Tariffs & subsidies in agriculture, forestry & fisheries: briefing by Department of Agriculture, Forestry & Fisheries

Meeting report

The Chairperson informed the Committee that the Department of Trade and Industry (DTI) had chosen not to attend the meeting.  A written apology had been received from the Minister of Agriculture, Forestry and Fisheries.

Department of Agriculture, Forestry and Fisheries (DAFF) presentation
Mr Sipho Ntombela, Acting Director General: Economic Development, Trade and Marketing: DAFF, introduced the Department’s briefing by reminding the Committee that the issue of tariffs and subsidies was a highly complex one, involving a confluence of interests from Government, farming sectors, multilateral forums and bilateral relationships. The Minister had been booked off for the rest of the month, which is why an apology had been sent. The delegation had also expected the DTI to attend and had found out only that morning that they would be reporting to the Committee alone.

Mr Billy Morokolo, Director: Marketing: DAFF, and part-time Commissioner: International Trade Administration Commission (ITAC), briefed the Committee on the current situation regarding tariffs and subsidies in agriculture, forestry and fisheries.  ITAC operated within a prescribed legal framework and achieved the objectives legally charged to it through customs tariffs, import and export control, and the administration of specialised trade remedies like Anti-Dumping (AD) and Special Safeguards (SSG).

South Africa had also signed formal trade agreements with various countries and economic blocks, which often required the lowering of customs duties to increase market access.  For example, the result of South Africa’s Free Trade Agreement (FTA) with the European Union (EU) was that 96% of EU products were being imported duty-free. Certain products like meat, sugar, dairy and maize were classified as “sensitive” for food-security reasons, and were excluded from the zero-tariff policy.

Under the Trade, Development and Cooperation Agreement (TDCA) signed in 2004 between the European Community (EC) and South Africa, a “standstill” provision meant that specific product tariffs could not be increased later, once they had been agreed upon. At the end of TDCA implementation, 881 out of South Africa’s 996 total agricultural tariff lines would be duty-free with regard to the EC. Though sensitive tariff lines were excluded from the standstill provision up to a certain limit, they were currently also at zero.

The Uruguay Round: Agreement on Agriculture (URAA) in 1994 had converted quantitative import restrictions into tariffs on imports. The intention had been to keep import duties at a level that would continue to provide protection for farmers in the new, deregulated environment. This had not happened. South Africa had been overly ambitious and had applied rates that fell well below the “bound rates” stipulated in its World Trade Organisation (WTO) commitment. South Africa’s average import tariff of 9% was also much lower than Organisation for Economic Cooperation and Development (OECD) members’ average of 17% and non-OECD members’ average of 16%.  South Africa’s import tariffs were also typically lower than the export tariffs its products incurred, resulting in a negative trade balance.

In 2010, the EU had accounted for 29% of all agricultural imports. A mix of small countries, each contributing less than 5%, had collectively accounted for 34% of the total (“Other”). The South American block, Mercusor, had accounted for 20% and China had accounted for 6%.

The Producer Support Estimate (PSE) was a measure of how much government support and subsidisation farmers in different countries received. The PSE for South Africa was 5%, lower than that of the EU, the OECD, Japan, the US and China. High levels of global farmer support elsewhere were rendering unsubsidised production unsustainable and unprofitable.

Industry concerns over current EU tariff levels included the fact that most duties were not “ad valorem”, meaning they remained fixed while prices climbed, which eroded product protection.  Industry also felt that the EU had been asymmetrically favoured by the TDCA.  South Africa’s signing of the TDCA and other FTAs had reduced its policy space but the Department would use the remaining space to push for a conversion of certain duties to ad valorem status.

DAFF had approached the DTI about the relative lack of subsidisation and the material injury to the domestic sector that this was creating.  DAFF felt that South Africa had perhaps been too bullish when negotiating its tariff rates, and had liberalised them faster than the rest of the world.  As applied, tariff dispensation might not be sufficient to encourage expanded domestic production of some products. A non-linear and differentiated tariff policy framework was needed that would account for the various special features of the sector, from its high labour absorption rates to food security to rural development.

