Competition watchdog must do proper research and stop blaming industry players

The Competition Commission’s Essential Food Price Monitoring Report, released this week, is the eighth such report it has published since 2020. The commission’s interest in food prices is therefore not new.

Competition in food markets and food prices have been a priority for the Competition Commission for many years. It has experience in this sector after successful cartel prosecutions in staple food markets such as bread and maize meal.

Given its mandate, it is right that the commission should be concerned with inefficient markets that yield uncompetitive prices. However, its most recent claims, contained in the media statement that accompanied the report and widely reported in the press, of “unjustified food price increases” seem far removed from the factors that actually drive food prices in SA. 

Well documented supply-side factors driving food price inflation in SA include, among other things, increasing global commodity prices, the weakening of the rand (making imports more expensive), higher energy prices and global supply chain disruptions linked to climate change and the ongoing war in Ukraine. Domestically, food producers throughout the value chain have been hard hit by persistent and escalating load-shedding and higher security costs.

From an economic point of view, the price of food is determined by demand and supply factors. Supply shocks such as those discussed above (more frequent load-shedding, for instance) will result in increased prices. These supply shocks are recognised in the report's introduction. However, the analysis of price movements in the focus products — sunflower oil, bread, maize meal and fruit & vegetables — does not attempt to link any of the price volatility to these known drivers of food prices. 

The first staple product the commission focuses on in its report is sunflower oil. It reports the wholesale and retail prices, and the spread between the two, but for only one stock-keeping unit, 750ml cooking oil (for January 2021 to December 2022). Without any further analysis, only documenting changes in retail and wholesale prices as well as the spread between the two, the authors of the report find that the “percentage margins may be similar to 2021, but the higher wholesale price means the retailers are taking more rand margin than before, which is unlikely to be justified”.

This is a startling conclusion when based only on the movements in margins for a single stock-keeping unit, and without any attempt to analyse the drivers of cooking oil prices and margins. A higher rand margin, in absolute terms, is also not the correct metric to consider. The Competition Commission’s own analysis points to similar margin percentages over time, which in effect nullifies concerns that food price increases are unjustified. 

Global price changes

Astonishingly, the commission goes as far as to ascribe a decline in the wholesale price of sunflower oil between June and December 2022 as partially stemming from its own investigation of these prices, as reported in its August 2022 food price report. The authors seem to completely miss that the price of cooking oil is significantly exposed to global price changes, with oilseeds (a globally traded commodity) a main input.

Indeed, in its March 2022 food price report the commission said that SA imports of oilseed accounted for 37% of domestic consumption in 2020/21. It is therefore an extremely far-fetched notion that investigations by the commission into the price of sunflower oil could have contributed in any way to a decline of almost 30% in the price of a 750ml sunflower oil unit over the period June to December 2022. 

If the Competition Commission were interested in linking price changes in sunflower oil to actual determinants of prices it would only need to consider the February Food Inflation Brief by local think-tank the Bureau for Food & Agricultural Policy (BFAP). The brief was published on March 27, a day before the commission’s report was issued, and documented the dramatic increase in food price inflation in SA since the beginning of 2022, reaching a high of 13.6% in February 2023 (compared to headline inflation of 7%).

The BFAP demonstrates that big contributors to food price inflation are “oils & fats” (16.7%) and “bread & cereals” (20.5%). Unlike the Competition Commission, rather than (unjustifiably) concluding that these price increases are the result of unjustifiable wholesaler and/or retailer conduct, the BFAP discusses the drivers of high food inflation and points out at the start that “many of the factors that have driven food inflation for most of the past year are not unique to SA”.  

The commission’s analysis of cooking oil prices concludes with the statement that it “remains concerned about the cooking oil value chain pricing and is conducting a formal investigation”. Nobody should hold their breath that unjustified or untoward behaviour will be uncovered. In fact, as the February Food Inflation Brief explains, factors keeping grain and oilseed prices (and therefore the price of sunflower oil) high, relate to the war between Russia and Ukraine, and climatic conditions in main producer countries. Nevertheless, the same report explains that global oilseed prices are declining due to the expected international crop expansion, especially in the US, as well as promising crop forecasts locally in respect of maize and soybean. 

The other staple food analysed in the Competition Commission report is bread (brown and white). Similar to the approach with cooking oil, this analysis is restricted to simple graphs of retail and wholesale prices (of 700g loaves) and a spread/margin percentage. Based on these trends, while the spreads/margins in 2022 were more or less in line and at times below those in 2021, the commission finds that retailers have sought to take “much more rand margin” on these staples.

However, a simple margin analysis on a single item is not sufficient to conclude anything about the behaviour of wholesalers and retailers, even less so that prices are unjustified. Economists would generally control for, among other things, lags and external drivers that may affect wholesalers and retailers disproportionately. 

If prices (and margins) decline locally for sunflower oil and bread in the coming months, will the Competition Commission conclude that the “unjustified” behaviour has ceased? The commission has a role to monitor competition in food markets and associated price movements, but it also has a responsibility to conduct proper research and use all available information before blaming local wholesalers and retailers, which have been struggling with increased operational costs due to factors that are completely out of their control. 

• The authors are with FTI Consulting.