Industry remains on edge amid National Treasury’s tariff dilemma

On the 8th April 2016, the National Treasury released a statement which notified industry and other interested stakeholders of a review on the variable tariff formula for wheat, maize and sugar. The expectation was that, after soliciting for public comments, National Treasury would consider them and finalise the review process by the end of 2016, the conclusion of which would lead to necessary recommendations to the variable tariff formula in general, and the wheat duty in particular.

However, on the 23rd December 2016, National Treasury released another statement to inform interested parties that the review process would be extended up to the end of March 2017. It is now May 2017, and there is still no word from National Treasury regarding the conclusion and outcome of the review process.

This has obviously gotten the industry anxious, adding a degree of needless uncertainty to markets. What makes the tariff review process particularly tricky is the divergent views from different stakeholders in the sugar and wheat markets.

A Wheat Industry Perspective

The level of protection for wheat is determined by the difference between the world reference price and the 3-week moving average of the Chicago Board of Trade (CBOT) price, calculated on a weekly basis. When this deviation amounts to more than US$10 per ton for 3 consecutive weeks, a new duty is calculated and a new reference price is set.

The wheat industry has been concerned by the uncertainty that tariff adjustments bring to markets. While the wheat tariff remained unchanged for four years at null between August 2010 and October 2014, it has changed eight times between October 2014 and March 2017.

While farmers are content with the variable formula, traders are concerned that the tariff formula is exposed to currency risk, which has been particularly severe due to the volatility of the ZAR to US$ exchange rate.

Moreover, it takes about six to eight weeks for the tariff adjustment to occur – the lag period between the time the tariff adjustment conditions are met, and the time when a tariff change is effected by law. The average six to eight-week delay in the trigger causes a decline in volumes traded on the South African Futures Exchange (SAFEX). Industry experts point out that this decline in traded volumes on the market leads to a significant depletion in liquidity by a factor of 30%.

Meanwhile, data over the period October 2014 and January 2017 shows that, South Africa’s wheat imports during the “delay months” (320 910 tons) are three times the overall average imports of the other months (120 760 tons). This could be an indication of “stock-piling” by traders seeking to avoid tariff hikes.

Wheat 2

An additional effect of the delay is that, in the past, the timing of the trigger was sometimes overtaken by events in the market, such that tariffs decline (increase) when current market conditions suggest that it should increase (decline). In this sense, the variable tariff model can be, at times, counter-intuitive because the slow trigger mechanism works against fast-paced and quick changing market conditions.

A Sugar Industry Perspective

The level of protection for sugar is determined by the difference between the world reference price (the London No.5 Settlement Price) and the 20-trading-day moving average of the London No.5 settlement price, calculated on a daily basis. When this difference amounts to more than US$20 per ton for 20 consecutive trading days, a new duty is calculated and a new reference price is set.

The sugar tariff has changed 12 times over a 36-month period – between April 2014 and May 2017 (see Chart 2). After the sugar tariff peaked to R3 040 per ton between October 2015 to November 2015, the tariff declined to zero in February 2017. This was the first time the tariff had reached null since April 2014. But since March 2017, the sugar tariff has been R63.63 per ton.

Wheat 1

Like the wheat industry, sugar producers (cane producers and processors) do not have a problem with the existing tariff model. Although they are content with the overall framework of variable tariff formula itself, they hold a few reservations relating to specific variables used to calculate the tariff.

The dollar-based reference price calculation in the formula was based on a distortion factor of 7%, and this was drawn from a 2013 report by Patrick H. Chartenay. Some industry players believe that this 7% distortion factor was not appropriately quoted, as the true level of distortion – which captured both direct and indirect support in the Brazilian market for both ethanol and sugar markets – was in the order of 22%. As such, the dollar based reference price under-stated the true level of global market price distortion.

Sugar market stakeholders further argue that, the variable tariff formula does not contain an inflation adjustment factor, which would ideally capture the rising cost of production inputs. While one might argue that the exchange rate could be a proxy for an inflation adjustment, it is largely exogenous and its volatility present considerable risk.

