South Africa: Efficiency And The Maize Industry

Last Updated: 13 July 2011
Article by Neil MacKenzie

The problems facing the South African maize industry illustrate the difficulties in balancing economic efficiency with the development objectives of the Competition Act.

Reconciling the many goals of the South African Competition Act presents a significant challenge. The Act prohibits restrictive collaborative and unilateral conduct by firms that yields market outcomes deemed 'inefficient' when measured against consumer, producer and total welfare standards. However, it also seeks to remedy endemic inequality by explicitly promoting a range of social objectives, including employment and the participation of historically disadvantaged people in the economy.

This can create an inherent conflict – achieving the 'development' goals contained in the Act may necessitate sacrificing efficient market outcomes. The complex dilemma facing South Africa's maize industry provides a lens through which this overarching problem may be illustrated.

South Africa has an oversupply of maize at present. Maize consumers pay low prices while bankruptcy threatens many farmers. Silos are full and poor export infrastructure, together with the strong currency, limits the volume of maize that can be sold into the international market. Many producers have been forced to exit the market and financial institutions are also alleged to be refusing to grant financing for upcoming production seasons, as a result of the surplus.

Proposed solutions

In attempting to solve the industry's difficulties, Grain SA, an industry association of maize producers in South Africa, recently applied to the Competition Commission for exemption from application of Chapter 2 of the Competition Act . It sought permission to establish an 'export pool' through which the producers could collectively set prices for the sale of maize into international markets and allocate export markets amongst themselves.

The intended effect would have been to increase the volume of maize exported and to achieve higher prices in international markets. This in turn would have reduced the excess volumes in the South African market and thereby increased prices which could be achieved domestically.

The Commission refused to grant exemption on the basis that:

  • It was not clear that the pooling arrangement would in fact have increased the volume of maize exported from South Africa.
  • The arrangement would have resulted in (artificially) increased food prices, increased the risk to food security and reduced the incentives of maize producers to innovate. There was insufficient evidence of how the exemption would yield benefits which would outweigh the proposed restriction in competition.
  • A number of alternatives, such as crop substitution, converting maize to bio-diesel, producing value added products, hedging on futures markets, storage for future use and the entry into the market of specialised export traders.

In short, the Commission's approach was to allow the market to dictate the acceptable levels of supply, demand and price. While there is an oversupply of maize domestically, consumers should benefit from lower prices. Producers should benefit in future periods of increased demand and reduced supply.

Another solution advocated by maize farmers is to collaboratively restrict output by planting 15% less maize in 2011. This would ensure that stockpiles currently in the system are sold and that future production matches expected demand. However, once again, artificially high prices would be achieved at the expense of consumers.

In practice, the proposed concerted output restriction by maize farmers may be found to contravene the Act's per se prohibition of indirect price fixing. If this were the case, then efficiency considerations would not be relevant in seeking to justify the behaviour. Nevertheless, this example provides a useful illustration of the broad problem of reconciling the Act's divergent goals.

Problems with the per se provisions of the Act and the narrow breadth of section 10 which deals with exemptions have been extensively written about and are not covered in this article.

Problems with 'efficiency'

Neither of these proposed solutions are likely to align with the conventional standard of (static or dynamic) efficiency. Economic theory would hold that less efficient farmers should exit the market, survived by those who realise the scale economies necessary to stay viable in the long term. The market mechanism's invisible hand would determine the most efficient price and output levels.

Although this approach is intuitively (and politically) appealing, the reality in this case is that efficiency and mechanisation are inexorably linked. The minority of farmers, who achieve the scale economies necessary for long term survival, run highly capital-intensive operations with relatively low labour absorption rates per unit of maize produced. Allowing the market mechanism to deal with the oversupply may result in job losses and the bankruptcy of a number of firms.

The victims of the prioritisation of efficiency would be farm labourers and smaller scale, predominantly black farmers – an undesirable and, it is submitted, inefficient outcome when considered in the South African context.

In refusing Grain SA's exemption application, the Commission prioritised the interests of consumers over those of producers, and appears to have prioritised welfare-based efficiency considerations over the developmental and public interest objectives set out in the Act.

Realigning efficiency

The Act envisages that an efficient competitive environment can balance the interests of workers, owners and consumers and achieve development objectives. As the preamble provides, the Act was promulgated in order to "provide all South Africans equal opportunity to participate fairly in the national economy; [and] achieve a more effective and efficient economy...". These two ideals should not be mutually exclusive.

A solution to the apparent conflict between the efficiency and development goals may reside in reconceptualising the conventional 'efficiency' benchmark. As le Roux suggests, a normative interpretation of efficiency should be adopted which incorporates the stated purposes of the Competition Act. Redistribution and employment creation should be valued as efficient outcomes in themselves. The Act invites this integrated approach by requiring that its terms be interpreted in manner that gives effect to its stated purposes.

Ideally, this should be in conjunction with broadening the limited grounds on which an exemption may be granted under section 10 of the Act, and softening the per se approach to certain contraventions of the Act. By incorporating an integrated notion of efficiency into these sections, a more balanced assessment of market behaviour may be conducted and more desirable outcomes achieved.

Unfortunately, the suggested development of the concept of efficiency would come at the cost of some degree of legal certainty. Although the traditional welfare-based version of efficiency may stymie achievement of the Act's public interest goals, it is measurable. This makes it easier to assess, and in turn provides firms with predictable precedents on which their behaviour can be based.

However, the Act's stated objectives appear to allow (and arguably mandate) incorporation of broader social goals into the Commission's assessment of, for example, exemption applications. It is submitted that to cater for any uncertainty that may be created, publication of guidelines and other policy documents by the Commission would be helpful.

As illustrated by the dilemma facing the maize industry, a holistic and uniquely South African account of 'efficiency' could reposition the yardstick which guides the authorities' assessment of competition enquiries. This may help to broaden access to the economy and enable the diverse aims of South Africa's competition policy to be realised.

In the meantime, South Africa's maize producers face significant challenges. The industry's performance in 2011 should provide some insight as to whether the Commission's assessment of Grain SA's exemption application was correct.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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