The effects of drought on price transmission in the South African white maize market

Abstract

South Africa, on average, has received an annual rainfall of 600 mm since 1904. Over the years, the country has been characterised by frequent drought periods, with 2015 receiving the lowest rainfall since 1904, of 403mm. Drought has a negative impact on the physical agricultural production, with maize being the most affected by the recent 2015 drought. The South African white maize market is vulnerable to climate anomalies such as drought since 83% of white maize is produced under dry land conditions. The focus of the study is on the white maize market, given that it is a staple food for the majority of South African people and they spend a significantly large share of their income on purchasing maize meal. The aim of this study is to understand the effects of drought on price transmission in the South African white maize market. This objective was achieved by using a Cointegration and Error Correction Model (ECM) that estimated price changes during a drought and recovery period. Drought, in this study, is defined as periods in which the annual average rainfall was below 600 mm, with rainfall above that being a recovery period. The study also used monthly white maize and maize meal prices for the period 2000–2017. The findings of the study highlight that shocks to the system during both drought and recovery are corrected at a slow pace. However farm-price changes trigger a faster response during drought than in a recovery period. There is no indication of asymmetry in the white maize market, more particularly during a drought period. However, error correction terms for producer price decreases during a recovery period were not significantly different from zero. This implies that any cost savings during a recovery period are not passed on to the consumers. Moreover, poor consumers pay a larger share of their income for maize meal during a recovery period, as opposed to a drought period, leaving them worse off. This study provides insight on the pricing behaviour of role players, given rainfall variability. The study also highlights how these pricing mechanisms affect consumers, especially low-income earners, who constitute the majority of the South African population. This study recommends that in any fiscal planning, especially for social welfare grant adjustments, consideration should be given to rainfall pattern projections before decisions are made.