With sugar producers and processors generally in favour of the variable tariff model, traders remain skeptical for the same reasons that wheat traders have. After peaking to 720 000 tons in the 2013/14 season, sugar imports declined by 24% in the 2014/15 season to 544 000 tons as the tariff increased from null to an annual average of R1 390 per ton. Imports fell further by 15% in the 2015/16 season to 462 000 tons as the tariff increased by a futher 80% to an annual average of R2 508 per ton.

Like in the wheat sector, a series of tariff hikes between April 2014 and October 2015 saw a peculiar trend of peaking sugar imports just before tariff hikes. There is evidence of traders stock-piling non-SACU originating sugar imports which are affected by higher tariffs.

The discussion above reveals two diametrically opposite views related to the variable tariff formula. One the one hand, traders generally favor the a departure from the variable tariff formula. Traders in the wheat market suggest that the it would be ideal to ditch the less predictable “complex variable” tariff formula for a more predictable much “simpler constant” ad valorem tariff. Further arguments to support this view suggest that such an ad valorem tariff could be adjusted every three to five years to reflect the most recent structural market conditions, and should also incorporate an appropriate distortion factor.

The dilemma

On the other hand, traders from both the sugar and wheat industry seem to favour the current structure of the variable tariff formula. Sugar producers have reservations on the variables contained in the formula, namely the selection of an appropriate distortion factor, as well as the need to incorporate an additional inflation adjustment factor, as previously discussed.

Traders, however, prefer to see a more predictable and certain tariff mechanism. Tariff hikes have significant implications on trader’s sourcing decisions. What makes it even more difficult is that the dates on which regulators decide to effect tariff hikes is never known until the day they are published through the Government Gazette. As a result, there are instances in which tariff changes occur when shipments are already in transit, which is problematic.

The divergent views between producers and traders in the sugar and wheat markets present an interesting dilemma for the National Treasury, especially given that both divergent arguments have merit.

Debunking the paradox of land expropriation without compensation

I had a colleague of mine lambast my views in the Farmer’s Weekly of the week of 27 March 2017 where I argued why expropriation without compensation is not a viable alternative. Before I debate my views, it’s important for me to point out that I am a firm believer of social justice, and I believe in land reform as a means to addressing inequality. The only difference between myself and my colleague lies in the manner through which this goal is attained.

Some strong believers of social justice argue that, since land was expropriated from the black population without compensation, the white population that now owns it should be afforded the same courtesy. Though logical, the reality however is not that straight forward. There are two reasons why land should not be repossessed without compensation.

The first reason why it is now imperative to pay for land that was taken for free is that South Africa needs to maintain a delicate system of confidence – otherwise known as the economy. Today, South Africa is the most dynamic and complex economy in Africa – much more sophisticated than what it was back in 1913 when the Land Act was passed.

So complex is this system of confidence that the expropriation of land will in itself not be the problem, but rather, the perceptions around it – namely its weakening of property rights and the perceived risk of capital to be securely invested within the agricultural sector and the rest of the economy.

The second reason, why it is important to pay for land that was taken for free is that, expropriating land without compensation, in effect, strips the land of its intrinsic value. When you make land a free commodity, the system of confidence can no longer accept it as collateral because it will be perceived to no longer hold its value. Some analysts will argue that one could consider collateralizing agricultural output instead of the land itself.

That proposition, however, does not resolve the enormous risk created by weak property rights at farm level. The system of confidence will not afford farm-level agriculture any capital without a significant premium. This premium – otherwise known as the cost of capital, or simply as interest – will adjust upwards because the cost of money has to match the level of risk associated in investing within a system that has weak property rights.

The inherent problem is that, returns in agriculture are generally low, and do not match this risk premium. As a result, the potential risks will outweigh the returns to agriculture. The result is that capital will seek higher returns with lower risks in other sectors of the economy. Without any investment in agriculture, you end up with is land that has no value, and a system of confidence that cannot accept land as a safe haven of investment.

