1. QUALITY, PRICING AND THE PERFORMANCE OF THE WHEAT INDUSTRY IN SOUTH AFRICA 21 September 2015 Dr Johnny van der Merwe Lecturer / Agricultural economics (Prof HD van Schalkwyk and Dr PC Cloete)

2. So what motivated me to undertake this study? We experienced a significant decline in wheat production, especially since the abolishment of apartheid in 1994 At the same time: –Yields increased significantly –Area dedicated to wheat production declined significantly

3. Western CapeEastern Free State Performance of producers in major production areas declined One argument was that South Africa wheat producers are simply not competitive enough to compete in the international market

4. South Africa AustraliaBrazil International competitiveness (RTA index) However, when the competitive status was analyzed, it was seen that: –SA is the only country amongst its trading partners that exhibits a uncompetitive unprocessed sector while also having a competitive semi-processed sector

5. What does this mean? Wheat is imported, processed and exported mostly to African countries. Although the expansion of the African market is exciting, why has local production rapidly declined and lost ground alongside its global competitors? The declining competitiveness of SA producers can be attributed to increasing costs and/or stagnant (declining) income. The concentrated on the income side of the equation which is dependable on two factors: –Yields –Price In a search for what can possibly be held accountable: –Bikker et al. (2007) showed that a country’s institutional framework—or, in other words, the way in which an industry conducts business—will influence the competitiveness of that industry.

6. The Cultivar Release Criteria The Cultivar Release Criteria, which is a system that approves certain cultivars for commercial production (based on certain quality characteristics), can have an influence on both yields and prices received by producers. The fact that yield and quality of a cultivar are negatively correlated means that this system thus has the potential to influence the income and competitiveness of producers. This study therefore determined whether or not declining wheat production in South Africa can be attributed to the way in which this market conducts business.

7. Is the quality prescribed to producers justified? Quality is an essential part of the wheat industry and determines the kind and quality of product that can be produced. Thus, quality can't simply be disregarded for higher yields. However, for the industry to be sustainable over the long term, yields can't be disregarded. It is essential that a balance between yield and quality is found. It was therefore attempted in this study to find this balance. This was done by determining the quality that was used in the marketplace for all products and comparing it to the prescribed quality to producers. If these two did not match, the balance is regarded as off.

8. Quality prescribed to producers In order to determine the quality prescribed to producers, quality data was obtained from the cultivars that serves as biological standards in each production region. In order to correct for seasonal variations, the average quality over a 8 year period was used. Three comparisons were made to determine whether or not these qualities are justified or not: –Wheat quality standards compared to wheat quality supplied –Wheat quality standards compared to wheat flour quality –Wheat quality standards compared to the quality of price determining wheat-importing countries

9. Release criteria standards as set to producers 6 year biological standard for Elands (dry land Northern Standard) 4 Year biological standard for SST806 (Irrigation) 4 Year biological standard for Kariega (Southern Spring wheat) Deviation allowed Test MinMax Kg/hl (clean)80.3981.7481.73-1.8 1000 kernel mass, g32.3737.9341.38-44 Falling number, sec350.20443.57427.33-15% Protein (12% mb)13.0212.4612.48-1% Buhler Extraction75.5477.1675.33-1.50% Colour (KJ 76)-2.20-2.99-3.13 1 Mixogram Peak time (SST 806) 2.46 -10%20% Peak time (Elands)3.07 -25%15% Peak time (Kariega) 2.75-25%15% Farinogram Absorption63.1762.0162.45-2.50%2.50% Development time, min5.585.465.92-25%25% Stability, min9.937.5610.87-30%10% Baking test 100g Corrected volume, cm3877.50946.14939.17-10% Alveogram Strength, cm344.5440.8643.78-20%20% Stability, mm100.7178.4983.83-20%20% Distensibility92.69121.00117.10-10%20% P/L value1.270.670.75-25%25%

