Drought bailout: If farmers, what of miners? Assistance that distorts dangerous.

The damage caused by the drought was last seen at R16 billion. Farm unions have called for assistance, with some organisations calling for it to be a called national disaster. But as Johannes Wessels argues, a drought (like a flood) is a normal risk that impacts negatively on farming. And calls that Government should financially assist the farmers to overcome the set-back is fairly complicated. – Stuart Lowman

By Johannes Wessels*

In November 2015 I was told of a farmer who took 80 head of cattle to an auction. He received no bid on his livestock and left them with the auctioneer with the words: “Take them. I have no fodder back at the farm”.  This heart-rending situation evokes sympathy and over the past months several radio stations have mobilised people to donate either water or fodder to farmers in drought stricken areas.

I haven’t encountered anyone organising water for Richards Bay Minerals (RBM) to keep up with their production of titanium from dune-mining since the uMhlathuze Municipality had introduced Level 4 water restrictions. Why? In the case of RBM 4 000 jobs are at stake and the possibility is that once shut, the operations might not reopen due to the current commodity oversupply.

Farmers work the land outside Lichtenburg, a maize-growing area in the northwest province of South Africa, in this file picture taken November 26, 2015. REUTERS/Siphiwe Sibeko/Files
Farmers work the land outside Lichtenburg, a maize-growing area in the northwest province of South Africa, in this file picture taken November 26, 2015. REUTERS/Siphiwe Sibeko/Files

Organised agriculture calculates that several billion rand will be required to support the recovery of commercial agriculture over the next 3 years. Up to now Government has committed support mainly to communal and emerging farmers. The rationale for the latter is the philosophical-ideological framework of BEE and the anti-established business sentiment prevalent in many segments of Government.

To plead for Government financial support to farmers to “ride out” the ravages of the drought is, from the perspective of enterprises, not more valid than what an appeal by RBM would be for support. And would financial support then also be afforded to fishing companies like Oceana and the SME snoek fishers in seasons when the tuna or snoek is scarce? The contraction of the fishing industry had major implications for numerous communities and villages on the West Coast just as the current drought cycle has on small and medium sized towns in the Free State, Eastern Cape and North West.

Read also: SA says late rains avert national drought disaster, still needs 4m maize imports

Also: what about losses incurred by investors in companies that could not operate to capacity due to Eskom’s power droughts?

Assisting farming concerns but shutting out mines or fisheries (or tourism businesses losing out due to “road maintenance drought”) would be distorting. The following requires consideration to strengthen the enterprise environment and to ensure a more robust economy in times of severe drought:

  • Water should be properly priced. The role of municipalities as water providers selling to households, industry and (in some cases) to farmers, is problematic if municipalities are the proven largest culprits in wasting water resources. There are umpteen reports about massive water losses due to poor maintenance of water infrastructure. If municipalities are to continue as retailers of water (there are substantially better institutional arrangement possibilities that should be pursued) they will only become effective if they are charged a high wholesale price. That will compel them to jealously guard their stock (proper retail infrastructure maintenance) and ensuring higher service charge collection ratios. It will simultaneously plug two massive holes: one preventing water spillages and waste and the other ensuring that Treasury can rely on at least better local municipal efficiencies and therefore spend less on the endless bailing out of municipalities. Farmers paying a proper price for water will also revert to more drought resistant farming practices.
  • Introduce a national emergency relief insurance scheme. Insurance is based on uncertainty and probability assumptions and “the law of large numbers”. It offers immense scope for innovation. SA has a state owned company SASRIA that covers short term political insurance.  Emergency relief insurance could have a range of financial models for funding, e.g. expand VAT from 14 to 15% with the extra 1% to be channelled into a statutory independent financial insurance entity or launch a Public-Private Partnership where Government underwriting merges with producer and/or consumer contributions.  Alternatively, introduce on agricultural produce sales (whether eggs, livestock, grain or grapes) a fraction of a percentage levy into a buffer fund for producers against climatic risk. Sales form the key to the coverage: if a subsistence farmer sells three cows per annum from a herd of 30 and a commercial farmer 500 from a herd of 900 the coverage will be in accordance to the contribution made. Productive use is thereby encouraged.
  • Assess whether the R&D levy on water consumption that finances the Water Research Commission is applied in a balanced mode to focus in addition to technical issues concerning water supply also on the economics of water and water scarcity. Applied research pursuing technologies that would limit natural risks (e.g. improved drip irrigation or dry sanitation that would release water for productive usage) should receive a fair share of the resources
  • Cull the wasteful expenditure at DTI and the Department of Small Business Development on e.g. co-operatives and at municipal level on failing LED initiatives: channel these resources into assisting firms with differentiated products and services to market at international trade shows and to reward those that produce commodities when they successfully launch differentiated products.

The best strategy for a farming enterprise against the negative impact of drought is to become water wise and to move away from producing commodities to producing differentiated products. There are in the world examples of carpets made of maize polymers and also maize pasta producers. Why are farmers not transforming commodity crops into differentiated branded Bothaville Boerewors flavoured Corn Bites or Clocolan Chakalaka flavoured wheat pasta?

  • Johannes Wessels, director at EOSA (Enterprise observatory of South Africa).