Minister Zokwana’s Strategic Grain Reserve a costly option

Recent reports have quoted Minister Senzeni Zokwana alluding to government’s considered intent to establish a strategic grain reserve. At face value, it sounds quite rational, especially in light of recurrent droughts and emerging high food prices. But in practice, it could spell serious negative consequences, especially for a mature and advanced market like South Africa. Before I explain why a strategic grain reserve is problematic, let me get a few “principle” issues out of the way.

First, a strategic grain reserve can either be in the form of cash or physical stock. However, people often associate the term with the latter, where parastatal Boards hold actual physical stocks. The mechanism of stock holding works in two ways:

  • The Board releases stocks into the open market, OR
  • They roll over the stocks into the next marketing year.

The former depresses grain market prices and creates uncertainty for private sector, while the latter often leads to high levels of crop wastage as well as exorbitant costs of storage. I will come back to this point later.

Secondly, in many countries where strategic grain reserve policies are implemented, the Board purchases grain from farmers at above market price, and sells the grain into the market at below market price. The difference between the purchase price and the selling price – which is an effective subsidy – needs to be accounted for under what is called the Amber Box (i.e. an envelope of somewhat trade distortive support, otherwise called the Agricultural Market Support (AMS) in WTO terminology). South Africa is currently allowed to use just over R2 billion in AMS under its WTO commitments.

Let us consider an example of South Africa’s Maize Board. During the pre-1994 market control era, South Africa’s Maize Board usually purchased maize from farmers at prices that were above world-price in most years. If we take the 1985/6 season, as an example, the Maize Board offered a price that was R71.83 per ton above the world price. If, for instance, the current R2 billion AMS applied to that period, then the R71.83 per ton maize subsidy would imply a total maize subsidy of R578 million – which in turn, would translate into 29% of the South Africa’s AMS allowance. This maize subsidy would then be added onto other agricultural subsidies that South Africa provided for other commodities, such diary, wheat, soybean etc. – all of which should normatively amount to R2 billion, in order for South Africa to remain compliant to its WTO commitments.

Having said that, there is yet another subsidy allowance that is offered to developing countries in terms of support.  The WTO allows that developing countries limit their stock holding as follows:

  • They should not exceed 10% of the value of product-specific output, and
  • They should not exceed 10% of the value of non-product-specific output,

They call this provision de minimis, which is essentially an abbreviated form of the Latin for de minimis non curat lex which actually means that “the law cares not for small things”.

Under this provision, the difference between the Board’s purchase price and selling price should not exceed 10% of the gross value of maize production in a specific year. For instance, in 2016, the product-specific de minimis provision for maize was R2.8 billion. So if the maize subsidy (the price difference between the purchase and selling price) exceeds R2.8 billion, then the excess amount beyond R2.8 billion must be allocated into the Amber Box – under the product specific support base.

But there is another caveat though. If for example, South Africa had a Maize Board in 2015/16, and if that Maize Board provided a maize subsidy that exceeded R2.8 billion, the excess subsidy would still make South Africa WTO complaint IF it’s total value of all agricultural subsidies were less than R24.7 billion (the 10% of the value of overall agricultural production (non-specific support)) in 2015/16. Therefore, there is substantial scope for South Africa to implement a grain reserve under its AMS commitments and de minimis provision.

If the Board purchases and sells grain at market price, (and hence zero subsidy,  and no trade distortion), the stock holding programme would fall under the Green Box (i.e. non-trade distortive support). Under this scenario, there will be no limit to what government can spend in a grain reserve.

Having said that, the Minister was quoted to have mentioned Zimbabwe and Zambia as key countries that have existing grain reserves. I would quickly caution here that Zimbabwe’s grain reserve was never fully implemented under the post-1992 era of agricultural market deregulation.

In a research article which I published in 2013, I found no evidence to suggest that Zimbabwe ever reached its physical stock reserve policy – neither in the form of a 500 000-ton of physical stock nor a cash reserve. While I stand corrected, my impression is that Zimbabwe does not serve as a good illustration to justify the Minister’s argument.

A better illustration would be Zambia, which has a comparatively better functioning stockholding programme under its Food Reserve Agency (FRA). Zambia has a public stockholding mandate which includes a minimum procurement rate of 25% of total production. It is difficult to verify how much of that is actually procured – as the FRA’s planned purchases are not always achieved.

In the 2015/16 season, the FRA was reportedly buying maize at K75 per 50 kg bag of maize, which was well below the national average market price of around K87.50 per 50 kg. Using the season’s average ZMW/US$ exchange rate of K9.70, it means that the market price was US$180.47, against the FRA’s was purchasing price of US$154.69. Since the FRA was purchasing grain at 14% below market price, and 3% below the world price, of US$159.16 per ton, this would not count as a subsidy. In this instance, the FRA can purchase as much maize as it wants, and still be WTO compliant.

We cannot challenge the argument of a strategic grain reserve on the basis of WTO compliance. However, we can challenge it on the basis of cost, because it is the cost dimension that makes the strategic grain reserve approach highly questionable.

