1. DEPARTMENT: AGRICULTURE 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. DEPARTMENT: AGRICULTURE 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. DEPARTMENT: AGRICULTURE 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integration of supply and demand chains further added pressure for reforms,  Statutory interventions (subsidies) later withdrawn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. DEPARTMENT: AGRICULTURE 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. DEPARTMENT: AGRICULTURE 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. DEPARTMENT: AGRICULTURE 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. DEPARTMENT: AGRICULTURE 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. DEPARTMENT: AGRICULTURE 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. DEPARTMENT: AGRICULTURE 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. DEPARTMENT: AGRICULTURE 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. DEPARTMENT: AGRICULTURE 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. DEPARTMENT: AGRICULTURE 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. DEPARTMENT: AGRICULTURE 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. DEPARTMENT: AGRICULTURE 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. DEPARTMENT: AGRICULTURE 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