Tariff administration remained a balancing act, between farmers on the one side and downstream industry and consumers on the other.  Local wheat farmers wanted tariffs on imported wheat increased, but millers sourcing cheap wheat wanted these tariffs to remain low. Further, increased tariffs on raw agricultural products had the potential to increase food prices, but low tariffs on primary products crowded out local primary producers. ITAC had been tasked with straddling these divides.

Mr Molokolo concluded with a brief report on the situation of Brazilian chicken imports. The South African Poultry Association (SAPA) had approached DAFF with concerns that cheap poultry was entering the country from Brazil. A full investigation had been launched and in January 2012 a “dumping” allegation had been confirmed. Preliminary dumping duties had been imposed on Brazil and delegations from both countries had met in Geneva to try to resolve the issue. Following complaints from the Brazilian delegation about the calculation of dumping margins, the matter had been referred back to DTI Minister Rob Davies, who had in turn referred it to ITAC. The preliminary dumping duties had since lapsed. The dumping of whole and de-boned chickens into South Africa had been caused by a sudden reduction in demand for these products from China and Russia, when both countries began developing and favouring local production lines.

Discussion
Mr S Abram (ANC) called the briefing “manna from heaven,” and thanked Mr Molokolo for his “honest, practical account of the state of affairs in the entire agricultural industry”. Instead of saying what politicians had told them to say, the delegation had told the Committee the shocking truth.  He felt that in opting out of the meeting, DTI had disrespected the Committee, and by extension Parliament, and that a strongly-worded letter should be written to this effect.  DAFF was not the sole implementing department and the responsibility had to be shared.  Similarly, the Committee was not an implementation agency and could only make recommendations. Had this report reached political principals, and had it been taken note of?

Mr Ntombela replied that the principals were aware of the issues. Cabinet Ministers and even the Deputy President had been present at a recent CEO forum meeting on the poultry issue.  But intervention was also needed at the highest level, namely at the country-to-country and WTO-level.

Mr Abram gave examples of the real-time problems faced by farmers today. The price of wheat had almost doubled from last year, when South Africa had been exporting wheat, to this year, when the US was dominating production. The Department of Rural Development (DRD) had proposed to build a R100m dairy complex in the Free State, but this had reflected a lack of understanding of the industry’s problems. Dairy farmers were leaving the industry and putting their farms up for auction on a weekly basis.  The DRD was also buying out healthy farms around the country, which left farm workers “jobless, helpless and homeless” and contributed to the swelling of informal settlements. How did the delegation see the scenario developing, given the lack of state support and responsiveness? What emergency measures could be taken to prevent the situation from spiralling out of control?

Mr Molokolo replied that the grain supply chain was highly sporadic and constantly in flux, with South Africa often in a surplus position but sometimes needing to import. The US currently occupied 45% of total wheat production, thanks to its gradual diversification away from a consumption market.  DAFF was working closely with the South African National Commodity Exchange (SANCE) to better understand the dynamics at work here. He predicted that, in the worst-case development of the scenario described, investor confidence would be demoted and diverted elsewhere. An intensive-care environment was needed, but with a long-term view of the problem. The key issues in the dairy industry, and in other industries like wool and meat, had to do with monopolies driving out small competitors. These had to be brought to, and dealt with by, the Competition Commission.

Mr Abram said that, in spite of cheaper chicken flooding in from Brazil, chicken on supermarket shelves was not cheaper.  Who was benefiting from the lower prices, if not the consumer?

Mr C Msimang (IFP) agreed that the report had been powerful and shocking. The PSE information helped explain why so many farmers were leaving South Africa and travelling north. The agriculture industry had once been the second biggest employer in the country, after mining, but it was now being destroyed.  Rural municipalities needed help in developing agriculture and farming.  Emerging farmers were being given start-up capital, but the Committee had heard today that this assistance only amounted to 5%.  How could these farmers compete with countries where agriculture was being subsided by up to 30%?  How could these farmers access international markets?  He also supported Mr Abram’s question about the beneficiaries of cheap Brazilian chicken.