In terms of cost, if we assume that the FRA kept a reserve stock of 500 000 tons throughout the entire 2015/16 marketing season, and stored this grain at a cost of US$2.50 per ton per month, then the cost of maize would amount to  US$77 million, plus an additional cost of storage in the order of US$15 million. Assuming administration and procurement fees of 20% of total purchase and storage, Zambia’s strategic grain reserve would cost an estimated US$111 million per year. If estimated at the average Rand/US$ exchange rate of R13.80 between 1 April 2015 to 31 March 2016, it translates to an eye-watering R1.5 billion.

South Africa produces four times Zambia’s maize production, and has three times its population. So, a strategic grain reserve in South Africa will be considerably larger than that of Zambia, and will obviously cost much more.

But how much more would this cost be? Let’s assume that the strategic reserve entails a designated authority (i.e. a Maize Board, for example) that is mandated to procure 25% of total white maize production for human consumption. Lets further assume that this Board will purchase and sell at market price (i.e. zero subsidy). The Minister’s proposition would imply purchasing 1.7 million tons, which, on the open market, would cost R6.8 billion. The grain would attract an additional R702 million in storage cost. Add 20% in administration and procurement fees, and you come to a staggeringly silly total of R9 billion.

Does South Africa really need to spend that much money for something that the market can do at no extra cost? I think not. Why not consider other options instead. For instance, let’s have a cash reserve that can be ring-fenced by Treasury as an emergency fund to be used, as and when needed, rather than keeping physical stock. Or better still, why not invest less than 10% of that money in promoting seed research and adoption of drought-tolerant maize varieties? I would further argue that a modern agricultural sector such as South Africa’s does not need an archaic stockholding programme. Rather, it needs more progressive and efficient market policies that foster access to food at a much lower cost. A stockholding programme will be hugely disruptive to markets, and in the long run, even discourage private sector investment.

**Many thanks to Hilton Zunkel (HiltonLambert Practioners of Trade Law) and Gunter Muller (Department of Agriculture, Forestry and Fisheries (DAFF)) for their invaluable comments to this article.

Expropriation of land “with” or “without” compensation: Why the latter is not a viable option

There is a broad consensus that a Zimbabwe-style land reform process will be grossly counter-productive in South Africa. But after two decades of frustration over the slow pace of land reforms, there are growing fears that the proponents of radicalism are beginning to find a voice, particularly amongst a broad section of the poor, who are now desperate for any respite to their continued suffering.

The pressure has undoubtedly mounted on the government to deliver on the promise of land reform, and experts and observers feel that the next 10 to 15 years might prove crucial to the policy direction that will ultimately determine the fate of the agricultural sector. Some analysts even believe that should land reform stall, or remain sluggish, it would increase the likelihood of a radical, if not chaotic policy response.

The reason being that the land reform agenda will fall prey to opportunism from the body politic. On the one hand, the ruling party will feel the need to strategically deflect attention from the broader failures of economic policy and unemployment; while opposition politics will likely use land reform as a draw card to grow political capital among the poor, on the other.

To the keen observer, this scenario has already been playing out strongly particularly in the last five years, and it is now epitomised by President Jacob Zuma’s new “expropriation without compensation” message, which hitherto, had been associated with Julius Malema and the Economic Freedom Fighters (EFF). With President Zuma’s utterances at the State of the Nation (SONA) address going against the African National Congress’ (ANC) policy, the contradictions within the ANC itself will continue to manifestly play out in the public space, and this will reassert the land reform debate at the 2016 policy conference.

Within the context of the politics, the country’s land reform debate, at this juncture, is now narrowly focused on two options, meaning that land reform is no longer at a crossroads, but at a T-junction. The two options that frame this T-junction are whether to expropriate farmland “with” OR “without” compensation. This dichotomy seems to defy the complex nature of the “land question” itself, which until now, has been handled with delicate care. But the intensity of the frustration among a broad section of South African society has morphed into dissent, to the extent that the option to expropriate “without” compensation has become appealing, with little regard over the broader consequences to the sector and the economy.

Yet the “with” or “without” compensation option is in itself, a false dichotomy, not least because the latter will come at a heavy long-term economic cost that will attract some very unpalatable and unintended consequences – some of which could very well negate the benefits that land reform intends to deliver.

In that sense, the public discourse for land reform should continue to emphasize two overriding factors. The first is that, expropriation “without” compensation will wipe out, overnight, R160 billion of bank lending collateralised through land. This will no doubt cause irreparable damage that will not only destroy the value of land – and thus, make it a dead asset – but will also make any future long-term investment prospects in farmland highly unlikely.

The second factor, which is a consequence of the first, is the crisis in confidence which will emerge as a result of the apathy of foreign and domestic investors to inject capital into a sector, especially given weakened and insecure property rights. This crisis in confidence will take years, if not decades to overcome, particularly due to the fact that a longer time frame will need to lapse before a new equilibrium and a new level of certainty can be re-established within the sector. This again, will lead to permanent and irreversible structural damage in the sector, which could cost the country billions of Rand in lost production, unrealised export potential, and losses in taxable agricultural revenues.

