Opinion / 18 February 2016, 07:30am / Petru Fourie and Wandile Sihlobo
Bread is an important staple food in South Africa and plays an integral role in ensuring national food security. The majority of consumers do not buy food directly from farmers, and the price they pay for food is exceedingly higher than what farmers receive for the raw commodity.
In this article, we highlight the share of income that the average wheat farmer gets per loaf of white bread at its retail price.
The wheat farmer’s share of the retail price of white bread will be examined to clarify a common misconception that farmers are responsible for high bread prices.
Background on wheat price
The price of wheat for a South African buyer is normally determined by the international wheat price, the exchange rate and the local supply and demand for wheat.
South Africa is not self-sufficient in the production of wheat, therefore, approximately 60 percent of our local consumption is imported.
South Africa’s wheat demand has been growing, which has increased our dependency on imported wheat. As a result, the domestic price of wheat, as reported by the SA Futures Exchange (Safex), has also shown an upward trend towards the import parity price.
To reduce our dependence on expensive imports, the South African wheat industry is currently working on strategies to boost domestic wheat production.
While this is in progress, there is an import tariff imposed, which provides protection for the local wheat industry. At the moment this tariff is R911.17 per ton and it is expected to increase to R1 224.31 per ton due to a fall in international wheat prices.
It is important to note that the import tariff has been factored into the calculations below.
What consumers pay – and what farmers receive
In order to calculate the difference between the real farm value and real retail value, the following assumptions were made: to bake a 700g loaf of white bread an average of 480g of flour is needed.
In order to mill that 480g of flour, 588g of wheat is required. Thus 1 700 loaves of white bread can be produced from 1 ton of wheat.
Figure 1 presents a derived wheat farmer price required to produce 588g of wheat for one loaf of white bread.
The derived farmer price is calculated by taking the average annual Safex price for each marketing year and deducting relevant costs, such as the location differential, as well as handling and storage costs for grade B2 wheat.
Figure 1 compares the derived farmer price for 588g of wheat with the annual average price of a 700g loaf of white bread in a retail store.
During the eight year period, wheat farmer prices declined twice, but bread prices consistently increased, indicating that farmers did not fully benefit from these higher retail prices.
If one focuses on the past season, 2014/15, wheat producer prices (588g) increased by 3 percent while the price of a 700g loaf of white bread increased by 8 percent from R10.28 to R11.11 over the same period.
Overall, raw wheat price movements were in most instances not the main contributing factor to the increase in the bread price, even with the additional import wheat tariff effects.
Producers’ percentage share
While input prices increased both for farmers and retailers; the farmers’ share of the consumer’s rand remained relatively stable or even decreased in some years. Between 2008 and 2015, a wheat farmers’ share of a 700g loaf of white bread fluctuated between 15 percent and 20 percent.
This implies that when a consumer buys a loaf of white bread, the raw material (wheat) simply costs R2.38 in comparison with the total loaf of bread at R11.76.
For example, if one loaf consists of 21 slices, the farmer’s income equals four slices while the rest of the wheat-to-bread value chain enjoys the rest of the slices.
It is imperative for consumers and other stakeholders to be made aware that increases in bread prices are not necessarily linked to increases in the wheat farmers’ payments (the producer prices), but rather can be attributed to a variety of costs further down the value chain.
* Petru Fourie is an agricultural economist for inputs and production at Grain SA and Wandile Sihlobo is an economist at Grain SA.
** The views expressed here do not necessarily reflect those of Independent Media.