The new land reforms set out by the Rural Development and Land Reform Minister Gugile Nkwinti caused a fair amount of up-roar and rightly so. The land reform set out that half of big farms should be handed to the workers on the farm, with the longest serving workers benefiting the most. The farm owner will not be directly compensated, but will receive a share in a fund that funds the small farmers and in return benefits from the returns of the fund (if there are any).
The basic idea that everybody should own some land, especially if they work on it is amended from the communist principle that says that everybody should be able to benefit from the land, thus all land should be owned by the government. It sounds fair enough, but as we have witnessed so many times before (it happened in almost every African country) it always has a devastating effect, especially on the poor. And it will be the same for South Africa, where our poor population once again get left further behind because of poor policy choices by the government.
To understand why, one needs to understand a bit about the business of farming, the food chain and inflation. Let’s start with the first one:
The business of farming:
Farming is a highly competitive and, in my mind, volatile business to be in. Essentially you are producing a homogeneous product (since the chickens or maize produced by one farmer is not very different than that produced by another) thus your selling price will be the biggest determining factor of the quantity sold. Added to that, the farmer is often subjected to very unpredictable events that are not within their own control, like the weather and nature (think of locust plagues). Because of this, the income stream is often uncertain and very difficult to predict.
If a farmer is a price taker, there are only two ways to increase profits (or in most cases, just survive). The one is to decrease the costs of producing, the other is to increase the yields by increasing the efficiency. The trouble is that most of the innovations done to increase the yields cost money, requiring a cash outlay to buy expensive machinery. The only way to make it feasible somehow, is to be as big as possible, thus reducing the incremental cost per unit (the benefits of economies of scale).
The food chain:
A lot depends on our maize production. The reason is very simple; maize is one of the main input costs of other foods, like chicken and pork. Thus a lower maize price should reduce the price of chickens (maize cost are about 40% to 50% of the costs of your chicken in the supermarket). We are currently producing about enough maize to supply most of South Africa’s needs. That means that if we loose any more production capacity in South Africa (as we surely will, it has always been the case in previous attempts to distribute land. Farm production of farms that have been redistributed through a the lands claim program before has fallen by more than 90%), we will have to import maize. That doesn’t sound too bad? Well, because of the geographic distance to other major exporting producers (like USA), the imported maize will be substantial more expensive. No local farmer in his right mind would sell his maize at a lower price, thus the local price will adjust to import parity. The effect will be that all foods further down the food chain will become more expensive, just because we have lost the ability to produce enough, which will have a devastating effect on the third topic, inflation.
Inflation:
Inflation is the percentage at which goods and services get more expensive every year. The official target rate of SARB is 6%. This means that if something costs R100 today, it will cost R106 in a years’ time. With that rate, prices double roughly every 13 years (with an inflation of 2% they would double in about 36 years). The trouble with the inflation figures is that it is a compounded number of the average household. Poor households typically spend more on basic demands (as per Marslow’s hierarchy) such as food and shelter. Thus poor people are more exposed to volatility in food prices (we have recently seen double digit food inflation). A rise in the price of maize will have a devastating effect on the ability of poor families just to get by.
I am of the opinion that the impact of the land reforms on the wider economy have not been thought through properly. It is based on sentiments instead of realism, and should it be passed as is, would nudge South Africa one more towards repeating the failed expectations of Argentina in the early 20th century, rather than living up to the potential it could be.