Given the foregoing, my argument is that you cannot restore human dignity through land if such land becomes a dead asset. You cannot empower a landless population sustainably by giving out a valueless asset. Real economic empowerment lies, rather, in giving people a productive asset in which the system of confidence offers its true intrinsic value – you cannot have one without the other.

For many land reform radicalists, the principle of compensating land that was taken away at no cost under the apartheid system is one that sounds counter-intuitive at best, and even anti-poor, at worst. And I know many will reject the rationale articulated in this opinion piece, not on the basis of merit, but ideology.  With due respect to the pain and suffering of the poor, many of whose stories are yet to be told – I believe that as the nation reflects on the failures of past land reform efforts, a new collective wisdom can emerge to craft a new progressive model.

*This article was published in the Farmer’s Weekly edition of the 24th April 2017

Investment in irrigation infrastructure now an integral part of Africa’s Green Revolution

It was not until Anton Earle asked the question, when I learnt that Johannesburg is actually wetter than London. I had to cross check online just to make sure – Johannesburg receives an average annual rainfall of 604 mm per year, compared to London’s 593 mm. But why then does London look and seem wetter than Jo’burg?

Anton, who happens to be a water expert, and also a Director at the Stockholm International Water Institute (SIWI) explained this to be a result of evaporation. There tends to be relatively much less evaporation in London compared to Jo’burg – so moisture is retained for much longer in London.

In fact, as Anton explained, water in sub-Saharan Africa tends to evaporate three times faster than in Europe. Therefore, sub-Saharan Africa requires more water use efficiency, as well as harvesting – particularly for agriculture, in order to achieve food security.

Yet much of African agriculture is almost entirely dependent on rain-fed agriculture, which suffers from the curse of either too much or too little rainfall. The forces of nature hardly ever provide that precise amount of rainfall that perfectly suits agricultural production.

And with extreme weather phenomena becoming more of a new norm, the variation in yields and production have become particularly severe. This reflects the extreme vulnerabilities of production systems in sub-Saharan African agriculture.

Yet there is very minimal investment that has gone into developing irrigation infrastructure. Recent studies point out that 13 million hectares in Africa are under irrigation, which is 6% of the continent’s total cultivated land. In South Africa, 12.9% of cultivated land is under irrigation – which is 1.7 million hectares.

Perhaps part of the reason for this low irrigated hectarage is the exceptionally high levels of investment required to develop irrigation infrastructure. Water experts argue that developing a hectare of irrigation requires up to US$8 000 per hectare. This is well beyond the reach of many small to medium scale farmers, who form the bulk of sub-Saharan African primary agriculture.

Part of the reason for this high investment cost has been explained by the unfavourable topography and bio-physical terrain. What is even more discouraging, however, is that such significant investment will unlikely be made if returns in agriculture remain low.

Analysts believe that doubling area under irrigation will take an investment cost of US$32 billion – which would expand  sub-Saharan Africa’s irrigated area by 16.3 million hectares, with an average return of 6.61 percent.

With that said, and against the reality of climate change, what then becomes of the much hoped for Green Revolution for Africa? Whereas poor infrastructure, lack of political will, and corruption, among other factors, led to a false start of the Green Revolution in Africa, the centrality of climate change to the discourse of agricultural development means irrigation has become an integral part of future growth path of the sector.

This emerging reality seem to suggest that Africa’s Green Revolution in will not follow a path comparable to that of Asia. It will be driven by the evolution and revolution in climate smart agriculture.

Will Brexit Reduce South Africa’s Potential to Fill the EPA Wine Quota?

Under the recently implemented Economic Partnership Agreement (EPA), the EU makes a provision for South Africa to export 110 million litres of wine duty free, in 2017. This volume will increase by roughly 1% per year until 2021, to reach 114 million litres.

The overall volume is split 70:30 between packaged and bulk wine – meaning that in 2017, the quota for packaged wine will be 77 million litres, and that of bulk wine will be 33 million litres. South Africa’s wine exports exceeding this volume are charged a tax of between €15.40 and €35 per 100 litres, depending on the type of wine.

