ADMINISTERED PRICES AND AGRICULTURE Christo Joubert CEO Forum 09 May 2011 1
ON THE MENU Putting thing in context Administered and regulated prices: Some general trends Administered and regulated prices: Specifics Some industry examples Concluding remarks 2
Putting things in context 3
Jan-8 Apr-8 Jul-8 Oct-8 Jan-9 Apr-9 Jul-9 Oct-9 Jan-10 Apr-10 Jul-10 Oct-10 CPI Putting things in context: SA - CPI Headline CPI and Food and Non-alcoholic Beverage CPI from (year-on-year, 2008=100) 20 18 16 Headline CPI Food and non-alcoholic beverages 14 12 10 8 6 4 2 Inflation and food inflation in particular down significantly 0 Stat SA 4
Putting things in context: SA CPI (continue) CPI for different food groups and items (2008=100) 140 130 120 110 100 90 Bread and cereals Oils and fats 140 130 120 110 100 90 Meat Fish Milk, eggs and cheese 115 110 105 100 95 Processed Unprocessed 80 MO012008 MO012009 MO012010 80 MO012008 MO012009 MO012010 90 MO012008 MO012009 MO012010 140 130 Fruit Vegetables 140 130 Sugar, sweets and deserts Other food 180 170 160 Water and other services Electricity and other fuels 120 110 120 110 150 140 130 100 100 120 110 90 80 MO012008 MO012009 MO012010 90 80 MO012008 MO012009 MO012010 100 90 80 MO012008 MO012009 MO012010 5
Putting things in context: Farming income vs costs R million - real values (2008=100) 1980/81 1982/83 1984/85 1986/87 1988/89 1990/91 1992/93 1994/95 1996/97 1998/99 2000/01 2002/03 2004/05 2006/07 2008/09 140000 120000 100000 80000 Gap between Gross and Net Farm income increasing due to costs pressures 60000 40000 20000 0 Gross income Expenditure on intermediate goods and services Net farming income Long run Net Farm Income trends sideways, but some improvement due to commodity price boom DAFF and own calculations 6
% Average % contribution of individual variable cost items to total variable input cost - Maize 31% 23% 33% 35 30 25 18% 20 15 10 5 0 2001/02 2002/03 2003/04 2004/05 2005/06 2006/07 2007/08 2008/09 Grain SA, 2010 Fertiliser & Lime Seed Herbicides All other Maintenance & Repairs Interest on production credit Insecticides and fungicides Fuel and labour 7
% of total variable costs Average % contribution of individual variable cost items to total variable input cost - Wheat 10.1% 26% 27.5 25.0 22.5 20.0 17.5 15.0 12.5 10.0 7.5 5.0 2.5 0.0 2001/02 2002/03 2003/04 2004/05 2005/06 2006/07 2007/08 2008/09 21% 11.7% Grain SA, 2010 Fuel Fertiliser and lime Permanent labour Crop insurance Seed Weed control Interest on production credit Pest control Repairs and parts All other 8
1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 R million - real values (2008 = 100) Putting things in context: Implications Ability to provide jobs Employment in this sector declined from over a million in 2000 to just over 600 000 people employed in this sector in 2007 (Stats SA). Investment is compromised CAGR for fixed investment = -0.56% CAGR for tractors, machinery and implements = -2.08% 14000 12000 10000 8000 6000 4000 2000 0 Fixed improvements Tractors, machinery and implements 9
Putting things in context: Implications Contribution to rural development and poverty reduction OECD studies suggest that agricultural growth can be 4 to 6 times more effective in reducing poverty as compared with growth in the non-agricultural sector Continued growth in the agricultural sector is required to compliment non-agricultural sector growth Managing costs as a prominent management strategy is becoming increasingly difficult 10
Administered and regulated prices: Some general trends 11
Administered and regulated prices Administered price: The price of a product, set consciously by an individual producer or a group of producers and/or any price, which can be influenced by government, either directly or through one or other government agencies without reference to market forces. Examples: o o o o o o Sanitary fees Refuse removal Water & electricity Paraffin & fuel Public transport Telephone fees, postage Regulated prices: Those administered prices that are monitored and controlled by government policy. Prices may vary, depending on government s policy objective. Examples: o o o Water & electricity Paraffin & fuel Telephone fees, postage Stat SA, 2011 12
