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ECONOMIC EMPOWERMENT (AGRIBEE) POLICY:
IMPLICATIONS FROM A DOMESTIC CONTENT MODEL

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SOUTH AFRICA’S AGRICULTURE BROAD BASED BLACK
ECONOMIC EMPOWERMENT (AGRIBEE) POLICY:
IMPLICATIONS FROM A DOMESTIC CONTENT MODEL

By

Kudzai Mukumbi

A THESIS

Submitted to
Michigan State University
in partial fulfillment of the requirements
for the degree of

MASTER OF SCIENCE

Department of Agricultural Economics

2008

ABSTRACT
SOUTH AFRICA’S AGRICULTURE BROAD BASED BLACK ECONOMIC

EMPOWERMENT (AGRIBEE) POLICY: IMPLICATIONS FROM A DOMESTIC
CONTENT MODEL

By

Kudzai Mukumbi

The problem of market access for previously disadvantaged producers in the South
African agricultural market has remained despite the removal of the apartheid policy. The
South African Agricultural Broad Based Black Economic Empowerment policy
(AgriBEE) seeks to redress this issue. This study examines the potential economic effects
of the preferential procurement aspect of the proposed AgriBEE policy. The AgriBEE
policy has a target that ﬁfty percent of agricultural produce sold by retailers must be
procured from previously disadvantaged producers. The study is an empirical analysis of
the potential effects of the policy using a partial equilibrium framework. The welfare
implications of the proposed AgriBEE policy on retailers, large and small-scale producers
are analyzed. An international trade tool, (the domestic content policy) was adapted to
analyze a domestic issue (AgriBEE policy) in the context of a single dualistic economy
composed of previously disadvantaged farmers and large-scale commercial farmers. Data
from the tomato, cabbage and butternut squash markets was used to quantify the welfare
implications of the policy. Results from the analysis indicate that consumers are
penalized with the policy but there is potential for the previously disadvantaged farmers
to beneﬁt from the policy. Another key result is that the higher the target set for

preferential procurement under AgriBEE the higher the dead weight loss of the policy.

Copyright by
KUDZAI MUKUMBI
2008

DEDICATION

I would like to dedicate this work to my family: my parents Dr. NE Mukumbi, Mrs. J.
Mukumbi and my siblings Kudakwashe, Kupakwashe, Kufaramunashe and Tinodaishe.
Thank you guys for your support, encouragement and for always believing in me. I would

also like to thank God for providing me strength as I worked on my thesis.

iv

ACKNOWLEDGEMENTS

I am especially indebted to my major Professor and thesis supervisor Professor
Dave Weatherspoon for his support throughout my master’s degree program and during
the writing of this thesis. I would also like to thank my guidance committee members
Professor David Schweikhardt and Professor Lisa Cook for providing me with invaluable

guidance and comments in writing my thesis.

I would also like to thank Mr Flash Bediako from the University of Fort Hare,
South Africa who assisted me in obtaining information on budgets for previously

disadvantaged farmers and large-scale commercial farmers.

I am also grateful to the Michigan State University Graduate School for providing
me with funding to collect data in South Africa and funding for the writing of thesis.
Lastly I would like to thank all my colleagues in Cook Hall for their contribution in the

completion of my thesis.

TABLE OF CONTENTS

LIST OF TABLES .................................................................................... ix
LIST OF FIGURES ................................................................................. x
LIST OF APPENDICES ............................................................................. xi
KEY TO ABBREVIATIONS .................................................................... xiii
CHAPTER 1 INTRODUCTION .................................................................. l
1.1 Background ....................................................................................... 1
1.2 Research Objectives ............................................................................. 4
1.3 Contribution of the Research ................................................................... 5
1.4 Organization of the Thesis ....................................................................... 6

CHAPTER2 LITERATURE REVIEW 8

2.1 Contextualization of the Problem .............................................................. 8
2.1.1 Dualism in South African Agriculture .......................................... 9
2.2 Importance of Issue ..................................................................... » ...... 10
2.3 Review of the AgriBEE Law ............................................................... 11
2.3.1 Preferential Procurement 13
2.3.2 Monitoring and Evaluation ofthe AgriBEE Policy 14
2.4 Literature Review on Preferential Procurement in South Africa ....................... 15
2.5 Literature Review of Economic Empowerment and Afﬁrmative Action
Policies ......................................................................................... 17
2.6 Alternative Methods for Policy Analysis .................................................... 20
2.6.1 General and Partial Equilibrium Analysis .................................... 20
2.6.2 Beneﬁt Cost Analysis and Cost Analysis ..................................... 21
2.6.3 Analysis at Regional, National or Multinational Level .................... 24
2.7 Domestic Content Protection Policies (DCPs) ............................................. 25
2.7.1 Deﬁnition of a Domestic Content Requirement and its
Objectives ............................................................................................ 25
2.7.2 Review of Studies on the Effects of Domestic Content Protection
Policies ............................................................................. 28
2.7.3 DCP in the Auto Industry ........................................................ 31
2.7.4 DCP in the Television and Radio Industry ................................... 33
2.7.5 DCP in Agriculture ............................................................... 34
2.7.6 Key Points About DCPs ......................................................... 35

vi

CHAPTER 3 METHODOLOGY ................................................................ 38

3.1 Justiﬁcation of the Use of an International Trade Tool to Analyze the Effects of

Domestic Policy .............................................................................. 39
3.2 Model Speciﬁcation and Development .................................................... 41
3.2.1 Proﬁt Maximization Problem .................................................. 41
3.2.2 Assumptions of the Modiﬁed Model. ......................................... 42
3.2.3 Mathematical Derivation for the Three Cases: Fulﬁllment,
Underﬁilﬁllment and Overfulﬁllment of the AgriBEE Policy ............ 44
3.2.4 Explanation/Description of Modiﬁed Domestic Content Model
Diagram ............................................................................ 48
3.3 Welfare Analysis .............................................................................. 51
3.4 Effect of Location of Supply Curve ......................................................... 52
CHAPTER 4 DATA, ESTIMATION METHODS AND RESULTS .................... 54
4.1 Data Sources ................................................................................... 54
4.2 Fresh Vegetables Selection Criteria ......................................................... 55
4.2.1 Tomatoes ......................................................................... 56
4.2.2 Butternut Squash ................................................................ 57
4.2.3 Cabbage ........................................................................... 58
4.2.4 Income Contribution of Selected Vegetables to Previously
Disadvantaged Farmers ......................................................... 59
4.3 Welfare Analysis Estimation ................................................................ 60
4.3.1 Parameters Used in Analysis ................................................... 60
4.3.2 Data Calculation Methods ...................................................... 64
4.4 Empirical Scenarios ........................................................................... 73
4.4.1 Baseline Scenario ................................................................ 73
4.4.1.1 Economic and Welfare Impacts of the AgriBEE Policy:
Discussion for Baseline Scenario ................................. 73
4.4.2 Simulation Scenarios for Varying the Level of AgriBEE
Requirement ..................................................................... 78

4.4.2.1 Tomato, Butternut Squash and Cabbage Simulations for
Varying the Level of AgriBEE Preferential Procurement

Requirement ......................................................... 78
4.4.2.2 Economic and Welfare Impacts of the AgriBEE Policy:
Discussion for Scenarios 1 to 6 ................................... 79
4.4.3 Effect of Simultaneously Varying the AgriBEE Requirement Level and
the Price Difference ............................................................ 84
4.4.3.1 Assumptions for Scenarios 7, 8 and 9 ............................ 84
4.4.3.2 Discussion of Simulation Results for Scenarios 7, 8
and 9 ................................................................... 85
4.4.4 Price Elasticity of Supply Simulations ....................................... 85
4.4.4.1 Scenarios 10, 11 and 12 ............................................. 85

vii

4.4.4.2 Discussion of Simulation Results for Scenarios 10, 11.

and 12 ................................................................... 85
4.5 Summary of Chapter ........................................................................... 91
CHAPTER 5 POLICY IMPLICATIONS AND CONCLUSION .......................... 92
5.1 Summary of Key Results .................................................................... 92
5.2 Policy Implications and Recommendations ............................................... 95
5.3 Conclusion .................................................................................... 101
APPENDICES ...................................................................................... 104
BIBLIOGRAPHY ................................................................................. 121

viii

LIST OF TABLES
Table 2.1: Discrimination Under Apartheid ...................................................... 8
Table 2.2: NEP Benchmarks ...................................................................... 19

Table 2.3: Economic, Technological, Managerial and Socio-Political Effects of DCPs
Across Countries and Industries ...................................................... 30

Table 4.1: Percentage Contribution of Various Vegetables to Total Income of Previously
Disadvantaged Farmers ................................................................ 59

Table 4.2: Summary of Data Source or Calculation Method .................................. 62
Table 4.3: Published Price Elasticity of Demand Estimates for Selected Vegetables .....65
Table 4.4: Published Price Elasticity of Supply Estimates for Selected Vegetables... .....67

Table 4.5: Percentage of Fresh Produce Procured from Large-Scale Commercial

Producers and Previously Disadvantaged Producers .............................. 68
Table 4.6: Average Prices for Selected Vegetables in South Africa, R/kg .................. 69
Table 4.7: Summary of Price Difference Values ............................................... 72

Table 4.8: Economic and Welfare Impacts of the AgriBEE Policy: Baseline Scenario...77

Table 4.9: Economic and Welfare Impacts of the AgriBEE Policy: Scenarios 1 and 2 for
Tomatoes ................................................................................ 81

Table 4.10: Economic and Welfare Impacts of the AgriBEE Policy: Scenarios 3 and 4 for
Butternut Squash ..................................................................... 82

Table 4.11: Economic and Welfare Impacts of the AgriBEE Policy: Scenarios 5 and 6 for
Cabbage ................................................................................ 83

Table 4.12: Welfare Implications of AgriBEE Policy Results for Scenario 10:
Tomatoes ............................................................................... 88

Table 4.13: Welfare Implications of AgriBEE Policy Results for Scenario 1].: Butternut
Squash ................................................................................. 89

Table 4.14: Welfare Implications of AgriBEE Policy Results for Scenario 12:
Cabbage .............................................................................. 9O

ix

LIST OF FIGURES

Figure 2.1: AgriBEE Policy Time Line ......................................................... 15
Figure 2.2: Effects of a Domestic Content Policy on the South African Motor

Industry ............................................................................... 22
Figure 3.1: Welfare Analysis of AgriBEE Policy .............................................. 46

Fig. 3.2: Modiﬁed Version of Fig 3.1 Showing Different Locations of the Supply
Curve ...................................................................................... 52

Figure 4.1: Total Volume of Tomato, Butternut Squash and Cabbage Produced in South
Africa ................................................................................... 58

Figure 4.2: Comparison of Price Elasticities of Demand for Fruit and Vegetables
Between Low, Middle and High Income Countries .............................. 65

Figure 4.3: Price Trends for Tomatoes, Butternut Squash and Cabbages in South
Africa .................................................................................... 69

LIST OF APPENDICES

Appendix 1: Previously Disadvantaged Farmers Contribution to Total Sales and
Production .......................................................................... 1 04

Appendix 2: Number of Producers Growing Selected Vegetables in South

Africa ............................................................................... 104
Appendix 3: Comparison of Asset and Labor Costs for Large-Scale Commercial Farmers
and Previously Disadvantaged Farmers ........................................ 105
Appendix 4: Comparison of Costs for Cabbage Production ................................. 105
Appendix 5: Comparison of Costs for Butternut Squash Production ...................... 106

Appendix 6: Availability of Services and Facilities Among Farming Operations That
Require Them by Type of Farmer .............................................. 107

Appendix 7: Mathematical Derivation for the Three Cases: Fulﬁllment, Underfulﬁllment
and Overfulﬁllment of the AgriBEE Policy .................................... 108

Appendix 8: Summary of Values Used in Welfare Estimations For the Baseline
Scenario ............................................................................. 111

Appendix 9: Summary of Values Used in Welfare Estimations For the Scenarios 1 and
2 Tomatoes .......................................................................... 112

Appendix 10: Summary of Values Used in Welfare Estimations For the Scenarios 3

and 4 — Butternut Squash ..................................................... 1 13
Appendix 11: Values Used in Welfare Estimations For the Scenarios 5 and 6

— Cabbage ....................................................................... l 14
Appendix 12: Summary of Values Used in Welfare Estimates for Scenario 7 ........... 115
Appendix 13: Summary of Values Used in Welfare Estimations for Scenario 8 .........116

Appendix 14: Summary of Tomato Data Used in Welfare Estimations for
Scenario 9 ........................................................................ 117

Appendix 15: Summary of Butternut Squash Data Used in Welfare Estimations for
Scenario 10 ....................................................................... 118

xi

Appendix 16: Summary of Cabbage Data Used in Welfare Estimations for
Scenario 11 ........................................................................ 119

Appendix 17: Economic Welfare Results for Scenarios 7and 8 .............................. 120

xii

KEY TO ABBREVIATIONS

AgriBEE
BEE

DCP
WTO
ZARorR
GATT
CUSFTA
NEP

ROO

Agriculture Black Economic Empowerment
Black Economic Empowerment
Domestic Content Policy
World Trade Organization
South African Rand
General Agreement on Tariffs and Trade
Canada-United States Free Trade Agreement
New Economic Policy

Rules of Origin

xiii

CHAPTER 1
INTRODUCTION

1.1 Background

The proposed South African Agriculture Black Economic Empowerment
(AgriBEE) policy has the potential to dramatically change the structure, conduct and
performance of the South African agricultural industry. The AgriBEE policy is a policy
framework whose main objective is to set guidelines that promote an environment that is
conducive for the participation of previously disadvantaged Black producers in the
mainstream agricultural economy. In other words, the aim of the AgriBEE policy is the
re-distribution of economic opportunity among the farmers. The AgriBEE policy is not
merely an afﬁrmative action program that provides preferential treatment to previously
disadvantaged farmersl but it is an important social/economic reengineering tool. It is
part of the broader Black Economic Empowerment (BEE) policy which includes all.
economic sectors in South Africa and seeks to correct economic injustices from the past

apartheid era.

The current structure of South Africa’s agricultural sector is dualistic and consists
of two groups of farmers — the large-scale White commercial farmers and the small-scale
previously disadvantaged Black farmers. The large-scale commercial farming sector is
made up of sixty thousand producers who occupy 87% of the total agricultural land.
These large-scale commercial farmers are well ﬁnanced and have many years of

experience in production and marketing of agricultural produce. However the small-scale

 

I The term ‘previously disadvantaged’ refers to those groups of individuals that were discriminated against
the during the apartheid era. These groups include Blacks, Indians, Coloureds and women.

previously disadvantaged farming sector is made up of nearly three million households
that occupy 13% of the agricultural land (Statistics South Africa, 2005). Other challenges
that the small-scale farmers face include the lack of access to inputs such as land. In
addition, participating in agricultural markets has only recently become an option. This
dualistic structure occurred due to the discriminatory laws used during the Apartheid

regime.

According to Statistics South Africa (2007), agriculture accounts for 2.9% of the
GDP of South Africa. Despite this low level of contribution to GDP, agriculture in South
Africa is still important because it contributes to poverty alleviation in rural and urban
areas by reducing food prices, creating employment, increasing real wages and improving
farm income. Empirical evidence from a FAQ (2004) study conducted in Indonesia for
example, found that agricultural growth reduced the level of poverty by 50% in rural
areas and by 36% in urban areas. Delgado (2005) notes that “smallholder agriculture is
simply too important to employment, human welfare and political stability in Sub-
Saharan Africa to be neither ignored nor treated as just another small adjusting sector of a
market economy” (Delgado in Development Report, 2005). However according to the
F A0 (2004) unless small holder agriculture involves some degree of commercialization,
the impact of agricultural growth on food insecurity and poverty alleviation is limited. As
a means of accomplishing these objectives, the AgriBEE policy applies to the entire
South African agricultural sector value chain, from the provision of agricultural inputs to

distribution of products.

