Little oil price benefit for African farmers
Fin24

Little oil price benefit for African farmers

2014-12-24 05:00

Buloba - From the coffee plantations of Uganda to the maize fields of Zambia, the collapse in world oil prices has so far brought few benefits for African farmers, with stubbornly high pump prices and voracious middle-men maintaining a squeeze on margins.

Only in South Africa, the continent's most sophisticated economy and one of its top agricultural producers, have fuel prices - tightly regulated by the government - come down enough to make a difference.

Elsewhere, many smallholders are unaware of the near-halving of crude oil prices on world markets since July, and even the better informed doubt any savings will filter through the web of agents and brokers that dominates much of African farming.

"If it's true fuel prices are falling, it is possible these traders will increase what they're paying us," said 73-year-old Ugandan Gladys Kavuma, who has been farming two acres of coffee in Buloba, 15km west of Kampala, for four decades.

"But I doubt prices will ever improve. They will simply come up with another reason to keep prices low," she said, with a resigned shrug.

A typical Ugandan smallholder who has brought up five children on the back of her meagre coffee earnings, Kavuma's plight is replicated across sub-Saharan Africa, which relies on small farmers for 80% of its food.

In essence, weak government regulation means fuel importers and distributors can raise pump prices as crude oil rises, but drag their feet when it drops.

"We have heard and read that the cost of oil has dropped globally but unfortunately we are yet to feel the effects," said Jack Kneppers, a Dutch florist who employs 500 people at his Maridadi farm in Naivasha, northwest of Nairobi, Kenya.

"The price of fuel has dropped by a few shillings and this has very little if any effect on our cost of production."

Delayed drop

In countries such as Zambia, Africa's number two copper producer, oil's dramatic decline has been offset by currency weakness as foreign investors have retreated from frontier market debt and stocks due to concerns about global growth.

Furthermore, fuel imports are often paid for months in advance, meaning any benefit from the collapse in oil prices is delayed.

In its first price adjustment since April, Zambia dropped pump prices by 2.5% at the end of November based on fuel shipments bought in August, when crude was only just beginning its slump.

Over that time, the kwacha weakened 8%, eroding much of the impact of the oil price decline.

"The drop in global oil prices has not been felt in Zambia. The reduction in prices has been extremely negligible and means nothing to the farming community," said 62-year-old Request Muntanga, who owns a 500-hectare maize farm south of Lusaka.

Only in South Africa, where fuel price changes filter through faster and the government is stricter about ensuring reductions are passed on, have farmers seen major savings.

According to commercial farmers group AgriSA, for every 0.1 rand drop in the domestic fuel price, farmers nationwide save an annualised R100m.

Economists forecast that a litre of petrol will fall to R11.44 a litre next month, its lowest since August 2012 and 20% below a record R14.39 in April.

If sustained, such a decline means $250m wiped off the annual fuel bill of South Africa's commercial farmers.

The knock-on effect is even greater as the price of chemical fertiliser, another hydrocarbon by-product, should also come down over time.

"If fertiliser prices do come down it will have a huge effect," AgriSA President Johannes Moller said. "Production will go up and food prices will at least start rising slower, or may even come down. It's good news all round."

Nigeria

In Nigeria, where agriculture accounts for 40% of GDP - a surprising statistic in Africa's biggest crude oil producer - only a few large commercial farms have also been able to use their purchasing power to extract savings.

"The drop in energy prices directly impacts the cost of urea which is the biggest farming input cost," said Kola Masha, managing director of agriculture investment firm Doreo Partners.

Nigeria, too, has seen a sharp decline in its currency in the last three months, but Masha said this may ultimately reinforce the importance of diversifying the economy to reduce its 90% reliance on oil for foreign exchange.

"A drop in oil should encourage governments to diversify, which should help agriculture businesses," Masha said. "If governments see they need to diversify into areas like agriculture then these oil price shocks won't be so painful."

Comments
  • Andrew Gibbs - 2014-12-24 06:39

    Its competition that reduces prices. If prices are too high then you need to ask yourself what are you doing to ensure there is competition among your suppliers.

  • New_South_African_Glory - 2014-12-24 08:59

    Andrew I think there is competition in those markets but there is no unified user. There are too many lone wolfs probably creating a chain of resale much too long and only seeing profit. The market must dig its heals and if there is an organised agriculture it must arm wrestle or create its own supply chain. It is a shame as I think they should in fact maybe benefit more than South Africa as the South African product is bound to a very high not percentage driven but fixed levy cost. If fuel goes down the percentage of levies against real fuel cost actually increases. Even if fuel was supposed to be R1/L we will still pay something like R6 (not very sure) a liter due to levies. In the rest of Africa the reduction in oil prices should actually have a more direct effect on fuel prices. What I hope is that government come February see the light of lower fuel costs and reduce some of the levies and tighten profit margins on suppliers a little or just not give them any new increases next year. Then government must wean themselves off fuel levy income a little bit every year. For nxt year government must incorporate the toll levy into the fuel price without raising the fuel price one cent and rather sourcing the difference from within the current pricing structure. Politically this will give the ANC some points and economically it will raise confidence of the local industry dragons in our political-economical environment and get them to start breathing fire again.

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