Smith must have been inspired to write this statement by the free market economy of that era, after observing that self-interest was the main drive for the private enterprises. In a free market economy, theory tells us, price is the fundamental aspect which takes various functions, namely signalling, rationing and incentives.
A few weeks ago, our local bakers and millers signed a memorandum of understanding that would see bakers purchasing the bulk of their flour from local millers. After years of fighting each other, what prompted these two to suddenly kiss and make up? Millers used to accuse bakers of buying flour from across the border, to the end that a 20 percent import duty was imposed on imported flour in August last year. Bakers complained that local wheat was too expensive and that they should be allowed to import flour duty free. What has changed?
This deal makes sense as it allows millers to contract wheat farmers, thereby expanding wheat production in the country. Crops like cotton and tobacco are thriving because growers are being funded by the private sector. However, this deal is not as rosy as it looks. Being guided by Adam Smith’s wise counsel above, we should ask these two questions: What is in it for millers? What is in it for bakers?
The bakers have agreed to buy a whopping 70 percent of their monthly flour requirements from local millers and a total of 220,000 tonnes of flour annually. In accounting, they have a prudence concept, which says revenue is not recognised unless it is certain and expenses are recognised while they are probable.
1.6 million loaves
We require 1.6 million loaves of bread as a nation. In terms of wheat, we require 450,000 tonnes per year. We have planted a paltry 3,000 hectares this year and that will give us about 12,000 tonnes of wheat, against our requirement of 450,000 tonnes. What it simply means is that bakers and millers want to trade a product that is simply not there.
Why should millers be guaranteed to supply 70 percent of flour every day, when it’s apparent that they will have to import the wheat? Will millers be interested in financing local growers, where power, water and labour are so expensive?
Unlike other crops, virtually all wheat is grown under irrigation, where power and water are indispensible for any meaningful production to take place. If millers use the money they get from bakers to pay for wheat imports, they will have no money to finance local growers.
The price of a loaf
What will happen to the price of bread? It will go up substantially.
In 2010, Bakers Inn MD, Marcus Athitakis, said flour prices had to be within $650 and $700 per tonne for the price of bread to be $1. Now, the international price of wheat has surged by 28 percent, from $223.7 in 2010 to $308.7 this year, implying that international flour prices have also gone up over the past three years.
Bakers have been absorbing costs in order to be competitive. Given our obvious competitive disadvantage in wheat production, if we start to locally supply 70 percent of our expensive flour to bakers, bakers will struggle.
The 70 percent quarter will benefit millers in that they will be assured of a market for their flour, whether they have imported it or sourced it locally. Given the obtaining conditions under which the MoU was signed, we might actually be promoting millers to be middlemen for flour imports, and this will put pressure on the price of flour.
The MoU between millers and bakers has been signed 10 months prior to the operationalisation of the COMESA Customs Union and 20 months prior to the operationalisation of the Tripartite Free Trade Area. These are deeper levels of regional integration that Zimbabwe has commited itself to.
COMESA members, Zimbabwe included, have been eliminating tariff and non-tariff barriers to trade, as a precondition to joining the Customs Union and TFTA. The ‘buy local’ MoU is therefore regarded as a non-tariff barrier to trade which should be phased out.
The MoU signed between bakers and millers requires severe scrutiny. This is a bread and butter issue whose impact will be felt by ordinary people like you and me.Post published in: Business