in place since then.

The milling industry has now been protected by quotas and tariffs since 1995 and, although at 17 it is not legally an adult, it is now far from what can be called an "infant industry".

What are the consequences of this duty? Ask any baker in Gaborone and he or she will tell you: higher bread prices because they cannot import wheat flour freely from South Africa.

But the consequences are far greater than this. Raise the flour price and biscuit-makers cannot compete with South African bakers. That is what happened last year. The Botswanan industry asked for protection for its biscuits, but the government refused it.

Competing internationally
Moreover, when millers are given a margin on wheat, they can use this to cross-subsidise their maize milling, which distorts competition in that sector as well.

Perhaps the most pernicious effect is that this raises the price of bread, which is particularly hard for low-paid working people and means wages have to be kept at relatively higher levels. This, in turn, makes it more difficult for other firms in Botswana to compete internationally.  

In 2009, South Africa officially complained to the Southern African Development Community (SADC) about the 15% duty. In May this year the Botswanan government reported that the matter had been "resolved", although some analysts believe the matter has been deferred rather than resolved.

Although the customs union and SADC countries maintain these so-called "non-tariff barriers" to trade, the question is: How long can the government possibly sustain them in the face of what appear to be international legal obligations to the contrary?

In Botswana there are two milling firms, Bolux and Bokomo (partly owned by Pioneer), which have market shares of 70% and 30% respectively. There are also reports that the Botswanan supermarket chain Choppies, which has many shops in South Africa, is considering entering the milling industry. Surprisingly, neither Bokomo nor Choppies are reported to want the 15% levy and can live without it.

This is curious. Why does Bolux need it and Bokomo and Choppies do not?

Positive development
The reason is simple. Bokomo is a diversified business in Botswana involved in poultry, maize and sugar and, thanks to a bad decision by the Competition Authority, it also owns a big stake in the day-old chick business. Choppies, an increasingly integrated supermarket chain, is even more diversified. But Bolux is primarily a milling firm and relies heavily on that sector for most of its revenue.

If Bolux goes belly up, it would simply mean a bigger market share for Choppies and Bokomo. Business is not for the faint-hearted and, if a change in government policy hurts your competitor more than it hurts you, or better still, kills it outright, then those left standing see it as a positive development.

For the government this is not an easy call. Bolux will claim that jobs will be lost if the levy goes and this may be true. But what about the price of bread and the rights of two million consumers?

This is always a tricky balancing act but, based on the experience of other countries, the decision almost invariably goes to the loudest, which in this case is Bolux.

But perhaps the most important question for those policymakers drawing up the government's economic diversification drive, which is based on giving preference to locals so that they can become internationally competitive, is how to move from the first stage of protection of the local industry to the second stage, at which point firms are supposed to be competitive globally. Based on the milling industry, the answer is a long way off.

Professor Roman Grynberg, who is employed by the Botswana Institute for Development Policy Analysis, writes in his personal capacity

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