Covid-19 Watch

What do we learn from the previous Covid-19 response measures?

Insights into the grain prices

INTRODUCTION:
The outbreak of Covid-19 has caused detrimental effects across the various sectors. Within the agricultural sector, the negative effects have been exacerbated by disruptions in operations of global supply chains thereby leading to delays in trade. To minimise the spread, a number of countries imposed various measures such as lockdowns as well as temporary trade measures on a number of agricultural products. Temporary trade measures aimed at ensuring that people are food secure in the different countries. Although South Africa imposed restrictions on the sale and distribution of alcoholic beverages and tobacco products, activities within the agricultural sector were generally permitted to go on uninterrupted. This article aims at providing insights into how governments’ response measures have impacted on the prices of South Africa’s major grains. Insights are based on a technical working paper available at: https://www.namc.co.za/wp-content/uploads/2021/06/Working-Paper-Seminar-Presentation.pdf

Maize and wheat are very important staple food items in South Africa. Due to the pandemic, some countries imposed temporary trade measures on wheat and maize. However, although South Africa’s major suppliers of wheat and maize (United States (US), Argentina and Germany) did not impose any temporary trade measures on these commodities, other measures put in place affected prices. Two types of prices (import parity and SAFEX) are considered. Import parity price is the price payable by a purchaser for imported goods, constituting the cost, insurance and freight (c.i.f.) import price plus tariff and the transport cost to a purchaser’s location. SAFEX price is the price of a good at a given time as at the South African Futures Exchange, a subsidiary of the Johannesburg Stock Exchange (JSE). In the technical working paper, authors used a stringency index (1= least strict & 100 = strictest) as the yard stick to measure any government’s strictness during the different phases of the lockdown basing on various Covid-19 response measures. 

Researchers note that as countries imposed very strict response measures during March of 2020, the SAFEX price of wheat in South Africa also increased by 9.8%, and this was largely driven by a 13.9% rise in the import parity price of wheat sourced from the US. However, during May 2020 when the levels of strictness imposed by South Africa and the US remained constant for some time, Argentina became stricter while Germany’s stringency level reduced by 22.3%. Overall, the changes in the level of strictness were linked to a 1.8% drop in the SAFEX price of wheat, but largely being driven by declines in the import parity prices of wheat from US. Between July and August 2020, as South Africa’s and US’s level of stringency did not fluctuate while Argentina’s declined by 5% and Germany’s increased by 3.4%, the SAFEX price of wheat increased by 7.8%. This increase was largely driven by a 6.7% increase in the import parity price of wheat from Germany. In September, countries gradually started to ease a number of lockdown restrictions and a 4.5% decline was observed in the SAFEX price of wheat despite an increase in import parity prices for the countries supplying wheat to South Africa. This implies that strictness of lockdown had a direct effect on SAFEX wheat prices.

For maize, as countries imposed drastic measures in March 2020, the price of white maize was the most affected unlike yellow maize. SAFEX prices of white maize rose by 49.4% and 14.9% for yellow maize. The increase in white maize SAFEX prices was largely driven by a 12.4% upsurge of import parity prices of white maize from the US while yellow maize SAFEX prices were more influenced by a rise in import parity prices of yellow maize from Argentina. Import parity prices for yellow maize from Argentina and US however showed little variations. This suggests that the strictness of during the lockdown in Argentina and the US had a more direct impact on white maize than yellow maize. However, between April and May 2020, while South Africa and Argentina relaxed the strictness during the lockdowns, maize prices dropped ranging from 7.8% for Argentina’s import parity prices of yellow maize to 22.9% for the SAFEX price of white maize. The large decline in the SAFEX price of white maize was driven by a drop in import parity prices of maize from the US due to the stability in the country’s strictness in response to the pandemic. Within South Africa, the decline was attributed to the consistent assurance by various institutions in the agricultural sector that there is adequate stock of white maize coupled with a bumper harvest that had been projected for the 2020 production season.  

CONCLUSION:
The devastating effects of Covid-19 are eminent in the various spheres of the economy. Although major suppliers of maize and wheat to South Africa did not impose temporary trade measures on these commodities, other stringent measures imposed are having significant effects (increasing) on the prices of wheat and maize in South Africa. Therefore, stringent measures imposed during lockdowns are directly associated with the increase in wheat and maize prices. These increases are directly borne by the consumers as observed through higher retail prices.  

What should be done? South Africa should consider diversifying the sourcing of wheat and maize from other countries so that the risk of price spikes is minimised. Furthermore, countries (South Africa inclusive) should consider minimising imposing measures that may not be urgently needed. This will then assist in avoiding other negative spill over effects. More recommendations are detailed in the working paper.

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