With that said, the critical consideration of land reform should not only be to achieve the goal of pivoting the balance of land ownership, but to achieve this feat without disrupting commercial agricultural production. In this sense, while due consideration is placed on the landless, the primary target beneficiaries should however, be black farmers that are actually intent on becoming full-time small to medium (or even large) commercial farmers.

Professor Ben Cousins – a land reform expert – estimated this group of black farmers to be around 200 000 and argued that this group can be allocated farms that have remained under-utilized in the sector, with such farms still being acquired through market purchases. Professor Cousins further argued that, in order to ensure that land reform is not disruptive to food security and foreign-exchange earning exports, the future process will also have to place special consideration on the country’s top 20% of farmers who produce 80% of agricultural revenue.

This sentiment goes against the radical economic transformation narrative, mainly because radicalism is disruptive and costly, by nature. As the debate on land reform continues, the guiding principles –  from a process perspective – should remain anchored in preserving (i) the value of farmland, (ii) food security, (iii) property rights, and (iv) a system of confidence that can attract foreign and domestic capital. Such a process is neither quick nor perfect, but it will at least keep the sector under relative stability, which is key to attaining the long-term growth and equity.

**A version of this article was published in the Farmer’s Weekly of the 27th March 2017

Grasping the scale of the challenge in Zambia’s agricultural sector

On Monday 11th January 2016, Joseph Bish – the Director of Issue Advocacy at the Population Media Center – published an article in The Guardian titled “Population growth in Africa: grasping the scale of the challenge”[1] in which he pointed out two important trends. First, the fact that population growth in Africa will grow at a relatively faster pace, a trend that is at variance with most parts of the world. Second, that this growth is projected at annual increases that will exceed 42 million people per year, which will see the continent’s population double to 2.4 billion by 2050.

One of the more promising African democracies of our time – Zambia – faces a scenario that is consistent with the continental trend. Zambia’s population will grow from the current levels of around 17.2 million in 2017 to 43 million by 2050. To put that increase into context, it means that, on average, a child will be born every minute for the next 33 years, which translates to a population that is two and a half times that of 2017.

But population growth alone tells only half the story, because the population will not only grow significantly, but it will have a considerable purchasing power. Over the next five years (2017 – 2021), average income in Zambia will increase by 20% in nominal USD terms (See Chart 1).

Chart 1

However, the broad consensus of increasing income – and consequently, the emergence of the middle class – does come with a caveat. Professor Thomas Jayne – an International Development expert – in his analysis of mega-trends shaping Africa’s evolving agro-food system, argued that there are scenarios in which income growth will not be “broad-based”[2]. The concentration of buying power among a much smaller segment of the population has led to recent arguments that fundamentally question the size of the emergent middle class, emphasizing that initial projections may have over-looked the impact of skewed income distribution and inequality. A growing body of evidence from research (such as that of McKinsey & Co.) suggests that average incomes in urban centers tend to be significantly higher than the national average – which implies that income growth has oftentimes occurred in concentrated pockets. This dimension of the rural-urban dichotomy has been grossly under-explored thus far.

What has been much talked about, however, is how the urbanization phenomenon is set to re-configure the structure of agro-food markets. In Zambia, 42% of the population currently resides in urban centers. Population projections suggest that Zambia’s urban-rural divide will be evenly split in 15 years’ time (see Chart 2).

Chart 2

This level of rural-to-urban migration is expected to continue unabated, such that 60% of Zambia’s population will be urbanised by 2050. We might not know the extent to which the benefits of income growth will be distributed within and across the urban-rural divide. But what is easily discernible is that the complete reversal of the rural-urban population share will come with some fundamental implications in food production and distribution.

For instance, the competition for land will predictably come into sharp focus, with urban sprawl and other competing uses for land – such as agriculture – likely to become an issue of fundamental importance[3]. Fortunately, Zambia is one of six to eight countries in Africa that are classified as “land abundant”, with a reasonable amount of available crop land. However, with the overall population expected to more than double, there is a good chance that the prevailing scenario of land availability might not be guaranteed in the future. Zambia’s rural population is still going to grow by 80% over the next 30-35 years, with studies also indicating an increase in the size of farms – what Dr Anthony Chapoto termed “the emergent class of medium-scale farmers”.

With land availability likely to become a key uncertainty in the not-so-distant future, how can agriculture position itself to be ready to feed a growing population, within the context of an evolving agro-food system (i.e. growing population and incomes, urbanization, changing dietary patterns etc.)? This question has been the subject of a number of conceptual and empirical analyses over the recent past. My view is that Zambia, like the rest of the continent, has only one of two choices.

The first choice is to do nothing. We can either continue with life as usual and produce and market agricultural production the same way, or at best, effect minimal changes just enough to prevent existential damage to our current production systems. However, without much change in production systems, the sector will not sufficiently meet the demands of a burgeoning populace – and as a result, we will depend on others to produce for us.

