South Africa is facing a unique season, in which a severe drought, high fuel prices, a weak Rand all simultaneously conspired to brew a perfect storm that has led to exceptionally high food prices.
Recently, the South African wheat import tariff increased by 30% to a record high of R1 591.40 per ton.
As discussions around this subject start to gain momentum, it is important to keep in mind that trade policy should seek a balance on producer and consumer welfare, in equal measure. For consumers, higher wheat import tariffs are adding to the bullish pressure on staple food prices. On the producer side, South African wheat farmers also need to be protected against unfair competition from highly subsided foreign imports.
The underlying logic of the tariff mechanism is admittedly simple. An increase in import tariff would keep the domestic wheat prices at a level attractive enough to incentivize farmers to increase production. A knock-on effect would ultimately moderate prices in the long run. In the short run, prices would inevitably increase. However, the extent of the increase remains debatable.
While it is important to take a long term view, it is worth noting that achieving a supply response of the magnitude that would lead to self sufficiency is impossible, at least not in a season or two. South Africa currently produces just 40% of its annual wheat consumption of 3.4 million tons. From this perspective, a tariff is not a dismissible option, but a strategic necessity.
The question is, how should such a tariff be structured in order to attain the delicate balance that promotes domestic production on one hand, while fostering food security on the other. The levels to which the tariff has reached thus far has led to emerging concerns regarding the “variable tariff formula” method.
South Africa is facing a unique season, in which a severe drought, high fuel prices, a weak Rand all simultaneously conspired to brew a perfect storm that has led to exceptionally high food prices. Meanwhile, as the variable tariff formula triggered naturally in response to falling international wheat prices, which are currently at a six year low of roughly US$192 per ton. As a consequence, the import tariff escalating to a record high, attracting the unintended consequences of food inflationary pressure. In essence, the high wheat import tariff is a double-edged sword, protecting farmers from unfair international competition on the one hand, but burdening consumers through increased prices on the other.
Well-placed concerns have brought the import tariff mechanism in the limelight, with a government-sanctioned review in order, which now extends to all other formula-determined import tariff lines such as maize and sugar. The argument is not to do away with the import tariffs entirely, but to identify a more appropriate and less complicated instrument of protection.
Important to bear in mind, with insights from Grain South Africa’s data, that South African wheat production has been steadily decreasing over the years. This decrease could be attributed to the effects of climate change, which has resulted in many farmers, particularly in the Free State province, opting out of high risk wheat production. At the same time, wheat imports have been increasing gradually due to increasing demand and decreasing production.
Given this scenario, the question remains – just how long and how much of societal welfare is being sacrificed, if import tariffs increase against an increasingly widening wheat deficit? The trend is somewhat disturbing. Unless there is an active drive to increase investments in seed breeding research, which would lead to higher yields, and thus reduce the country’s dependence on imported wheat, a tariff escalation of the magnitude that we have seen lately would only serve to hurt consumer welfare.
In the long run it is increased investment in research, which will save South Africa’s wheat sector. In the short term it is perhaps trade policy that can help to balance consumer and producer welfare. The question, however, is what instrument will work better – an “ad-valorem tariff” or a “formula-determined tariff”? With the import tariff review underway, by end of this year the National Treasury might give us some guidance in this issue.
Image Credit: http://kramerseedfarms.com/
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