The objective of the AgriBEE policy is therefore to merge the two separate
agricultural economies into one. “Economic empowerment of previously disadvantaged
people will be facilitated through: increasing the number of people that manage, own and
control agricultural enterprises; facilitating ownership and management of agricultural
enterprises by communities, workers cooperatives and other collective enterprises; human
resource and skills development; achieving equitable representation in all occupational
categories and levels in the agricultural workforce, preferential procurement, and
investment in enterprises that are owned or managed by blacks” (Department of

Agriculture South Africa, 2005).

One of the main objectives of the policy is the economic empowerment of
previously disadvantaged people through preferential procurement and this aspect of the
AgriBEE policy will be the main focus of this study. The AgriBEE policy has a target
that at least 50% of the volume or value of agricultural produce that is sold by a retailer
must be procured from previously disadvantaged producers. The 50% preferential
procurement target should be reached by the year 2017. The ﬁrst year of implementation
of the policy is proposed for 2007. This is an enormous task and challenge for the
agricultural sector to increase the previously disadvantaged farmers supply to the formal

markets from below 1% to at least 50% in just 10 years.

The realization of the AgriBEE policy goals will be measured against a scorecard.
Agricultural-related ﬁrms will be awarded points based on the attainment of each of the

objectives of the scorecard. If an industry and its ﬁrms do not obtain the minimum level

or score that is required by the policy, as a penalty, they may be excluded from access to
govemment contracts and public resources. For example, the government could withhold:
state funds for research purposes; duty free access to European export markets; Land
bank loans; and access to irrigation water (Williams, 2005). In addition, retailers will
need to obtain a favorable score for them to remain competitive. This is a credible threat
because ﬁrms that fail to comply with the AgriBEE policy requirements are likely to lose
business since it is assumed that customers (75.2 % of South Africans are Black) will

prefer to do business with ﬁrms that are AgriBEE compliant.

1.2 Research Objectives
The main objective of this study is to empirically estimate the welfare effects of
implementation of the preferential procurement aspect of the AgriBEE policy. The
speciﬁc objectives of this research are:
1. To analyze the current structure of the South African agricultural sector
and give a description of the context in which the AgriBEE policy is set.
2. To review literature on the South African AgriBEE policy and determine
which policies it is similar to.
3. To conduct a welfare analysis of the potential effects of the policy using
fresh produce data for speciﬁc vegetables.
4. To estimate the potential economic welfare effects of the AgriBEE policy
on large-scale commercial producers, small-scale previously

disadvantaged producers; consumers and retailers.

5. To provide policy recommendations that help to minimize the costs of the
AgriBEE policy and recommendations that help to maximize the potential

beneﬁts of the policy.

The study also seeks to answer the following research questions:

a) How will the policy affect large-scale commercial producers and small-
scale previously disadvantaged producers?

b) How will the preferential procurement requirement affect retailers?

c) What can the policymakers, government, private and public sector and
supply chain members do to ensure the success of the policy?

(I) What is the effect of varying the level of AgriBEE preferential

procurement requirement on the estimated value for welfare loss to

society?

To analyze this problem we utilize a modiﬁed version of a domestic content
policy2 model. The approach allows us to conduct welfare analysis on the effects of the
policy on the following markets: tomatoes, butternut squash and cabbage. The domestic

content approach was adopted for a single dualistic economy.

1.3 Contribution of the Research
This study is unique in three ways. First, this is the ﬁrst time in South Africa that

a law has been proposed that has the potential to require retailers to be involved directly

 

2 A domestic content policy is a regulation that requires that some speciﬁed fraction of a ﬁnal good be
produced domestically (Krugman and Obstfeld, 2006)

with the burden of correcting the economic injustice resulting from the apartheid policies
and the dualistic agricultural structure. However, it is important to note that the principles
of the AgriBEE policy are similar to the (New Economic Policy, NEP) afﬁrmative action
programs in Malaysia. Second, this study uses a domestic content model within a one
country context to illuminate who beneﬁts and loses as a result of the AgriBEE policy.
Third, past literature on domestic content policies focuses only on the situation when the
content requirement is fulﬁlled. However in the case of the AgriBEE policy if the
preferential procurement target is set too high, the previously disadvantaged producers
may not be able to supply the quantity of produce required by the policy. In addition, we
analyze the potential situation when the price of produce from both large-scale and small-
scale producers is equal, this would imply that the retailer would be indifferent of where
(s)he procures produce and (s)he can decide to procure more than is required under the

AgriBEE policy.

The study quantiﬁes potential economic effects of the AgriBEE policy with the
objective of informing policy makers and agribusiness supply chain players on the
potential effects. This will enable the parties affected by the policy to identify how

beneﬁts of the policy can be maximized and how the costs can be minimized.

1.4 Organization of the Thesis
The paper begins with a literature review that focuses on the South African context,
followed by a description of the AgriBEE Law. The ﬁnal section of the literature review

consists of a review of the domestic content policy. Chapter 3, the Methodology Section,

derives the domestic content model and incorporates various assumptions resulting in a
modiﬁed version from which the welfare analysis is carried out. Chapter 4 discusses the
estimation method and results of the analysis and Chapter 5 ends with the conclusion and

implications.

CHAPTER 2

LITERATURE REVIEW

2.1 Contextualization of the Problem

A history of apartheid policies has led South Africa to have very high levels of
income inequality. South Africa’s Gini coefﬁcient3 is currently 0.68 (Machethe, 2004)
which is one of the highest in the world. Government policies after 1910 turned Black
farmers into laborers through subsidies to White farmers and closing down of markets to
Black farmers (Goebel, 2005). The table below demonstrates the preferential treatment of

Whites under the apartheid regime.

Table 2.1 Discrimination under apartheid

 

 

 

Blacks Whites
Population 19 million 4.5 million
Land Allocation 13% 87%
Share of National Income <20% 75%
Ratio of earnings (compares 1 14

value of earnings between
the two groups)

 

Source: Chokshi et al 1995

 

Inequality is reﬂected by the Gini coefﬁCient, which measures the distribution of a country's
national income. The Gini coefﬁcient varies between 0 and l - the closer to l, the more unequal a society;
the closer to 0, the more equal a society

 

It is important to note that “rural underdevelopment and impoverishment among
Black farmers is still rampant in South Africa because in the past Black farmers were
systematically undermined with inadequate access to inputs, markets and infrastructure”

(Goebel, 2005). As a result, the AgriBEE policy seeks to address the issue of inequality.

2.1.1 Dualism in South African Agriculture

One of the main features of the South African agricultural economy is its dualistic
structure. There exists a group of large-scale commercial producers as well as a group of
small-scale producers; this division is generally along racial lines. The large-scale
commercial farming sector is capital intensive, export oriented, engaged in large-scale
production and, operated by 60,000 producers who occupy 87% of total agricultural land,
and employ 10% of the formal labor force (Statistics South Africa, 2005). On the other
hand, there is the small-scale holder farming sector which is primarily still located in the
former homelands. It is an impoverished sector, dominated by low input - labor intensive
forms of production and poor access to markets. Up to 3 million households subsist in
this sector which occupies 13% of agricultural land (Development Bank South Africa,

2005).

In terms of production, estimates from Statistics South Africa (2002), which is the
government statistics ofﬁce, suggest that small-scale producers in homelands contribute
0.7% of the total production of fresh vegetables, and only 0.13% is for sale, the rest is
consumed within the household. Producers in homelands also contribute 1.09% of the

total production of fruits, and they sell only 0.33% of their produce. Due to policies of

apartheid in South Africa (before 1994), a large proportion of the population was denied
the opportunity to engage in many forms of economic activity. The small-scale
previously disadvantaged Black farmers currently face many challenges in farming due to
these past apartheid policies. For example, the previously disadvantaged farmers lack
access to: land, water, markets, ﬁnance, communications infrastructure, education, skills

development and market information (Hendricks, 2004).

From this background in which the proposed AgriBEE policy is set, it is clear that
due to the challenges the previously disadvantaged farmers face it is very difﬁcult for
them to be competitive in the agricultural industry. The AgriBEE policy seeks to redress
this issue. The challenge is to increase the contribution of previously disadvantaged
farmers in terms of the volume and value of fresh produce they sell from less than 1% to
50%. If successful, the policy could be used as a model by other countries in Sub-Saharan

Africa, for example Namibia.

2.2 Importance of the Issue

Hendricks (2004) notes that the AgriBEE policy is crucial to the success of the
South African economy. She states that in order for South Africa to increase its GDP
growth rate from the current levels of 2.5 to 3% to at least 5%, economic empowerment
of previously disadvantaged groups is essential. Hendricks (2004) also notes that the low
and narrow entrepreneurship base in South Africa is one of the major constraints to
economic growth. This low entrepreneurship base resulted from past apartheid policies

that prohibited Black farmers in participating in the formal agricultural markets. Hence

10

the AgriBEE policy seeks to remove this constraint of a low entrepreneurship base by
increasing the opportunity for more previously disadvantaged groups to start or manage

businesses and hence economically empower them.

Another reason why the AgriBEE policy is important is because equality and
economic empowerment of previously disadvantaged farmers has the potential to reduce
the incidence of political instability. When we look at other countries within the Southern
Africa region that have faced similar challenges with past apartheid policies or
colonialism such as Zimbabwe and Namibia, the signiﬁcance of the AgriBEE policy is

enhanced.

The AgriBEE policy is also important because in the past the policy making and
service delivery has been focused on the two agricultural economies; one for the large-
scale commercial agriculture value chain and the other one for the previously
disadvantaged farmers (Hendricks, 2004). However the AgriBEE seeks to merge the two
agricultural economies into one uniﬁed sector. The AgriBEE policy therefore has the

potential to dramatically change the structure of the agricultural sector in South Africa.

2.3 Review of the AgriBEE Law
“The AgriBEE Law applies to the entire value chain in the South African
agricultural sector, including all economic activities relating to the provision of

agricultural inputs, services, farming, processing, distribution, logistics and allied

ll

activities that add value to agricultural producers” (Department of Agriculture South
Africa, 2005). The AgriBEE law has four main components with the objective of
correcting economic and social injustices: direct empowerment, human resource
development, indirect empowerment, corporate social investment. Direct empowerment
of previously disadvantaged farmers includes equity in ownership, management and
control of agriculturally related enterprises. Human resource development of previously
disadvantaged farmers includes employment equity and skills development. In addition,
indirect empowerment includes: provisions of access to markets, ﬁnance resources,,

support for facilitation of BEE enterprise development, and preferential procurement.

The objectives of the policy are to facilitate empowerment in the agricultural
sector by: ﬁrst, promoting equitable access and participation of Black people in the entire
agricultural value chain. Second, empowerment will be through the de-racialization of
land and enterprise ownership, control, skilled occupations and management of existing
and new agricultural enterprises. A third method of empowerment is by, facilitating
structural changes in agricultural support systems and development initiatives to assist
Black South Africans in owning, establishing, participating in and running agricultural
enterprises (Department of Agriculture South Africa, 2005). Fourth, the empowerment
will also be facilitated by increasing the extent to which communities, workers,
cooperatives and other collective enterprises own and manage existing and new
enterprises, thereby increasing their access to economic activities, infrastructure and
skills training. Fifth, rural and domestic communities will be provided with access to

agricultural economic activities, land agricultural infrastructure, ownership and skills

12

 

(Department of Agriculture South Africa, 2005). The indicators of empowerment are
based on seven key elements of the AgriBEE policy, these are: ownership, management
control, employment equity, skills development, preferential procurement, enterprise

development, and corporate social investment.

2. 3. I Preferential Procurement

This study focuses on the preferential procurement aspect of the AgriBEE law.
The aim of preferential procurement is to provide preference in allocation of contracts,
supply chain commercial transactions or procurement of materials and services to people
that were previously or historically disadvantaged. Under the preferential procurement
aspect of the AgriBEE policy there is a requirement that 50% of the agricultural produce
sold by a retailer must be procured from previously disadvantaged producers by the year

2017.

The AgriBEE policy states that “the agri-industry will undertake to proactively
identify and implement targeted procurement strategies and policies to realize AgriBEE
objectives. In addition, the agri—industry also undertakes to progressively provide Black
people and small and medium scale enterprises preferred supplier status including the
supply of services and goods” (Department of Agriculture South Africa, 2005). Under
the AgriBEE policy the role of the government is to utilize all legislative and other
measures available to inﬂuence the attainment of AgriBEE objectives. In addition, the
government will provide previously disadvantaged producers preferred supplier status in

the supply of goods and services to the government.

13

2.3.2 Monitoring and Evaluation of the AgriBEE policy

Monitoring and evaluation of the implementation of the AgriBEE policy by ﬁrms
is based on a scorecard. Each of the seven elements4 of the AgriBEE policy is given a
weight in the scorecard. A ﬁrm will be allocated points on the attainment of each of the
requirements of the policy. If a ﬁrm does not score high enough on the scorecard, they
may be excluded from access to government contracts and public resources. For example,
the government could withhold: state funds for research purposes; duty free access to
European export market; Land bank loans; and or access to irrigation water (Williams,
2005). In other words a ﬁrm that refuses to comply with AgriBEE requirements will have

major interruptions in their business.

The proposed implementation of the AgriBEE law is based on a ten year
scorecard from 2007 to 2017, with 2007 as the ﬁrst year of compliance when all the
indicators will be measured (Department of Agriculture, 2005). Figure 2.1 illustrates the

time line for the discussion and implementation of the AgriBEE policy.

 

4 The seven elements include: ownership, management control, employment equity, skills development,
preferential procurement, enterprise development, corporate, and social investment.

14

Figure 2.1. AgriBEE Policy Time Line

 

General public
discussion of affirmative
action began in 1994

 

 

 

 

 

Brainstorming workshop
and first discussion paper
of AgriBEE
2002

 

 

 

 

 

Announcement of Draft
of AgriBEE policy
2004

 

 

 

 

 

Proposed Dates for
Implementation of
AgriBEE policy
2007-2017

 

 

 

Source: Department of Agriculture, South Africa (2007)

2.4 Literature Review on Preferential Procurement in South Africa

The literature review on preferential procurement in South Africa is limited to the
two case studies below that analyze the beneﬁts and costs of a preferential procurement
system. Bienabe and Vermeulen (2007) analyzed two case studies of local procurement

by rural-based retail chain stores from small-scale farmers in South Africa. These cases

15

occurred before the proposed AgriBEE policy was written but they provide information
on the details of how a preferential procurement system could Operate in South Africa.
Bienabe and Vermeulen (2007) carried out a qualitative analysis of the beneﬁts and costs
of a local procurement scheme. The cases involved two rural based retailers in Giyani
and Thohoyandou, South Africa. These retailers, out of their own initiative, began to

procure from small-scale farmers that were located close to the stores.

According to Bienabe and Vermeulen (2007) over time some of the adjustments
that had to be made by the small-scale farmers in order to sustain their relationship with
the retailers included: “use of good quality seed; improved production planning;
application of higher quality retailer approved fertilizer and pesticides; improved
technology for adequate irrigation capacity and employment of more workers due to
increased production levels. In addition, due to the increased production and use of more
expensive inputs, the farmers had to learn how to manage their cash ﬂows. “The farmers
also had to develop better technical skills in order to produce the higher quality produce

required by the store,” Bienabe and Vermeulen (2007).

One of the beneﬁts of procuring from small-scale farmers was that it provided the
farmers with a secure market to sell their produce which improved the farrners’
household income and food security status. The case studies showed that participating in
the supermarket chain procurement gave farmers incentives to invest in farming assets
such as vehicles and drip irrigation. The retailers also beneﬁted from the local

procurement scheme with respect to freshness of produce since the small-scale farmers

16

supplied the retailer with frequent small deliveries of produce. In these case studies, local

procurement was established as part of the retailers’ community involvement.

From the case studies it is concluded that the main risk and cost implications
associated with the retailers’ procurement schemes was that the risk of shortages
increased. This occurred because of the challenges faced by the small-scale farmers in
production failure. In addition, the retailers faced higher transactions costs. In these case
studies the authors note that success and sustainability of the procurement program
heavily depends on the retail stores “communication and coordination functions, and
provision of technical and ﬁnancial support” (Bienabe and Vermeulen, 2007). We expect

similar results after the AgriBEE policy is implemented.