Broadly, we have seen this strategy at play so far in the wider African region as a whole, with a few exceptions. The “do-nothing” approach is manifestly reflected in the shift in Africa’s position from a net exporter to a net importer of food over a period of three to four decades (1960s – 1990s). This trade deficit has continued to widen, as witnessed over the past 15 years –  it grew from US$4.7 billion in 2001 to US$24.6 billion in 2015 – an astonishing 5-fold increase [4].

Unlike many African countries, Zambia has made some reasonable progress over the past 10 to 15 years. It’s worth mentioning that maize yields have essentially doubled since the turn of the millennium – from 1.4 tons/ha in 2001 to 2.8 tons/ha in 2015, turning Zambia into a consistent surplus maize producer[5]. In fact, Zambia was the only country to produce a surplus in the 2015/16 drought season. Also, worth noting is how Zambia’s wheat production quadrupled over the past 15 years, from 60 000 tons in 2001 to 250 000 tons in 2016[6]. Zambia has generally established an enviable level of food self-sufficiency that is unparalleled in present-day Africa.

The temptation to become complacent while basking in the glory of recent successes is almost inevitable.  It is important to remind ourselves that all of this success could be negated if the sector adopts a “do-nothing” approach against a tidal wave of imminent changes, whose potential impact we cannot afford to under-estimate. It is for this reason that a second alternative choice is critical to consider.

The second choice is to seize available technologies (such as drought and pest tolerate seed, fertilizers, chemicals etc.) and adopt them in a much more aggressive but sustainable way. In the spirit of Esther Boserup’s narrative of “necessity as the mother of invention”, the doubling of Zambia’s population over the next 35 years implies the need to attain quantum leaps in agricultural production that can only be attained by technology adoption at a significant scale.

That means 2.8 tons/ha of maize yields will not be good enough in 2050, neither is it even today. Despite yield gains, Zambia’s maize yields are still 1.3% below the SADC’s weighted regional average, and 37% below those of South Africa (See Chart 3).  Between 2010-2014, South African average maize yields were 4.2 tons/ha; and in certain parts of the Free State Province, yields for maize under irrigation can get up to 10 tons/ha. Yields in large scale commercial agriculture in Zambia are at par with South Africa, but smallholder farmers lag behind significantly. Professor Thomas Jayne– and his team at the Indaba Agricultural Policy Research Institute (IAPRI) here in Lusaka – argued that if smallholder farmers apply some very basic and appropriate agronomic practices, such as applying lime to correct soil acidity, this alone could improve their yields by as much as 10%.

Chart 3

The other reason why the second option is now a strategic necessity is the recent threat of the Fall Army Worm (FAW) – which has affected 124 000 hectares of cropped land[7] – as well as the perennial threat of the El Nino weather phenomenon, both of which demand that the agricultural sector starts thinking outside of the box. The scale of exogenous changes challenge all of us to think differently about how agriculture ought to adapt and cope with the multitude of factors, above-mentioned.

The more urgent question, however, is if the policy makers have a full grasp of the scope and scale of the challenge. I am inclined to be take a much more pessimistic view. In the three and a half years I have spent engaging policy makers within the African continent, I have derived very little inspiration. In my humble observation, there remains a general reluctance within the continent’s body politic to implement some of the much needed disruptive but progressive agricultural policies that will shift and align the agricultural sector to more ably meet the challenges ahead – particularly in relation to technology adoption.

In the Zambian context, this reluctance also extends to agricultural trade and market policy, with maize export bans indicative of the fact that policy makers are yet to fully embrace the country’s perceived role as the bread-basket for the region. But technical change without market reforms will lead to a negative disruption of markets. As it seems, Zambia has managed, thus far, to produce food at a pace faster than its growing population, but its trade and market policies have not recognized this shift. Of key importance going forward is that, as the gains of technology adoption spread to small scale and emergent medium-scale farmers, market reforms should align to facilitate the free movement of agricultural production within Zambia, and across its borders. There are clear advantages for adopting this approach and the hope is that the policy makers will be bold enough to adopt free market reforms.

*****This article was based on a presentation I gave at the Omnia Farmer’s Day in Lusaka – on 24 March 2017

[1] https://www.theguardian.com/global-development-professionals-network/2016/jan/11/population-growth-in-africa-grasping-the-scale-of-the-challenge

[2] TS Jayne, FH Meyer and L Ndibongo-Traub. (2015). Africa’s evolving agro-food system: Drivers of change and the scope for influencing them. http://pubs.iied.org/pdfs/14637IIED.pdf

[3] TS Jayne, et al. (2016). Africa’s Changing Farm Size Distribution Patterns: The Rise of Medium-Scale Farms. http://fsg.afre.msu.edu/gisaia/Rise_of_Medium_Scale_Farms_Agricultural_Economics_Vol_47_2016.pdf

[4] International Trade Centre (ITC) Statistical Database, (2017)

[5] United States Department of Agriculture (USDA), (2017)

[6] United States Department of Agriculture (USDA), (2017)

[7] Food and Agricultural Organisation (FAO) – Global Information and Early Warning Systems (GIEWS), (2017). http://www.fao.org/giews/countrybrief/country.jsp?code=ZMB

Did US chicken imports flood the South African market? No, but Yes, and Maybe…

Amid the crisis in South Africa’s poultry sector, observers have been questioning the extent to which the AGOA rebate has contributed to the predicament of the country’s chicken industry. Since the Paris Deal – concluded on 5th June 2015 – many well-placed fears seemed to suggest that removing an anti-dumping duty of R9.40/kg on 65 000 tons of bone-in chicken portions would pose a serious threat to the domestic industry, which had already endured several years of economic distress. But the promulgation of the AGOA rebate in December 2015 meant that bone-in chicken imports from the United States could commence as soon as January 2016. So, have bone-in chicken portions from the United States “flooded” the South African market?

