The recently released labour force survey data for quarter-4 by Statistics South Africa indicates unemployment rate was recorded at 35.3%, an increase of 0.4 percentage point from the preceding quarter. The expanded unemployment rate was recorded at 46.2% and is defined as percentage of discouraged work seekers. The unemployment rate for youth aged between 15-24 years and 25-34 years is 66.5% and 43.5% respectively. Provinces that recorded above 50% of expanded unemployment rate were Eastern Cape, Limpopo, and Mpumalanga. These provinces are classified as rural. The agricultural sector is noted as the mainstay and driver of economies in rural provinces. Hence the poignant expression by the National Development Plan (NDP) related to the latent potential of the agro-food industry to ameliorate the triple challenges of inequality, unemployment and poverty.
Coincidentally, the release of the labour force survey data was preceded by publishing of the report by the Competition Commission in November 2021 titled “Measuring Concentration and Participation in the South African Economy: Levels and Trends”. The report cites agro-food industry as concentrated. The report validates the generally accepted view. Concentration relates to the degree to which small number of firms, often large-lead-dynamic agribusinesses account for a larger percentage of the ownership and control of the industry. Analyses may assume records of total production, sales, turn-over and market share. Inefficient concentration growth occurs where there are entrenched dominant actors in an industry resulting in lower levels of competition, higher entry barriers and lower investments. Competition is expected to lead to greater product variety, higher product quality, and greater innovation.
Consistent with the theory of structure-conduct-performance (SCP) the market structure of the agro-food industry is likely to determine the conduct of agribusinesses. Similarly, the conduct of the agribusinesses would influence its competitive performance. Market structure may be measured by various factors such as the number of competitors in an industry, the heterogeneity of the product, the cost of entry and exit. Whilst the conduct of the firms may be analysed by product differentiation, exploitation of market power and price determination. In contrast, the performance of the agribusiness may be measured by a number of indicators such as profitability and efficiency ratios. Therefore, the concept of barriers to entry is at the heart of the S-C-P model. Notwithstanding, the theory of contestable markets critics the S-C-P model. Additionally, some studies indicate that variation in profitability or efficiencies of firms may be explained by other factors apart from industry concentration.
Remarkably, the recent economic performance of the agro-food industry has been the shining light during the COVID-19 pandemic. However, the draft Agriculture and Agro-processing Master Plan identifies amongst others information asymmetry, market failures and concentration as barriers to even greater performance. Information asymmetry is information failure that occurs when one party to an economic transaction possesses greater material knowledge and advantage than other value chain actors. Further elucidated by the transaction cost economics. In contrast, market failure is the inefficient distribution of goods and services in the free market where prices are determined by the forces of supply and demand. The two concepts are distinct but inter-related.
The focus of this thinking piece is on the quantum and the adverse effects of a concentrated agro-food industry. Previous articles have focused on juxtaposition and analyses of sector-by-sector concentration levels. The widely used measure of industry concentration is concentration ratios. Whilst an imperfect indicator, a ratio of greater than 40% by top-five firms is considered highly concentrated and undesirable. The Competition Commission report indicates that over 90% of seed market is dominated by top three firms. Moreover, top three fertiliser agribusinesses control between 60-80% of sales. Almost 6.5% of large farms accounted for 67% of the income. Further, there was a 24% decline in the number of grain commercial farmers. Despite the decline, the average farm sizes increased. Probably reflecting farm consolidation. However, the decline in commercial farming may be due to other factors such as economies of scale and diversification. Notwithstanding, scale requirement may in large part be due to deficient market structure facing start-ups, small and medium agribusinesses (SME’s). The top three grain processing agribusiness control greater than 50% market for human and animal consumption. While the largest three broiler producers are vertically integrated and accounted for 55% of broiler production. Likewise, the top three dairy processors account for more than 50% of the main dairy product lines. The complex and dynamic nature of the agro-food industry necessitates extrapolation of agribusinesses that adopt innovation as business strategy invariably contributing to efficient concentrated growth. Similar to firms that drive economies of scale to via efficiencies.
The Global Entrepreneurship Monitor depicts SME’s as the engine for sustainable economic growth and job creation. In contrast, the Competition Commission report note economic structure of South Africa as hostile towards the development and growth of SME’s. The penetration by SME’s into mainstream value chains is likely to offer substantial entrepreneurial opportunities. However, a concentrated agricultural value chain is at risk of placing SME’s in a squeeze both at the supply and demand sides. Input suppliers may raise input costs while processors may invoke buying power. Mitigating industry concentration is not the panacea to all constrains and limitations facing the agro-food industry. Some of the market failures limiting the economic growth include inadequate on-off farm infrastructure, energy security, lack of access to finance, inability to access markets (domestic and exports) and insufficient investment in research for development.
In conclusion, competition is involuntary whilst free market based economies are characterised by structural deficiencies. Hence the requirement for the State to effectively regulate. However, regulations are effective if accompanied by application and enforcement. An ethical, capable and developmental State is fundamental to effective regulation. Albeit trust deficit amongst some social partners entrenches and deepens market failures. The mandate of the Competition Commission to investigate, control and evaluate restrictive business practices and abuse of dominant position is critical to propel competition. Often, the focus of investigations is on the conduct of agribusinesses. It must be extended to investigate firm structure’s considering the back-forward linkages in the agro-food industry. The up-downstream integration of agribusinesses may lead to anti-competitive conduct and the lack of appetite to implement transformation imperatives. Moreover, there is an urgent need to strengthen proactive market inquiries. Biting punitive and remedial sanctions should be imposed to agribusinesses practicing anti-competitive policies and strategies. Further, interventions to promote competition must include divestiture. Additionally, notifiable merger transactions must incorporate stringent public interest commitments. Validation and conclusion of the merger agreements must be subjected to perfect implementation. Also, inclusion of contraventions for the abuse of buying power and price discrimination must be broadened and up-scaled.
Lastly, inclusive economic growth is a requirement for job creation. Whilst industry concentration is considered an enemy to inclusive economic growth. Consequently, SME’s are likely denied the opportunity to actively and meaningfully participate in the economy. A concentrated agro-food industry is unlikely to realise the latent potential espoused in the NDP of alleviating poverty through the creation of the desperately needed jobs.
Disclaimer: The views and opinions expressed in this article are those of the author. They do not purport to reflect the opinions or views of the National Agricultural Marketing Council (NAMC), Mzansi Agriculture Talk or its members.