2.5 Literature Review of Economic Empowerment and Affirmative Action Policies

Two examples of countries that have addressed the problem of economic inequality along
racial lines using afﬁrmative action programs are Malaysia and India. These two
countries were chosen as examples because their afﬁrmative action policies have been in
place for a long time and therefore provide useful information to compare with the
AgriBEE policy. The policies implemented in Malaysia and India are similar in many
ways to the South African AgriBEE policy. Analyzing these two case studies provides

insight into some of the potential economic effects of the AgriBEE policy.

Malaysia

The Malaysian case has been both one of the most successful and controversial

cases. The occurrence of violent racial clashes between native Malays and Chinese

17

Malays in 1969 necessitated the implementation of the New Economic Policy (N EP)
(Darity, 2005).The NEP was implemented in 1971 with the objective of reducing the
wealth gap between native Malays and Chinese Malays. According to Darity (2005),
although native Malays constitute 60% of the Malaysian population in 1970 they only
owned 2% of Malaysia’s corporate wealth. The NEP target was to ensure that 30% of the
corporate wealth would be in the hands of native Malays by 1990. However after
implementation of the NEP policy the share of corporate wealth had risen to only 18.7%
by 2004. A unique aspect of the Malaysian NEP was that the government purchased
shares of Malaysian corporations and put them in a trust fund for native Malays (Darity,
2005). Although in the case of the South African AgriBEE policy case the government is
not purchasing shares directly, in many other aspects the Malaysian NEP policy and
AgriBEE policy are similar as they are both used as tools for reducing the wealth gap
between two social groups and reducing poverty. It is also important to note that although
the NEP policy ofﬁcially ended in 1990 because it was not able to reach its 30% target,

the government found it necessary to implement other similar policies.

The NEP had both negative and positive effects on Malaysia. According to Island
Business International (2007), one of the drawbacks of the NEP was that: although
corporate wealth between native and Chinese Malays increased, the policy was not able
to achieve its set target. In addition once in place the policy was difﬁcult to remove
because of the preferential treatment the policy offered to native Malays. One of the
positive effects of the policy was that absolute poverty for the Malaysian population as a

whole declined from 52% to 6.8% between 1971 and 1997. Another positive effect was

18

that Gini coefﬁcient decreased from 51.3 in 1970 (Gerson, 1998) to and 49.2 in 2003

 

 

 

 

 

 

(Netto, 2003)
Table 2.2 NEP benchmarks
Year

1970 1990 2004
Native Malay 2.4% 19.3% 18.7%
(Bumiputra) equity
Overall poverty 52% 1 7. 1% 5%
Household Income RM‘ooo RM1,254 RM2,996

 

 

 

 

Source: Malaysian Dream (2007)

mg

India is known for having one of the oldest afﬁrmative action programs in the world.
According to Darity (2005), preferential treatment is given to speciﬁc lower social
classes/castes in the form of a 22.5% quota in allocation to civil service positions,
parliamentary seats and university student positions. It is important to note that in India’s
afﬁrmative action programs were implemented in the public sector whereas with the
AgriBEE policy preferential treatment and economic empowerment will be implemented

in both the private and public sectors.

 

5 Where 1US$ = 3.37 Malaysian Ringgits (RM)

19

 

2.6 Alternative Methods for Policy Analysis

This section discusses alternative methods to analyzing the AgriBEE policy.
Economists usually classify methods used in policy analysis according to the following
three groupings: partial equilibrium or general equilibrium analysis; beneﬁt - cost or cost
analysis; or the policy can be analyzed at the regional, national or multinational level.

Below, each of the three approaches is detailed.

2. 6.1 General and Partial Equilibrium Analysis

Economists deﬁne general equilibrium analysis as the simultaneous analysis of all
capital, product, and labor markets throughout the economy; for example, it shows the
impact on exchange rates, savings, investment, and government transfer on the market
equilibrium. One of the disadvantages of the general equilibrium analysis is that it is
relatively empirically more difﬁcult to analyze than partial equilibrium analysis. General
equilibrium was not an appropriate to use in this study because the objective of this study
is to analyze the potential effects of the policy on the agricultural sector without looking
the effect of the policy on backward and forward linkages in other sectors. Using a
general equilibrium analysis framework would lead to general economy wide results on

the effects of the AgriBEE policy.

Mas-Collel et al (1995) note that “partial equilibrium models of markets or
systems of markets determine prices, proﬁts, productions, and other variables of interest
adhering to the assumption that there are no feedback effects from these endogenous

magnitudes to the underlying demand or cost curves that are speciﬁed in advance.” The

20

partial equilibrium analysis was chosen to analyze the potential effects of the AgriBEE
policy because it was more useful in analyzing the effects of the policy on large-scale
commercial, small-scale previously disadvantaged producers and consumers on the
agriculture sector for selected vegetables. According to Mas-Collel et al (1995) one
advantage of the partial equilibrium analysis is that it “allows us to determine the
equilibrium outcome in the particular market under study in isolation from all other
markets” .The partial equilibrium analysis is therefore useful in analyzing the effects of
the AgriBEE policy because it examines potential changes in the agricultural sector in

isolation using data from selected vegetables.

2. 6.2 Beneﬁt Cost Analysis and Cost Analysis

Another alternative analysis tool that could have been used. to analyze the
potential effects of the AgriBEE policy was the beneﬁt-cost analysis method. Beneﬁt-
cost analysis is a tool used in policy decision making processes which weighs the
potential economic beneﬁts and costs of a proposed policy. It provides a monetary
measure of whether a proposed regulation is desirable or not. However one disadvantage
of the beneﬁt-cost analysis approach would be that the accuracy of the outcome or results
heavily relies on the accuracy of the estimates of the beneﬁts and costs of the policy
(Sewell and Marczak, 2006). In addition, in order to give estimates of the beneﬁts and
costs of the policy, researchers often use information from similar past research or

projects and the method is therefore prone to the researcher’s biases.

21

In the case of the AgriBEE policy, the policy is unique and there is no similar
policy in South Africa that places the burden of past economic injustice on other
members of society from which analysts can obtain estimates of beneﬁts and costs
therefore this method was inappropriate. Sewell and Marczak (2006) note that although
beneﬁt- cost analysis may be useful in revealing unexpected costs, it does not provide
information on whether or not the policy is having a signiﬁcant net effect on the desired

OUICOITICS.

Another alternative approach that could be used to analyze the potential effects of
the AgriBEE policy is the Black and Mitchell (2002) model which analyzes the welfare
effects of a domestic content policy in the auto industry in South Africa from a cost

perspective. Figure 2.2 shows the cost analysis method.

Figure 2.2. Effects of a Domestic Content Policy on the South African Motor

 

 

Industry
W
Domestic in local content
Components — 66/33
Z C
Y B Z
X Y,
A
1 car
W’
0 Imported
Components

Source: Black and Mitchell (2002)

22

In the Fig 2.2 the curve CA represents an isoquant for a ﬁrm producing a car
using both domestic and imported parts. The isoquant represents the tradeoff between the
domestic and imported car parts. The slope of line XX’ represents the free trade relative
price of imported to domestic parts. Point A represents the minimum cost of producing a
car with both domestic and imported parts before a domestic content policy is put in

place.

Line OX represents the cost of making the car in terms of world prices. The slope
of line OB represents the 66%-local-33% percent imported requirement. Line YY’ is
parallel to line XX’ therefore OY shows the cost of making a car when a domestic
content requirement is in place. From the diagram we therefore note that the effect of the
domestic content requirement is to increase the cost of producing a car from OX to OY.
This approach was not used because the objective of this study is to analyze both the
beneﬁts and the costs of the policy. Therefore using the cost analysis method would not

capture both the beneﬁts and the costs of the policy.

An alternative type of method is to assess qualitatively the main costs and beneﬁts of the
AgriBEE policy for previously disadvantaged farmers and retailers. This approach was
used by Bienabe and Vermeulen (2007) who analyzed the beneﬁts and costs of local
procurement schemes from small-scale farmers by rural based retail stores. Some of the
beneﬁts that result from the local procurement system were that small-scale farmers
beneﬁted from access to the “secure and stable market provided by the store” (Bienabe &

Vermeulen, 2007) and this improved the farmers income through the bigger market

23

opportunity provided by the local procurement scheme. An example of a qualitative cost
that they identiﬁed was a higher risk of shortages of produce from the small farmers. The
qualitative analysis approach was not adopted in analyzing the potential effects of the
AgriBEE policy because the objective of the study was to provide empirical estimates of
the beneﬁts and costs to society of the AgriBEE policy. However, the qualitative analysis
provided a background on which to identify the types of beneﬁts and costs associated

with preferential procurement system.

2. 6.3 Analysis at Regional, National or Multinational Market Level

One of the models that could be used to analyze the potential effects of the
AgriBEE policy is an analysis of the dualistic structure of the South African agriculture
sector using a regional trade market model (Tomek and Robinson, 1990). In this case, the
analysis could be based on analyzing the large-scale commercial producers as one
regional market and the previously disadvantaged producers as another regional market.
Spatial markets or interregional trade can be described as trade between two markets that
are dispersed geographically. In South Africa, the location of the majority of the
previously disadvantaged farmers is concentrated in speciﬁc geographic areas within the
country. For example, there is a high concentration of previously disadvantaged farmers
in the Limpopo province. Applying this regional trade model would mean the two regions
that would be analyzed would include: a region where the large-scale commercial farmers
are concentrated and another region where the small-scale previously disadvantaged
farmers are concentrated. We would then analyze the quantities of agricultural produce

that are procured from each region and sold by the retailer (supermarket) using the

24

regional market trade model. Potential implications of the AgriBEE policy on trade
between the two markets could then be investigated. However, a limitation of this
approach is that it does not cater to the possible cases of under fulﬁllment, over
fulﬁllment and fulﬁllment of the AgriBEE policy requirement that are crucial for the

analysis therefore this method was not used.

Another reason why this method was not used is because the fundamental issue to
be analyzed is not the geographic dispersion of the two types of farmers. However the
focus of this analysis is the problem of asymmetric access to markets and resulting
patterns of low-vs-high value production between the large-scale commercial farmers and

previously disadvantaged farmers, hence the regional trade model could not used.

This study carries out the analysis of the potential effects of the AgriBEE policy
at the national level within a dualistic structure of the agriculture sector using a modiﬁed
domestic content model. The analysis in this study was not carried out at the
multinational level because the objective of this study was to analyze the potential effect

of the AgriBEE policy on the domestic South African markets.

2.7 Domestic Content Protection Policies (DCPs)

2. 7.1 Definition of a Domestic Content Requirement and its Objectives

Economists deﬁne a domestic content requirement/policy as a regulation that

requires that some speciﬁed fraction of a ﬁnal good be produced domestically. A

25

domestic content regulation provides protection in the same way a quota does. Krugman
and Obstfeld (2006) note that for ﬁrms that must procure parts domestically, the domestic
content regulation does not place a strict limit on imports but it allows the ﬁrms to import
more provided that they also buy more domestically. As a result, the effective price of the
inputs to the ﬁnal goods producer is an average weighted price of the domestic and
foreign inputs. The ﬁnal price of a good produced under a domestic content policy is

higher than that of a good produced under free trade.

Munson and Rosenblatt (1997) state that domestic content policies differ by
deﬁnition and by inducements (penalties) for compliance. For example, a foreign ﬁrm
must promise to adhere to domestic content requirements before being allowed to operate
a business in the host country. Non compliance, in this case would result in the breach of
the contract and the foreign ﬁrm can not do business in the host country. Other penalties
may include high penalty tariffs on intermediate goods imported by a ﬁrm that has
violated the domestic content policy. Hollander (1997) points out that governments often
have inducements for DCPs such as duty free imports of intermediate goods provided

that the ﬁrm complies with the DCP rule.

Domestic content policies have been used in both developing countries such as
India and the Philippines (Ministry of Economy, Trade & Industry Japan, 2001) and in
industrialized countries such as Canada (Richardson, 2002), USA (Crandall, 1987) and
Australia (Pursell, 2001). The DCP policies have been widely used in the automobile,

agricultural and television and radio industries. For example, Australia has used DCPs

26

extensively in the past in the following industries: automobile parts, petrochemicals,
tobacco leaf, peanut oil, coffee, fruit juices, industrial machinery and agricultural tractors

(Grossman, 1981 ).

In developing countries and especially in the automobile industry, DCPs have
been used as a tool to encourage the intermediate good production instead of assembly
functions they were carrying out previously. The domestic content policy is therefore
justiﬁed by some authors on the basis of the infant-industry argument6. In industrialized
countries the DCPs have been used as a way of protecting their domestic industry from
competition with foreign ﬁrms. In other cases the DCPs have been implemented as a way
of “supporting the domestic industry, developing domestic technological capability and

ensuring protection for the domestic workforce” (Munson and Rosenblattt, 1997).

The use of domestic content policies has always been a controversial issue
because under the WTO regulations, domestic content policies are prohibited as they are
a form of a non tariff trade barrier. However the goals of domestic content requirements
are not merely based on trade issues but include issues such as the protection of a nation’s
culture in the case of DCP in the TV, radio and ﬁlm industry or other issues such as
correcting inequalities in resource allocations or business opportunities as in South
Africa’s AgriBEE policy. As a result of this fact, DCPs have been used by many
countries despite the fact that sometimes they may have an overall negative effect on

society’s welfare.

 

6 The infant industry argument is used to argue that a domestic industry does not yet have the capacity to be
competitive with larger foreign ﬁrms when they start and hence protection is necessary to enable them to
succeed

27

However it is important to note that rules of origin (ROOs) are a form of DCP.
Rules of origin are used to determine the “nationality” of goods that are traded
internationally (Ministry of Economy Trade and Industry Japan, 2000). Some ROOs are
used to give preferential treatment to goods from speciﬁc countries within a preferential
trade area. ROOs are permissible under WTO regulations and they have the same effects

as DCPs.

2. 7.2 Review of Studies on the Effects of Domestic Content Protection Policies

Most of the theoretical literature on DCPs has focused on welfare and resource
allocation effects of the DCP (Grossman, 1981) and (Mussa, 1984). Other authors have
expanded the work by Grossman and Mussa and have explored the effects of DCPs in the
context of a variety of market structures such as monopoly (Beghin and Sumner, 1992),

monopsony (Kuroda, 2004) and oligopoly (Krishna and Itoh, 1988) cases.

The ﬁrst published paper on DCPs by Grossman (1981) was based on the
resource allocation effects of content protection under alternative assumptions. The
assumptions include: the manner in which domestic content is deﬁned, the number of
intermediate goods and the market structure of the domestic intermediate industry.
Grossman (1981) concluded that a domestic content policy aimed at increasing domestic
value added in a multi-stage industry may in fact have the opposite effect. Grossman also
noted that a domestic content policy that seeks to raise the output level of the
intermediate good may fail in this objective if the intermediate good producers are larger

relative to the domestic market for outputs. This is similar to the case of the AgriBEE

28

policy where the large-scale commercial producers are much larger than the previously

disadvantaged in terms of the output level of fresh produce.

Mussa (1984) also performed an analysis on the economic effects of content
protection and observed that content protection creates a production distortion by forcing
inefﬁcient choice of domestic and imported inputs. However in a competitive market
situation, Mussa (1984) noted that the introduction of a marginally effective domestic
content policy can lead to increased demand for the domestic input. He observed that a
domestic content policy generally has a propensity to enhance monopoly power and when
scale economies are signiﬁcantly important, there is often a danger that the content
protection will artiﬁcially create a ‘natural monopoly’. The natural monopoly would
consist of a single, efﬁcient domestic producer who has the power to keep out domestic

competitors who can not reach an efﬁcient size.

