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Wheat import tariffs: What you should know
During the early 2000s, South Africa was able to produce the majority of our local wheat demand, as shown in Figure 1. However, this self-sufficiency has dramatically decreased over the past decade, and imports have significantly increased as a result. The decrease in production is due to various reasons, but one of the contributors is the decrease in local competitiveness due to wheat imports from highly subsidized countries. The question is often asked: how has this impacted South Africa’s ability to produce wheat for our local demand? Essentially, this means that foreign producers, due to subsidy support, can be more financially competitive than South African producers and can also absorb risks more effectively. Thus, there is a need to protect our local wheat industry, but more importantly, there is a need to give the industry a chance to invest in research and development to rejuvenate it. As a result, an import tariff on wheat was implemented to meet these needs.
Figure 1: Producer deliveries, total demand and imports of wheat since 1999/2000 Bron:
SAGIS What is the wheat import currently? For the wheat tariff to be published in the government gazette, certain conditions must be met. The international wheat price must trade below the official reference price of $279/ton, based on a 3-week moving average, to trigger the announcement process. The wheat import tariff is calculated using a variable formula that ensures market fluctuations are considered. The variable formula takes into account, among other factors, a reference price, a distortion factor, and transportation costs:
Reference Price: This component consists of a 5-year average price of the international wheat price. The US No.2 HRW wheat price is used as the reference. The US wheat price serves as a reference because it provides a comparable quality to South African wheat.
Distortion factor: This is the subsidy effect on international markets. Each country has a Producer Support Estimate (PSE) calculated by the Organisation for Economic Co-operation and Development (OECD). The PSE percentage is then calculated as a weighted average based on the countries from which South Africa has imported over the past 5 years. The factor only considers the countries from which we import and is based on statistics from SAGIS.
Freight costs: This is a standard deduction of transportation costs to determine a local landed price. At the beginning of April 2024, the decline in international wheat prices led to the 3-week moving global reference price (US No.2 HRW) trading below the original reference price ($279/ton). As a result, an import tariff of R176.29/ton had to be implemented. There is often a question of whether the announcement of an import tariff will lead to an increase in local wheat prices. When a tariff is implemented, the only effect is that imports can now only be brought in at the $279/ton level. This means that cheaper imports must now be imported at the reference price. The process of publishing a wheat tariff in the government gazette can be described as administratively complex and creates uncertainties in the market. When a tariff is implemented, several government departments must sign off. This process, which takes an average of 44 days, applies regardless of whether the tariff needs to be adjusted upwards or downwards. The implementation of the R176.29/ton tariff took approximately 78 days, with the next tariff of R421.95/ton having already come into effect on July 2 and still in the process of being officially announced at the time of writing this article. Does the wheat price have a large impact on bread prices? The wheat price only contributes 20% towards the overall price of a loaf of bread. This is only four slices of a loaf. This means if the tariff increases with R367,09/ton, the bread price, in a worst case scenario, can only increase with 22c (1700 loaves from a ton of wheat). Remember the import tariff does not increase prices, it only changes the import price to a $279 level. The effect of wheat prices on bread prices can also be explained by means of using Figure 2.
It is clear from the graph that there is a very small correlation between the wheat price and the bread price. In some periods the wheat prices decreased drastically and it had no effect on the bread prices. Factors amongst others such as energy, transport, packaging and labour costs are the largest contributors in terms of costs within bread production and can contribute to the increase in bread prices. Why must the producers be protected and why can’t we just import cheaper wheat? The local industry will just stop producing wheat, which means that this will have a depraved effect on social and rural economies. Thus, in the long run, South Africa will experience enormous losses, not to mention the risk in terms of food security. It is also a concern in terms of quality. South Africa produces very high quality wheat and if we import lower priced wheat, we will also import lower quality. In the last few years the importance of self-sufficiency was also escalated with the impact of wars and geopolitical differences. These events affected the wheat industry specific, not just in terms of price increases and volatility but also concerns in terms of sustainable supply. Furthermore the industry can only invest capital in terms of research and development if the producers produce and growth is experienced. It is therefore important to create a platform where producers can produce on a competitive basis. The goal would always be to reach levels of self-sufficiency. It is also very important to understand that agriculture is not the same as manufacturing. A capital investment does not have an immediate effect in terms of revitalization. Research and new development of cultivars and production techniques are subject to nature and production cycles, which mean it takes time. To develop a new cultivar can take up to 12 years. This is why it is very important to create the platform where producers can increase their competitiveness.
I grew up in Durbanville in a household where the finance world had a strong influence. From there I went on to study Agricultural Economics at the University of the Free State, where my love for agriculture grew. I am currently a Junior economist at Grain SA where I get to combine both my love for agriculture with economics. I am also part-time busy with my Master’s degree, with a focus on the functioning of the South African commodity markets.
