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Deregulation of agricultural marketing in South Africa: Lessons learned

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Deregulation of agricultural marketing in South Africa: Lessons learned

Deregulation of

    agricultural marketing in South Africa: Lessons learned

Nick Vink

    Johann Kirsten

    FMF Monograph No. 25

    First published in May 2000 by The Free Market Foundation

    PO Box 785121, Sandton 2146, South Africa

Telephone: (011) 884 0270

    Fax: (011) 884 5672

    Email: fmf@mweb.co.za

    Website: www.freemarketfoundation.com

    ? The Free Market Foundation 2000

FMF Monograph No. 25

All rights reserved

ISBN: 1-874930-37-6

Contents

     Foreword

     The authors

1 Introduction

    2 Agricultural policy in historical perspective

     Segregation and support: 1910 to the Second World War

     The post-war period to 1980

     Agricultural policy during the 1980s

    3 Changes in agricultural policy from the 1980s

     Change in tax policy

     Budgetary allocations to agriculture

     Agricultural and rural development policy

     Trade policy reform

     Labour market reform

    4 Reform of the agricultural marketing system

     The period before 1996

     The promulgation of the new Marketing Act

     The objectives of the Act

     The NAMC

     The procedures for allowing intervention in the market

    5 Some effects of the changing farm policy

     Structural changes

     The financial position of farmers

     Changing land use patterns

     Changes in domestic support to South African agriculture

     Effects on productivity of South African agriculture

     Changes resulting from the new Marketing Act

     The average annual growth rate in the consumer price index for food

     Growth in gross domestic investment and foreign direct investment in agriculture

     Growth in new enterprise establishment in the food and agricultural sector

     Changes in cropping patterns

     The benefits of deregulation: Two case studies

     Maize and wheat

     Apples in South Africa and Chile

     The effects of deregulation

     Output and net incomes

     Composition of production (output mix)

     Employment and wages

     Direct investment and new entrants

6 Conclusions

     References

Foreword

    The purpose of FMF Monographs is to use the analytic method of political economy to shed light on how best the promotion of free markets will improve the workings of the South African economy. In particular, authors are urged to apply the microeconomic approach of studying how individuals, firms and households behave in response to either naturally occurring or regulatory induced incentives. This requires that they display a sound institutional knowledge and understanding of their theme. It also implies that authors pursue their analysis in a logical fashion to policy proposals, unencumbered by preoccupation as to what is or is not politically acceptable at any given time.

     In one sense this Monograph has departed from that format. It is less a series of policy

    proposals and more a record of a decade of successful deregulation. Agricultural Control Boards disturbed the industry’s commercial activities for decades. Of course agricultural support policies of various sorts are not unique to South Africa. They have been common throughout the world since the Depression years. They have been maintained allegedly to keep farm incomes above what they would be in the presence of exposure to free markets, including imports. Subsidies, price guarantees and restrictions on imports are all variations on the theme.

     France and Germany in Europe, the USA in the Americas, and South Africa are all countries typified by long-standing government intervention in agricultural markets. The front runner in deregulation has been South Africa. This Monograph recounts the growth in regulation in the early-

    to middle-twentieth century to the revolutionary reforms of the 1990s.

     Few people are better equipped to provide this narrative than Professors Vink and Kirsten. Vink served on the Kassier Committee whose recommendations underlie many of the current reforms. Kirsten, holds a chair at Pretoria University and is widely experienced internationally as a commentator on both small and large scale agriculture.

     Vink and Kirsten carefully document how the deregulation has benefited both farmers, farm workers and the overall economy. They show how food price inflation has decreased and investment in agriculture has risen.

     In addition there has been a marked relative shift away from field crop production towards higher value horticulture and livestock products. Growth rates in gross income from field crops, horticultural products and livestock products have been higher since the elections in 1994. There is evidence of large changes in cropping patterns. The area under yellow maize has declined and under oilseeds and cotton has increased. Thus, a shift from low value to higher value commodities is taking place. Total output of maize and wheat has been maintained despite the declines in area planted, i.e. grain yields have increased. Increased productivity will lead to increased economic activity in rural areas. The non-farm rural economy will benefit as farm production becomes more diversified and storage, processing and support services become more diverse and decentralised. The farm sector will continue to lose jobs, but the demand for labour will switch to skilled and better paid employment. More rural non-farm job opportunities will be created. There is growing evidence of increased foreign investment in input supply, agro-processing and marketing activities directly related to agriculture.