In absolute terms, the data seems to suggest not. Between January and December 2016, South Africa imported 22 154 tons of bone-in chicken portions – which is roughly 34% of the 65 000 tons that were set aside under the AGOA rebate provision. Overall, the United States accounted for 9.3% of the 239 465 tons of bone-in chicken portions that South Africa imported in 2016 (see Chart 1). In absolute terms, the numbers evidently show that the United States had a small share of the South African market, and therefore, one would argue that bone-in chicken from the United States did not flood the market. However, some experts would tend to disagree with this viewpoint.

Chart 1

In relative terms, the data could be interpreted otherwise. A “back-of-the-envelope” calculation shows that South Africa’s imports of bone-in chicken increased by 24%, from 192 446 tons in 2015 to 239 465 tons in 2016 (see Chart 2). The fact that the 239 465 tons of bone-in chicken portion imports is a historic record, has led some analysts to believe that the entry of the United States could be seen to have flooded the market. The basis of this argument is drawn from the thinking that imports of bone-in chicken portions from the United States did not “substitute and replace”, but rather simply “added-on” to South Africa’s import volumes.

Chart 2

From 2015 to 2016, total bone-in chicken imports grew by 47 019 tons, and this increase from the United States contributed 22 154 tons to the overall growth. As imports from the United States increased in 2016, those from comparable competitors such as Brazil and Argentina declined by 7 793 tons and 6 748 tons, respectively. This suggests an element of a substitution effect in imports, where imports from the United States partially displaced those from Brazil and Argentina.

However, the overall picture of growth and losses in South Africa’s bone-in chicken imports “before” and “after” the AGOA rebate also present an interesting dynamic. Let’s consider 2015 as the base year for a “before the AGOA rebate” scenario. In 2015, overall bone-in-poultry imports increased by 35 435 tons, and in 2016 “after the AGOA rebate”, they increased by 61 560 tons[1] – this shift suggests an additive effect to imports.

One could dispute this point on the basis that 2015 would not be an appropriate base year for a comparative analysis, because some bans in EU chicken occurred during the course of 2015.  And yet more bans were also implemented on poultry imports from the EU in December 2016, making any assessment even more tenuous. But if, for argument’s sake, one considers a longer-term trend, then you might also come to a similar conclusion. The average growth in South Africa’s bone-in chicken portion imports in 2016 was 1% over and above the previous 5-year average (2011-2015) of 23%. In this sense, it is entirely plausible to argue that the additive effect is larger than the substitution effect – such that the net effect of the United States AGOA rebate has led to an increase in South Africa’s bone-in poultry imports.

In light of the above, one can appreciate the divergent views regarding the influence of the United States’ entry in the South African bone-in chicken market. Some will argue, from an “absolute” perspective, that the United States’ share of 9.3% in South Africa’s bone-in chicken imports does not amount to a “flooding” of the market. However, others may argue from a “relative” point of view, that the additive effects of the United States volumes may have, indeed, led to a flooding of the South African market. That said, whether bone-in portions of poultry imports from the United States “flooded” the market remains debatable, and depends on your point of departure from the two viewpoints outlined above.

[1] This increases include those from the European Union (EU), which accounted for 38 264 tons

Poultry imports as an alternative paradigm to South Africa’s economic transformation: A classic case of throwing away the baby with the bathwater?

Adezwe Camngca’s article titled; “An honest view of the South African poultry industry: Inviting the hen to dinner”[1] published on the 20th January on news24.com articulated some uncomfortable perspectives, which after much thought, deserve attention and debate. Adezwe’s line of thinking evokes a fundamental question: Can poultry imports be used to strategically advance South Africa’s transformation agenda, even if such imports occur at the expense of the domestic industry? This is a very important question, especially given the 65 000 tonne South Africa-US Africa Growth Opportunity Act (AGOA) rebate, which was used to advance transformation through provisions that allow for preferential quota allocations to the Historically Disadvantaged Individuals (HDIs). Given the crisis in the poultry sector, would it be prudent to actively support this approach – on the basis that the industry is not transformed – even as poultry imports reach a level that is now detrimental to the survival of the sector? Given the importance of the poultry sector to the economy, would this approach not become self-defeating in the long run, if actively supported as a tool to achieve transformation? There are four key points in the article that warrant debate.

