The distortions to incentives in South African agriculture: a case study of the wheat industry

Day, Michael Ross Bowerbank (2018-03)

Thesis (MCom)--Stellenbosch University, 2018.

Thesis

ENGLISH SUMMARY : Throughout history, governments across the world have persisted with policy implementation that restricts international trade, including the trade of agricultural products. Although differing across countries in terms of the policy instruments used, market volatility within agricultural markets has been an unwanted product of this intervention and, in the opinion of Williamson (2008), has had an economic growth-retarding effect. Largely considered as a given, however, is that when governments intervene in markets, price wedges develop between the prices facing domestic market agents and the prices that would have prevailed in a free market without intervention. These price wedges are known in the literature as distortions, as they distort the incentives of market agents to transact. While the contrasting stances of developed nations’ governments and developing nations’ governments towards their respective agricultural sectors has been widely documented in the literature, empirical studies quantifying the distortions to agricultural producers’ incentives caused by the polar policy stances have been dominated by three key global studies. Two of these studies have been conducted under the direction of the World Bank, and the other is an ongoing study by the Organization for Economic Co-operation and Development (OECD). The World Bank study, headed by Kym Anderson, was concluded in 2009 and included a complete set of distortion estimates for South African primary agriculture and selected secondary agricultural industries. These distortion estimates were estimated on aggregate commodity level from 1965 until 2005,1 and their long-term trends were documented by Kirsten, Edwards and Vink (2009). However, due to the intense data requirement, these estimates were never estimated in a disaggregated format per agricultural industry/commodity, which implies that there is limited knowledge of the distortions facing the individual market agents in each of the covered industry value chains. Knowledge of the incentives facing industries, as well as value chain agents within industries, is vital in the formulation of effective agricultural policy. However, just as important as the magnitude of the distortions is the identification of the key drivers impacting the size of the distortions facing aggregate industries or specific value chain agents within industries. This study is the second comprehensive analysis of the distortions to agricultural producers’ incentives in South Africa. The core analysis of this study reapplies the Anderson et al. (2006) empirical framework for the time period 2005 until 2014, as was applied by Kirsten et al. (2009) in order to estimate the distortions faced by agricultural producers. In addition to the aggregate application, the disaggregated approach to measuring distortions to individual agents’ incentives in a vertical value chain is seminally applied in the South African context. The methodology developed by Briones Alonso and Swinnen (2015) is applied to the South African wheat value chain for the marketing years starting in October 2000 and ending in September 2014. The results of the study highlight the opposing incentives faced by primary agricultural producers depending on the trade status of their commodity. The long-term depreciation of the South African Rand was found to be largely responsible for this, with producers of exportable commodities facing positive incentives to produce (positive distortions) as opposed to producers of importables being faced with negative incentives to produce (negative distortions). Furthermore, within the wheat value chain, the study’s results provided critical insight into the manner in which the market power “bulge” at processing level harmed both producer incentives as well as the incentives of consumers to consume wheat flour. The results highlight the need for effective market regulation within the wheat industry, as well as question the core competitiveness abilities of the respective value chain agents. It is recommended that policy makers and market regulators thus consider the implicit impact of the long-term depreciation of the South African Rand on agricultural producers’ incentives, while also focusing on the phasing out of inter-industry distortion differences in order to realise potential efficiency gains. Furthermore, orchestrating an adequate link between the competitiveness and market power of agents within a value chain in relation to their estimated incentive distortions could form an integral part in unpacking the drivers of the inter- and intra-industry distortion differences. Once the key drivers of the respective disparities are identified, a far more informed approach to attempting to eliminate the differences and ensure efficient resource use will be enabled.