How will the departure of the UK from the EU affect the EPA wine quota? Will Brexit reduce South Africa’s potential to fill the EPA wine quota in the future? To answer this question, let’s look at South Africa’s wine exports to the EU and the UK, respectively.

Between 2012-2016, South Africa exported an average of just over half a billion litres of wine per year. About two thirds of this went to the EU, with packaged and bulk wine exports being 90 million litres and 230 million litres per annum, respectively (see Chart 1).

Chart 1 - v2

That said, there are two reasons why Brexit is an important factor in South Africa’s wine exports. First, because the UK accounts for an average of 36% of packaged wine volume and 32% of bulk wine exports of South Africa’s wine exports that went to the EU between 2012-2016. Overall, the departure of Britain reduces the EU market by 108 million litres (or 34%), which makes Brexit significant.

Secondly, because the UK has been one of South Africa’s fastest growing markets for packaged wine over the past 5 years. The UK has increased its consumption of South Africa’s directly exported packaged wine by 10 million litres between 2012 and 2016, whereas the rest of the EU grew by 6 million litres over the same period. This translates to a growth of 8% per year for the UK, and 2% per annum for the EU.

After running 10 000 possible wine export scenarios over the period 2017-2021, there is a 90% probability that South Africa’s export volumes to the rest of the EU (without the UK) will lie between 189-211 million litres. Table 1 summarizes three scenarios at the margin.

Table 1 - v2

The scenarios can be described as follows:

  • A low road scenario: South Africa’s wine exports to the rest of the EU decline by 1% per year to 189 million litres in 2021; consisting of 54 million litres for packaged wine, and 135 million litres for bulk wine.
  • A middle-of-the-road scenario: South Africa’s wine exports to the rest of the EU remain stagnant at around 200 million litres in 2021; consisting of 57 million litres of packaged wine, and 143 million litres of bulk wine, and
  • A high road scenario: South Africa’s wine exports to the rest of the EU increase by 1% per annum, to 211 million litres in 2021; consisting of 61 million litres for packaged wine, and 150 million litres for bulk wine.

In light of the scenarios above, will Brexit reduce South Africa’s future export opportunities to the EU under the EPA wine quota? There are two points to note. Firstly, packaged wine exports to the rest of the EU will lie between 54-60 million litres, which will be well below the packaged wine quota of 80 million litres in 2021. This leaves an excess capacity of between 19-26 million litres.

Secondly, however, the EPA allows for bulk wine to be exported under the packaged wine quota from 1st September of each calendar year. As such, South Africa will be able to utilise the excess bulk wine exports over the last four months of each calendar year. This means South Africa will export an additional 11-26 million litres of bulk wine between September and December each year, bringing annual bulk exports to between 45-60 million litres of bulk in 2021, instead of 34 million litres.

The collective implication of the points above is, South Africa’s total of bulk and packaged wine exports to the rest of the EU will remain above the EPA quota, exceeding it by between 75-97 million litres under low and high road scenarios, respectively. Therefore, Brexit will not reduce South Africa’s opportunities for “direct wine exports” into the EU.

While on this point, there is a key caveat to take into consideration; which is, South Africa’s bulk wine that is exported into the EU, and then re-exported into the UK as packaged wine. This analysis has not taken this dimension of the argument into account because available data does not provide insight into South Africa’s wine re-exports within the EU.

So, South Africa’s direct exports to the UK under-estimate, somewhat, the level of impact of Brexit, especially because it doesn’t take into account the outcome of the EU-UK negotiations – whether there will be a trade deal or not. That uncertainty, combined with a lack of data, makes the exercise of calculating the overall cost difficult to estimate.

If we stick to direct exports, we can deduce that Brexit will present a further opportunity if South Africa can secure a trade agreement with the UK. A SACU-UK trade arrangement might see South Africa exporting 106 million litres of its wine duty free into the UK market (consisting of an average of 33 million litres of packaged wine and 73 million litres of bulk wine).

 

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