Ms M Pilusa-Mosoane (ANC) shared the concerns of Mr Abram and Mr Msimang about the Brazilian chicken situation. She explained that products in South Africa were not shelved according to country of origin, as they were in Europe, and that all chicken would thus be shelved together at one price for the consumer. She wanted DTI and its Minister to tell the Committee how long the dumping problem would take to resolve.

Mr Molokolo replied that it was probably the traders and importers who were benefiting from the cheaper chicken. The fact remained that the chicken came in cheaply and provided competition for local producers. The issue had been escalated to the level of the WTO, via the Minister of DTI, and would be resolved by November or December of this year. He agreed with Mr Msimang that farmers were being attracted to countries where farming was heavily invested in. The number of farmer leaving had not yet reached a critical level, but the Department was monitoring the situation.

Mr L van Dalen (DA) said that import duties alone would not solve the dumping problem and that quality control of incoming goods needed to be stepped up. South Africa checked the quality of every product that went out, but this did not seem to be the case for products coming in. Between 20m and 25m chickens were entering the country each month, but were these chickens being thoroughly inspected? Were our entry criteria stringent enough? The country was also overtaxing its producers by forcing them to cover diesel expenses and Road Accident Fund fees when most producers used only their internal farm roads. These taxes should be subsidised.

Ms A Steyn (DA) had similar concerns to Mr Van Dalen about the quality of imported goods, and asked who was responsibility for quality assurance processes.  The DTI, Treasury and the Department of Health were no doubt all involved, among others, but how were these entities interlinked?  There were rumours that milk powder coming in from China was problematic and needed to be tested.  Was the Department aware of this and was the product being tested?  She had spoken to representatives from the wheat industry who had told her that transporting costs would drop by 50% if wheat could be put on to rail.  Who was responsible for negotiating this?  The same held for the fruit industry. Hands seemed to be tied by the Department of Transport.

Mr Ntombela replied that the Department’s main infrastructure interest at the moment was in getting freight structures moved from road to rail.

Mr Molokolo added that a total assessment of the freight situation had in fact been launched in 2006, and the Department now had a much better understanding of it. There had been a shift from rail to road during the unregulated post-1994 period of structural change.  While the current structure was still rail-friendly, efficiency levels did not correspond and needed to be ramped up.  For example, the number of producers in certain areas did not justify the provision of rail-service lines there. These smaller volumes needed to be consolidated.  Negotiations were in process with Transnet and other parties.

Ms Steyn asked why only de-boned chicken and whole chickens had been brought up during the dumping discussion.  Why were there no dumping duties on quarter legs, which were also a major source of the problem?

Mr Molokolo replied that the industry had asked for protection against only de-boned and whole chicken imports. If it wanted protection against other imported products, it had to come forward with that specific request. This was the procedure followed by the Department.

Ms Steyn asked about the use of green-box subsidies and suggested that South Africa take a look at Malawi’s effective use of them.

Mr Molokolo replied that R9 billion could still be pumped into the policy space within the context of the green-box code. How soon this would be done depended on the availability of financial resources.

Ms Steyn said that South Africa needed to start viewing agriculture not in terms of its raw input to Gross Domestic Product (GDP), but in terms of its contribution to all sectors. Attention to agriculture would then become urgent. She felt that Members of Parliament might start taking agricultural issues more seriously if they were made to fast for a day. South Africa was not naturally an agricultural country, in terms of rainfall and so on, and lack of political consideration only exacerbated the baseline problems for farmers. The poultry issue should also be viewed as a jobs issue.  If one substituted the import of five million chickens per week with the development of local production, one would help a large number of new jobs.

Mr L Gaehler (UDM) commended the delegation on a very good presentation, saying Parliament needed more like it.   Farmers operated within a vicious circle because there was no proper coordination of agricultural affairs. Money was being invested widely, but recipients were doing their own thing in their own corners. He said comprehensive research and marketing strategies were essential to agriculture’s success.