10. Quality of wheat supplied to processors The quality of imported wheat and locally produced wheat must be taken into account TestCategory 8 year weighted average Kg/hl (clean)P78.55288 1000 kernel mass, gS36.64716 Falling number, secP378.1353 Protein (12% mb)P11.82807 Buhler ExtractionP74.23473 Colour (KJ 76)P-1.44645 Break flour yieldS Mixogram Peak time (SST 806)P3.100418 Peak time (Elands)P Peak time (Kariega)P Farinogram AbsorptionP60.66004 Development time, minS3.471057 Stability, minS7.28852 Baking test 100g Corrected volume, cm3P824.0242 Dough characteristicsP Alveogram Strength, cm3P37.69983 Stability, mmS91.86261 DistensibilityS87.02302 P/L valueP1.248978

11. Quality of wheat supplied to processors Release criteria bracket for Northern Dry Land Cultivars (Elands) Release criteria bracket for Irrigation (SST806) Release criteria bracket for Kariega (Cape Spring) TestMinMaxMinMaxMinMax Kg/hl (clean)78.59 79.94 79.93 1000 kernel mass, g28.3736.3733.9341.9337.3845.38 Falling number, sec297.67 377.04 363.23 Protein (12% mb)12.02 11.46 11.48 Buhler Extraction74.41 76.00 74.20 Colour (KJ 76) -1.20 -1.99 -2.13 Mixogram Peak time (SST 806) 2.212.95 Peak time (Elands)2.303.53 Peak time (Kariega) 2.063.16 Farinogram Absorption61.5964.7560.4663.5660.8964.01 Development time, min4.196.984.096.824.447.40 Stability, min6.9510.925.298.317.6111.95 Baking test 100g Corrected volume, cm3789.75 851.53 845.25 Alveogram Strength, cm335.6453.4532.6949.0335.0352.54 Stability, mm80.57120.8562.7994.1867.07100.60 Distensibility83.42111.23108.90145.20105.39140.52 P/L value0.951.580.500.830.560.94

12. Quality of wheat supplied to processors Proposed bracket for Dry Land Northern Standard (Elands) based on SA quality demand Proposed bracket for Irrigation cultivars (SST806) based on SA quality demand Proposed bracket for Cape Spring Wheat (Kariega) based on SA quality demand TestMinMaxMinMaxMinMax Kg/hl (clean)-1.84 -3.19 -3.18 1000 kernel mass, g-4.004.28-4.004.00-4.734.00 Falling number, sec-15.00% Protein (12% mb)-1.19% -1.00% Buhler Extraction-1.73% -3.79% -1.50% Colour (KJ 76) 1.00 1.54 1.69 Break flour yield Mixogram Peak time (SST 806) 10.00%26.18% Peak time (Elands)-25.00%15.00% Peak time (Kariega) -25.00%15.00% Farinogram Absorption-3.97%2.50%-2.50%2.50%-2.87%2.50% Development time, min-37.79%25.00%-36.39%25.00%-41.33%25.00% Stability, min-30.00%10.00%-30.00%10.00%-32.93%10.00% Baking test 100g Corrected volume, cm3-10.00% -12.91% -12.26% Dough characteristics Alveogram Strength, cm3-20.00%20.00%-20.00%20.00%-20.00%20.00% Stability, mm-20.00%20.00%-20.00%20.00%-20.00%20.00% Distensibility-10.00%20.00%-28.08%20.00%-25.68%20.00% P/L value-25.00%25.00%-25.00%87.21%-25.00%66.16%

13. Quality of wheat supplied to consumers A survey was done across the country to test flour quality supplied to consumers TestCategory South African flour quality Kg/hl (clean)P78.55 1000 kernel mass, gS36.65 Falling number, secP378.14 Protein (12% mb)P10.8 Buhler ExtractionP74.23 Colour (KJ 76)P-1.45 Break flour yieldS Mixogram Peak time (SST 806)P3.3 Peak time (Elands)P3.3 Peak time (Kariega)P3.3 Farinogram AbsorptionP62.6 Development time, minS4.5 Stability, minS8.3 Baking test 100g Corrected volume, cm3P816 Dough characteristicsP Alveogram Strength, cm3P50.9 Stability, mmS128.3 DistensibilityS73.1 P/L valueP2

