NATIONAL DEPARTMENT OF AGRICULTURE

1. NATIONAL DEPARTMENT OF AGRICULTURE BRIEFING SESSION TO THE PORTFOLIO COMMITTEE ON AGRICULTURE THE IMPACT OF TARIFFS ON GRAIN PRICES: MAIZE 7 FEBRUARY 2005 CAPE TOWN

2. CHARACTERISTICS OF S.A AGRICULTURE: PRE 1994 • Agricultural marketing done through cooperatives owned by the agricultural marketing control boards, • Sector characterized by price controls, subsidization, import and export controls, and restricted access to raw materials such as grains for milling and baking industries. • Farmers operated under a price guarantee system, i.e., no marketing research, no price risk management (hedging and futures), production decision not influenced by market fundamentals, etc, • Surpluses in the market were pooled together and removed from the markets to maintain certain prices. • Cost plus pricing system used.

3. AGRICULTURAL MARKETING REFORM: AN HISTORICAL CONTEXT. • Agricultural marketing reform was influenced by policy reforms outside the agricultural sector. • The liberalization of the financial system triggered the reform process since the 1970’s. • Regulated environment increased pressure on the fiscus through subsidies, • Legal challenges to Control Boards schemes, • Farmers interest groups and industrialist critical of the marketing control system, • Globalization and integration of supply and demand chains further added pressure for reforms, • Statutory interventions (subsidies) later withdrawn

4. AGRICULTURAL MARKETING REFORM: AN HISTORICAL CONTEXT………… • Controlled system was further criticized for inefficiencies it had fostered in the production and marketing of agricultural grains. • Reforms of agricultural marketing effected through the Marketing of Agricultural Products Act of 1996. • The new Act led to the closure of all agricultural marketing control boards. • Pricing of all agricultural products is now deregulated with the exception of sugar.

5. CHARACTERISTICS OF S.A AGRICULTURE: POST 1994 • The agricultural sector started to adjust to the comprehensive and managed programme of deregulation. • The sector is further emerging as a strong and internationally competitive producer of many primary agricultural products, • Shifting from commodity based agricultural economy to high value based sector. • It is creating a sound platform for downstream value addition, investment attraction, export focused and branching into predominantly high value products.

6. CHARACTERISTICS OF S.A AGRICULTURE: POST 1994 • Prices of most agricultural products, especially grains are determined by: • Import and export parity pricing • Tariffs • Net domestic and regional demand and supply conditions • Domestic and regional stock levels, • Climatic conditions (good and bad) • Rand/dollar exchange rates • Unfavorable statements (underestimates) • Grains are commodities whose prices are determined internationally (CBOT), • US grains prices used as international benchmark (yellow maize).

7. PROFILE OF THE S.A GRAINS INDUSTRY • Maize is a major grain crop produced in S.A and largest contributor to total value of agricultural production, • S.A has the largest maize industry in the continent, • Industry deregulated since 1997, • Prices determined under free market conditions, • Formal trading takes place at SAFEX which was established in 1995 (SA grains price barometer) • S.A is self-sufficient in maize production, • S.A is still a net importer of other grains such as wheat and oilseeds,

8. PROFILE OF THE S.A GRAINS INDUSTRY • Local consumption requirement is about 8 million tons p.a. split as follows (constant): • 4.2 million white maize for human consumption, and • 3.2 million tons yellow maize for animal feeds • Balance is used by the wet milling industry to extract starch and other by-products, • During surplus periods, S.A export maize to Zimbabwe, Zambia, Malawi, Mauritius, Kenya, Japan and Mozambique, • Sporadic and limited imports of yellow maize from the US are experienced, • Trade in grains is tariff based – Formula used.

9. PROFILE OF THE S.A GRAINS INDUSTRY: PRIMARY PRODUCTION. • S.A has about 9000 commercial maize farmers, • Deregulation caused shifts in geographic patterns of white and yellow maize production, • S.A Produces between 7 and 9 million tons of white and yellow maize annually on 3.4 million hectares,

10. PROFILE OF THE S.A GRAINS INDUSTRY: STORAGE. • The total grains silo storage capacity is about 17.5 million tons, • Silos are mainly owned by cooperatives which have now converted into agribusinesses, • About 85 percent of silo capacity is owned by 22 silo owners.

11. PROFILE OF THE S.A GRAINS INDUSTRY: MILLING. • Consist of the dry and wet milling industries as well as the animal feed manufacturers, • Milling industry was concentrated prior to deregulation, • Deregulation provided opportunities for new entrants into the milling industry, especially informal millers, • There are about 190 millers in the country, • Total milling capacity is 5 million tons out of which only 3.7 million is used, • There are 22 large millers accounting for 85 percent of maize milled in S.A. • Industry value chain is integrated.

12. GOVERNMENT INTERVENTION IN THE GRAINS INDUSTRY. • Government intervention in the grains industry is in the form of tariff policy, • Tariff is a tax on imports or exports to protect domestic farmers from import competition (protective tariff) • Money collected through tariff is called a duty or customs duty, • Tariffs are used to encourage domestic production, discourage dumping and predation, • In terms of the tariff policy, maize is protected at any international price below $110/ton while wheat is at a price below $154/ton. • Current protection for maize and wheat is at R84.24/ton and R18.67/ton respectively

13. CURRENT STATUS OF THE MAIZE INDUSTRY • S.A is experiencing a huge carry-over stock of maize from the previous season(s) estimated between 3 – 3.5 million tons, • Expected harvest is estimated at 9 million tons this marketing season, • Domestic consumption averages 8 million tons per annum (stable), • A potential for additional 1 million ton surplus anticipated, • Surplus maize pushed domestic prices to export parity, in much the same way shortages in 2001/2002 pushed prices to import parity (normal phenomenon), • Regional maize production is improving thereby leading to limited export opportunities to the regional markets (Mozambique, Tanzania, Zambia, Angola), • Therefore local surpluses to be fed into the market and reflected through low producer prices.

14. POINTS TO CONSIDER • Farmers will always argue for high tariffs to limit import competition, whether fair or not, • Millers will always argue for low tariffs to get grains as cheap as possible from any source, • Consumers will always argue for affordable food, • Tariff setting is therefore a balancing act • During years of surplus domestic production, the domestic price discounts the tariff – therefore low prices (current situation) • During years of domestic shortages, domestic prices include the tariff – therefore high prices (2001/2002)

15. POINTS TO CONSIDER • Arguments for increasing tariffs during export parity situation does not hold as no or very less is imported – nothing to protect, • The current problem is overproduction not a trade related matter that could be solved through application of tariffs policy, • Maize surpluses and shortages happen in a cyclical pattern, years of shortfall normally followed by surpluses, • Proper utilization of derivative marketing tools an option to hedge price risks, • Spreadsheet example on how tariff is applied