First, Adezwe argued that the poultry industry (and farming as a whole) still remains the least transformed sector in the South African economy, and furthers argued that an external competitive intervention/stimulus in the form of imports will ensure that the industry remains competitive and honest.

I agree with the first part relating to the lack of sufficient transformation of the industry. However, the lack of transformation is not only a poultry industry problem, but rather, a sector-wide (and even economy-wide) problem. I think it’s a bit opportunistic and unfair to single out the poultry sector, and then peddle the transformation argument as a reason why it should be left exposed to unfair international competition. Also, the poultry industry is also not the only sector that has an oligopoly structure where only a few big players dominate the industry. It’s a systemic issue that even exists in other sectors of the economy such as mining and manufacturing.

Second, Adezwe argued that the ‘external intervention’ in the form of imports will provide the much-needed remedial relief which will allow black (poultry) importers who can bypass what he termed “economic racism” and the perception that “black products” area substandard. He then justified his points further that the perception that “black products” would not of good quality would not apply in the poultry import scenario because poultry imports from the United States (US), should “surely” be of a better quality because it is produced by white farmers.

My considered opinion is that the evolution of the structure of the poultry sector aligns with the global trend of consolidation of large scale operations. In other words, the sector is typically a “volume-driven” business, where margins are relatively thin, and where gains are made on the basis of economies of scale and efficiency. This scenario is, by and large, unfavourable to small players – who might not be able to compete due to small volumes. Yet being small does not imply in any way that the output produced is sub-standard. The statements Adezwe makes here might not be supported by facts.

I don’t quite know what the term “economic racism” means, but I assume it implies the exclusion of Historically Disadvantaged individuals (HDIs) who are finding it difficult to access opportunities to participate in the value chain. The AGOA temporary rebate did offer preferential access to HDIs for import permits under the 65 000 tonne quota for bone-in portion imports from the United States. Now, import quotas are admittedly, a “low-hanging” fruit” that can potentially overcome the barriers to entry in the industry. But it would be naïve to suggest this to be the only tool to ensure the participation of HDIs in the economy, especially if it is at the expense of the existence of an entire sector. The argument that HDIs can now use imports to fight domestic “monopoly” is self-defeating because you do not advance economic integration and development by destroying the country’s local productive capacity.

Moreover, the assumption that poultry imports from the United States are of a relatively better quality will be disputed by the South Africa Poultry Association (SAPA), who have gone on record to argue that South African standards are much higher than those applied to US poultry. More importantly, however, quality and health issues related to poultry meat consumed in South Africa should not be a matter of debate. Standards applied to food should not be compromised on any basis or reason, and food standards should apply to all producers regardless of race.

Third, Adezwe argued that poultry imports are nothing new in the sector in fact more than 40% of poultry products ‘masquerades’ as being locally produced (when in fact it is not).

I don’t quite understand this statement – whether he is saying 40% of all imports are actually being labelled as domestically produced chicken, OR the proportion of imports as a share of domestic production is 40%. If it is the former, then that’s fraud, and perhaps he can bring further evidence to back up his claim. If it is the latter, then one can easily verify this using available data.

Depending on what data source you use, the share of imports as a proportion of domestic production has fluctuated between 27% and 33% between 2011 and 2015. So, on average, chicken imports are 29% of domestic production. If I take Adezwe’s statement to mean that the proportion of chicken imports as a share of domestic production is 40%, then he has over-estimated that figure by a margin of over 10%. I trust SARS is keeping an accurate record of imports, and production data is also being recorded diligently, despite the labelling issues that Adezwe has seen at the retail end of the value chain.

Fourth, Adezwe argued that the perception that imports from the United States do not meet the poultry sectors hygiene and health standards is a gross embellishment that is unsubstantiated. He further argues that the refusal of international imports (especially from the US) is meant to maintain the ‘Monopoly’ that certain companies enjoy in South Africa, which he believes to have done very little in terms of SME development or supporting/preferring BEE suppliers.

I have partly addressed this question when I answered the second point. Concerns over health and food safety are serious and I imagine Adezwe has not had a discussion with Veterinary experts from the Department of Agriculture, Forestry and Fisheries (DAFF) to get a deeper appreciation of how the US negotiations proceeded, and the challenges that arose when Health protocols were being discussed. Adezwe clearly takes this very serious issue for granted, and this point needs to be treated with the contempt it deserves. You cannot peddle the transformation narrative at the expense of human health risks – that argument is false and misplaced.

Adezwe then argued that, the debates against imports are often articulated within the context of food security and (un)employment, and not from the perspective of how imports may actually indirectly contribute to the shrinking of all educational programmes relating to Agriculture and the Animal sciences.

This point does not only negate the other points Adezwe made about letting imports into the country as a counter-narrative to “monopoly” and white dominated agriculture, but it contradicts the very essence of the leftist perspective of transformation he has advanced in his article. As I mentioned before above, you do not address the question of inclusivity and economic integration by destroying the productive capacity of the economy. There are models that can be used to explore how to integrate more HDIs into the economy, without necessarily damaging prospects of growing the poultry production base, or sacrificing the thousands of jobs in the sector.