Moran (1998) illustrates that the effects of domestic content policies have been
largely negative in both developing and industrialized countries, regardless of the
objectives of the policy. Research has shown that DCPs have technical, economic, social-
political and managerial effects on a country in which they are implemented. Many
examples of the use of the DCP in industrialized and developing economies exist and are

illustrated in Table 2.3.

29

Table 2.3 Economic, Technological, Managerial and Socio-Political Effects of DCPs
Across Countries and Industries
l Balkrishnan". Pursell ‘ ‘ Richafdson lBegh—in
l (2005) l (2001) l (2002) ‘ (1997)
i COUNTRY ’ 1 India 1 Australia ' Canada F USA
. INFUSTFY” ' {Au-to” ' AGE)" ; TV and L Tobacco
: 1 Radio ; and .
: Cigarettes "

AUTHOR

jECONOMIC

1 EFFECTS

i Proﬁtability ' Decrease ‘ = Increase

Demand of local . Increase ‘ Increase ' Increase
1 inputs ' '

f Competitiveness of ; Increase Decrease . Increase

j industry ‘

5 Prices , Competitive , Increase '

‘ Volume of production , Decrease é . Increase

Q Volume of exports Increase Increase ' Decrease
‘ Production costs - ~ Increase

{ TECHNOLOGICAL
' EFFECTS

I Productivity Increase
Quality ofiprOduct I Increase ' ' V i I Decrease
‘ Employment? 7 ; ’ Decrease ;
g Technological change ._ Increase V 7 I
f MANAGERIAL " ' V
| EFFECTS
Transactioﬂnsicosts If Increase ‘
1 SOCIO-

r POLITICAL
! EFFECTS

: Conﬂicts between _ ‘ 7 . . Increase
» foreign investors and
‘ host country

Difﬁculties in removal Increase Increase

30

From Table 2.3 we note that the effects of DCPS have been both negative and positive.
The next section begins by describing DCP in the auto industry followed by DCP in the

television and ﬁlm industry and ﬁnally DCP in the agriculture industry.

2. 7.3 DCP in the Auto Industry

A study conducted by Pursell (2001) focusing on Australia’s experience with
domestic content protection policies in the automobile industry led to the following
economic effects from implementing the policy: high prices; incompatibility of DCPS
with open non-discriminatory international trade; market fragmentation; reduced national
income and counter-competitiveness due to government cartelization of the industry.
However a positive economic effect of the DCP was that there was an increase in the

volume of exports.

One of the major technological effects of the DCP was that it resulted in reduced
employment in auto production, distribution and repair industries. In addition, the DCP
retarded technological change. Under the managerial effects, the DCPS led to increased
transactions costs for government, the private sector, and the micro-management of
industry. The socio-political effect of the DCP was that there were major difﬁculties in
removing the DCPS once implemented due to populist appeal, lack of transparency and

vested interests of multinational and domestic ﬁrms who had become dependent on the

policies.

31

In India’s auto industry, Balakrishnan et a1, (2005) concluded that the economic
effect of India’s government (indigenization) DCP was positive in terms of the
production of low cost, high domestic content cars. The cars were competitively priced
due to the adoption of a low cost mass production strategy. The results from the study
Show that there was an increase in exports of cars from India and an increase in the
competitiveness of the small car industry. However, despite the positive technological
effects of the DCP with respect to quality and productivity improvements through use of
advanced technologies, there have also been some negative economic effects of the
policy such as a decline in the total volume of cars produced and the level of proﬁtability

for the ﬁrms.

Crandall (1987) analyzed the effects of US trade protection for autos during the
19703 and 19805. He found that in terms of economic effects, import restraints reduced
competitive pressure from abroad and raised industry prices and proﬁts. One of the major
technological effects of the DCP was that it inﬂuenced industry wage bargains7. The
restraints allowed the United Auto Workers to maintain their premium over
manufacturing wages. He notes that the protection of the auto industry in the 19803
increased cash ﬂows but did not raise output or employment. The fact that the imported
cars and domestically assembled cars from Japan were not perfect substitutes in terms of
quality, made it difﬁcult for US. auto manufacturers to compete with products produced

by the Japanese on US. soil.

 

7 It is important to note that US automobile producer’s continue to face further competitive difﬁculties
because of continuing wage increases.

32

2. 7.4 DCP in the Television and Radio Industry

DCPS have also been used widely in the television and radio industry. Richardson
(2002) notes that “many countries have expressed concerns that domestic culture is
threatened by an international cultural hegemon (i.e. the USA), be it in ﬁlm, television or
music played on radio stations”. As a result of this observation, many DCPS have been
implemented all over the world in countries such as Canada, Australia and New Zealand.
Richardson (2002) notes that some of the economic effects were that the policies:
induced an increase in the volume of artists entering the market, increased demand for the
output of new domestic artists, increased proﬁtability but there was also a reduction in

the quality of products.

Studies on the Canadian DCP by Richardson (2002) showed that one social effect
of the policy was to produce domestic artists that produced products with similar style
and quality to that found on the international market. In this case the DCP produced an
effect that was opposite of the desired effect by “encouraging the domestic artists to
become more like international ones rather than preserving any perceived cultural

distinctiveness” (Richardson, 2002)

In Australia the effects of DCPS were studied by Mason (2003). The effects were
similar to those found in Canada; there was a signiﬁcant increase in the volume of
Australian recordings from 20 per year in 1942 (when the DCP ratio was 2.5%) to 97
recordings per year in 1946 (when the DCP ratio was 5%). However in 1989 and 1990 it

was noted that only 26% of the domestic content releases appeared on the top 100 charts.

33

From this case it is important to note that although the volume of products increased as a

result of the DCP policy the quality of products under the DCP did not improve.

2. 7.5 DCP in Agriculture

The effects of DCPS on the US. tobacco and cigarette industries were studied by
Beghin et a1, (1997). They applied Grossman’s (1981) model and empirically analyzed
the welfare and trade effects of the policy on US. tobacco growers, manufacturers and
competing tobacco imports. The 1994 -1995 DCP policy required that 75% of all tobacco
used in US. cigarette manufacturing had to be of domestic origin. Some of the effects of
the policy were that it: had a small negative output effect (total demand for US.
cigarettes declined by 0.55% and the total export demand for US. cigarettes by 1.71%);
increased domestic use of U.S.-grown tobacco; decreased imports; and the export
demand for US. tobacco decreased due to the higher price induced by the content
requirement. The DCP caused controversy and was found to be inconsistent with GATT
principles. The DCP policy was then removed but replaced by a tariff rate quota which
provided protective effects similar to those provided by the DCP to the US. tobacco

growers.

Canada has also used a DCP in the form of blending requirements for wine.
Before the implementation of the Canada-United States Free Trade Agreement
(CUSF TA) in 1989, the province of British Columbia protected its grape and wine
industry through a policy that stated that “domestic wines had to have an 80% British

Columbian grape content with the remaining 20% coming from either imports or local

34

sources. More imports could be used only after the entire provincial grape crop had been
bought and used in production” (Heien and Sims, 2000). However, demand for British
Columbian grown grapes was so high that most British Columbia labeled wines
contained only 60% British Columbia grapes. The effects of the removal of the DCP
under the CUSF TA were that: the number of grape producers declined from 200 growers
to 111 growers and the total grape production area in British Columbia was drastically
reduced by approximately 38%. The economic effect of the policy was that it cost the
Canadian government vine removal subsidies worth Can$8,000 per acre (Heien and

Sims, 2000).

2. 7.6 Key Points About DCPS

Moran (1998) notes that one of the reasons why domestic content requirements
often have a negative domestic impact is because they attempt to improve on functioning
markets and this generates technical, economic, managerial and socio-political problems
for the investors and the host country. However, in the case of the South African
AgriBEE policy, the policy is set in a context where there is market failure in the
agriculture markets due to the effects of apartheid. The market failures include market
failure in: access to information on markets, access to capital and access to transportation.
For example there are high transactions costs for the previously disadvantaged producers
in obtaining information about the markets and high transaction costs in access to

markets.

35

Moran (1998) also points out that one of the negative effects of DCPS is that they
are “difﬁcult for projects that do not capture economies of scale to become globally
competitive”. In other words, the presence of economies of scale has a signiﬁcant role to
play in determining the success of a DCP policy. Currently the previously disadvantaged
producers do not have scale economies in production and marketing of fresh produce. In
order for the previously disadvantaged producers to beneﬁt from the AgriBEE policy
they will have to Obtain economies of scale, one possibility is through forming

cooperatives and or creating joint ventures with large-scale commercial producers .

Moran (1998) also notes that the three most important factors that determine the
potential effects of a policy include: economies of scale, cutting-edge technology and
best practice management. With respect to the political economy, domestic content
policies have often led to conﬂicts between investors and the host country authorities. In
the case of the AgriBEE policy, there is potential for conﬂict to arise between small-scale

and commercial producers, retailers and the lawmakers of the AgriBEE policy.

A study by Veloso (2001) on domestic content policies concluded that domestic
content policies are likely to be effective in regions where the overall technology gap of
the components that are forced into domestic production is small. Veloso (2001) suggests
that coupling of DCP with subsidies can help to drive investors to make choices that
optimize welfare of the domestic economy without hurting their competitive ability. He
also notes that “domestic content requirements have a clear upper bound” (Veloso, 2001).

This implies that if governments demand too high a level of content requirement, they are

36

likely to severely hurt the economy. For example, with small production volumes from
the domestic market, it is nearly impossible for any positive gains to be realized by the
domestic content policy. In the case of the AgriBEE policy, if the previously
disadvantaged producers fail to produce sufﬁcient volumes of fresh produce to meet the
50% preferential procurement target, the content ratio is underfulﬁlled and it will be

difﬁcult for the objectives of the policy to be attained.

According to the Ministry of Economy, Trade and Industry Japan (2001) DCPS
have both short term advantages and long term disadvantages. This occurs because they
“force a foreign afﬁliated producer to use domestic parts, the short term advantage is that
there is an immediate increase in the sales of domestic parts. However the long term
disadvantage is that the industry is protected from competition and in the end will fail to
improve its international competitiveness. The consumer also suffers when the DCP is
implemented because they have to pay a higher price and domestic demand will stagnate
therefore hindering long-term economic development of domestic industries” (Ministry

of Economy, Trade and Industry Japan, 2001).

The next chapter discusses the conceptual model or framework and methodology

used in the analysis of the potential effects of the AgriBEE policy.

37

CHAPTER 3

METHODOLOGY

A model of international trade policy (the domestic content policy), was modiﬁed
to analyze the welfare effects of a domestic issue (AgriBEE Policy). To domesticate the
policy, the foreign country is represented by the large-scale commercial producers and
the domestic country by the previously disadvantaged producers. It is important to note
that the two groups of producers that are being compared have different resource
allocations. In this context the previously disadvantaged producers can be viewed as
farmers in a developing country with limited resources and the large-scale commercial
producers as the industrialized country that has the latest technology for production and

less binding resource constraints.

This analysis uses a partial equilibrium model to analyze the potential economic
welfare effects of the AgriBEE policy. The policies of apartheid that were used before
1994 created advantages and granted market access among White large-scale commercial
producers. However the AgriBEE policy seeks to create advantages or minimize
disadvantages for the previously disadvantaged farmers, hence the AgriBEE policy acts
as a subsidy or quota to the previously disadvantaged farmers. The AgriBEE policy can
also be viewed as a tax on large-scale commercial farmers. However, before 1994 the

previously disadvantaged farmers were being taxed.

38

The AgriBEE policy is therefore a tool used for redistributing wealth or economic
opportunity and it shifts the tax burden from the previously disadvantaged farmers to the

large-scale commercial farmers.

3.1 Justification of the Use of an International Trade Tool to Analyze the Effects of
Domestic Policy

The justiﬁcation of the use of an international trade tool to analyze the effects Of a
domestic policy is based on the comparison of the similarities between the domestic
content model and the AgriBEE policy. First, the objectives of both policies are Similar:
both policies are aimed at protecting a special interest group using the infant-industry
argument. In the case of the DCP, the policy is designed to stimulate development of the
domestic industry and to protect domestic producers from foreign producers competing in
the market. In the case of the AgriBEE policy, the goal is to stimulate an increase in the

participation of the small-scale producers in the agricultural supply chain.

Second, both policies involve a market consisting of two groups of participants
that compete. In the case of the DCP the market includes the domestic and foreign
producers and in the case of the AgriBEE policy the market includes the large-scale

producers and the previously disadvantaged small-scale producers.

Third, both policies include quantitative restrictions. In the case of the DCP the

policy makers set a restriction on the ratio Of domestic to imported input used to produce

39

the ﬁnal good. With the AgriBEE policy, retailers are required to procure 50% of the

total agricultural produce they sell from previously disadvantaged producers.

Fourth, both the DCP and AgriBEE policies are government intervention tools;
they are used to make markets more favorable for domestic producers. However, unlike
the AgriBEE policy, they are not correcting past economic injustices. With free trade and
no DCP, the domestic producer would be driven out of the market by foreign producers
who have a cost advantage. Without the implementation of the AgriBEE policy, access to
agriculture supply chains for small-scale producers is limited. One of the major
objectives of the AgriBEE policy is to create economic opportunities for previously
disadvantaged farmers. Similarly, the objective of a DCP is to create economic

opportunities for the domestic ﬁrms.

The ﬁfth important factor is that the effects of the policies are similar: both
policies affect the equilibrium price and quantity of the products available in the market.
Both are protectionist policies and therefore have a cost attached to their implementation.
The DCP increases the use of domestic inputs and the AgriBEE policy could increase the
amount of produce procured from the previously disadvantaged groups. The AgriBEE
policy is therefore a tool that affects the procurement decisions of ﬁnal good producers

(retailers).

The interaction between supply and demand in the domestic content model will

provide the foundation for welfare analysis. Results Similar to those of the Australian,

40

USA and Indian automobile industry are expected to be found. This is because the
situations are similar; however in the case of South Africa’s AgriBEE policy a single

dualistic economy will be analyzed.

3.2 MODEL SPECIFICATION AND DEVELOPMENT

Modified Grossman-Kuroda Model
The Grossman (1981) domestic content protection model was modiﬁed to
accommodate a Simple dualistic economy within a one country context. The derivation of

the model follows given the assumptions from section 3.2.2.

3. 2.1 Profit Maximization Problem
The Short run production possibility function Of the ﬁnal goods industry can be
represented by an industry production function: F (l, de + Q15). As noted earlier, the
AgriBEE policy requires that 50% of agricultural produce be procured from previously
disadvantaged producers. Thus the proﬁt maximization problem of the retailer subject to
the constraint or requirement of 50% procurement from previously disadvantaged
producers imposed by the AgriBEE policy, when making procurement or purchasing
decision is:

Max II

Max PF(l, de + Q,,) - de de — PM] + t) Q1, -wl
Subject to the constraint:

(1) M" = 0. iszs < (149(de + Q.)

(2) tm* = t,,,, otherwise

41

Where:

de = quantity of fresh produce procured from previously disadvantaged

producers before the AgriBEE policy is implemented

Q, = the quantity Of fresh produce procured from large-scale commercial
producers

de = the price of the fresh produce procured by previously disadvantaged
producers

P1, = the price of fresh produce procured from large-scale commercial farmer

P1, (1 + 1,.) = the AgriBEE (or DCP-augmented) price

w = the per unit labor cost

I = quantity Of labor representing a vector of non traded primary inputs
L = the Lagrangian multiplier

t," = represents the penalty/tariff rate or increase in price that results from

implementation of the AgriBEE policy

k = the AgriBEE preferential procurement requirement or content ratio.

3. 2.2 Assumptions of the Modified Model

Before the AgriBEE policy is implemented, the retailer uses de units of goods
from small-scale producers and procures (Q, - QM) units from the large-scale producers.
With the introduction of the AgriBEE policy the retailer (ﬁnal good’s producer) uses de'
units of the goods from small-scale producers and (Q, ’- de') from the large-scale

commercial producers.