AFRIKAANSE OPSOMMING : Dwarsdeur die geskiedenis het regerings die wêreld oor volhou met beleid wat handel in landbougoedere aan bande gelê het. Hoewel die beleidsinstrumente wat gebruik is verskil het in verskillende lande, het dit omtrent oral en altyd aanleiding gegee tot onbestendigheid van markpryse wat op sy beurt, volgens Williamson (2008), ekonomiese groeie negatief beinvloed het. Wat egter grootliks as ’n gegewe beskou kan word, is dat wanneer regerings in markte ingryp, ontwikkel pryswigte (price wedges) tussen die pryse wat agente in binnelandse markte teëkom en die pryse wat in ’n vryemark sou geheers het sonder staatsingryping. Hierdie pryswigte staan in die literatuur bekend as verwringings, aangesien hulle die aansporings van die markagente om sake te doen, verwring. Dit is duidelik uit die literatuur dat die benadering van die regerings van ontwikkelende en van ontwikkelde lande teenoor hulle onderskeie landbousektore verskil. Verder word die kwantifisering van hierdie verdraaiings deur drie belangrike studies gedomineer. Twee van hierdie studies is deur die Wêreldbank aangepak, terwyl die Organisasie vir Ekonomiese Samewerking en Ontwikkeling (OESO) ’n deurlopende studie aan die gang hou. Die studie deur die Wêreldbank onder Kym Anderson is in 2009 voltooi en het ’n volledige stel skattings van beleidsverwringings vir Suid-Afrikaanse primêre landbou en geselekteerde sekondêre landboubedrywe ingesluit vir die periode 1965 tot 2005,2 en die langtermyn tendense is deur Kirsten, Edwards en Vink (2009) gedokumenteer. As gevolg van die intense datavereiste is hierdie beramings egter nooit gedisaggregeer per landboubedryf/kommoditeit gedoen nie, wat impliseer dat daar beperkte kennis is oor die omvang van die verwringings (of aansporings) waarmee die individuele markagente te doen kom te doen kry. Kennis oor hierdie aansporings is noodsaaklik vir die formulering van doeltreffende landboubeleid. Net so belangrik as die omvang van die verdraaiings is egter die identifisering van die belangrikste drywers wat ’n invloed het op die omvang van die verwringings waarmee die totale bedrywe of spesifieke waardekettingagente binne die bedrywe te doen kom. Die huidige studie volg op hierdie analise van die verwringings van landbouprodusente se aansporings in Suid-Afrika, en volg ook die empiriese raamwerk van Anderson et al. (2006), maar nou vir die tydperk vanaf 2005 tot 2014. Hier word die aggregaat sowel as die gedisaggregeerde verwringings in ’n vertikale waardeketting in die Suid-Afrikaanse konteks geskat. Die metodologie wat deur Briones Alonso en Swinnen (2015) ontwikkel is, is op die Suid-Afrikaanse koring- waardeketting toegepas vir die bemarkingsjare wat in Oktober 2000 begin het en in September 2014 geëindig het. Die resultate van die studie bring na vore die kontradiksies in aansporings (en dus in verwringings) waarmee primêre landbouprodusente te doen kom, grootliks as gevolg van die langtermyn depresiasie van die Suid-Afrikaanse Rand met produsente van verhandelbare kommoditeite wat positiewe aansporings het om te produseer (positiewe verwringings), teenoorprodusente van invoerbare produkte wat negatiewe aansporings het om te produseer (negatiewe verwringings). Verder bied die studie kritiese insigte oor die koring- waardeketting en spesifiek in die manier waarop markkonsentrasie op prosesseringsvlak beide produsent-aansporings sowel as die aansporings van verbruikers om koringmeel te verbruik, benadeel het. Die uitslag bring die behoefte aan doeltreffende markregulering binne die koringbedryf na vore, asook die kwessie van die kern mededingendheidsvermoëns van die onderskeidelike waardekettingagente. Daar word aanbeveel dat beleidmakers en markreguleerders dus die implisiete impak van die langtermyn depresiasie van die Suid-Afrikaanse Rand op landbouprodusente se aansporings in ag neem, terwyl daar ook gefokus word op die uitfasering van die diskriminasie teen produsente om sodoende potensiële doeltreffendheidsvoordele te realiseer. Verder kan die skep van sterk skakels tussen die mededingendheid en markkrag van agente binne ’n waardeketting’n integrale rol speel in die uitpak van die drywers van inter- en intrabedryfsverskille. As die belangrikste drywers van die onderskeie ongelykhede eers geïdentifiseer is, sal ’n baie meer ingeligte benadering tot die uitskakeling van die verskille en doeltreffende hulpbrongebruik gevolg kan word.

Please refer to this item in SUNScholar by using the following persistent URL: http://hdl.handle.net/10019.1/103282
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