     In short, South Africa is a successful pioneer in agricultural deregulation. The market rules in almost every sector; from maize, to wheat to fruit. (There are still some sectors where little has been achieved most notably sugar). Market control, not state control, unambiguously best serves farmers, consumers, and the economy at large.

     The FMF offers this Monograph as a serious contribution to the economic history of the

    country. The views of Professors Vink and Kirsten are their own and not necessarily shared by the members, directors or staff of the FMF. Nevertheless, as discussions continue on how future policy should evolve, the record as laid out by Vink and Kirsten will be an indispensable foundation for that process.

    W. Duncan Reekie

    Bradlow Professor

    University of the Witwatersrand

    Publications Editor, FMF

References

    Dittmer, N (1998) The Meat Board “carve-up”, FMF Monograph 22, Johannesburg. Kassier, WE (1992) Report of the committee of inquiry into the Marketing Act, Department of

    Agriculture, Pretoria.

The authors

    Nick Vink has been Chair of the Department of Agricultural Economics at the University of Stellenbosch since 1996. He completed his undergraduate and post-graduate studies at the University of Stellenbosch. He completed his PhD in 1986. He has taught at the Universities of the North, Pretoria and Stellenbosch, and managed extensive policy programmes while at the Development Bank of Southern Africa. He has served on several government commissions including the 1992 Kassier Committee which investigated deregulation of South African agriculture. His research interest is focused on agricultural policy and policy analysis, and he has published widely on related issues, both domestically and internationally.

Johann Kirsten completed his undergraduate studies in Agricultural Economics at the University

    of Stellenbosch, and his post-graduate degrees at the University of Pretoria. He served a term as Agricultural Councillor in the United Kingdom. He is currently Chair of the Department of Agricultural Economics, Extension and Rural Development at the University of Pretoria, and was recently appointed Chair of the School of Agricultural and Food Sciences at that University. He has extensive field experience in researching small farmer systems throughout the sub-continent, and recently managed an extensive research project for the Government of Namibia on livestock marketing in the Northern Communal Areas.

1 Introduction

    The purpose of this Monograph is to document the changes in agricultural policy in South Africa in recent times, and to attempt to trace some of the effects of those policy changes on the agricultural sector, and on the broader economy of South Africa. To this end, Chapter 2 of the paper provides an introduction that places these policy changes into historical context. This is followed in Chapter 3 by a discussion of the policy shifts that have taken place since the early 1980s, with a focus in Chapter 4 on changes to agricultural marketing policy. In Chapter 5 the effects of the changes in policy at the sector level are analysed. Chapter 6 summarises our conclusions.

2 Agricultural policy in historical

    perspective

    There has been a long history of state intervention in South African agriculture, which reached its zenith around 1980 with a host of laws, ordinances, statutes and regulations. These affected, and in many cases still affect, all aspects of agriculture, including prices of, access to and use of natural resources, finance, capital, labour, local markets, foreign markets and foreign exchange, etc. Importantly, these measures impacted unequally on different categories of farmers. The two best known outcomes of the complex interaction of social, political and economic factors that characterise South African agriculture are probably the highly skewed distribution of land ownership and food production’s consistent outpacing of population growth rates. In this century these have been the result of at least three distinct phases of structural adjustment in the sector (see e.g. Vink, 1990; Brand et al, 1992; Kassier Report, 1992). There are the periods from Union to World War II; from 1945 to 1980; and from 1980 to the present.

Segregation and support: 1910 to the Second World War

    When the Union of South Africa was established in 1910, legislation from its constituent parts was consolidated into national laws and supplemented by other farm policy measures. The most important legislation was the Land Bank Act of 1912, the 1913 Land Act, the Land Settlement Act of 1912 and the legislation establishing the wine farmers’ co-operative, the KWV. In the period

    leading up to the Second World War further legislation was promulgated, including the Co-operative Societies Acts of 1922 and 1939, the Natives Administration Act of 1927, the Land Act of 1936 and the Marketing Act of 1937. This body of policy instruments set the scene for the almost total segregation of agriculture and for a comprehensive system of support measures to white farmers.

