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Opinions of Friday, 4 February 2011

Columnist: Amoabin, Kofi

Tariffs on Food Imports Hurt Consumers

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Every night, the number of hungry people in sub-Saharan Africa runs about 230 million people. Most sub-Saharan countries depend on food imports and foreign aid to feed its people. Imports put pressure on the currency exchange rate, creating currency instability and depreciation.

However, using tariffs to limit importation of agricultural commodities and poultry could exacerbate food shortages and worsen the plight of poor in our societies. Increasing food production takes strategic planning, and Ghana must pursue policies that will not disrupt Ghana’s macro-economic gains.

Ghana spends about one billion dollars in food imports every year. The items imported include wheat, rice, poultry, beef, sugar, and others. Commodities prices surged in 2010 and are projected to go higher this year, and Ghana could face a higher food import bill.

Clearly, Ghana’s reliance on food imports to meet its food security needs mean Ghana cannot sustain a stable currency, and maintain a reasonable level of foreign reserves. Unfortunately, higher tariffs will not help but hurt Ghanaians, especially at a time the world faces a crisis in food security.

Recent reports on production figures from the United States Department of Agriculture (USDA) support higher grain prices in 2011. Russia, the 3rd largest producer of wheat, is facing a major drought. Pakistan the 3rd largest exporter of rice after Vietnam and Thailand could face production cutbacks due to floods, in 2010, in key planting regions. Australia, a major exporter of sugar, faces a production cut of about 20%.

African countries spend close to fifty billion dollars on food imports every year. Demand for wheat is strong, and supplies are tight. Egypt had a 600,000 metric tons order canceled by Russia. For USA farmers, the cancellation of orders by other exporters means a boost in food exports and more profits. United States could be the only country with free stocks of wheat for export. This food import bill limits foreign reserves and wrecks the current account balance of poor sub-Saharan countries.

In the mid of December 2010, wheat traded at $7.50 per bushel or $277 per metric ton. This is an increase of 50% compared to the price in January 2010. The price of rice has jumped about 40% over the price from this past spring 2010. Also, the price of corn has jumped almost 100% when compared to the lows of 2009. And sugar is trading at a 30-year high.

The surge in price means, in 2011, the average Ghanaian will pay a higher price for the same portion of rice or for a loaf of bread or a bowl of porridge. The possibility exists that some sub-Saharan countries could run out of wheat for bread, and sugar.

Recently, some Sub-Saharan governments have increased tariffs as a way to deter food imports. This policy could lead to serious shortages and political instabilities. Imposing higher tariffs on food imports will limit the amount of food imported and consumers will eventually pay a higher price than before tariffs were raised.

The American Farm Bureau Federation (AFBF) has already predicted that the price of wheat could jump to over $9 per bushel on the Chicago Board of Trade. Already, US wheat exports are up about 35%. Some research organizations in Japan have forecasted below average rice and wheat harvests in India and Southeast Asia.

Sub-Saharan Africa should guard against higher food prices by finding ways to boost the commercialization and investments in food production. However, increasing tariffs on food imports are not a viable solution because increasing the level of food production usually takes long-term planning. Governments in the sub-region must reduce the level of tariffs and build buffer stocks. President Mills’ recent budget imposed new tariffs on importation of food items.

Most Sub-Saharan countries putatively project better food production figures than can be actually achieved. This leaves consumers in the region to face food shortages and higher than normal prices. Ghana’s food import bill could be higher than the foreign exchange generated from the sale of crude oil, in 2011. As the prices of agricultural commodities go up, more foreign exchange will be needed to support the same level of food imports, and Ghana’s foreign reserves will dwindle.

A way to boost food production would be to aggressively invest in commercial farming, and pursue modernization of agriculture. Ghana’s Millennium Challenge Account offered a program to commercialize agriculture, but commercialization would probably be difficult unless it is supported by a program for farmers to effectively merchandise commodities. As governments invest in machinery and equipment with the hope to boost food production, farmers, traders and the private investors must have a transparent system of buying and selling commodities. The Government of Ghana could provide the seed capital for a centralized cash grain marketing system across the sub-region. This will attract investments in agriculture. The grain merchandising system will lay a foundation for trading cash grain basis, which would link farmers, transportation owners and buyers on a common trading platform. This linkage of all participants in the agriculture value chain is called a centralized grain cash market.

The merchandising program could be boosted with price support system, where the governments will guarantee farmers a reasonable minimum price for commodities like rice, corn, millet, soya and cow peas. Government purchases under the price support program will go to the buffer stock. As prices soar above normal levels, the government could release food from buffer stocks to mitigate surging prices on the local markets.

By establishing a centralized cash market system for grains in Ghana, the government could network in West Africa through NEPAD, and enhance grain trading to cover the major grain markets in West Africa. The food staples are basically - rice, gari, wheat, and corn – the same across West Africa. This means the markets across the sub-region could be linked, creating a huge commodities market. This would boost intra West Africa grain trade.

According to consultants hired by the World Bank, and Ghana’s Ministry of Finance, and Ghana’s Security Exchange Commission, three separate attempts to start a commodities exchange in Ghana failed and could not go beyond the level of a feasibility study. An exchange cannot be viable without an underlying transparent cash merchandising market. The consultants probably do not understand that a commodities market and futures trading relies on an underlying cash market.

The failure could be due to the approach, which is the Warehouse Receipt System (WRS). All previous attempts to start a commodities exchange were based on this failed WRS approach. The WRS relies on huge government infusion of cash and does not rely on innovation and leadership from the private sector.

Importation of food limits Ghana’s economic development by putting excessive downward pressure on the cedi, and depreciates the cedi against foreign currencies. According to the United States Department of State, Nigeria imports over five billion dollars of food every year. This month, the UN Food and Agriculture Organization’s monthly food price index jumped for the sixth consecutive month to 213.5, a level seen since the food riots of 2008. Sub-Saharan Africa must boost food production or risk wrecking macro-economic gains achieved so far. The World Bank says, “as a result of food insecurity, poor people eat less, switch to cheaper foods, or forgo spending on health and education. High food prices not only worsen malnutrition and poverty, they aggravate the conditions of conflict, instability, and drought

The author, Kofi Amoabin, is a consultant on commodities trading and the energy markets. Previously, Mr. Amoabin served as CEO of Chicago Futures Investment Group, Inc. Send comments to: adansi@inbox.com.