CPI & Admin prices CPI & administered price index Administered price index CPI 18 16 14 12 Administered price trends regularly above the CPI causing a cost squeeze. 10 8 6 4 2 0 2007 2008 2009 2010 Stat SA, 2011 13
Percentage Regulated price index 35 30 25 20 15 Regulated price index: 2007 Regulated price index: 2008 Regulated price index: 2009 Regulated price index: 2010 Fuel and electricity price hikes made a significant contribution 10 5 0-5 -10 Jan Feb Mar Apr May Jun Jul Aug Sept Oct Nov Dec Drop in the fuel price brought significant relief Stat SA 14
Jan Feb Mar Apr May Jun Jul Aug Sept Oct Nov Dec Percentage Non-regulated price index Non-regulated prices which include refuse removal, public transport, television licence & school fees. 11 10 Non-regulated price index: 2007 Non-regulated price index: 2008 Non-regulated priceindex: 2009 Non-regulated price index: 2010 Non-regulated prices from July-Dec 2009 were high. 9 8 7 6 5 Non-regulated prices in 2010 were the highest. 4 Stat SA 15
Administered and regulated prices: Electricity 16
Percentage change Electricity tariff increase compared to CPI 35 30 25 Tariff increase % CPI - regulated prices Tariff increase for 2008, 2009 and 2010 higher than the Headline CPI 20 15 10 CPI higher than the electricity tariff increase 5 0 Source: Eskom, 2011 2007 2008 2009 2010 17
Electricity usage in percentage by industry Residential 20% Commercial & public service 15% Agriculture/ Forestry 3% Transport 2% Other 2% The primary agricultural sector consumed 5931 GWh (3.0%) in 2008. The industrial sector consumes the biggest share with (117744 GWh) 58% of the total South African energy Industry 58% Source: IEA, 2011 18
GWh Consumption for the primary agricultural sector in RSA 6200 6158 6000 5841 5800 5755 5640 5627 5520 5600 Avg. growth = 1.5% 5400 5200 5142 5000 Avg. consumption/yr = 5245.6 GWh 4800 4600 4400 4644 4200 4000 3954 4175 3800 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Source: Department of Energy, 2009 19
Estimated consumption and cost of electricity for the primary agricultural sector Year Average consumption in GWh 2006/07 5246 Estimated consumption in GWh 2007/08 5324.340 2008/09 5404.262 2009/10 5485.384 2010/11 5567.723 2011/12 5651.298 2012/13 5736.128 Year Price of electricity in GWh Increase (%) 2009/10 R336,000 34.8 2010/11 R415,000 24.8 2011/12 R523,000 25.1 2012/13 R658,000 25.9 Year Price of electricity Estimated usage in GWh Total estimated cost 2009/10 R336,000 5485.384 R1 843 088 871 2010/11 R415,000 5567.723 R2 314 502 390 2011/12 R523,000 5651.298 R2 955 628 921 2012/13 R658,000 5736.128 R3 777 240 239 Source: Joubert, 2011 20
Administered and regulated prices: Transport 21
Jan-06 Mar-06 May-06 Jul-06 Sep-06 Nov-06 Jan-07 Mar-07 May-07 Jul-07 Sep-07 Nov-07 Jan-08 Mar-08 May-08 Jul-08 Sep-08 Nov-08 Jan-09 Mar-09 May-09 Jul-09 Sep-09 Nov-09 Jan-10 Mar-10 May-10 Jul-10 Sep-10 Nov-10 Jan-11 US$/barrel R/litre FUEL & OIL 160 Crude oil Petrol 95 ULP Gauteng 140 Diesel 0.05% S Gauteng 120 100 80 60 40 20 0 SAPIA, 2010 16 15 13 12 10 9 7 6 4 Price of oil 2008: $97.55 2009: $61.80 2010: $79.44 2008 2009: 36.65 % 2009 2010: 28.55 % Price of petrol 2008: R9.01 2009: R7.40 2010: R8.26 2008 2009: 17.91 % 2009 2010: 11.66 % Price of diesel 2008: R9.34 2009: R6.58 2010: R7.39 2008 2009: 29.47 % 2009 2010: 12.18 % R/$ exchange 2008: R8.21 2009: R8.41 2010: R7.34 2008 2009: 2.35 % 22 2009 2010: 12.72 %
COMPOSITION OF DIESEL PRICE (current c/l and % contribution) Slate levy, 0 cents or 0% Petroleum Products levy, 0.15 cents or 0% Contribution to the Basic Fuel Price, 626.63 cents or 65% The composition of the wholesale price of 0.05 % sulphur diesel in Gauteng, which is currently (May 2011) 964.45 cents per litre. RAF levy, 80 cents or 8% Customs & excise duty, 4 cents or 1% Fuel levy, 162.5 cents or 17% IP Tracer levy, 0.01 cents or 0% Zone differential in Gauteng, 22.9 cents or 2% Department of Energy, 2011 Storage, handling & delivery costs, 11.4 cents or 1% Service cost recoveries, 3, 0% Wholesale margin, 53.86 cents or 6% The Basic Fuel price (BFP) is the sum of the FOB value, freight, demurrage, insurance, ocean loss, cargo dues, coastal storage and stock financing. The BFP is currently 626.63 c/lt or 65 % of the wholesale price. Other items listed are levies and taxes that currently amount to 337.82 c/lt or 35% of the wholesale price. 23