Mr B Bhanga (COPE) called for a comprehensive analysis of the damage being done to local industry’s protection. He reiterated that the topics raised by the delegation were high-level policy issues with long-term effects, involving multiple Cabinet Members. If they were not championed at the national-leadership level, nothing would be done to address them.

The Chairperson noted that two fundamental questions raised during discussion were how best to protect our own producers and how best to coordinate agro-processing.  He also asked what role the DAFF was playing in the WTO, as he had heard talk that its role in the relationship was that of a younger brother, with the DTI assuming the older brother role.

Mr Molokolo replied that DAFF did not leave WTO matters up to DTI alone. The Department had an official representative at the WTO, to be close to policy-making and to gain insight into directions taken by China, Europe and the US.

The Chairperson asked what DAFF’s specific role was in WTO negotiations.

Mr Molokolo clarified that the DAFF’s role was mainly one of technical support, since DTI lacked a tacit understanding of agriculture issues, and tended to adopt a generic approach when dealing with these issues.

The Chairperson asked whether cost-benefit analyses had been applied before South Africa had entered into its various binding treaties.

Mr Morokolo explained that there had been much initial optimism in South Africa about the benefits of opening up its markets. The actual outcome had been the opposite of what had been expected, and the Department was now looking at ways to correct the error.

Mr Abram urged the delegation to think of specific short-term or “quick-fix” actions that could be taken while matters were being worked out at a higher level. Talking was not enough.

The Chairperson said that the Department had been locked in a phase of restructuring and planning for quite some time. It was time move into a phase of action.

Mr Ntombela reiterated the highly complex nature of the topic. There were foreign policy issues, international trade issues and various associated issues involved.  During the Reagan-Thatcher era, free-market policies, trade liberalisation and other “structural adjustments” had become prerequisites for receiving assistance from the International Monetary Fund (IMF) and the World Bank (WB).  Third world countries had complied fully, and were now at a disadvantage.

Mr Morokolo said that a quick-win solution might involve something as simple as ramping up coordination and integration of all the sectors involved, something both Russia and China had done, to great success.

Mr Ntombela said that parliamentary coordination was typically done by economic sectors and employment clusters. There was in fact a meeting of the economic cluster this afternoon, led by DRD and with representatives from all economic departments attending, including Cabinet Members, Director Generals and members from supporting teams.

Dr Simpiwe Ngqangweni, Acting Deputy Director General: Economic Development, Trade and Marketing: DAFF, told the Committee that Government was doing much to get industry involved. The coordination process had begun, and one would soon be seeing progress towards unified solutions.

He told the Committee about a structure within DAFF whose aim was to come up with an effective agro-processing strategy, in consultation with the DTI and other Departments. The structure had been established in April of this year and was headed up by him.  DAFF had recognised that the country was overly dependent on the export of primary products and that it lacked an all-encompassing agro-processing strategy to help address the problem. Details of the new structure were available on request.

The Chairperson told the delegation about a case where land that had once been used to farm sugar now lay abandoned.  He proposed that DAFF investigate whether this and other such land could be resuscitated and that it return within the next three months with a detailed assessment. This was one of the simple ways of tackling these “complex” issues. Instead of merely talking, the group wanted to be able to say that, out of today’s discussion, the following results had emerged -- this many jobs, enterprises and returns had been created.

Mr Abram told the Committee about a report published many years ago by a DAFF official, named AT van Coller, which had analysed the water tables of various parts of South Africa and had concluded which land could be put under irrigation. He advised the delegation to “dust off” the report and put it into action. Though doing so would require a large capital injection, he felt that it had the potential to make Southern Africa the “breadbasket” of the continent, and added that “if you don’t start somewhere, you won’t get anywhere”.

The Chairperson urged DAFF to talk to its colleagues in DTI about taking these meetings seriously.

The meeting was adjourned.