Large-scale commercial farmers have benefited from new technology but it is also valuable for small-scale farms. Picture: 123RF/KOSTIC DUSAN
Large-scale commercial farmers have benefited from new technology but it is also valuable for small-scale farms. Picture: 123RF/KOSTIC DUSAN

SA’s agricultural sector is now in another planning phase with the drafting of the Agriculture & Agroprocessing Master Plan. This social compact between the government, labour and industry is envisaged to result in practical, actionable reforms to drive inclusive growth and job creation in agricultural value chains. The foundation of this new plan is anchored on inclusive, sustained and profitable participation in SA’s agricultural economy.

Whenever stakeholders gather to discuss reform at the sector level, import replacement, or localisation of food production, is often first on the agenda. Proponents argue that this boosts local production and results in higher levels of investment, economic growth and job creation in the domestic economy, as opposed to in other countries. A wide range of policy instruments are available to achieve this, but import tariffs and tariff quotas are mostly used. However, there are compelling counterarguments that merit careful consideration.

It serves little purpose to protect potential market monopolies, other forms of inefficiencies in the value chain including poor infrastructure and services, or boost local production where SA does not have the natural resource base. There are numerous case studies in African markets where food prices are notoriously high and policymakers continue to implement blunt trade policy measures and do not tackle the core challenges of inefficiencies within the value chain that are driving cost structures. To illustrate these arguments, the opportunities and constraints to import replacement for vegetable oils in SA have to be analysed. 

Vegetable oils that are used in human diets (cooking oil and margarine) and animal feeds constitute one of SA’s largest categories of processed food imports, with a trade deficit of R8.6bn in 2020. Palm oil imports are the largest in this category, ranked fifth out of all food and agroprocessing imports, with more than R4.5bn being imported per annum. Palm oil imports have been growing consistently, more than doubling from 248,000 tonnes in 2001 to 525,000 tonnes in 2020.

Contrasting trends

Just a few places down the list, annual sunflower oil imports of more than R2bn also appear among the top imported agroprocessing products. In contrast, soya bean and canola oil imports have gone in the opposite direction, with the imported product consistently replaced by locally manufactured imports of oil cake. In the case of soya bean oil, import volumes declined from a peak of 278,000 tonnes in 2011 to 150,000 tonnes in 2020. Based on the latest outlook of the Bureau for Food and  Agricultural Policy (BFAP), less than 50,000 tonnes will be imported annually by 2030.

There are thus contrasting trends within the same industry (vegetable oil manufacturing), which raises the question: why does SA not replace palm oil imports with an import replacement strategy? The obvious answer is that SA does not produce palm or palm oil because we lack the tropical climes of the big producers such as West Africa, Indonesia and Malaysia.

Graphic: KAREN MOOLMAN
Graphic: KAREN MOOLMAN

However, if planting palm is not an option, why not substitute palm oil use with locally produced oil from sunflowers, soya and canola? To address these types of questions, the BFAP has employed a detailed and end-to-end value chain approach to unpacking the underlying drivers of demand and supply, assessing the overall competitiveness of these industries, and considering the best use of a wider range of policy measures.  

Regarding the relative pricing of vegetable oils, palm oil trades at much lower prices in international markets than any of the other major vegetable oils. This relationship is not expected to change, despite the current spike in vegetable oil prices. Palm oil is not only a low-cost alternative to many other vegetable oils but yields up to 10 times more oil per unit area than other oilseed crops. That there are no commercially produced genetically modified (GM) palm trees is attractive to the European market.

Fat alternative

Due to the high level of imports, local vegetable oil prices are closely linked to international prices. Therefore, from a pricing perspective, palm oil trades at a discount of about 25% compared with sunflower and soya bean oil.

Apart from competitive pricing, the initial rapid growth in palm oil imports was ignited when the department of health drew up legislation regulating the use of trans-fatty acids in foods in 2010. The implication was that food manufacturers and many fast-food outlets required a fat alternative that did not convert to trans fats with heating, but still provided the same solid texture and taste in foods without the industrial addition of hydrogen.

Palm oil provided the solution to this problem and has since taken over this market segment, with little opportunity to substitute any of the other oils. Much research has been undertaken in the development of high-oleic sunflower and soya beans, which will also comply with the health regulations. Yet this oil cannot be produced cost-effectively in bulk and is now traded only in niche premium markets. The opportunity for import replacement in the bulk vegetable oil consumption market is thus limited to replacing imported sunflower, soya bean and canola oil.

Localisation strategies should be based on improved competitiveness, from the farm to the processing and retailing of the product. In this regard, the production of soya beans and canola has already increased rapidly through the introduction of high-performing cultivars, best farming practices and major investments in the processing and handling of canola and soya beans. However, the production of sunflower seed has concomitantly declined, and the local value chain is in distress. Therefore, rather than indiscriminately applying a blunt instrument such as tariffs on all vegetable oil imports, there is scope for more targeted interventions.

Improved practices

The BFAP recently published a comprehensive sunflower value chain report funded by the Oilseed Advisory Committee, in which challenges and the required reforms are highlighted. These include stagnant yields over the recent past and lower oil content compared with other major producers. One of the main problems identified is that while maize is the predominant cash crop in the main sunflower seed-production regions, sunflower is often planted as a “catch crop”, with preference not being given to the timing of production, such as optimal planting date, fertiliser applications, soil analysis or much of the required pest, weed or disease programmes required for optimal production.

Improved farming practices such as the selection of high-oil cultivars can result in significant increases in domestic production. An incentivised pricing mechanism has already been tested in which producers receive a price premium for delivering sunflower with high oil content.

While localisation might be an ideal policy approach for other sectors of the economy, in agriculture its potential is limited. Vegetable oils are just one example of the complexities and potential unintended inefficiencies of the localisation policy approach to agriculture.

The focus should instead be on boosting inclusive growth through the use of uncultivated land in joint venture approaches, while exploring avenues of expanding export markets.

The maintenance and expansion of infrastructure remains a critical driver to ensure the global competitiveness of SA’s food system.

• Meyer is MD of the Bureau for Food and Agricultural Policy and an extraordinary professor in agricultural economics at Stellenbosch University. Davids is a senior agricultural economist at BFAP.

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