42

In order to analyze the potential implications of the AgriBEE policy the following
assumptions were made: ﬁrst, in the modiﬁed model the content requirement Operates
like a quota. This implies that when the quantity of produce from large-scale commercial
farmers are limited at the initial price, the demand for the produce exceeds the quantities
supplied by small-scale previously disadvantaged farmers plus the quantity supplied by
large-scale commercial farmers. This will cause the price to bid up until the market clears,
the effect of the AgriBEE policy will therefore be to increase the price of the produce

sold by the retailer.

Second, in the analysis it is assumed that the agricultural produce from both the
large-scale commercial and small-scale previously disadvantaged producers are perfect
substitutes. In reality, with the AgriBEE policy there may be problems in substitutability
of products between small and large-scale producers as the produce may differ in terms
of quality and production method used in the short run. In this analysis we will aSSLune
that the previously disadvantaged farmers will have to upgrade the quality of their
produce after the AgriBEE policy is implemented, and this leads to a higher cost of
production for them. (See section 4.3.2 on treatment of this issue in the actual

estimation)

Third, it is assumed that the marginal cost can increase to high levels such that the
AgriBEE requirement will not be fulﬁlled due to the prohibitive costs. The results of
those modiﬁcations result in Figure 3.2 where the effects of different levels of marginal

costs were analyzed using S], S 2 and S '.

43

Fourth, for the purposes of this analysis we will assume that a perfectly
competitive market exists. However the effects of the AgriBEE may vary depending on
the structure of the South African agricultural market. For example, if the product has a
large export market, the effect of the AgriBEE policy may be minimal. Another
example could include a product that is heavily supplied to the informal markets and the
modern retailers do not sell much of, such as Amadumbe (C olocasia esculenta) in this

case the effect of the policy would also be minimal.

Fifth, the price/cost of fresh produce from previously disadvantaged producers is
higher than that from large-scale commercial producers. This is due to the higher
production costs faced by previously disadvantaged producers. The high costs emanate
from: lack of economies of scale in production; high transportation costs since farms of
previously disadvantaged producers are located very far away from markets; lower
quality of land and lower productivity than farms for large-scale commercial producers;
inadequate access to capital; and difﬁculties in gaining access to supermarket supply

chain leading to high transactions costs.

3. 2.3 Mathematical Derivations for the three Cases: Fulfillment, Underfulfillment and

Overfulﬁllment of the AgriBEE policy

Case 1: Fulfillment of Content Requirements

From equation (1) where content requirements are met, the Lagrangian formulation is:

L = PF ﬂ: de + le) —dede' Pls(1 + 0) le " WI-A{QIS'(1'k) (de + Q15,”

 

8 See Appendix 7 for a more detailed mathematical derivation

44

L = PF ﬂ. de + st) - dede- P1, st - W’ - ’1 {-de - kad - kQ,_,)
First order conditions for proﬁt maximization are:
i) 5 L/ 51 = w
ii) 61/6de = P,,., -,l(1—k) so
iii)5L/6Q,, = P,_,. +Ak50
iv) 6 L /dk = kQ,,-(1-k)deZ 0
Equating (ii) and (iii)
PM -k(1—k) =P,,. +,lk
v)P,,,1 - Pi, = )1

Substituting (v) into (ii) we get: k PM + P,_,. (1- k)

Under the AgriBEE policy (DCP), when the content requirements are met exactly,
the price of produce sold by the retailer will be: k de + P1, (1- k) and the ratio of the
quantity Of fresh produce procured from previously disadvantaged producers tO the
quantity procured from large-scale commercial producers should be k/ (I-k). This is

represented in Figure 3.1 as the line AF.

45

Figure 3.1 Welfare Analysis of AgriBEE Policy

Price/
Cost

SS

Pls (1+tm/k]

P15(1'Hm)

P1 ST

 

 

 

Quantity of fresh produce

P = MC = industry supply curve and P, is the average weighted price of the total

produce under the restriction of the AgriBEE policy, P, = k PM + (l-k) P1,.

When the AgriBEE policy is implemented, k is the 50% AgriBEE target that requires that
50% of the fresh produce must be procured from the previously disadvantaged producers.
If we substitute k = 0.5 into the Lagrangian formulation:

L = PF (1.de + le) - de de- PM] + 0) le - wl—2{ le - (1'05) (de + lel}

L = PF (1. de + Q’s) - de de- P1, st - Wl-Il 6de - 0-5 de- 0-5 Qis)

First order conditions will be

i) (5L/ 6] = w

11) 5L/5de =de -0.5/ISO

46

iii) 6L / 6le = P], + 0.5}. s 0
iv) 6L/o‘2. = 0.5 st- 0.5 Q,.,20
but
de - 0. 52. = P,, + 20.5
v) de - P1, = 2
Substituting (v) into (ii):

Price of composite good: 0.5 PM + 0.5 P],

Case 2: Over-fulfilling of Content Requirements
Allowing the ﬁrms to over-fulﬁll the content requirements necessitates the use of Kuhn-
Tucker conditions to maximize proﬁts:
Max PF 4de + Q“) - de de — P1, (1 + t) Q1, -wl
Subject to:
(m* = , if Q,, < (I-k) (de + Q13), this constraint holds as a strict inequality only
if de < P], under one of the Kuhn-tucker conditions.
The line F k (see Fig. 3.1) represents over-fulﬁllment of the content requirements. Along

F k retailers are indifferent between the two sources of supply.

Case 3: Under-fulfillment of Content Requirements

If ﬁrms in the ﬁnal good industry choose to satisfy but not over-fulﬁll the content
ratio requirement then the constraint tm* = 0 holds. The proﬁt function is non-increasing
in factor prices and a sufﬁcient condition for the ﬁrms to opt to under-fulﬁll the content

requirement is:

47

P... (1 + in.) < k P... + P... (1- k),
de > P1S(lm/k+ 1)
Under-fulﬁllment of the content requirements is represented by EN in Figure 3.1. This

occurs when the input price of intermediates is P., (1 + tm).

3. 2.4 Explanation/Description of Modified Domestic Content Model Diagram

This section provides a more detailed description of the components of Figure 3.1

In Fig 3.1:

line DD’ = represents the total derived demand curve Of both the previously
disadvantaged producers and large-scale commercial producers

k = the AgriBEE requirement or content ratio represented in the diagram by
EB/BN and RA/BN

line S 3 = the industry marginal cost of intermediate good (fresh produce)
production from small-scale previously disadvantaged producers.

ST = the industry supply curve for both the large-scale commercial producers

and small-scale previously disadvantaged producers.
Line EBAF K (in bold) = the net demand for fresh produce from previously
disadvantaged producers.
BF = the weighted average price
line AF = the demand for the previously disadvantaged producers fresh produce as
a function of P1, (1 + 1m)-

de' = the quantity of fresh produce procured from previously disadvantaged

48

farmers with the implementation of the AgriBEE policy
Q, = total quantity of fresh produce procured from both large and small
scale producers before the AgriBEE policy is implemented
Q, ' = total quantity of fresh produce procured from both large and small-
scale previously disadvantaged producers after the AgriBEE policy is

implemented

The discontinuity in the line at point B is due to the fact that when the AgriBEE
content requirement is fulﬁlled there is no tariff or penalty charged to the ﬁnal goods
producer (retailer). From the graph we note that the costs of the previously disadvantaged

producers are higher than that of the large-scale commercial producers.

According to Grossman (1981) the net demand curve consists of segments that
accord with whether the content ratio is underfulﬁlled, exactly met, or overfulﬁlled. The
retailer behaves competitively in the previously disadvantaged goods markets and the use
of fresh produce from previously disadvantaged producers is determined at point H where
the line AF intersects SS' and the total use of produce is determined at point g .The
retailer will therefore use de’ units of fresh produce from previously disadvantaged

producers and will procure (Q, ' - de') units from large-scale commercial producers.

Above Point R

If the price is above R all of the produce is procured from large-scale commercial

producers and net demand is zero for previously disadvantaged producers’ fresh produce.

49

Above R the ﬁnal good producers (retailers) prefer to pay the penalty than to pay the

much higher price under the AgriBEE policy content requirement.

Underfulﬁllment 0f the Content Ratio

If the ratio is underfulﬁlled, the input price of intermediates is P1, (1 + t,,,) and
total intermediate demand is EN. Along EB the content requirement is underfulﬁlled, net
demand is inﬁnitely elastic at domestic price P1, (1 + t,,,). In this case the ﬁnal goods
producer (retailer) is indifferent of purchasing from either previously disadvantaged
producers or large-scale commercial producers because the price of fresh produce from
previously disadvantaged producers is equal to the price of fresh produce from large-

scale commercial producers along EB.

Fulfillment of the Content Ratio
Any point along the line AF the content requirement is fulﬁlled, that is the content
ratio is binding. The line BF represents the average weighted price. At point F the content

ratio, k, is no longer binding. This means that at point F the policy content requirement is

not fulﬁlled.

Overfulﬁllment of the Content Ratio

Along F K the price of produce from previously disadvantaged producers is equal
to the price of fresh produce from large-scale commercial producers so the retailer is
indifferent in its purchasing decision, only the total quantity of goods procured matters

but the retailer is indifferent on the proportion of intermediate goods procured from

50

previously disadvantaged producers and large-scale commercial producers. Along F K the
fresh produce from the previously disadvantaged producers is low cost and the retailer

could purchase all the fresh produce from them.

3.3 Welfare Analysis

The economic welfare effects of the AgriBEE policy are measured through changes in
consumer surplus and producer surplus. Economists deﬁne consumer surplus as the
amount that consumers beneﬁt by being able to purchase a product for a price that is less
than they would be willing to pay. Producer surplus is deﬁned as the amount that
producers beneﬁt by selling at a market price that is higher than they would be willing to

sell for (Investopedia, 2007).

After implementation of the AgriBEE policy, the change in consumer surplus is
represented by the area P1 Plskg (Figure 3.1) and this area has a negative value due to the
increase in the price that is charged to consumers. The change in producer surplus for
previously disadvantaged farmers is deHaP,, (Figure 3.1) and this has a positive value
due to the increase in the price they receive. The welfare loss is represented by areas acH

and ekg (Figure 3.1).

The triangle acH (Figure 3.1) represents the technical efﬁciency loss to society as
a whole, this is a loss that occurs on the supply side. The loss occurs because resources
are taken from other sectors in the economy and are used in the protected small-scale
producer sector. The welfare loss cost includes the loss from the increased use of fresh

produce from previously disadvantaged producers who are high cost producers. The area

51

ekg represents the consumer dead weight loss with the restriction of the AgriBEE policy

that occurs on the demand side.
3.4 Effect of Location of Supply Curve

This section summarizes the effect of the location of the supply curve within the modiﬁed

DCP model.

Fig. 3.2 Modified Version of Fig 3.1 Showing Different Locations of the Supply
Curve

The diagram below (Fig 3.2) is a modiﬁed version of the Grossman model

Price/
Cost

SI

R
I)ls(1+tm/k] ' i S '

 

 

 

 

Pl, (1+tm) N
de
Pl ------------------- ' ;
Pi. ej k\D
of Q.
Quantity of produce

52

In Figure 3.2 the AgriBEE content requirement is satisﬁed in equilibrium provided
that the industry supply curve (SS ') intersects the net demand curve at a point of the right
of point A. If industry marginal costs rise so steeply that the only intersection of the
industry supply curve (S 1) and the net demand curve is along EB, then the content
protection is not fulﬁlled in the new equilibrium. If the supply curve ($2) intersects the
net demand curve twice, along EB and along AF, then two possible equilibria exist.
However the equilibrium along AF would dominate because both types of producers

make larger proﬁts at this equilibrium.

This implies that for the previously disadvantaged farmers to beneﬁt from the
policy the supply curve Should shift to the right. Factors that will cause the supply curve
for the previously disadvantaged farmers to shift to the right i.e. those that would
decrease production and marketing costs are: an increase in extension services, improved

access to transport; capital, land, increased, productivity and use of good quality inputs.

53

CHAPTER 4

DATA, ESTIMATION METHODS AND RESULTS

The Objective of this chapter is to elaborate on the data, estimation methods and
results of the welfare effects of the AgriBEE policy. This study is an ex-ante analysis of
the estimated potential welfare effects of the AgriBEE policy. A modiﬁed domestic
content model is used to estimate values for the change in social welfare due to the
AgriBEE policy. Estimates of the price elasticity of supply and demand for the selected
vegetables are used to Obtain estimates for: consumer surplus, producer surplus and the
welfare loss. This information is utilized to determine the potential costs and beneﬁts
from the AgriBEE policy. Simulations were carried out for the welfare effects under
different scenarios by varying: the content ratio level and the price elasticity of supply.
This chapter begins with a description and justiﬁcation for the data used, followed by a

discussion of the results.

4.1 Data Sources

The data for the prices and quantities Of the tomatoes, butternut squash and
cabbages sold at the fresh produce terminal markets in South Africa were Obtained from
the Department of Agriculture South Africa (2007). The equivalent to the world price in
Grossman (1981) is represented by the large-scale commercial producer’s price of fresh

produce which is the ﬁve-year average price of produce.

In addition, data from enterprise budgets of large-scale commercial farmers and

previously disadvantaged farmers was used in the analysis. The data provided insight

54

into the differences in production and marketing costs of both the two types of farmers.
(See Appendix 4 and 5). From the appendices we note that in order for the previously
disadvantaged farmers to increase the quantity and quality of their produce they will need
to increase expenditure on some inputs (e. g. the quantity of chemicals they use in
production). However for some costs such as labor the previously disadvantaged farmers
will have to decrease their costs through increased use of machinery. The data from the
enterprise budgets were therefore useﬁil in comparing the producer costs before the
AgriBEE policy is implemented versus estimates of the producer costs after
implementing the AgriBEE policy. The data on the enterprise budgets was obtained from

Fort Hare University in South Africa.

4.2 Fresh Vegetables Selection Criteria

To analyze the potential implications of the AgriBEE policy on preferential
procurement of fresh vegetables, it is important to focus on the following types of
vegetables: ﬁrst, vegetables that are most important to the previously disadvantaged
producers in terms of contribution to farm revenue and experience in growing them (for
example, cabbage and butternut squash). Second, the selected vegetables must be
representative of the full range of perishability (tomatoes and butternut squash). It is
important to look at both highly perishable vegetables and those that are not highly
perishable because perishability affects capital investment and procurement decisions.
This is crucial because the majority of previously disadvantaged producers often do not
have cold storage facilities. Third, it is crucial to consider vegetables that are being

currently grown by both large and small-scale producers, (tomatoes). Fourth, vegetables

55

that are currently produced predominantly by large-scale producers, but have the
potential for previously disadvantaged producers to enter those markets must be
considered, such as tomatoes. Fifth, vegetables which are mainly produced and consumed
domestically within South Africa were selected i.e., those that are not exported in large
volumes. This was important in order to ensure that we analyze the effect Of the AgriBEE
policy on the domestic fresh produce supply chain. For heavily exported vegetables, the
AgriBEE policy might not have an effect on large-scale commercial farmers who produce
those products. This could occur because the large-scale commercial farmers could

respond to the policy by exporting more of those vegetables and ignore the local market.

Taking into consideration these ﬁve factors, the following vegetables were chosen
for the analysis: tomatoes, butternut squash and cabbages. Sections 4.2.1 - 4.2.3 provide
some background information on production and sales of tomatoes, butternut squash, and

cabbage.

4.2.1 Tomatoes

From Fig 4.1 we illustrate that there is little variation in the level Of production of
tomatoes over the past 10 years in South Africa. Participation of previously
disadvantaged farmers in tomato production and marketing is crucial because it may help
alleviate poverty since it is a high value crop. According to Statistics South Africa’s
Survey of Large and Small-Scale Agriculture (2002), previously disadvantaged producers
sold only 27% of the tomatoes they produced. However it is important to note that

although previously disadvantaged producers contribute to only 0.8% Of total tomato

56

production in South Africa, tomatoes are the most important vegetable for hawkersg.
Tomatoes were therefore chosen for use in estimating welfare effects of the AgriBEE
policy because they have potential to make a signiﬁcant contribution to poverty

alleviation through provision of employment opportunities. (Louw et a1, 2004)

4. 2.2 Butternut Squash

Figure 4.1 shows that between 1993 and 2005 sales of butternut squash have
increased signiﬁcantly. This increase implies that there is a growing market for buttemuts
and that the previously disadvantaged producers could beneﬁt from participation in this
market after implementation of the AgriBEE policy. In addition, butternut squash is a
crop that previously disadvantaged farmers already have experience in producing for
local markets and home consumption. It will be important to focus on butternut squash
and not pumpkins in general because the average price for butternut squash is higher than

that of pumpkins.

