Modelling the market outlook and policy alternatives for the Wheat Sector in South Africa

Abstract

The South African agricultural sector has experienced a long history of state intervention. In the past decade, the marketing of agricultural products has been transformed from a highly regulated to an essentially free dispensation. South African agriculture is now exposed to an uncertain environment that is influenced by the dynamic changes in the world economy. The dynamic environment in which producers of agricultural products operate urges the need to understand the production and consumption patterns of the products that they produce. South Africa does not have a modelling system in place that can simulate the impact of economic policies and exogenous changes on commodity markets. The general objective of this dissertation is to analyse the structure of the South African wheat market using economic theory and econometric modelling techniques. The specific objectives are to make baseline projections regarding the supply and use of wheat in South Africa and to analyse the impacts of various policy alternatives on the wheat sector for the period 2002 to 2008. The convenient and efficient methodology developed by the Food and Agricultural Policy Research Institute (FAPRI) for conducting policy analysis research, is particularly pertinent to this study and hence underpins the approach used for modelling the market and policy alternatives for the South African wheat sector. Ordinary Least Squares (OLS) is used to estimate single equations, which are collapsed into one system and estimated simultaneously using the Two-Stage-Least-Squares (2SLS) modelling technique. After the validation of the model’s performance, it is used to make baseline projections for the South African wheat sector during the period 2002 to 2008. In order to establish a baseline, a number of assumptions are made, relating to agricultural policies, the macroeconomic environment, and weather conditions. In the final part of this study, the constructed model is used to simulate the impacts of changes in policies, world markets and the production environment on domestic prices as well as levels of demand and supply. Three scenarios are analysed, the elimination of the import tariff for wheat, a twelve percent depreciation in the exchange rate, and the convergence of the elimination of the import tariff and the 12% depreciation in the exchange rate. Although the model developed in this dissertation is for a South African specific case study and therefore, contributes significantly to the understanding of the South African wheat market, it also highlights a number of shortcomings in the structure, relevance and applicability of such models, that need to be considered and addressed. The first of which is that the model structure is based on the level of knowledge, understanding, and perception that the modeller has of the sector; therefore, the basic structure of the model could be bias. The second is that this particular model was not developed with the necessary interaction between the different commodity and livestock sectors and that this model should ideally be integrated into a larger model, incorporating a larger number of commodities and policy variables. Lastly, it is important to take the nature of the good being modelled into consideration by asking whether or not the relevant product is a homogenous good. Ideally, a model of this nature would include a supply and demand function for each type of wheat that could then be estimated as a single system of equations.