Markets, efficiency and public policy -- an evaluation of recent influences on price in the maize market and government responses

Abstract

Markets, efficiency and public policy – an evaluation of recent influences on price in the maize market and government responses Neo Chabane (bio) Introduction1 Food prices in South Africa soared towards the end of 2001 and in early 2002. The food price index rose by 11.4 per cent in December 2001 compared with an increase of only 3 per cent for non-food prices (NALEDI 2002). In particular, the price of maize had increased by 212 per cent in just over a year, from R668 per ton in October 2000 to R1200 per ton in September 2001 and to R2500 per ton in January 2002. These operations of the maize market, which was fully liberalised in 1993, have been hailed in some quarters as 'an elegant example of the efficiency of the free-market system'.2 Aside from an ideological position on markets, economic efficiency needs to be critically evaluated in both social and private terms. Furthermore, while government regulation has been substantially reduced, concentration at different levels of maize supply and distribution suggests there is governance (or regulation) of the supply chain by private institutions.3 In the past, the maize market was controlled by the Maize Board, which apart from regulating the market also set a uniform maize price. Between 1987 and 1993 the market was liberalised and the Maize Board, as it formerly operated, was abolished. One of the most important consequences of the abolition of the Maize Board is that prices are now allowed to fluctuate according to both local and international conditions. Another significant change that has taken place since liberalisation has been the restructuring of the main agents within each level of the maize supply chain, thereby impacting on the levels of concentration in the market. [End Page 55] The effect of market outcomes on the livelihoods of the poor is significant. It has been estimated that ultra poor households in South Africa spend about 16 per cent of their monthly income on maize alone (NALEDI 2002). A household is defined as ultra-poor if its monthly adult equivalent expenditure is less than half the poverty line, which is generally accepted as US$1 a day (SARPN 2003). This, together with concerns about concentration, led government to call for an investigation of the maize price rises by the Competition Commission in 2002. A Food Price Monitoring committee has also been established by government that will report any abuses of market power to the Commission for further action. This article consists of five sections. The first section gives a brief explanation of the economic theories useful in understanding how the maize market works. The second gives a broad overview of the maize supply chain in South Africa including its linkage with regional trade flows. Section three examines the determination of maize prices and production levels while the fourth discusses concentration and market power in the maize market. Finally, conclusions and policy implications are drawn. Theoretical underpinnings of the maize market The move to liberalised markets is based on orthodox microeconomic theory. The basis of this theory is briefly outlined before discussing the implications of its very restrictive assumptions. Broader issues of the governance of production and linkages between different levels of production are then explored. Maize goes through various stages of processing and the relations between producers and markets at these different stages are crucial for understanding the ultimate determination of prices. Markets, prices and efficiency The market mechanism yields an efficient allocation of goods from producers to consumers as the marginal utility (or benefit) that consumers will get from an additional unit will be just equal to the marginal cost of producing the unit. If this is not so, and marginal utility is greater than the marginal cost, welfare could be improved by increasing production; conversely if marginal utility is less than marginal cost, welfare could be improved by reducing production as the cost saved would be greater than the utility forgone. The price mechanism is the way in which changes in production and consumption are brought about. Higher utility will translate into willingness to pay, thus exerting upward pressure on price, to which producers will respond with increased production. [End Page 56...