In his conclusion, Adezwe argued that the country’s politicians and the government departments that have an oversight over the industry have failed the country and industry “in many ways”. He further pointed out that a trite principle of [the] political engagement[s] that [define South Africa’s] foreign trade policy must consist of self-interest strategies chosen by the state to safeguard its national interests and those of its citizenry. He then makes the recommendation that South Africa, in general and the Departments Agriculture, Forestry & Fisheries [DAFF]and Trade and Industry [dti] should always strive to only engage in agreements that have a tripartite-nature of being equitable, fair and balanced.

I have my issues with DAFF and the dti, and maybe they haven’t performed to the expectations of the broader public. I do however want to emphasize that, despite the challenges that are seen in the poultry sector, I do not doubt the intention and goodwill of the government to safeguard the interests of the country. I think the government sometimes does not get the credit due on some of the more progressive trade policy milestones that it has managed to attain. It is a difficult task to balance the multiple interests of a society, and the AGOA negotiations as a special case in point, were admittedly challenging.

Overall, I think the perspective taken by Adezwe and like-minded South Africans are coming from a place of deep frustration and anger over the painfully slow progress of transformation in the broader economy. While feelings of anger and frustration are well-placed, care should be taken not to allow these negative emotions to drive and shape the narrative of economic transformation. The problem that South Africa has is too significant and too important to be driven purely by emotion, and overcoming them will require a level of calmness and sober-mindedness that can allow for progressive and holistic approaches.

[1]http://www.news24.com/MyNews24/an-honest-view-of-the-south-african-poultry-industry-inviting-the-hen-to-dinner-20170120

The one million jobs that never was: South Africa’s employment dilemma in agriculture

The 6th Chapter of the National Development Plan (NDP) – which sets out a vision of creating an integrated and inclusive rural economy – presented a very ambitious target of how the agricultural sector can create an additional one million jobs. Is this policy target realistic OR is it “optimism taken a tad too far”? As the African National Congress (ANC) pontificated on how agriculture will become a key job-creating sector, questions have remained over how it was going to be possible, given that agricultural employment numbers were already set on a long-term downward trend since the late 1960’s.

Research by Dr Frikkie Liebenberg at the University of Pretoria showed that the sector was actually losing jobs, with formal regular and seasonal agricultural employment at a record low – 624 000 jobs at the time he wrote his article in 2011. This is almost a third of the sector’s employment figures in the 1960’s. Against this background, the “one million more jobs” narrative has been unconvincing for four fundamental reasons.

Firstly, as pointed out by the Bureau for Food and Agricultural Policy (BFAP), a number of farm-level factors are underpinning the terminal long-term downward trend in employment, and these include mechanisation and improved productivity. This has been widely attributed to a naturally occurring “optimisation” phenomenon that has been hastened by the deregulation of agricultural markets, and reinforced by the South African agricultural sector’s quest to attain global competitiveness.

Secondly, despite agricultural GDP growing from R21 billion in 1994 to R83 billion in 2015, the sector’s standing in the broader economy has, however, diminished over the past five decades. In the last 20 years, agriculture’s share of the economy had declined from over 3% in 1994, to current levels of around 2,4%.

While agricultural sector’s GDP growth was matched by a growth in agricultural exports, the sector’s share of overall exports declined from a third in the 1970’s, to less than 10% in the 1990’s, to between 4% and 6% over the past 5 years. Thus, as the sector grew in terms of GDP and exports, it has employed less people; and this labour has leaked out of agriculture to other sectors of the economy.

Thirdly, and related to the first point, is the recently proposed minimum wage of R3500 per month, to be implemented in 2018. On average, 89% of agricultural sector employment is either semi-skilled or unskilled labour, and the latter segment of the labour-force is the targeted beneficiary of the minimum wage policy. However, despite its moral imperative, the minimum wage will inadvertently act as a restriction against farmers hiring semi- and unskilled labour. With all its good intentions, the minimum wage will likely lead to a decline in employment opportunities for the 90% pool of semi- and unskilled labour, with farmers opting rather, to mechanize, in order to manage labour costs.

Fourth, there is growing evidence that the intensive commercial farming sector has shifted from hiring permanent workers to using more seasonal workers, as farmers try to mitigate against the risks of heightened uncertainty in agriculture.  Much of the sources of uncertainty stem from a number of land reform and restitution-related legislation – which include the Extension of Security Act, Expropriation Act, Protection of Investment Act – whose collective effect have led to a perceived weakening of property rights, and a general loss in investment confidence in the sector.

Against the four factors outlined above, there is little indication so far to suggest that the agricultural sector will generate jobs to anywhere close to the number suggested in the National Development Plan. In fact, the biggest challenge currently facing the ANC government is to reverse the terminal long-term trend of job losses in the agricultural sector, let alone create one million more additional jobs. The latter cannot occur without addressing the former.

