The issue of higher food prices has taken priority specifically because of the ongoing drought. In explaining the driving factors, most analysts focus on low domestic supplies and the costs associated with imports.
But, when considering fluctuating food prices, it has always troubled me that most people seem to ignore the costs associated with food processing. In fact, more often than not the entire associated value-chain costs are overlooked.
Recent discussions on social media and online platforms in reaction to the adjustment of the import tariff on wheat made me realise that some people donâ€™t understand the effects of raw commodity supply and demand dynamics (such as maize, wheat and sugar cane) on the price of food. We should all have a comprehensive understanding of the entire production system and the resultant price of food, so hereâ€™s the low-down.
On Friday April 8, the treasury released a media statement announcing an adjustment to the import tariff on wheat, which will be increased from R911.20 a tonne to R1 224.31 a tonne. This adjustment is in line with the existing variable import duty formula. The important variables that influence the adjustment of the import tariff are the international wheat prices and the exchange rate movements.
This means the tariff increase is not being driven by South African wheat farmers wanting higher prices for their produce, and it does not mean enriching farmers at the cost of consumers, as suggested by some news articles.
Consumersâ€™ concerns are understandable. Wheat is one of the products that we eat every day; it is a staple food and is integral to ensuring national food security.
Most of us do not buy food directly from farmers and the price we pay is generally far higher than the amount farmers receive for raw products such as wheat, maize and sugar cane.
It is important to understand that the adjustment in the wheat import tariff is intended mainly to support domestic production, not to enrich farmers.
The price of wheat is generally determined by the international wheat price, the exchange rate (rands/dollars) and the local supply and demand for wheat. South Africa is not self-sufficient in the production of wheat, and about 60% of our local consumption is imported. That is a significant amount, which calls for regulation to protect and revive the domestic wheat industry.
To address this, the industry is working on a turnaround production strategy to counter the imports from countries in which farmers are highly subsidised. While this is being developed, the wheat tariff provides some form of protection for the domestic wheat industry.
Protection is not meant to drive up the price of wheat or to profit local farmers. Chiefly, it is meant to keep the price above the level at which it would not be viable to produce wheat in South Africa.
Moreover, the increased tariff does not translate directly into higher food and bread prices; in fact, we have done a study at Grain SA, which indicates that wheat itself is responsible for only 15% to 20% to the retail price of bread in South Africa. So tariff flux affects only a part of this 20%. The other 80% of the costs are linked to the value chain.
The value chain costs consist of, among other things, labour costs, processing costs, electricity costs and transport costs. This chain provides a source of income to the people involved, which is worth protecting, particularly with our high rate of unemployment.
Grain SAâ€™s report shows that, for a standard 700g loaf of white bread, a bakery needs on average 480g of flour. For that, 588g of wheat before milling is required. So one tonne of wheat produces about 1 700 loaves of white bread.
Taking the current South African Futures Exchange price of wheat of R4 500 a tonne and taking into account all the related costs (transport, handling and storage costs of wheat), the price of the raw commodity (wheat) in one loaf equals about 20% of the total price of the loaf (on average, R2.38 of R11.76). In other words, if there are 21 slices in a loaf, the farmerâ€™s return equals four slices. The food value chain accounts for the rest.
Consumers and other stakeholders must be made aware that increases in bread prices are not necessarily linked to increases in the payments to wheat farmers (producer prices) and the wheat import tariffs, and that they can be attributed to costs further down the value chain. That is where more of our attention should be focused.
Wandile Sihlobo is an economist at Grain SA. These are his own views. Follow him on twitter @WandileSihlobo