     The main features of this period can be summarised as follows:

    1 The existing racial discrimination in access to land was consolidated in the early part of this

    period and extended as time went on. The cumulative effect of the Land Acts was the

    eventual 87:13 split in access to land, with many African landowners deprived of ownership

    during the decades after 1913. The maldistribution of land ownership is of course worse than

    this, as most of the land in the former homelands is owned by the state. The Land Acts also

    attempted to outlaw other forms of access to land such as labour tenancy and sharecropping.

    This caused much disruption to the farm production of the black peasantry (Keegan, 1981;

    Matsetela, 1981; Willan, 1984; Plaatje, 1987).

    2 The Land Acts, the Administration Act of 1927 and a wide range of Proclamations made in

    terms of these Acts during the 1960s, controlled the form of land access in the ‘reserves’. The

    legislation served to co-opt traditional chieftanship systems into the structures of the state and

    to cement the ruling interpretation of ‘traditional’ tenure systems in law. The principal

    economic effect was to increase the transaction costs of evolutionary changes to these tenure

    forms (Vink, 1986; Ault and Rutman, 1993).

    3 A wide range of instruments was introduced for supporting commercial (white) farmers.

    These included the Land and Agricultural Bank, formed out of existing provincial institutions;

    the securing of input supply and marketing services for farmers under the Co-operative

    Societies Acts of 1922 and 1939; and the tightening of controls over produce marketing under

    the Marketing Act of 1937 and various other bits of legislation. Settlement of state owned

    land by white farmers under the Land Settlement Act of 1912 took place at a time when, in

    the USA for example, there was considerable pressure to keep state owned land in the public

    domain for conservation purposes (e.g. Schmid, 1987).

    4 Although it would change more rapidly in the future, the structure of the agricultural sector

    was subjected to a number of changes during this period. The number of farms in the

    commercial farming areas of South Africa was still increasing throughout the first half of the

    century. Labour tenancy and sharecropping remained features of the farm economy despite

    legal prohibition under the Land Acts (e.g. Keegan, 1983; Morrell, 1986; Trapido, 1986;

    Murray, 1992). At the same time population pressure in the homelands was increasing and

    already above the environmental carrying capacity (e.g. Simkins, 1981). The economically

    perverse inverse spatial pattern of farm sizes, with the smallest farms on the geographical and

    economic periphery of the country, was largely set in this period.

    Prior to 1937 State intervention in agricultural marketing in South Africa was piecemeal, and was seen as merely part of a larger effort to support the agricultural sector. The Marketing Act of 1937, on the other hand, became the cornerstone of commercial agricultural policy: from that date agricultural policy and agricultural marketing were virtually synonymous. It is also no coincidence that the second of the most intrusive interventions in the lives of black farmers, namely the 1936 1Land Act, was promulgated at the same time, thereby consolidating segregation in agricultural

    policy.

     The 1937 Act was amended fairly regularly and eventually consolidated into a new Marketing Act, No.59 of 1968. Although the legislation had succeeded in a) changing the lives of commercial farmers; and b) excluding African farmers from access to most markets for farm commodities, it also provided ample evidence of the working of the ‘law of unintended consequences’. The aims of the Marketing Act were never entirely clear, as the Act itself defines its purpose as intervention in pursuit of ‘orderly marketing’, but does not define this concept. The Kassier Committee (Kassier,

    1992) argued that the Act had not been successful at achieving aims which could have been seen as facilitating ‘orderly marketing’ such as keeping the maximum number of (white) commercial farmers on the platteland; efficient production; reducing the marketing margin; increasing

    onsumption; and price stability. There is evidence that the Act achieved the opposite of each of c

    these aims in at least some industries.

    Despite its claim to foster ‘orderly marketing’, the most relevant of the effects of the Marketing Acts of 1937 and 1968, was its role in influencing access to markets for different groups of farmers. In this respect, it is clear that the main beneficiaries of the legislation were not commercial farmers in general, but a favoured few within the commercial farming sector. Three examples illustrate the point:

    1 Nieuwoudt (1987) estimated that beef marketing quotas at the controlled abattoirs resulted in

    an increase in retail prices and a decrease in producer prices at uncontrolled abattoirs. Larger-

    scale farmers were more likely to be allocated these permits, and smaller-scale farmers were

    more likely to sell to uncontrolled abattoirs.