So, as we look ahead, will agriculture ever generate an additional one million jobs at some point in the future, if the existing systemic risks and structural conditions are addressed? Keeping in mind that the one million jobs mantra effectively means more than doubling agriculture sector employment. Also, keeping in mind that historically, the sector’s growth has not led to job growth, as witnessed over the past fifty or so years. Given the current realities, one can argue that the hope for an additional million jobs in agriculture is misplaced, and policy has put unrealistic and undue pressure on agriculture to generate job numbers that might never materialise.

**This article has been published by the Farmer’s Weekly edition of the 3rd March 2017

Is it immoral to earn profits from the poor? An African perspective

In two articles by Paul Polak and Mal Warwick, they ask if it is immoral and wrong to earn profits from the poor[1] . From an African perspective, this question is even more fundamental for four key reasons.

Firstly, because 75% of the world’s poorest population – earning less than US$1.25 per day – resides in the African continent (Packtor, 2014) [2].

Secondly, because despite the continent’s robust economic growth – averaging 5.2% per year over the past two decades – the number of people living under $1.25 per day has continued to increase unabated, from 358 million in 1996 to 415 million in 2011 (Chandy, 2015)[3]. Laurence Chandy argued that the number of the poor in Africa are expected to remain around 400 million until 2020, in spite of a forecast of ongoing economic growth.

Thirdly, that the high economic growth on the one hand, and the ever-increasing head count of the poor on the other, supports evidence that positive past and future economic growth has not, and will not be “broad-based”. As a consequence, the level of inequality – which has been, and still is at unacceptably high levels – will remain a key feature of African society.

Fourth, that under the existing economic model, it will take 100 years for poverty to be eradicated in the world (Woodward, 2015)[4]. If it is going to take a century to bring the poorest above the standard poverty line of $1.25 per day, it implies that the Sustainable Development Goal (SDG) of eradicating poverty by 2030 is unrealistic, at best.

Within the context of these poverty dynamics is the reality of Africa’s exceptionally risky “doing business environment”, which comes with a justifiably higher investment premium. So as can be expected, business investments in Africa would attain relatively higher returns (or say profits) that ought to reward investor’s appetite for higher risks.

Against the backdrop of the typical “high risk-high return” scenario in Africa, Polak and Warwick’s moral question becomes somewhat of an enigma. If we know that poverty can never be completely eradicated, and if we have a “high risk-high return” scenario, would it be morally reprehensible for businesses in Africa to seek profit from the continent’s 400 million poor consumers? If so, then what could be deemed a socially acceptable level of profit? Would such a profit level be economically viable?

To answer these questions, Polak made reference to Milton Friedman – a celebrated free market economist who argued that “…there is one and only one social responsibility of business – to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game.” However, many critics do not entirely subscribe to the notion that profit-seeking motives are a lever for reducing poverty, even if governed by a fair rule-based framework.

Critics of free markets argue that, as countries competitively seek to attract foreign direct investment, they implement policy reforms such as tax incentives and favourable profit repatriation laws, which create conditions that disproportionately benefit investors. Philip McMichael – a Marxist political economist – argues that this process sometimes occurs at the expense of the poor, while contemporaneously re-enforcing the cycle of widening equality. Therefore, the ideological connection between free markets, globalisation and widening inequality has been well established.

Whether profit-seeking motives offer a “sustainable” basis for poverty reduction OR not remains a polarised and open-ended debate. What is more interesting, however, is an emerging counter-narrative to the age-long “capitalist versus socialist” economic system argument – called “conscious capitalism”[5]. What makes “conscious capitalism” uniquely fascinating is that the profit-seeking motives – which remain the centre-piece of business survival – are brought much closer in line with societal interests. The integration of social imperatives into a business’ profit model is a critical part of the sustainability equation, and as such, “conscious capital” resolves the moral dimension of “earning profits from the poor”.

Therefore, it is neither wrong nor immoral to earn profits from the poor, if such profits are made under the progressive guiding principles of “conscious capital”, which would allow for profit seeking motives to be framed within the context of creating societal wealth. This is because in the long run, “conscious capital” will expectedly move more people out of poverty, and reduce inequality.

[1] http://businesssolutiontopoverty.com/wrong-earn-profits-poor/https://unreasonable.is/is-it-immoral-to-earn-profits-from-poor-customers/

[2] Jordanna Packtor (2014). Top 10 Poverty in Africa Facts. https://borgenproject.org/10-quick-facts-about-poverty-in-africa/ The Borgen Project.

[3] Laurence Chandy (2015). Why is the number of poor people in Africa increasing when Africa’s economies are growing? https://www.brookings.edu/blog/africa-in-focus/2015/05/04/why-is-the-number-of-poor-people-in-africa-increasing-when-africas-economies-are-growing/ . Brookings.

[4] David Woodward (2015). Incrementum ad Absurdum: Global Growth, Inequality and Poverty Eradication in a Carbon-Constrained World. http://wer.worldeconomicsassociation.org/files/WEA-WER-4-Woodward.pdf

[5] https://www.consciouscapitalism.org/https://hbr.org/2013/01/cultivating-a-higher-conscioushttp://ventureburn.com/2013/04/why-african-entrepreneurs-need-to-be-thinking-about-conscious-capitalism/