14. Quality of wheat supplied to consumers Release criteria bracket for Northern Dry Land Cultivars (Elands) Release criteria bracket for Irrigation (SST806) Release criteria bracket for Kariega (Cape Spring) TestMinMaxMinMaxMinMax Kg/hl (clean)78.59 79.94 79.93 1000 kernel mass, g28.3736.3733.9341.9337.3845.38 Falling number, sec297.67 377.04 363.23 Protein (12% mb)12.02 11.46 11.48 Buhler Extraction74.41 76.00 74.20 Colour (KJ 76) -1.20 -1.99 -2.13 Mixogram Peak time (SST 806) 2.212.95 Peak time (Elands)2.303.53 Peak time (Kariega) 2.063.16 Farinogram Absorption61.5964.7560.4663.5660.8964.01 Development time, min4.196.984.096.824.447.40 Stability, min6.9510.925.298.317.6111.95 Baking test 100g Corrected volume, cm3789.75 851.53 845.25 Alveogram Strength, cm335.6453.4532.6949.0335.0352.54 Stability, mm80.57120.8562.7994.1867.07100.60 Distensibility83.42111.23108.90145.20105.39140.52 P/L value0.951.580.500.830.560.94

15. Quality of wheat supplied to consumers Proposed bracket for Dry Land Northern Standard (Elands) based on SA wheat flour quality Proposed bracket for Irrigation cultivars (SST806) based on SA wheat flour quality Proposed bracket for Cape Spring Wheat (Kariega) based on SA wheat flour quality TestMinMaxMinMaxMinMax Kg/hl (clean)-1.84 -3.19 -3.18 1000 kernel mass, g-4.004.28-4.004.00-4.734.00 Falling number, sec-15.00% Protein (12% mb)-2.22 -1.66 -1.68 Buhler Extraction-1.73% -3.79% -1.50% Colour (KJ 76) 1.00 1.54 1.69 Break flour yield Mixogram Peak time (SST 806) 10.00%34.30% Peak time (Elands)-25.00%15.00% Peak time (Kariega) -25.00%20.00% Farinogram Absorption-2.50%2.50%-2.50%2.50%-2.50%2.50% Development time, min-25.00%25.00%-25.00%25.00%-25.00%25.00% Stability, min-30.00%10.00%-30.00%10.00%-30.00%10.00% Baking test 100g Corrected volume, cm3-10.00% -13.76% -13.11% Dough characteristics Alveogram Strength, cm3-20.00%20.00%-20.00%24.58%-20.00%20.00% Stability, mm (P-value)-20.00%27.39%-20.00%63.47%-20.00%53.04% Distensibility (L-value)-21.13%20.00%-39.59%20.00%-37.57%20.00% P/L value-25.00%57.89%-25.00%199.79%-25.00%166.08%

16. Quality of wheat determining local prices An hedonic price model was used to determine the factors that has a significant impact on local prices Argentina Brazil Germany Ukraine TestCategory Average quality of wheat from countries that have an effect on SA prices Kg/hl (clean)P78.51 1000 kernel mass, gS36.20 Falling number, secP373.48 Protein (12% mb)P11.59 Buhler ExtractionP73.74 Colour (KJ 76)P-0.67 Break flour yieldS Mixogram Peak time (SST 806)P3.69 Peak time (Elands)P3.69 Peak time (Kariega)P3.69 Farinogram AbsorptionP60.36 Development time, minS2.08 Stability, minS5.39 Baking test 100g Corrected volume, cm3P749.44 Dough characteristicsP Alveogram Strength, cm3P36.41 Stability, mmS107.89 DistensibilityS61.27 P/L valueP1.95

