By Georg Southey
If you bought french fries last year, you would be paying R16 per kilogram.
Today, this staple food that is growing in popularity in both urban restaurants and township eateries, is selling at R30 per kilogram, a whopping 88% more than a year ago.
One has to question why the price has increased so dramatically, especially since fries, like potatoes, are classified as a VAT-exempted essential food under Government legislation.
VAT exemption on basic foods serves to ensure that those who are most marginalised in our society are able to afford basic foodstuffs.
Fries are important in South Africa.
They’re served everywhere, from a shisanyama in Alexandra to a fine dining restaurant in Constantia. They are the mainstay of every burger, every kota, every Gatsby and every Russian sausage. They are rich in vitamin B6, vitamin C, magnesium and iron, and most importantly, they’re accessible, affordable and convenient.
On the surface, one would be forgiven for thinking that the key catalyst for the increase in price of fries over the last year is due to Russia’s invasion of Ukraine, which created massive cooking oil shortages around the world. We all know that where there are product shortages, they are followed by constrained supply and sharp price increases. But cooking oil accounts for just 5% of the overall cost of producing french fries, so it’s not the oil.
What is it then? Well, it’s a combination of a few critical things: While South African farmers produce a lot of potatoes, they do not produce enough of the type of potato used for the production of french fries. We also don’t have enough processing capacity to make french fries in the country. So when that happens, wholesalers such as myself, and even the local fries producers themselves, have to import frozen chips from other countries so that every small food vendor, every shisanyama and every restaurant is able to keep french fries on their menus.
This is evidenced in the fact that of the three french fries manufacturers in South Africa, Lamberts Bay Foods and Natures Garden accounted for a full 20% of the imports of french fries. McCain, a 100% foreign owned company and the largest processor of fries in South Africa, doesn’t need to import since it controls 75% of the South African french fry value chain and market.
What pushes up the price of french fries is when Government applies import duties to those fries. The International Trade Administration Commission (ITAC) recently imposed provisional import duties of up to 180% on frozen potato chips. As we all know, duties are another form of tax that consumers have to bear. One would think that applying a duty of 180% on fries that need to be imported because we don’t make enough of them here is counterproductive, especially if you’re applying this duty (remember, it’s a tax) on a VAT-exempt food.
As a wholesaler, we distribute both imported and locally produced frozen fries. We have not been able to secure any local frozen chips from any of the local producers for more than six months because of the shortage in both the potatoes used to make fries and our country’s inability to produce enough to supply the demand.
The unfortunate reality is that duties always push up the price of food. We’ve seen this in chicken, where the price consumers pay has increased significantly after duty-upon-duty was applied on imported products that we just don’t produce enough of here, like chicken wings. We saw the same with duties imposed on imported tyres, which increased the price we pay for tyres by over 25%. The problem with the import duties on tyres is that they also increase the cost of transporting food, and therefore the cost of food.
So one must ask, who are we protecting when we impose duties on essential foods, and who are we harming?
The South African consumer will always be the biggest loser. When duties are applied, we pay more, fullstop. This may be okay in good times, when the economy is flourishing, people are employed, earning good salaries, and can thus afford to pay more for food. But we are not living in good times. Our economy is flat, as are salaries, unemployment is at record levels, inflation is increasing, and the price that we pay for everything, including transport, electricity, petrol, and most importantly food, is rising significantly.
While consumers lose, local manufacturers win. For years now, domestic producers have used trade protection as a way to increase profits and drive commercial growth. The upshot for domestic producers is that when you apply a duty on an imported product, you’re able to increase your own prices to meet the new import price. This may be good for shareholder profits in the short term, but it is not a sustainable strategy, nor is it an ethical one. When you raise the price of food, especially in a high inflation market like we are currently experiencing, people stop being able to afford your product. This often has catastrophic consequences for consumers. They stop buying nutritious, essential foods, their families go hungry, and if you push them too far over the edge, you lay the foundation for social instability.
South Africans are struggling under a cost of living crisis, with food inflation outstripping general inflation. At this critical time, everything must be done to contain food inflation as much as possible. While there are many factors driving up food inflation over which our government has no control, the application or removal of duties that drive up the cost of food is entirely within their power.
The inflationary effect of import duties was confirmed in the recent South African Reserve Bank’s October Monetary Policy Review report, which cautioned that duties drive up the price of food, hurting consumers. One of the reference documents used by the SARB was a World Bank Household Impacts of Tariffs report, which showed that developing countries would benefit from unilateral tariff liberalisation, which would increase real household income for citizens.
ITAC is applying provisional duties on french fries without taking into account the actual state of the sector, its challenges or the impact that duties have on consumers. It also doesn’t properly interrogate or take into account evidence submitted by numerous importers and trade partners. Critically, ITAC has not considered the two most fundamental facts: that there is a shortage of the variety of domestic potatoes used to make fries, and that there is not enough fries processing capacity in South Africa to meet local demand. These facts, incidentally, were recently acknowledged by PotatoSA, the industry body for the domestic potato sector.
It’s clear that duties are inflationary in nature and have a profoundly negative impact on the cost of food. This requires our Government to be more flexible in its response to trade policies, and to be more consumer driven and focused.
If we review import duties on food downwards, and suspend them, we will be able to curb the rising cost of food, ensure that people can continue to afford basic foodstuffs, enable eateries across the length and breadth of our country to stay in business, and stave off any possibility of social instability. This is a critical recipe for success.
A similar decision was recently made by the Minister of Trade, Industry and Competition in respect of duties on imported poultry, and the case for fries is equally strong.
Georg Southey is the general manager at Merlog Foods.
BUSINESS REPORT