TOLL FEES South African National Roads Agency Limited (SANRAL), an agency of the Ministry of Transport manage the national road network in SA. SANRAL has two revenue streams: From National Treasury for non-toll roads (81% of network) Selectively use the user-pay principle for toll road (19% of network) SANRAL manage approximately 16 150km of national roads. SANRAL, 2011 24
TOLL FEES ADDED COST TO AGRICULTURAL PRODUCTS Scenario assumptions: One way trip for delivering of fresh produce to Tswane Fresh Produce Market. Calculations from Musina on N1 South, from Durban on N3 North, Nkomazi on N4 West and from Paarl on N1 North. Class 3 vehicle with 3 or 4 axle. Class 4 vehicle with 5 or more axle. Only mainline toll points, thus no ramps. Shortest route off mainline into Pretoria. Own calculations based on SANRAL, 2011 25
Rand per one way trip TOLL FEES - CLASS 3 VEHICLE ONE WAY 600 550 500 450 From Musina to Tswane FPM From Paarl to Tswane FPM From Durban to Tswane FPM From Nkomazi to Tswane FPM R551 in 2010; 34.1% increase from 2006 to 2010 R516 in 2010; 39.1% increase from 2006 to 2010 400 350 300 R487 in 2010; 36.8% increase from 2006 to 2010 250 200 2006 2007 2008 2009 2010 R366 in 2010; 37.1% increase from 2006 to 2010 Own calculations based on SANRAL, 2011 26
Rand per one way trip TOLL FEES - CLASS 4 VEHICLE ONE WAY 900 800 700 600 From Musina to Tswane FPM From Paarl to Tswane FPM From Durban to Tswane FPM From Nkomazi to Tswane FPM R788 in 2010; 34.7% increase from 2006 to 2010 R681 in 2010; 36.7% increase from 2006 to 2010 500 400 R638 in 2010; 34.9% increase from 2006 to 2010 300 2006 2007 2008 2009 2010 R522 in 2010; 39.4% increase from 2006 to 2010 Own calculations based on SANRAL, 2011 27
NEW GAUTENG FREEWAY IMPROCEMENT PROJECT (GFIP) New classifications on vehicles: Class A1; Motorcycles, total vehicle length < 3.0m, width < 1.3m and height < 2.5m. Class A2; Light vehicles, vehicle length (excl trailer) < 6.0m and height (excl trailer) < 2.5m. Class B; Small heavy vehicles, total vehicle length, inclusive of any trailer >= 6m and < 12.5m or, total vehicle length, inclusive of any trailer < 6m and height >= 2.5m. Class C; Large heavy vehicles, total vehicle length, inclusive of any trailer >= 12.5m. Added transport cost for agricultural products. Own calculations based on SANRAL, 2011 28
GFIP ADDED COST TO AGRICULTURAL PRODUCTS Scenario assumptions: One way trip for delivering of fresh produce to Tshwane Fresh Produce Market. Calculations from Durban on N3 North and from Paarl on N1 North. Class C vehicle to replace Class 4. Pay with E-tag to utilise discounts. Shortest route off mainline into Pretoria. Own calculations based on SANRAL, 2011 29
Rand per one way trip GFIP TOLL FEES CLASS C VEHICLE ONE WAY 900 800 700 From Musina to Tswane FPM From Paarl to Tswane FPM From Durban to Tswane FPM From Nkomazi to Tswane FPM R90.28 more R120.36 without e-tag. 600 500 400 300 2006 2007 2008 2009 2010 R186.50 more R247.64 without e- tag. Own calculations based on SANRAL, 2011 30
2004 2005 2006 2007 2008 2009 2010 2004 2005 2006 2007 2008 2009 2010 2004 2005 2006 2007 2008 2009 2010 Rand Rand Rand Vehicle costs over time for different sized vehicles (2004 2010) 1.1. 1.2.3. 1.2.2.2. 1400000 4500000 4000000 1200000 4000000 3500000 1000000 800000 600000 400000 200000 Capital Cost Running Cost Fixed Cost 3500000 3000000 2500000 2000000 1500000 1000000 500000 Capital Cost Running Cost Fixed Cost 3000000 2500000 2000000 1500000 1000000 500000 Capital Cost Running Cost Fixed Cost 0 0 0 2-axle vehicles: 6-axle vehicles: 7-axle vehicles: Capital cost: 10.7 % Fixed cost: 16.3 % Capital cost: 33.9 % Fixed cost: 36.7 % Capital cost: 31.4 % Fixed cost: 30.8 % Running cost: 81.9 % Running cost: 105.8 % Running cost: 117.9 % 31 Max Braun Consulting Services, 2011.
