Farmers squeezed by big retailers

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Consumers want lower prices and retailers want their margins. This relationship is forcing producers into a very difficult position which could lead to a decline in the number of farmers. 

In theory, retailers pushing for low prices gives the end consumer an advantage, but from the farmers’ perspective it leaves them at the losing end of the supply chain, according to Nishlen Govender, a portfolio manager at Citadel Investment Services.

“The squeezing of [the farmer’s] margin effectively gets passed on to the consumer. And the consumer in South Africa has been under pressure for so many years that grocers have had limited ability to [increase] prices,” Govender told the Mail & Guardian. “So you have this problem of food [manufacturers] and grocers trying to squeeze any margin out of the supply chain.”

A recent report by the Competition Commission suggests a worrying drop in farmer numbers and an increase in concentration across the agricultural value chain — which begins with inputs, production, harvesting, food processing, packaging and retail — that has mainly benefited grocery giants.

The Commission’s latest essential food pricing monitoring report also tracks the effect of the pandemic and how the resultant economic crisis has affected food markets.

South African farmers predominantly supply to the four big retailers — Pick n Pay, Woolworths, Shoprite and Spar.

In effect, the Commission says there are fewer and fewer farmers in the value chain. “South Africa’s commercial agricultural value chain shows concerning trends of declining participation by commercial growers and increasing levels of concentration for inputs and outputs,” it says.

For instance, the Commission says, there has been a 73% decline in producer numbers in the primary dairy sector from around 3 899 farmers in January 2007 to only 1 053 reported in the same month this year. 

With Shoprite’s recent acquisition of Massmart’s operations, namely Cambridge Food, Rhino and Massfresh, there are technically fewer retail players that farmers need to supply, but now Shoprite’s demand has multiplied.

The Competition Commission report says small and emerging farmers also face several other difficulties, such as poor yields because of weather conditions and low productivity. 

“I feel for the farmer because depending on the industry, they are being squeezed from the bottom by their customers but also by nature when droughts affect the area, like in the Northern Cape and Eastern Cape,” Govender said. “They are in such a weak spot that they have not been able to pass food inflation and cost inflation onto the consumer.” 

Govender does not see the grocers letting up on the push to increase their own margins by buying at lower prices from farmers. “With guys like Shoprite and Pick n Pay moving more to private labels, they will squeeze margins even more from farmers, where they have taken out the middleman, which is the food producer,” he said.

“At the moment, I am okay with it from a consumer perspective but when things improve in South Africa, do [grocers] let go of that stranglehold they have on the supply chain? I don’t think they will.” 

The report says small-scale farmers, in particular, have been hard hit by low operating margins. 

“It may be necessary to build on changing the market structure and developing a model of agriculture that enables industrial agriculture while also supporting and including small-scale and local farming,” it says, adding this could also make the market more resilient to disruptions to global supply chains from climate-change events.

Shorter supply chains could generate more opportunities for smaller farmers by forgoing  the high transport and intermediation costs involved in longer value chains, the Competition Commission’s chief economist James Hodge said.

“This has the potential to improve small farmer participation in the value chain and also contribute to addressing issues such as rural poverty and the lack of access to affordable and healthy food,” said Hodge. 

According to Govender, there is no other option than adaptation for small-scale farmers. He uses the example of small-scale farming company ClemenGold.

ClemenGold is a mandarin producer that has an exclusive contract with Woolworths, and partners with Woolworths to develop exclusive products.

“They have a different product, cutting-edge technology, and that kind of specialisation allows them to go to Woolworths and say, ‘You can’t do this yourself, you can’t buy on a broad scale. You will be able to charge a higher margin because that product [is unique].’ That’s what smaller scale farmers are going to have to do, specialise and diversify,” said Govender. That works for suppliers of Woolworths because the wealthiest part of the customer base wants more differentiation and more interesting products. 

“If you are in a farming space where you are competing in heavy commodified farming elements such as wheat, you’ll struggle. The only thing that will help is diversifying, but adapting is the only way to move forward as a small-scale farmer.” 

Reacting to the Competition Commission report, the chief economist at the  Agricultural Business Chamber of South Africa, Wandile Sihlobo, says it is a myth that the number of South African farmers is declining, arguing that there are still many small family farms that sustain the food system in rural South Africa. 

“The small farming units will remain crucial for informal value chains and supplementing incomes in the rural areas, but their practice should not be viewed as an aspiration for South Africa’s food system,” Sihlobo said.