Keep efficient farmers on the land

2008-07-04 00:00

FOOD prices are rising rapidly. Why is this and will price increases slow down?

Economic theory states that price is the result of supply and demand. This implies that if demand outstrips supply, the price will rise. The food prices are rising dramatically, so does this imply that demand is increasing rapidly as well? I don’t think so. With the food price increase the consumer is buying less, so what is happening?

In the beef industry, the farmers produce weaners which, at seven months old, they sell to the feedlots. The feedlots then intensively feed these weaners until they double their weight and are ready for market. Two years ago, the weaner price increased to a reasonable price of R12 per kilogram as a result of the feedlotters demanding more weaners than the producers could supply.

The feedlotters then needed to sell carcasses at twice the weaner price because only 50% of the live animal is sold as meat. In which case they should have been selling for R24 per kilogram of carcass.

Then the butcher has to take this carcass and prepare it for sale to the consumer at 30% above the purchase price plus 14% VAT. This results in a consumer price of R35 per kg of meat. Bones may sell for R5 per kilogram and fillet for R80 per kilogram with an average of R35, which is usually reflected in the price of topside mince.

Until recently, the KwaZulu-Natal consumer resisted these prices by reducing consumption by 25%. Meanwhile, as I sit in Cape Town, the Pick ‘n Pay around the corner is selling topside mince for R55 a kilogram. What the Cape Towners appreciate is that if you want a product you have to pay for it. Maybe they have more money than the poorer people of KwaZulu-Natal, but at some stage the people of KwaZulu-Natal will be paying the same for their beef. They could become vegetarians, but that won’t help their budget because the price of non-meat foods will be rising in price even faster than meat.

Why is this price increase happening? It does have something to do with supply and demand, but it also has to do with the cost of production. Many consumers believe that farmers will always whinge about the price they are receiving, but their costs of production have become a serious problem.

The main input costs to food production are fertiliser, fuel and animal feeds. Since January this year, the fertiliser price has doubled. In the last year, the fuel price has also doubled and in three years, the animal feed price has gone from R600 per ton to R2 000 per ton.

Without price increases in the products farmers produce, they must sensibly stop production or go bust and consequently also stop production. In both cases food supplies will become shorter and prices will be forced to rise even further.

A lag in food price increases over production costs always ends up with the consumer having to pay much more for food because the farmers have stopped production. This happened recently with the milk price. If the consumer had been forced to pay more for his milk early on, then fewer dairy farmers would have gone out of business and more and cheaper milk would have been available. Unfortunately, farmers did cut back on production or went out of dairying, which resulted in a shortage and the current higher prices of milk.

The wheat producers have predicted that the price of a loaf of bread could reach R10 per kilogram by Christmas. I think they have underestimated their cost of wheat production and the bread price could be even higher. If government intervenes and keeps the bread price artificially down, more farmers will go out of business, there will be less wheat and bread prices will reach an all-time high on the black market.

Statements that the consumer price index will increase by 13% this year are blatant lies. With the current increases in production costs, consumers are going to have to pay at least double what they paid a year ago. In fact many consumers will agree that they are already doing so and will have to pay even more as the year progresses.

The real tragedy of food price increases is that those of us who spend 20% of our budget on food can adjust our other costs to ensure we have food on our plates. The majority who spend 90% of their budget on food will begin to starve.

The only way to help keep consumer prices down is to keep efficient farmers on the land producing as much as possible. How are we going to do that? See next week’s discussions.

• Alastair Paterson is an agricultural consultant. Contacted him at 033 330 4817, 082 880 9002 or e-mail: agpaterson@satweb.

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