 

9 Hawkers are small-scale entrepreneurs that buy and resell goods for a living (usually informally).

57

Figure 4.1 Total Volume of Tomato, Butternut Squash and Cabbage Produced in
South Africa

 

Volumes of Tomato, Butternut squash, Cabbage
for South Africa

300

338 n i - - m U ~---- 7 A _ +Tomato

 

 

 

 

150 -- w »—-—— ————~—— +Buttemut squash

100 ’ " Cabbage

50 ~— M ..

0 I I I I I I I ”TI I
<2) ’\

e” '99

 

 

 

 

 

 

 

Volume (Million kg)

9999\(1/“3 6J
SSSFFFFF

Year

 

 

 

Source: Department of Agriculture South Africa (2007)

4.2.3 Cabbage

Results from the Survey of the Large and Small-Scale Agriculture (Statistics South
Africa, 2002) suggest that the previously disadvantaged producers sell 42% of their
cabbage production. This is the highest percentage of vegetables sold by the previously
disadvantaged producers when compared to the percentage they consume at home.
Another reason why cabbages were selected for use in the welfare analysis is that the
previously disadvantaged producers already have experience in growing cabbage and
therefore it may be easier for them to supply the quantity and volumes required by the
fresh produce markets and supermarket chains. It is important to study the policy
implications of the AgriBEE policy on cabbage production because since 1993 there has

been a decline in the production of cabbages in South Africa as shown in Fig 4.1.

58

 

Studying the potential impact of the AgriBEE policy on the production and marketing of
cabbages will therefore be useful in this analysis.
4.2.4 Income Contribution of Selected Vegetables to Previously Disadvantaged
Farmers

Table 4.1 provides a summary of the contribution levels of the selected vegetables
to the total income of the previously disadvantaged farmers. We note that cabbages
provided previously disadvantaged farmers with a total income of 183 million South
African Rands during the survey year (for the Survey of Large and Small-scale
Agriculture, 2002) and they contributed to 55% of their total income. It is also important
to note that pumpkins and squashes contribute 12.2% of the total income to the
previously disadvantaged farmers while tomatoes only contribute 1.3%.

Table 4.1 Percentage Contribution of Various Vegetables to Total Income of
Previously Disadvantaged Farmers

 

 

Vegetable Crop Farming Income % of Total Income
(Million Rands”)
Amadumbe” (Colocasia esculenta) 12 3.6
Beetroot 11 3.4
Cabbage 183 55.1
Carrots 30 9.2
Green beans 2 0.7
Green peas 1 0.3
Lettuce 1 0.2
Onions 5 1.4
Pumpkins and Squashes 41 12.2
Spinach 40 12
Tomatoes 4 1.3
lumips l 0.3

 

Source: Statistics South Africa (2002)

 

'0 Exchange Rate: 1 United States Dollar = 7 South African Rands

“ Amadumbe is a root vegetable grown by previously disadvantaged farmers in South Africa (Slowfood
Movement, 2007)

59

4. 3 Welfare Analysis Estimation
This section elaborates on the parameters that were used in the welfare analysis

estimation and describes the estimation procedure.

4. 3.] Parameters Used in Analysis

The parameters used in the analysis include: the prices of the selected vegetables,
quantities of the selected vegetables, current percentage estimates of the quantity of
produce procured by retailers, price elasticities of supply and demand; and the price
wedge/difference between previously disadvantaged farmers and large-scale commercial
farmers. In this section a detailed description on where data came from for each variable
is discussed. This section is necessary because of the limitations of the data. In assessing
the potential economic welfare impacts of the proposed AgriBEE policy, there are four
main limitations that need to be acknowledged in this study:

a) It is important to note that data on prices and quantities of fresh produce from
previously disadvantaged farmers over a long period of time, for example 30
years is scarce and difﬁcult to obtain. As a result, this analysis uses an estimated
percentage contribution of fresh produce from previously disadvantaged farmers
Obtained from the Survey of Large and Small-Scale Agriculture (2002) to
estimate the quantity of produce from previously disadvantaged farmers. Given
this limitation of data it was not possible to carry out an econometric analysis to

estimate the supply curve of the previously disadvantaged farmers.

60

b) The analysis is based on a policy that is still in the discussion phase. The ﬁrst year
of implementation of the policy is 2007. However during the period when this

study was carried out some of the details of the policy were still being discussed.

G) Since an econometric study was not conducted, simulations were used where the

levels of price elasticities of supply were varied from 0.5; 1.0; 1.5 and 2.0.

d) Although general implications on the potential effect of the AgriBEE policy can

be drawn from the analysis, some of the results such as values Of welfare losses

are speciﬁc to the selected vegetable.

The symbols and formulas used in the welfare analysis estimation are described in Table

4.2.

61

Table 4. 2 Summary of Data Source or Calculation Method

 

 

 

 

 

 

 

 

 

 

AgriBEE policy

 

 

Symbol Description Data available Data not

available12

k Content ratio under AgriBEE Source: AgriBEE

Policy Draft,
(Department Of
Agriculture , RSA,
2004)

PM Price for produce from Equation:
previously disadvantaged PM = P,_, + u
farmers After the AgriBEE
policy

PL, Price for produce from large- Source:
scale commercial farmers Before 5 year average price,
the AgriBEE policy Abstract of

Agricultural Statistics
South Africa (2007)
P, Weighted average price Equation:
szkPM+(1-k)
Pls

de Quantity of fresh produce Equation:
procured de = %
from previously disadvantaged contribution of
farmers Before AgriBEE policy previously

disadvantaged
farmers * Q,

de' Quantity of fresh produce
procured from previously Equation:
disadvantaged farmers After de' = k * Q, '
AgriBEE policy

Q, Total quantity of fresh produce Source:
procured from both previously Abstract of
disadvantaged farmers and large- Agricultural Statistics
scale commercial farmers Before South Africa (2007)

 

 

'2 The data for the speciﬁc variable were not available and had to be derived from the existing data

 

Table 4.2 (cont’d).

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SYMBOL DESCRIPTION DATA DATA NOT
AVAILABLE AVAILABLE
Q,’ Total quantity of fresh produce
procured from both previously Equation:
disadvantaged farmers and large- ED = ((QL;Q, '2/ Q3
scale commercial farmers After (P, - P,,)/ P,,.
AgriBEE
E s Price elasticity of supply Source:
Simulation values:
ES= 0.5; 1.0; 1.5;2.0.
E 0 Price elasticity of demand Source: Ortmann (1981)
t,,. Tariff or penalty (Not speciﬁed under
current draft of AgriBEE
policy)
y Change in price 1 Equation:
y = Pl _ Pls
u Change in price 2 Source:

Estimated value (based
on past studies &
enterprise budgets)
Equation :

U = P pd - PL,-
CS Change in consumer surplus Equation:
CS=0.5 *(Q, '+ Q,)(P,- Pix)
PS Change in producer surplus for Equation:
previously disadvantaged PS=0.5 *(de'+ QM) *(P,-
farmers P13)
DW, Welfare loss represented by Equation:
triangle DW,
ekgin Fig3.l =0-5(PI-del (QI'QI’)
or

DW, = -0.5x’ ED P,_,. Q,

Where:
I = (P1 — Pol/Pl.-

 

63

 

Table 4.2 (cont’d)

 

 

SYMBOL DESCRIPTION DATA DATA NOT
AVAILABLE AVAILABLE
DW; Welfare loss represented by Equation:
triangle DW,
acH in Fig 3.1 = 05(de- P,_,)( Q,,,,'-
QM)
or
DW;
= 0.5122 ES P1,, de
Where:
V = de- PIX)/Pls

 

 

 

 

 

 

4.3.2 Data Calculation Methods
When the data were not available economic theory was used to calculate the needed
information. These procedures were as follows:

1. Q,, the total quantity of fresh produce procured from both previously
disadvantaged farmers and large-scale commercial farmers before implementation
of the AgriBEE policy was obtained from the Abstract of Agricultural Statistics
(Department of Agriculture, 2007). The price elasticity of demand (ED) estimate
from a previous study by Ortmann (1981) was then used to obtain Q, ', the total
quantity of fresh produce procured from both previously disadvantaged farmers
and large-scale commercial farmers after implementation of the AgriBEE policy.

The formula that is used to derive Q,’ was: ED = [((Q,- Q, ')/ Q0]

 

[(Pi - Pal/Pa]
Justification for the use of the selected price elasticity of demand values
In the analysis the values used for the price elasticity of demand were

obtained from Ortmann (1981). These price elasticities of demand were based on

64

data from 1950-1970 for fresh vegetables in South Africa. The price elasticities

from this study was used because data on recent values for the speciﬁc vegetables

for previously disadvantaged farmers are not available. The values obtained from

the Ortman (1981) study are reasonably within the range of the elasticities of

other studies as illustrated in Figure 4.2 and Table 4.3.

Figure 4.2 Comparison of Price Elasticities of Demand for Fruit and Vegetables
Between Low, Middle and High Income Countries

 

Elasticity
-- -- - Cereals __ Meat ”—Dairy —Oils and fats —Fruits and Vegetables
0
-0.2 A

IIIII
‘‘‘‘‘
.....

-1.2 r

 

|
...........

~1.0 W

 

 

 

 

 

-1.4

Low-income countries

A
V

LA
7‘

Source: Scale (2003)

Middle-income countries

A
V

High-income Countries

L
7

Table 4.3 Published Price Elasticity of Demand Estimates for Selected Vegetables

 

 

 

 

 

 

 

 

 

 

 

 

 

 

AUTHOR Huang Huang You San Juan Kunkel Ortmann
(1985) (1993) (1998) (1978) (1978) (1982)
COUNTRY USA USA USA Philippines Philippines South
Africa
VEGETABLE
Tomatoes -0.558 -0.622 -0.379 ---------------------- —0.77
CabbggL -0.038 ------- 0.012 ---------------------- -0.21
Butternut ----------------------------- -0.50
Squash

 

65

 

Table 4.3 (cont’d)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

AUTHOR Huang Huang You San Juan Kunkel Ortmann
(1985) (1993) (1998) (1978) (1978) (1982)
COUNTRY USA USA USA Philippines Philippines South
Africa
Fruit vegetables ----------- -0.78 - --------
Leafy ----------- -0.60 ---------
Legetables

 

In addition, Seale et a1 (2003) found that low income countries have aggregate

price elasticities of demand for fruits and vegetables that range between -0.471

and -0.562. For example, the price elasticity of demand for the fruits and

vegetables for Kenya was -0.530. Middle income countries such as Botswana and

Swaziland had price elasticities between -0.326 and -0.465. The high income

countries such as the US and UK had elasticities between -0.056 and — 0.306.

Seale et a1. (2003) found that the average price elasticity of demand for fruits and

vegetables was -0.516 for low income countries, -0.415 for middle income

countries and -0.221 for high income countries.

South Africa is a middle income country and we would expect that its

aggregate price elasticity of demand would be within the range noted in the Scale

et a1. (2003) study. For the purpose Of comparison, the US price elasticity of

demand for fruits and vegetables is the most inelastic value among other high

income countries with a value of -0.056. This implies that the values used in the

analysis for the AgriBEE policy are reasonable estimates of the price elasticities.

For the price elasticities of supply we would expect South Africa to have an

inelastic price elasticity of supply for its vegetables.

66

 

The price elasticities of supply that were used in the simulations were 0.5;
1.0; 1.5 and 2.0. Utilizing Simulations is the best approach to understanding the
effects of AgriBEE policy because actual price elasticities of supply for the
previously disadvantaged farmers have never been estimated or recorded.

Table 4.4 Published Price Elasticity of Supply Estimates for Selected
Vegetables

 

 

 

 

 

 

 

 

 

 

 

 

AUTHOR Dinan Huffman
(1988) (1996)
COUNTRY USA USA
VEGETABLE
Tomatoes 1.35 .......
Cabbage ..............
Butternut ..............
Squash
Other vegetables ------- 0.2
(SR)
Other vgetables (LR) ------- 0.8

 

Source: DeCanio (2005)
. From Q, ' we estimated the quantity of fresh produce procured from
previously disadvantaged farmers after the AgriBEE policy is implemented (de')

The formula for estimating de’ was de' = k * Q,'.

. The value for the quantity of fresh produce procured from previously
disadvantaged farmers before the AgriBEE policy was implemented (de) was
estimated by multiplying Q, with the percentage contribution of the previously
disadvantaged farmers to the total volume of produce sold. Values for the

percentage contribution of the previously disadvantaged farmers are summarized

67

in Table 4.5. The formula for estimating de was de = % contribution of

previously disadvantaged farmers * Q,

Table 4.5 Percentage of Fresh Produce Procured from Large-Scale
Commercial Producers and Previously Disadvantaged Producers

 

 

 

 

 

 

 

 

 

 

 

 

Tomato Butternut Cabbage
squash

Before AgiBEE
Previously 0.76% 2.19% 26.37%
disadvantaged
goducers
Large-scale 99.24% 97.81% 73.63%
commercial producers
After AgriBEE
Previously 50% 50% 50%
disadvantaged
producers
Large-scale 50% 50% 50%
commercial producers

 

Source: Statistics South Africa (2002) Survey of Large and Small-Scale

Agriculture.

. The price of produce from large-scale commercial farmers (P,,) was obtained

from the Abstract of Agricultural Statistics - 2006 (Department of Agriculture
South Africa, 2007). P,, represents a ﬁve- year average price for fresh vegetables

sold at the fresh produce markets in South Africa.

68

Justiﬁcation for Choice of the 5 year Average of the Prices

An illustration of the price movements for the selected vegetables is given in

Figure 4.3.

Figure 4.3 Price Trends for Tomatoes, Butternut Squash and Cabbages in

 

 

 

 

 

South Africa
Price Trends for Tomatoes, Butternut squash and
Cabbages in South Africa
I?
3 +Tomato
E + Butternut squash
I Cabbages
.2
E

 

 

 

 

Source: Source: Department of Agriculture South Africa (2007)
We note that the 5 year average price gives a reasonable estimate for prices of vegetables
before the AgriBEE policy because: (1) the ﬁve year average price reﬂects the current
situation and (2) it eliminates outlier years which occur in agricultural prices. For
example, from Figure 4.3, the price of cabbage in 2003 was much higher than average,

therefore, using 2003’s price for the base year would be misleading.

Table 4.6 Average Prices for Selected Vegetables in South Africa, R/kg

 

 

Butternut
Average price Tomatoes Cabbage Sq_l_rash
10 year average 1.87 0.47 0.97
5 year average 2.35 0.62 1.17
3 year average 2.57 0.67 1.20

 

Source: Department of Agriculture South Africa (2007)

69

5. The price of fresh produce from the previously disadvantaged farmers (PM)
represents the price or cost of their produce after the AgriBEE policy has been
implemented. The value of PM is obtained by using an estimate of the percentage
increase in the cost of produce from previously disadvantaged farmers. ( de = P,,
+ u (see table 4.2)). This increase occurs because previously disadvantaged
farmers have to increase the quantity of vegetables they produce and sell. In
addition, they have to improve the quality of their produce in order for them to

sell their produce to the formal markets.

6. The estimate for the price wedge between PM and P,_, is obtained by taking into
consideration: (a) the increased costs for the previously disadvantaged farmers
such as purchase of better quality fertilizer, and (b) data from other studies that
analyzed effects of a domestic content policy on the prices of goods. The estimate
of the price wedge is within the range of other studies where a domestic content
policy was implemented. These previous studies had a range from 19% to 60%

(Pursell, 2001).

