When duty calls the state must separate the wheat from the chaff

COMMENT

Those chaps at Grain SA don’t take any nonsense. When the trigger was reached for an increase in duties on wheat and treasury was vacillating with the implementation, the association took the treasury, minister of finance, the International Trade Administration Commission of South Africa (Itac), department of trade and industry and the minister of trade and industry to court on an urgent basis to see the duty immediately implemented.

In all fairness, the matter became urgent because, although Itac approved the duty adjustment, the treasury appeared to have been reluctant to implement the duty increase.

Itac were notified of the drop in the duty trigger event on December 3 last year and it normally takes a month to implement the change. Even accounting for half of government lying on Margate Beach sipping beer on January 3, it’s not unreasonable to have expected the duty change to be implemented by the end of January.

Fast forward to April 6 and suddenly there was a real sense of urgency as we reached the point where wheat farmers either had to plant or switch to another crop. The duty is a key factor in this decision.


The matter was never heard in court among the clatter of feet rapidly backtracking and implementing the duties. But it doesn’t end there. Itac is now looking into the very structure of the type of duty that nearly ended up in court, known as a variable duty formula, linked to the dollar-based reference price (yes, that really is the name).

This is an important discussion because this duty structure applies to wheat, sugar and maize. The drought has hit the three products, which consumers not on the Banting diet consider quite important. At present, maize attracts no duties but it has the potential for a duty should the trigger price level be achieved.

In the words of Grain SA chief executive Jannie de Villiers, the formula to calculate the duty is complex. He is right. Grain SA’s court papers explain how it works.

How to calculate the duty
Treasury sets an artificial floor price in consultation with Itac, the trade department and Grain SA. In the period we are dealing with, this floor price was $294 a tonne of wheat. If importers bring wheat into South Africa below this floor price, say $200 a tonne, then treasury is meant to impose a duty of $94 a tonne to bring the imported price up to a level where the domestic industry can compete. All of this seems fair enough until we look at item 10.1 in Grain SA’s application. “SA does not produce enough wheat to satisfy local demand for bread and is therefore a significant importer of wheat.”

This is a big deal, because the duty on wheat is extremely high. One would, however, expect that the high duties would be an incentive for farmers to plant more wheat. Yet, according to the 2015 United States Global Agricultural Information Network (Gain), the South African trend is the complete opposite, with Gain predicting a 6% rise in imports of wheat for the 2015-2016 season, to 1.9-billion tonnes.

Looked at another way, the duty is expensive but not terribly effective. There may be a number of reasons for this, aside from how much we consume versus how much we grow. One of the items lowering the effectiveness of the duty is the full rebate for the duty on wheat if it is imported by and processed further in one of the BLNS countries – Botswana, Lesotho, Namibia and Swaziland.

So, for instance, we see Lesotho is the largest supplier of flour to South Africa (17 500 tonnes for April 2015 to March 2016) and Namibia supplied 2 000 tonnes of pasta in that same period, both products that have wheat as their primary raw material. Pasta is about 75% flour, which in turn is 50% wheat, which translates to about 5 500 tonnes of wheat entering as pasta, duty free, because of the Southern African Customs Union agreement. If we assume that milling wheat to produce flour has a 50% yield, then Lesotho is 6 000 tonnes away from their limit of 40 000 tonnes of duty-free wheat a year.

These numbers are a drop in the ocean. According to that same Gain report, South Africa consumes about 3.6-million tonnes of wheat a year and we produce only a whisker over 47% of this. This is a big difference. It means we are increasing the cost of wheat by at least the amount of duty payable on the portion that we import, because we don’t grow enough. If we apply the existing duty to the 1.9-billion tonnes imported, that adds a cost to the consumer of R2.3-billion for something being produced in ever smaller quantities. Mechanisms need to be considered to alleviate this burden or we will see greater imports of downstream products. Pasta imports have already increased by 63% from 2013 to 2016, despite the rand’s depreciation against the dollar.

We are faced with a terrible dilemma. No one wants South Africans to go hungry and wheat is an important part of our diets, yet with duties that are now nudging 45%, farmers are still not keen to plant wheat.

Which brings us to the conceptual review of the duties on wheat, sugar and maize. Farmers need predictability not only of trade policy but also its implementation. But this has to be balanced with the cost of staple foodstuffs such as bread and mealie meal.

When treasury acts outside its mandate, which is my take on what happened with this court case, it introduces high risk into the system that no one is accounting for. By going through the existing process of reviewing the policy, rather than not carrying the policy out, there is greater transparency and everyone gets a say. Let’s hope the result of the current review is positive for farmers and consumers.

Donald MacKay is a director of XA International Trade Advisors and Stratalyze.

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