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The Perishable Pundit Visits South Africa
Dispatch IX: Wrong Ways To Reduce Food Prices

Jim Prevor’s Perishable Pundit, September 8, 2006

The Cape Times of Wednesday, September 6, 2006, reports that in South Africa a quarterly review of food prices presented before the national assembly’s agricultural affairs committee by the National Agricultural Marketing Council (NAMC) found that:

Rural people still pay more for food than those in urban areas, although most of South Africa’s food products are produced in the farmlands.

The NAMC executive officer Ronald Ramabulana pointed out that there was now “…a general acceptance within the council that the government needs to intervene and regulate food pricing, instead of leaving the issue in the hands of the market, which in essence means only four retailers in the country.”

The chairman of the NAMC, Mohammad Karaan, who I met at the allFRESH Conference, complained that the council’s work was hindered because the Council did not have “statutory powers” to take measures to “protect consumers.”

I really have come to love this country; so many good people are involved in such a noble task of attempting to transition the country to a new day.

But it is talk like this that makes me despair for the nation. Because it is action based on this world view that will take a world-class food exporter and bring mass starvation to the country.

Is it ignorance or demagoguery? That is the question. Four thoughts come to mind:

  1. The fact that food is grown in rural areas tells us nothing, literally nothing, about what the price of food should be in rural areas. The great insight of Federal Express was the realization that the cheapest way to distribute packages between two cities 500 miles apart could be to ship the package to a hub in Memphis, Tennessee — 1,000 miles away — and then ship it another 1,000 miles to its destination. Logistics and transportation, packaging and marketing, the allocation of product to different geographic areas, all these and more factor into the setting of a price.
  2. The regulation of food prices can only lead to shortages, black markets and other issues. This is because you can’t replace the judgment of actors in the food industry with the wishes of government officials. If you try, you assure that production, distribution and/or marketing will be constrained, resources will be reallocated to where they can get better returns and the next thing you know, there will be three-hour lines outside stores waiting for bread. The government here has a friendly feeling toward the Cubans. I’ve been there and seen people reduced to a life of queuing for a potato. I was with Kevin Moffitt of the Pear Bureau and watched adults in wide-eyed wonder as he showed them a pear for the first time. My advice to South Africa: don’t go there. It is the path to ruin.
  3. I’ve toured a number of retailers and gave workshops for several of them. I was quite impressed with these companies. These are decent operators struggling with difficult environments. First, although there may be only four western-style supermarket chains, there are loads of other venues for buying food, including a substantial “informal” sector that sells a lot of inexpensive food right on the street. Second, the four supermarkets seem pretty competitive. Four is not one. Third, there would be little difficulty in opening stores to compete if these four did act in secret consort to raise prices. I was shocked at how “anti-retailer” some of the comments at allFRESH were by certain speakers. These supermarket chains are businesses doing a service selling things to people and buying things from producers. The NAMC should send them a thank you note, not attack them.
  4. The NAMC needs to look at the barriers to entry in the retail market and work on those. If the members want competition, they should go to sleep every night asking how can we make the opportunity we offer so compelling that both domestic and foreign investors will want to open competitive retail outlets in the Republic of South Africa. How do I make our offer compelling to Wal-Mart, Costco, Tesco, Carrefour and new domestic concepts?

Here are some ways to start:

  1. The crime situation here is horrid, and it is not taken seriously by government. There was recently a news report that the equivalent of our “Brinks” armored-car division had to take a big hit to earnings because of robbery. It is an insult to decent poor people to say that armed robbery is caused by poverty. They need a larger, more professional police force, a quicker and more responsive judiciary and, most of all, a zero tolerance policy for even petty crime. This is the single biggest obstacle to economic growth in South Africa.
  2. Labor laws have to be relaxed so that people and organizations that take gambles on new ventures are not stuck with people on payroll if they have to scale back. Right now, nobody wants to open a big store and hire 1,000 people because if it turns out they only need 500, getting rid of the excess is difficult and expensive.
  3. Minimum wages at retail are absurd for a country with this kind of unemployment. By eliminating them, retailers would both create more jobs and reduce food prices.
  4. Assurance against expropriation. There is a big movement to get white business owners to transfer shares to the majority black population. Right now, foreign investors who own 100% of their local operations are basically exempt. There is a movement within the ruling African National Congress to change that. There are two aspects to this issue if they want to attract foreign investment: First, many foreign investors choose to enter a market through joint ventures with local players. They need to be assured that they won’t have to give away or sell shareholdings to players they don’t feel are contributors. Second, if a foreign entity wants to open a wholly owned subsidiary, they need super-constitutional-level protections against being forced to participate in any scheme to make them sell or give away shares.

The demographics in this market would probably work well for Wal-Mart, but after two weeks of due diligence, I couldn’t in good faith urge Wal-Mart to open stores here. If the shared-ownership movement comes to existence, the most likely course of events is that after the government finishes forcing local businesses to share ownership, the people will still be poor. Then the foreign investor exemption will be attacked, and Wal-Mart will be pressured to find a "partner" it does not wish to have.

If the NAMC really wants to reduce food prices for the people, it should focus on changing governmental policies that make Wal-Mart, Costco and Tesco hold back on entering the market.

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