Justification for Price Wedge/Diﬂerence Values:
After the AgriBEE policy is implemented, we expect the price wedge/difference
between the price of produce procured from previously disadvantaged farmers
and the price from large-scale commercial farmers to increase. This price
difference reﬂects the extra costs that are included when the retailer procures from

previously disadvantaged farmers.

70

Some of the reasons why previously disadvantaged farmers are considered
high cost producers are: they require more start up capital for them to be able to
produce high quality produce for the retailer; they are often located further way
from retailers than large-scale commercial farmers and hence they face higher
transportation costs; their production is small-scale so they can not utilize
economies of scale in production and this makes their production and marketing
costs higher than those of large-scale commercial farmers; the retailer faces more
costs in dealing with many small-scale previously disadvantaged farmers than

with a few large-scale commercial farmers (See Appendix 4 and 5).

Bienabe and Vermeulen (2007) concluded that the previously
disadvantaged farmers should use “better quality seed; carry out improved
production planning; apply a higher quality retailer approved fertilizer and
pesticides; use improved technology for adequate irrigation capacity and employ
more workers due to increased production levels. In addition, due to the increased
production and use of more expensive inputs, the farmers had to learn how to
manage their cash ﬂows. The farmers also had to develop better technical skills in

order to produce the higher quality produce required by the store”.

Based on the assumption that as the level of AgriBEE content requirement

increases the price differences increases, values for the price differences were

assumed based on data from past case studies where DCPS were implemented in

71

other industries such as in the case of India’s auto industry (Balakrishnan et al.,

2005). The table below summarizes the price differences used in this study.

Table 4.7 Summary of Price Difference Values

 

 

 

 

AGRIBEE PREFERENTIAL PRICE DIFFERENCE (%)
PROCUREMENT REQUIREMENT OR
CONTENT RATIO (%)
25 30
50 43
75 60

 

 

 

 

The values in the table were based on results from analysis of similar case
studies where domestic content policies were implemented. The extra costs that
are incurred by previously disadvantaged farmers when the AgriBEE policy is
implemented occur because they have to increase the volume and quality of the
produce they sell. The AgriBEE requirement levels of 25% and 75% were chosen
arbitrarily to analyze the effect of varying the level of the AgriBEE preferential
procurement requirement on the Size of the welfare loss.

. The weighted average price (P ,) is obtained from the formula:

P, = k de + (I -k) P,, that was theoretically derived in Chapter 3.

. The welfare loss values are estimated by Simply calculating the areas of the

triangles acH and ng as shown in Figure 3.1.

72

4.4 Empirical Scenarios
In this section we begin by analyzing the welfare effects of the AgriBEE policy in the
baseline scenario. In order to carry out an in depth analysis simulations were also carried
out by varying the following factors:
1. The price wedge and content ratio level simultaneously;
2. The level of AgriBEE preferential procurement requirement or content ratio at
k = 25%, 50% and 75%; and

3. The price elasticity of supply at 0.5; 1.0; 1.5; 2.0.

4.4.1 Baseline Scenario
The baseline scenario is the main focus of this analysis because it uses data based on the
current description of the AgriBEE policy. For the baseline scenario, the following
assumptions were made:

1. AgriBEE preferential procurement requirement or content ratio is 50%; and

2. The price difference between large—scale commercial farmers and the previously

disadvantaged farmers is 43%.
(See Appendix 8 for a summary of the data that was used in the baseline scenario)
;.4.1.1 Economic and Welfare Impacts of the AgriBEE Policy: Discussion for Baseline
cenario

This section summarizes the key economic and welfare impacts of the AgriBEE policy.

The discussion is based on the results in Table 4.8.

73

1. After the AgriBEE policy is the implemented there is a decrease in the total
quantity of produce procured from both large-scale commercial farmers and
previously disadvantaged farmers

From the table we note that the potential impact of the AgriBEE policy is
that it will decrease the total quantity of fresh produce procured by retailers with
values ranging from -4.8% for cabbage to -16.8% for tomatoes. The change in
quantity of produce procured from large-scale commercial farmers declines by -
35.4% for cabbage and -58.1% for tomatoes. The results from the analysis
therefore imply that the large-scale commercial farmers will be negatively
impacted by the AgriBEE policy. This result is similar to results obtained when
domestic content policies were implemented in the auto industry in the past (this

was discussed in Chapter 2).

2. The price of produce sold by retailers increases after the AgriBEE policy is

implemented
Table 4.8 shows that the change in price of the produce sold by the retailer

or supermarket is nearly 22% higher for all three vegetables. In addition, the value
of the price difference between the large-scale commercial farmers and previously
disadvantaged farmers is set at 43%. (This ﬁgure was obtained from analyzing
impacts of domestic content policies in past studies). This result is similar to the
effects observed in case studies of domestic content policies that were

implemented in the auto, television, radio and agricultural industries.

74

3. The revenue of previously disadvantaged farmers will increase substantially
after the AgriBEE policy is implemented.

The previously disadvantaged farmers will beneﬁt substantially from the
AgriBEE policy as indicated by the high level of increase in their revenue. For
example, the percentage increase in the revenue for tomatoes is 23 72% while
those for butternut squash and cabbage are 913% and 122% respectively. These
high values are consistent with the large changes in prices and quantities of
produce sold under the AgriBEE policy. It is important to note that if previously
disadvantaged farmers are not able to increase their production capacity to the set
levels it will be difﬁcult for them to obtain the maximum desired beneﬁts from
the policy. This result is similar to the result Obtained when domestic content
policies were implemented in the auto, television and radio and agricultural

industries in the past.

4. The AgriBEE policy places a large burden on consumers

In reviewing the change in consumer surplus we can conclude that the
AgriBEE policy will have a negative impact on the consumers. Tomato
consumers stand to lose approximately l3R111.4 million after the AgriBEE policy
is implemented. The loss is due to the increased costs faced by the retailer. The
consumer loss also occurs as a result of the increase in the cost of the produce
sold by the retailer due to procurement of produce from both high and low cost
producers. Butternut squash and cabbage consumers will lose R15.2 million and

R189 million respectively. It is important to note that the consumer loss is much

 

'3 R represents the South African Rand, where l USS = R7.

75

higher than the change in producer surplus. For example, the change in producer
surplus is less than half the change in consumer surplus. This implies that the
AgriBEE policy places a large burden on the consumers who have to purchase the

fresh produce at a higher price.

. The welfare loss is greatest for the high value produce

The welfare loss 1 (represented by triangle ekg) and welfare loss 2
(represented by triangle acH) are a cost to society that occurs due to the distortion
in market efﬁciency brought by the increase in price due to the AgriBEE policy. It
represents the difference between producer surplus and consumer loss when

procurement decisions are restricted under the AgriBEE policy.

We also note that the welfare loss values for the tomato market are much
higher than for the butternut squash and cabbage. This is because Of differences in
the quantity of the fresh produce sales and differences in the prices of the three
selected vegetables. For example, the total quantity of tomatoes sold at the fresh
produce terminal markets before the AgriBEE policy is implemented is nearly 4
times the quantity of butternut squash sold and 1.7 times the quantity of cabbage
sold. In addition tomatoes are a high value product. This is illustrated by the fact
that the ﬁve year average price per kilogram of tomatoes is double the price of
butternut squash and 3.8 times the price of cabbage. The welfare impacts are
lower for butternut squash and cabbage because the previously disadvantaged

farmers are already active in these markets.

76

Table 4.8 Economic and Welfare Impacts of the AgriBEE Policy: Baseline Scenario

 

Unit Tomato Butternut Cabbage

 

Squash
Change in total quantity Of fresh % -16.8 -10.8 -4.8
produce
Change in quantity of produce from % -58.1 -54.4 -35.4
large-scale commercial farmers
Change in quantity of produce from % 5372.2 1936.7 80.4
previously disadvantaged farmers
Change in price of produce sold by the % 21.5 21.4 21.8
retailer/supennarket
Change in price of produce from % 43.0 43.0 43.0
previously disadvantaged farmers
Change in revenue for large-scale % -58.1 -54.4 -35.4
commercial farmers
Change in revenue for previously % 2,372.0 913.1 122.1
disadvantaged farmers
Change in consumer surplus Million -1 1 1.4 -15.2 -l8.9
Rand
Change in producer surplus for Million 51.0 7.5 14.4
previously disadvantaged farmers Rand
Welfare loss 1 (triangle ekg) Million 10.2 0.9 0.5
Rand
Welfare loss 2 (triangle acH) Million 49.7 6.8 4.1
Rand

 

Exchange Rate: 1 United States Dollar = 7 South African Rands

Baseline Scenario: k =50% and price difference value = 43%

77

4. 4.2 Simulation Scenarios for Varying the Level of A griBEE Requirement

In order to fully understand the potential effects of the AgriBEE preferential
procurement policy, simulations were carried out by ﬁrst varying the AgriBEE
requirement content ratio. In Scenarios 1 and 2 data for the tomatoes was used to analyze
the effect of varying the AgriBEE preferential procurement requirement (k) by setting k
at 25% in Scenario 1 and at 75% in Scenario 2. In Scenarios 3 and 4 data for the butternut
squash was used to analyze the effect of varying the AgriBEE preferential procurement
requirement (k) by setting k at 25% in Scenario 3 and at 75% in Scenario 4. In Scenarios
5 and 6 data for the cabbages was used to analyze the effect of varying the AgriBEE
preferential procurement requirement (k) by setting k at 25% in Scenario 5 and at 75% in
Scenario 6. (See the Appendices 9, 10 and 11 for a more detailed summary of the data

used for Scenarios l to 6).

4. 4.2.1 Tomato, Butternut Squash and Cabbage Simulations for Varying the Level of
AgriBEE Preferential Procurement Requirement (Scenarios I to 6)
The assumptions for these simulations are as follows:
1. AgriBEE preferential procurement requirement or content ratio is set at the
following levels: 25%, 50% and 75%; and
2. The price difference between the prices of produce from the large-scale

commercial farmer and the previously disadvantaged farmer is 43%.

78

4. 4. 2.2 Economic and Welfare Impacts of the AgriBEE Policy: Discussion for Scenarios
.l to 6

From the results obtained in Tables 4.9; 4.10 and 4.11 we can conclude that:

1. The higher the AgriBEE preferential requirement (k) the higher the revenue,
producer surplus, and consumer surplus and welfare loss.

This is best illustrated in the tomato simulation (see Table 4.9). In this example
the welfare loss 1 value increases substantially from R2.5 million when the AgriBEE
requirement is set at 25% to R226 million when the AgriBEE requirement is set at 75%.
From this result we note that the welfare loss value is very sensitive to changes in the
AgriBEE requirement ratio. This result is similar to results Obtained when analyzing the

effects of domestic content policies in the auto industry (Munk, 1969).

2. If the AgriBEE requirement is set at a level below the current market level, the
policy could have a negative impact on the previously disadvantaged farmers.

From the cabbage simulation (See Table 4.11) we note that when the AgriBEE
requirement is set at 25% which is below the current percentage contribution of the
previously disadvantaged farmers (26.37 %), the change in quantity Of produce procured
from previously disadvantaged farmers’ declines by 7.5% (Scenario 5). We note that
when we compare results from the baseline scenario (where the AgriBEE preferential
procurement requirement (k) is set at 50%) with those from Scenario 6 (where the k is set
at 75% for cabbages), the quantity Of produce procured from previously disadvantaged

farmers’ increases by 80.4% and 164.6% respectively. In addition, the revenue of

79

previously disadvantaged farmers actually declines by 22.7% when the AgriBEE
requirement is set at 25%. We can therefore conclude that for cabbage, setting the

AgriBEE requirement at 25% has a negative impact on previously disadvantaged farmers.

80

Table 4.9 Economic and Welfare Impacts of the AgriBEE Policy: Scenarios 1 and 2
for Tomatoes”

 

 

Scenario 1 Baseline Scenario 2
Content ratio under AgriBEE 0.25 0.5 0.75
Change in total quantity of fresh % -8.2 -16.8 -26.6
produce
Change in quantity of produce % -30.6 -58.1 -81.5
from large-scale commercial
farmers
Change in quantity of produce % 2,919.9 5,372.2 7,139.8
from previously disadvantaged
farmers
Change in price of produce sold % 10.7 21.5 32.2
by the retailer/supermarket
Change in price of produce from % 43.0 43.0 43.0
previously disadvantaged
farmers
Change in revenue for large- % -30.6 -58.1 -81.5
scale commercial farmers
Change in revenue for % 1,328.5 2,372.0 3,704.9
previously disadvantaged
farmers
Change in consumer surplus Million -58.3 -1 11.4 -158.2
Rand
Change in producer surplus for Million 28.6 51.0 79.7
previously disadvantaged Rand
farmers
Welfare loss 1 (triangle ekg) Million 2.5 10.0 22.6
Rand
Welfare loss 2 (triangle acH) Million 27.0 49.7 66.0
Rand

 

 

'4 Scenario 1: Tomatoes, k= 25% and price difference value = 43%
Scenario 2: Tomatoes, k= 75% and price difference value = 43%

81

Table 4.10 Economic and Welfare Impacts of the AgriBEE Policy: Scenarios 3 and 4
for Butternut Squash15

 

 

Unit Scenario 3 Baseline Scenario 4

Content ratio under 0.25 0.5 0.75

AgriBEE

Change in total quantity of % -5.6 -10.8 -l6.5

fresh produce

Change in quantity of % -27.6 -54.4 -78.7

produce ﬁ'om large-scale

commercial farmers

Change in quantity of % 977.7 1936.7 2758.4

produce from previously

disadvantaged farmers

Change in price of produce % 10.7 21.4 32.1

sold by the

retailer/supermarket

Change in price of produce % 43 43 43

from previously

disadvantaged farmers

Change in revenue for large- % -27.6 -54.4 -78.7

scale commercial farmers

Change in revenue for % 503.30 913.1 1264.3

previously disadvantaged

farmers

Change in consumer surplus Million -7.8 -15.2 -22.1
Rand

Change in producer surplus Million 4.1 7.5 10.4

for previously disadvantaged Rand

farmers

Welfare loss 1 (triangle ekg) Million 0.2 0.9 2
Rand

Welfare loss 2 (triangle acH) Million 3.4 6.8 9.7
Rand

 

 

'5 Scenario 3: Butternut squash, k= 25% and price difference value = 43%
Scenario 4: Butternut squash, k= 75% and price difference value = 43%

82

Table 4.11 Economic and Welfare Impacts of the AgriBEE Policy: Scenarios 5 and 6

 

 

for Cabbage"
lUnit Scenario 5 Baseline Scenario 6
Content ratio under AgriBEE 0.25 0.5 0.75
Change in total quantity of fresh % -2.4 -4.9 -7.0
produce
Change in quantity of produce % -0.6 -35.4 -68.4
from large-scale commercial
farmers
Change in quantity of produce % -7.5 80.4 164.6
from previously disadvantaged
farmers
Change in price of produce sold % 10.9 21.8 32.7
by the retailer/supermarket
Change in price of produce from % 43.0 43.0 43.0
previously disadvantaged farmers
Change in revenue for large-scale % -0.6 -35.4 -68.4
commercial farmers
Change in revenue for previously % -22.70 22.1 58.8
disadvantaged farmers
Change in consumer surplus Million -9.6 -18.9 -28.1
Rand ~
Change in producer surplus for Million 9.1 14.4 18.7
previously disadvantaged farmers Rand
Welfare loss 1 (triangle ekg) Million 0.1 0.5 1.0
Rand
Welfare loss 2 (triangle acH) Million 0.4 4.1 8.4
Rand

 

 

'6 Scenario 5: Cabbage, k= 25% and price difference value = 43%
Scenario 6: Cabbage, k= 75% and price difference value = 43%

83

4.4.3 Effect of Simultaneously Varying the AgriBEE Requirement Level and the
Price Difference

Past literature on the domestic content policies indicates that there is a
relationship between the level of content ratio and the price difference between goods
from domestic and foreign producers, as the content ratio increases, the price or cost
difference between domestic and foreign producer goods increases (Munk, 1969).This
section analyzes the effects of simultaneously varying the level of AgriBEE preferential
procurement ratio and the price wedge between large-scale commercial farmers and

previously disadvantaged farmers.

