Big retailers and food security: danger of the Walmart effect

2011-05-21 13:02

In May 2007, South Africa ran short of milk.

Retailers across the country had ­limited supplies and, for a few months, consumers were not able to buy enough of or, in some cases, any of what is ­undoubtedly a basic and essential product.

Accusations were flying in the press about who was to blame. What happened?

Did South ­Africans wake up one day and ­decide to buy more milk?

The panic-buying that took place ­no doubt exacerbated the scarcity, but other factors ­relating to the procurement strategies of the large retailers were a critical factor.

Over a period of a few years, large South African dairy processors did two things. Firstly, they saw that they could source UHT milk cheaper internationally and ­started to import it.

Secondly, they put more pressure on local producers to supply milk at progressively ­lower prices to compete with the imports.

All this sounds good for consumers until there is no milk on the shelves because many of the local dairies go out of business.

South Africa saw the industry go from 7 077 milk producers in 1997 to 4 184 in 2006 (a decline of 41%), and an international drought saw imports dry up as these global producers gave ­priority to their own markets.

One of the international trade challenges that South Africa and other developing ­nations have been fighting in the World Trade Organisation negotiations is the ongoing and massive support that developed ­countries give to their agriculture sector.

The devastation that subsidies have caused in some of the poorest developing countries is well ­documented.

The often cited example is that a cow living in Europe ­receives a subsidy of $2 (R14) a day, while millions of people in Africa survive on an ­income of less than $1 a day. The argument put forward to maintain these subsidies is premised on ensuring food security.

But the substitution of local ­agriculture and food products with the same products from countries that subsidise their agriculture does not make a level playing field.

What could appear as cheap ­imports are simply heavily supported imports that create artificial price depression.

It is therefore not surprising that when Shoprite took the stand in the hearings on the Walmart-Massmart merger, it stated that part of its procurement policy was not only to source cheap prices but to ensure that there was a reliable source of supply.

Supporting domestic producers was an ­essential part of its procurement approach.

At the Walmart-Massmart hearings, much was made of Walmart’s ability to bring low prices to ­consumers. But how do they do it?

They stated it is done through improved ­efficiencies in their ­supply chain; shifting their import procurement by importing ­directly rather than using ­intermediaries; and shifting from local suppliers to imports.

Much was made at the hearings about the extent to which ­Walmart-Massmart will be shifting its procurement from local ­suppliers to imports.

The state argued that “substitution of local procurement sources with ­foreign ones would negatively affect the public interest by way of a reduction in ­domestic employment, a reduction in the output of particular sectors that economic policy is aimed at developing, and the eclipsing of SME (small and medium enterprises) and HDI (historically disadvantaged) firms”.

The state, through its economic expert, attempted to quantify some of the potential effect, contending that even a 1% shift from local to import content would cause up to 4 000 job losses.

Walmart disagreed and put its own argument forward. “Walmart has a turnover of $408 billion (R2.8 trillion), while the GDP of South Africa is $354 billion.

In fact, in 2004, if it was measured as a country, Walmart would have been China’s eighth-largest trade partner and would have had a GDP larger than 75% of all ­countries worldwide.”

Dependency on imports of agricultural or agroprocessed goods creates a vulnerable situation for a country.

It’s one of the key reasons that government intervened in the proceedings, arguing: “If value chains ­disintegrate, and agriculture, agroprocessing and food production become unviable, then the South African economy will become ­vulnerable to international price and ­currency fluctuations, and more affected by international food shortages.”

Walmart and Massmart have made vague undertakings that they would support local procurement and work with and build the capacity of local suppliers.

The government has sought to get binding undertakings from the company.

The offer made by Walmart and Massmart on the last day of the Competition Tribunal hearings to give support to the local industry is most welcome, but the state has argued that the commitment needs to go further to provide the assurances that arise from our very real public-interest concerns ­regarding the deal.

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