    2 Under the single channel, fixed price schemes (maize, sorghum, and wheat) agricultural co-

    operatives were generally appointed as agents of the relevant Boards. The co-operatives

    functioned as regional monopolies. Under these schemes, farmers were paid a fixed price at

    delivery to the co-operative, regardless of where the delivery was made. This resulted in

    substantial cross-subsidisation from farmers proximate to the market to farmers situated

    further away from the market.

    3 Van Zyl (1988) has estimated that the maize scheme resulted in a substantial transfer from

    consumers to producers. Small scale (African) maize farmers were twice affected by these

    arrangements: they were often forced to sell maize at a discount, either through a marketing

    arrangement in the former homelands, where they had to wait longer for payment, or via a

    white farmer; and up to 95 per cent of small scale producers were net consumers of maize

    (van Zyl and Coetzee, 1990).

    Similar distortions were found in the wine and sugar industries, which were covered by separate legislation (e.g. Brand et al, 1992). It is, therefore, clear that the Marketing Act resulted in the disempowerment of all farmers in South Africa other than a small proportion of the commercial farming fraternity.

     Despite the recommendations of the Kassier Committee in 1992, the then Minister of Agriculture created a committee (the Agricultural Marketing Policy Advisory Committee or AMPEC) whose report recommended far less sweeping deregulation in the marketing system than was envisaged by the Kassier Committee, or in terms of the stated policy of the ANC. The implementation of the AMPEC recommendations continued after the democratic elections of 1994 under the National Party Minister of Agriculture in the form of a draft Marketing Act which did little to change the skewed benefits apparent under the previous system. However, by the time the National Party had withdrawn from the Government of National Unity, a draft of what was to become the Marketing of Agricultural Products Act, No.47 of 1996, had already been prepared within the ANC, and the way was cleared for its eventual promulgation.

The post-war period to 1980

    The South African economy grew at above 5 per cent per annum to 1970 and above 3 per cent to 1980, both well above population growth rates during this period. Despite the increase in per capita incomes, the economy was characterised by a number of negative features that have been ascribed to apartheid and bad economic policies (Kritzinger- van Niekerk et al, 1992). The most important of

    these features, with their impact on agriculture, were the rise in the inflation rate from the early 1970s (e.g. Moll, 1993) and increasing concentration in the agro-industrial complex. The latter was largely a result of industrialisation through import substitution (Board of Tariffs and Trade, 1992; Brand et al, 1992; Kassier Report, 1992). By the beginning of the 1980s these distortionary influences on prices, together with a range of farm-specific policies, had created an agricultural sector that desperately needed to be reformed (Kassier and Groenewald, 1992).

     The main features of the second phase of agricultural restructuring, which took place after the Second World War, were the mechanisation of commercial farming and the increased pressure on food production in the homelands. Regarding the former, the experience in the maize farming areas tells the story of capital and labour substitution in agriculture (de Klerk, 1983; van Zyl et al, 1987a).

    The total number of farm employees in South African agriculture grew to 1970, and then fell between 1970 and 1980. Despite the decline in the latter period, farm employment was higher in 1980 than it had been in 1950 (van Zyl et al, 1987a). More detailed analyses of farms in the maize

    producing areas show a turning point around 1970, with the growth rate in employees per 1 000 ha dropping faster than that per 1 000 ha of cultivated land in the period 1945-1970 as compared to 1970-1985 (van Zyl et al, 1987a: 245). This turning point around 1970 is graphically illustrated by de Klerk (1983: 46), who shows that while 16 per cent of the maize crop was harvested with combines in 1968, this had increased to 81 per cent by 1977. The area planted to maize increased from 1945-1970 as tractors were introduced on a large scale. This increased the demand for labour to harvest the bigger crop. Combines were introduced in the late 1960s, stimulated by preferential tax treatment (van Zyl et al, 1987a), and the demand for labour fell. This period simultaneously saw the highest rates of forced removals from the farms and an increasing use of temporary or seasonal labour, most of whom were women and children (Marcus, 1989).

     Other features of the commercial farm sector in the post-war period included the tightening of control over prices and the movement of produce in terms of the Marketing Act, and an increase in subsidies to white farmers. The latter was both direct in the form of budgetary transfers for disaster relief, irrigation infrastructure, water subsidies, research etc and indirectly through for example price policy and interest rate subsidies (e.g. van Zyl et al, 1992; Vink et al 1992).

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