17. Quality of wheat determining local prices Release criteria bracket for Northern Dry Land Cultivars (Elands) Release criteria bracket for Irrigation (SST806) Release criteria bracket for Kariega (Cape Spring) TestMinMaxMinMaxMinMax Kg/hl (clean)78.59 79.94 79.93 1000 kernel mass, g28.3736.3733.9341.9337.3845.38 Falling number, sec297.67 377.04 363.23 Protein (12% mb)12.02 11.46 11.48 Buhler Extraction74.41 76.00 74.20 Colour (KJ 76) -1.20 -1.99 -2.13 Mixogram Peak time (SST 806) 2.212.95 Peak time (Elands)2.303.53 Peak time (Kariega) 2.063.16 Farinogram Absorption61.5964.7560.4663.5660.8964.01 Development time, min4.196.984.096.824.447.40 Stability, min6.9510.925.298.317.6111.95 Baking test 100g Corrected volume, cm3789.75 851.53 845.25 Alveogram Strength, cm335.6453.4532.6949.0335.0352.54 Stability, mm80.57120.8562.7994.1867.07100.60 Distensibility83.42111.23108.90145.20105.39140.52 P/L value0.951.580.500.830.560.94

18. Quality of wheat determining local prices Proposed bracket for Dry Land Northern Standard (Elands) based on imported wheat quality Proposed bracket for Irrigation cultivars (SST806) based on imported wheat quality Proposed bracket for Cape Spring Wheat (Kariega) based on imported wheat quality TestMinMaxMinMaxMinMax Kg/hl (clean)-1.88 -3.23 -3.22 1000 kernel mass, g-4.004.00-4.004.00-5.174.00 Falling number, sec-15.00% -15.80% -15.00% Protein (12% mb)-1.43 1.00 Buhler Extraction-2.38% -4.43% -2.11% Colour (KJ 76) 1.53 2.32 2.46 Mixogram Peak time (SST 806) -10.00%20.00% Peak time (Elands)-25.00%20.20% Peak time (Kariega) -25.00%34.18% Farinogram Absorption-4.44%2.50%-2.66%2.50%-3.34%2.50% Development time, min-62.78%25.00%-61.94%25.00%-64.89%25.00% Stability, min-45.67%10.00%-30.00%10.00%-50.35%10.00% Baking test 100g Corrected volume, cm3-14.59% -20.79% -20.20% Alveogram Strength, cm3-20.00%20.00%-20.00%20.00%-20.00%20.00% Stability, mm (P-value)-20.00%20.00%-20.00%37.46%-20.00%28.70% Distensibility (L-value)-33.90%20.00%-49.36%20.00%-47.68%20.00% P/L value-25.00%35.07%-25.00%192.41%-25.00%159.53%

19. So what? This was then compared to previously rejected cultivars and their corresponding yields. This enabled the study to quantify the impact on productivity (yields). Based on the yields of cultivars that could have been accepted had standards been relaxed to within reasonable limits, wheat production could have been increased by at least 12.8 percent. From the results of the sensitivity analysis, (comparing the yields of the “new” cultivars and subtracting 20 percent yield to the commercial yields in each production region) it was concluded that an estimated increase in production of 19.03 percent can even be expected. Thus, by bringing the regulations for the release of new cultivars simply into line with quality used by the market, the productivity and competitiveness of producers will be improved substantially (between 12% and 20%). When applying a DLP Farm Level Model, it was found that this equated to an estimated loss in NFI of between R606 million and R920 million per annum.

20. The following question however must be asked: Why is local production quality standards set so strict? –This enables wheat buyers (which is highly concentrated) to obtain high quality South African wheat at the lowest price globally. –Additionally it allows them to still have the desired quality by mixing local and imported wheat. It is essential for improved wheat production competitiveness that prices are linked to quality for not only for locally produced wheat but for imported wheat as well. –Allow lower qualities (higher yields) and/or –Pay a higher price for higher quality local wheat

21. Thank you