HomeBusiness DigestNew grain producer prices, for who?

New grain producer prices, for who?

By Admire Mavolwane

WE have in the past lamented the non-availability of essential information and delayed responses to events that should have been known to all and sundry in good time.

It is almost a month since the opening of the tobacco season yet we have no announcement as to the authorities’ intention to prop up prices and restore viability. The cotton buying season will be upon us very soon and international lint prices are not looking good.

As we have highlighted in previous columns, we are not opposed to subsidies as long as they can be quantified and are meant to temporarily protect farmers from adverse movement in commodity prices. It wouldn’t be a bad idea if an independent research board was set up to monitor international prices and advise the farmers. This would enable farmers to plan in advance and possibly switch to crops with a better outlook. The era of doing things blindly is surely past us.

Tuesday’s Herald ran a headline announcing the producer price for maize and a subsidy that seems to go against the new gospel that parastatals should be run profitably. The Grain Marketing Board (GMB) will now be paying roughly $2,2 million for every tonne of maize, up from $750 000 in the prior season. The price has been increased by an incredible 300% — presumably an admission that the CPI inflation is understated.

Ironically, the selling price to millers will remain pegged at $600 000 per tonne which does not make commercial sense given that even at last year’s producer price the parastatal was incurring negative margins. However, while in more normal times one would have expected the total subsidy to worsen, given the size of the crop likely to be bought by the GMB, the whole issue is reduced to an almost academic exercise.

What baffles many is the manner in which the subsidy, now amounting to $1,6 million, is applied and the resultant impact on the budget deficit. One would have expected the subsidy to be applied at the farm gate in the form of cheaper inputs, the rationale being that farmers would be encouraged to grow the crop through the availability of favourably priced inputs.

Also the producer price should at least be announced before the onset of the planting season. Besides being more sensible, it would allow the farmers plan in advance in terms of hectarage and yields.

The argument that hiking a producer price in April just before the commencement of harvesting will encourage deliveries does not, in our humble view, hold water. Had the price been announced in October or September, farmers would have compared the returns on tobacco, cotton, sunflowers, groundnuts and maize and made a decision as to which crop would give better returns.

In addition, it would enable the fiscal authorities to take into consideration the relevant subsidies when preparing the budget and hence come up with correct estimates of the budget outcome that would enhance credibility.

As an illustration, a number of new measures and incentives have been introduced since the 2005 budget was announced. At the time of presentation, a budget deficit of 5% of gross domestic product (GDP) was forecast.

Yet since then the central bank governor has announced that over the next two years the Reserve Bank proposes to raise $10 trillion as “seed funds” for the parastatals and local authorities reorientation programme (PLARP), of which one can assume that at least a budget-busting $5 trillion is likely to be spent this year.

Increases in civil service remuneration are forecast to account for $8,3 trillion; additional tax concessions amount to $5 trillion, while quasi-fiscal payments to gold, tobacco growers, the capitalisation of ZABG, the Energy, Housing and Infrastructure Development Bank and the outstanding advances to the productive sector at the beginning of the year together amount to a further $5 trillion.

So, before even adding in the grain subsidies, we are looking at an increased expenditure of $23-25 trillion. This is some $6 trillion more than the increase in expenditure of $19 trillion given in the budget estimates indicating that even without taking into account another year of falling real GDP the deficit will be at least 10% of estimated GDP and will in all likelihood be considerably higher.

Now, adding the new subsidies and possibly the increase in government expenditure necessitated by the expanded cabinet, which has an additional six ministries, the deficit will probably shoot up towards double that figure.

This is hardly a development which is likely to help us in our search for foreign partners to help promote our proposed recovery.

As alluded to earlier, lack of information as to how much the GMB is likely to purchase from farmers means that one would not be able to quantify how much the subsidy would work out to at the end of the day. What we have misgivings about is that the price differentials present an arbitrage opportunity.

One hopes that there are mechanisms in place to stop some innovative entrepreneurs from accessing maize from GMB under the guise of being a miller and repackaging it before immediately delivering back to GMB at a profit.

On another note, it is interesting to see that the new price almost equates to the import parity price of grade B maize of US$120 per tonne using the exchange rate of $18 733, which is in line with the more sober parallel market rates. Now that question that begs to be answered is: why and how would a state institution use the unofficial rate to set its producer prices?

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