Administered and regulated prices: Wages 32
2003/01/01 2004/01/01 2005/01/01 2006/01/01 2007/01/01 2008/01/01 2009/01/01 2010/01/01 R/month R/hour MINIMUM WAGES 1400 1300 Area A Rand/month Area A Rand/Hour Area B Rand/month Area B Rand/Hour 7.30 6.70 Area A: 64.4% from base Area B: 102.4% from base 1200 1100 6.10 5.50 Areas receive all the same rate 1000 4.90 900 800 4.30 3.70 6.8 % increase 700 3.10 600 2.50 Department of Labour, 2011 33
Some industry examples 34
Net Farm Income (R'000) Net farm income (million Rands) 2008 2009 2010 2011 2012 2013 2014 2015 2008 2009 2010 2011 2012 2013 2014 2015 Percentage of variable cost Percentage of variable cost Effect of electricity costs on irrigation farming in the Northern Cape 20% 18% 16% 14% 12% 10% Maize Electricity as % of variable cost 20% 18% 16% 14% 12% 10% Wheat Electricity as % of variable cost 8% 6% 8% 6% Year Year 1 750 1 500 1 250 1 000 750 500 250 0-250 -500 2008 2009 2010 2011 2012 2013 2014 2015 5.25 4.50 3.75 3.00 2.25 1.50 0.75 0.00-0.75-1.50-2.25-3.00 2008 2009 2010 2011 2012 2013 2014 2015 NFI with tariff increase NFI without tariff increase Mean Min Max Mean (tariff) Min (tariff) Max (tariff) 35 NAMC and BFAP, 2010
% contribution to total cost of production Average % contribution of regulated fuel, labour and electricity cost to total production cost of animal feed 56% 54% Labour, fuel and electricity % contribution to Total Cost of Production, Sales, Admin and Transport 52% 50% 48% 46% 44% 42% 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Own calculations based on data from AFMA, 2011 36
Cost per ton produced index 2001=100 Regulated fuel, labour and electricity cost for the production of a ton animal feed 350 300 250 200 150 Labour Electricity Fuel for delivery 2008 to 2009 up 31.1% 2009 to 2010 up 24.8% 2008 to 2009 up 12.9% 2009 to 2010 up 6.8% 100 50 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2008 to 2009 down 29.5% 2009 to 2010 up 12.2% Own calculations based on data from AFMA, 2011 37
Cost per kg produced index 2008=100 Regulated fuel, labour and electricity cost for the production of a kilogram poultry 160 150 Electricity Transport Water 2008 to 2009 up 28.2% 2009 to 2010 up 18.6% 140 130 120 2008 to 2009 up 16% 2009 to 2010 up 33.9% 110 100 90 2008 to 2009 up 6.2% 2009 to 2010 down 2.4% 80 2008 2009 2010 Own calculations based on data from role players in the industry, 2011 38
Operational cost components of a typical service abattoir NAMC, Food Cost Review, 2011 39
Percentage of Total Costs Costs in selling red meat at retail level 100 90 80 70 60 50 9.69 2.78 12.04 16.71 1.45 0.61 1.63 3.63 Other Other consumables Animal Transportation Certification costs 40 Land costs (rental) 30 20 10 51.46 Packaging costs Water and other utilities Electricity Labour costs 0 Retailer costs NAMC, Food Cost Review, 2011 40
Contribution of fuel, electricity and water to the selling prices of processors of certain dairy products as in December 2010 2 Litre Pasteurised 1 Litre UHT 1 Kg Cheddar Milk Milk Cheese Percentage Percentage Percentage Diesel 3,00 3,00 1,34 to 1,90 Petrol 0,30 to 0,50 0,30 to 0,50 0,06 Electricity 1) 0,79 to 1,10 0,83 to 0,94 1,03 to 1,14 Water 0,10 to 0,3 0,16 to 0,3 0,14 to 0,45 1) Used in respect of all activities in the processing plant, storage and offices 41 SAMPRO, 2011
CONCLUDING REMARKS Administered/regulated prices makes a significant contribution to the over cost of producing agricultural commodities and food, i.e. increasing the cost of doing business and could also hamper new entrants. The significant increase in administered/regulated prices will affect: Agriculture s ability to produce enough and affordable food The sustainability of the sector since it directly and indirectly influences investment, the profitability and competitiveness of the sector The sector s ability to contribute towards job creation The sector s ability to contribute significantly towards rural development and alleviation of poverty ample examples globally Hence, rethink the current policy environment within the ambit of the role of agriculture 42
Thank you Contact details: Christo Joubert Tel: 012 341 1115 E-mail: christo@namc.co.za Website: www.namc.co.za Acknowledgements to other NAMC colleagues for assistance to prepare this presentation: Prof A Jooste, Corné Dempers, Londiwe Thabethe This presentation would not have been possible without the contributions from various organisations and individuals. The NAMC would like to thank you for your willingness to assist with this very important programme. 43