4. 4. 3.1 Assumptions for Scenarios 7, 8 and 9
In Scenario 7 the estimation is carried out using data for tomatoes, while Scenario 8 and
Scenario 9 use data for butternut squash and cabbages respectively. For each of the three
Scenariosl7 7, 8 and 9 the AgriBEE preferential procurement requirement (k) and the
price difference value were varied as follows:
1. When the AgriBEE preferential procurement requirement or content ratio is set at
25%, the price difference between the prices of produce from the large-scale

commercial farmer and the previously disadvantaged farmer is set at 30%.

2. When the AgriBEE preferential procurement requirement or content ratio is set at
50%, then the price difference between the prices of produce from the large—scale

commercial farmer and the previously disadvantaged farmer is 43%.

 

'7 See appendices 12, 13 and 14 for a more detailed description of the data used in Scenarios 7-9

84

3. When the AgriBEE requirement or content ratio is set at 75%, then
the price difference between the prices of produce from the large-scale commercial

farmer and the previously disadvantaged farmer is set at 60%.

4. 4.3.2 Discussion of Simulation Results for Scenarios 7 and 8
The results obtained in Scenarios 7 and 8 are generally similar to those obtained in the
baseline scenario. (See Appendix 17 for a summary of the results). However it is

important to note that the higher the price wedge the greater the welfare loss to society.

4.4.4 Price Elasticity of Supply Simulations
4. 4. 4.1 Scenarios 9, 10 and I I

Scenarios 9, 10 and 11 were carried out to analyze the effect that changing the
price elasticity of supply has on the consumer surplus, producer surplus and welfare loss.
Scenario 9 analyzes the impact of the price elasticity of supply values of 0.5, 1.0, 1.5 and
2.0 for tomatoes. Scenario 10 analyzes the impact of price elasticity of supply on
butternut squash and Scenario 11 analyzes the impact on cabbage. (See Appendices 14,
15 and 16 for a summary of the data that was used in the price elasticity of supply

simulations).

4. 4. 4.2 Discussion of Simulation Results for Scenarios 9, 10 and 11
From Scenarios 9, 10 and 11 we note that the following results:
1. The estimated value for de’ is lower than that set by the AgriBEE preferential

procurement requirement.

85

It is important to note that the actual estimated quantity of fresh produce procured.
from small-scale previously disadvantaged farmers after AgriBEE policy is implemented,
for example, in Scenario 9 for tomatoes when k is 0.5, de' should be 100.2 million
kilograms (See Appendix 14). The true estimated value for de’ (of 2.2 million
kilograms) is however lower than that set by the AgriBEE preferential procurement
requirement. This lower de' values implies that it will be difﬁcult for the previously
disadvantaged farmers to meet the AgriBEE requirement in the short run within the given

ranges Of price elasticity of supply.

This result is similar to the effect of Malaysia’s National Economic Policy (NEP)
that was discussed in Chapter 2. We note that although the NEP has been in place for
more than 30 years it has not yet reached its target of ensuring that 30% of the businesses
in Malaysia are owned by indigenous/ethnic Malays. Currently the 19% of the businesses
in Malaysia are owned by indigenous Malays. This result is therefore important because
it shows that it will be very difﬁcult for the AgriBEE policy to reach its preferential

procurement target of 50% in 10 years.

2. The more elastic the supply curve of the previously disadvantaged farmers the
greater the possibility of meeting the AgriBEE requirement.

A common observation in Scenarios 9, 10 and 11 is that as the price elasticity of
supply is increased, the quantity of produce that is procured from previously
disadvantaged farmers increases substantially. For example, in Scenario 10 when the

price elasticity of supply of butternut squash is set at 0.5, the percentage change in

86

quantity of produce that is procured from previously disadvantaged farmers is 24.1%.
However if the price elasticity of supply is increased to 2, the percentage change is

85.5%. This observation is important because the more elastic the supply curve is the
greater the possibility of the previously disadvantaged farmers being able to meet the

AgriBEE produce supply requirement.

3. There is potential for previously disadvantaged farmers to benefit from the
AgriBEE policy.

From the results of Scenarios 9, 10 and 11 it is clear that previously
disadvantaged farmers can potentially beneﬁt from the AgriBEE policy. The results also
indicate that as the price elasticity of supply is increased, the change in producer surplus
for previously disadvantaged farmers (that is the revenue) also increases but the margin is
not substantial. For example, for Scenario 11 the producer surplus increases from R11.36
million when the price elasticity of supply is 0.5 to R14.74 million when the price

elasticity of supply is 2.0.

4. The percentage change in quantity of produce from large-scale commercial
farmers is the equal to their change in revenue.

This situation occurs because in this analysis we are only focusing on the change
in quantity of produce procured from previously disadvantaged farmers. In Scenarios 9,
10 and 11 we have pegged the price elasticities of supply for previously disadvantaged
farmers values and the price difference value (i.e. price difference between produce from

previously disadvantaged farmers and large-scale commercial farmers). This speciﬁc case

87

therefore implies that the change in revenue for large-scale commercial farmers will be

equal to the change in quantity of fresh produce procured from the large-scale

commercial farmers. Tables 4.12 to 4.14 summarize the results for Scenarios 9, 10 and 11

Table 4.12 Welfare Implications of AgriBEE Policy Results for Scenario 9'8:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tomatoes
SCENARIO 9
Price Elasticity of Supply
0.5 l 1.5 2

Change in total quantity of fresh produce % -l6.8 -l6.8 -l6.8 -16.8
Change in quantity of produce from large- % —17.l -l7.3 -17.4 -17.6
scale commercial farmers
Change in quantity of produce from % 21.5 43.0 64.5 86.0
previously disadvantaged farmers
Change in price of produce sold by the % 21.5 21.5 21.5 21.5
retailer/supermarket
Change in price of produce from previously % 43.0 43.0 43.0 43.0
disadvantaged farmers
Change in revenue for large-scale Million -l7.1 -l7.3 -17.4 -l7.6
commercial farmers Rand
Change in revenue for previously Million 78.40 73.10 69.23 66.00
disadvantaged farmers Rand
Change in consumer surplus Million -1 11.4 -1 l 1.4 -l l 1.4 -l l 1.4

Rand
Change in producer surplus for previously Million 2.05 2.25 2.45 2.64
disadvantaged farmers Rand
Welfare loss 1 (triangle ekg) Million 10.23 10.23 10.23 10.23

Rand
Welfare loss 2 (triangle acH) Million 0.20 0.40 0.60 0.80

Rand

 

 

 

 

 

 

 

 

'8 Scenario 9: Tomatoes Price Elasticity of Supply = 0.5; 1.0; 1.5; 2.0. and k = 50%

88

 

Table 4.13 Welfare Implications of AgriBEE Policy Results for Scenario 10:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Butternut Squash
SCENARIO 10
Price Elasticity of Supply
Unit 0.5 l 1.5 2

Change in total quantity of % -10.8 -10.8 -10.8 -10.8
fresh produce
Change in quantity of produce % -1 1.5 ~12.0 -12.5 -12.9
from large-scale commercial
farmers
Change in quantity of produce “/0 21.4 42.8 64.1 85.5
from previously disadvantaged
farmers
Change in price of produce % 21.4 21.4 21.4 21.4
sold by the
retailer/supermarket
Change in price of produce % 43.0 43.0 43.0 43.0
from previously disadvantaged
farmers
Change in revenue for large- Million -1 1.5 -12.0 -12.5 -12.9
scale commercial farmers Rand
Change in revenue for Million 47.30 52.20 56.40 61.30
previously disadvantaged Rand
farmers
Change in consumer surplus Million -15.22 -15.22 -15.22 -15.22

Rand
Change in producer surplus Million 0.78 0.86 0.93 1.01
for previously disadvantaged Rand
farmers
Welfare loss 1 (triangle ekg) Million 0.87 0.87 0.87 0.87

Rand
Welfare loss 2 (triangle acH) Million 0.08 0.15 0.23 0.30

Rand

 

 

 

 

 

 

 

Note: Scenario 10: Butternut squash, Price Elasticity of supply =0.5;1.0;1.5;2.0. and k =

50%

89

 

Table 4.14 Welfare Implications of AgriBEE Policy Results for Scenario ll:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cabbage
SCENARIO 11
Unit Price Elasticity of Supply
0.5 1 1.5 2

Change in total quantity of fresh produce % -4.8 -4.8 -4.8 -4.8
Change in quantity of produce from large % -l4.4 -22.3 -30.2 -38.1
scale commercial farmers
Change in quantity of produce from % 22.0 44.0 65.9 87.9
previously disadvantaged farmers
Change in price of produce sold by the % 21.8 21.8 21.8 21.8
retailer/supermarket
Change in price of produce from % 43.0 43.0 43.0 43.0
previously disadvantaged farmers
Change in revenue for large-scale Million -l4.4 -22.3 -30.2 -38.1
commercial farmers Rand
Change in revenue for previously Million 48.30 53.10 57.90 62.7
disadvantaged farmers Rand
Change in consumer surplus Million -18.94 -18.94 -18.94 -18.94

Rand
Change in producer surplus for previously Million 1 1.36 12.49 13.61 14.74
disadvantaged farmers Rand
Welfare loss 1 (triangle ekg) Million 0.47 0.47 0.47 0.47

Rand
Welfare loss 2 (triangle acH) Million 1.13 2.25 3.38 4.50

Rand

 

 

 

 

 

 

 

Note: Scenario 1 l: Cabbage, Price Elasticity of supply =0.5;1.0;1.5;2.0. and k = 50%

90

 

4.5 Summary of Chapter

This chapter has analyzed the potential welfare effects of the AgriBEE policy for the
selected vegetables: tomato, butternut squash and cabbage. The analysis was carried out
for the baseline scenario and for the simulation scenarios where the AgriBEE content
level and price elasticities of supply were varied. The results obtained from this study
where we analyze the potential effects of the AgriBEE policy are similar to the results
obtained in studies on the effects of domestic content policies that were discussed
previously in Chapter 2. In. the next chapter policy implications of the AgriBEE policy

are discussed.

91

CHAPTER 5

POLICY IMPLICATIONS AND CONCLUSION

5.1. Summary of Key Results

There are twelve key results from this study. First it is noted that when the AgriBEE
policy is implemented the price retailers and therefore consumers pay for vegetables
increases. This is due to the fact that the price of the vegetables sold in the retail store is
an average weighted price of the produce from the higher cost producers (the previously

disadvantaged farmers) and low cost producers (large-scale commercial farmers).

Second, when the AgriBEE policy is implemented, the total quantity of fresh
produce procured from both large and small-scale producers decreases. This occurs due
to the fact the price increase will lead to a decrease in the quantity of fresh produce

demanded by consumers.

Third, the AgriBEE policy reduces the percentage of produce procured from
large-scale commercial farmers by retailers as dictated by the proposed AgriBEE law.
The percentage contribution of large-scale commercial farmers to the total quantity of
produce procured will decrease from levels of over 80% to only 50%. Due to this
decrease in the demand for their produce, the large-scale commercial farmers will be
negatively impacted by the AgriBEE policy because they will lose revenue. This implies
that unless the large-scale commercial farmers form joint ventures with the previously

disadvantaged farmers they will have an overall negative impact from this policy.

92

Fourth, consumers will be affected the most negatively by the AgriBEE policy.
The consumer surplus has high values that range between — 15.2 million South African
Rands for butternut squash to approximately - 111.4 million Rands for tomatoes in the
baseline scenario. This implies that AgriBEE policy places a large burden on the

consumers.

Fifth, the effect of the AgriBEE policy on small-scale previously disadvantaged
farmers is that they may beneﬁt from the policy due to the increased quantity of produce
they sell. From the baseline scenario results we note that the change in quantity of
produce for previously disadvantaged farmers is 5372.2%. In addition the change in
producer surplus for previously disadvantaged farmers in the baseline scenario is
approximately R51 million for tomatoes; R 7.5 million for butternut squash and R144

million for cabbages.

Sixth, from the results it is also clear that in the short run when we look at the three
possible cases of fulﬁllment, under-fulﬁllment or over-fulﬁllment of the AgriBEE
preferential procurement requirement that could occur, it is most likely that in the short
run under-fulﬁllment of the AgriBEE requirement will occur. From the results it will be
extremely difﬁcult in the short run for the previously disadvantaged farmers to increase
the quantities of vegetables they supply to retailers from contribution levels of less than
1% before the AgriBEE policy to a contribution level of 50% after the AgriBEE policy is

implemented. In addition, it will also be difﬁcult for them to meet the quality standards.

93

 

Seventh, the results also imply that the presence of economies of scale in
production for the previously disadvantaged are important for the policy to be successful
in attaining its objective. To reach the production levels required for economies of scale,
for most vegetables, an upgrade in production technologies is required. In the long run
when the previously disadvantaged farmers have increased their production and supply
capacity and reduced their production costs, the AgriBEE preferential procurement can

be fulﬁlled or over-fulﬁlled.

Eighth, retailers also have the potential to beneﬁt or lose from the AgriBEE
policy. If they are able to minimize transactions costs when dealing with previously
disadvantaged farmers they could beneﬁt from the policy through fulﬁllment of the
AgriBEE requirements. However if the retailers are not able to minimize these
transactions costs, these extra costs will be a burden to the retailers and they could also

face government and social penalties.

Ninth, from the results it is also noted that there is a technical efﬁciency loss to
society in production that occurs on the supply side. The loss occurs because resources
are taken from other sectors in the economy and are used in the small-scale previously
disadvantaged farmer sector. The other welfare cost occurs to society due to the increase

in use of high cost fresh produce from previously disadvantaged farmers.

Tenth, from the results it is also noted that the higher the level of AgriBEE

preferential procurement target the higher will be the cost to society. In addition, the

94

more elastic the supply or demand curve is, the greater the cost the policy will be to
society. This result is also associated with a greater positive change in producer surplus

for previously disadvantaged farmers.

Eleventh, a key insight from the study is that the retailer plays a key role in the
sustainability or success of the AgriBEE policy preferential procurement requirement. If
the cost of procuring produce from previously disadvantaged farmers is too high for the
retailers they may opt to pay the penalty of non-compliance of the policy. This implies
that if the retailers are not able to minimize costs, for example, the transactions costs of
dealing with previously disadvantaged farmers, the burden of implementation costs of the

policy is shifted to them.

Lastly, we note that gains in revenue for previously disadvantaged farmers as a
result of the AgriBEE policy are highest in the case of high value products such as

tomatoes.

5.2. Policy Implications and Recommendations

Important implications for previously disadvantaged farmers; large-scale
commercial farmers; retailer’s procurement strategies and policy makers arise from both
the theoretical domestic content policy and its application to the AgriBEE policy.

The following section is a summary of the policy implications and recommendations.

95

1. In order for the AgriBEE policy to be effective in achieving its objectives, the
previously disadvantaged farmers will have to substantially increase the
quantity of produce they supply to retailers.

From the results it is important to note that for the two welfare triangles
acH and ekg (from Figure 3.1) the welfare loss is larger for triangle acH. This
implies that policy makers need to focus on ensuring that the size of triangle acH
is made as small as possible. This objective can be attained by shifting the supply
curve of previously disadvantaged farmers outward. The outward shiﬁ could only
occur when the production costs of previously disadvantaged farmers decrease. It
is therefore crucial that policies that address other market failures in the South

African agricultural sector be put in place for the AgriBEE policy to be effective.

For example, programs which provide access to: capital, land, water,
transportation, improved production methods, post harvest methods and market
information will enable the previously disadvantaged farmers to meet the
requirements set by the AgriBEE policy and shift the supply curve of the
previously disadvantaged farmers outwards. By providing these resources to
previously disadvantaged farmers production costs will be lowered thus making
previously disadvantaged farmers competitive and leading to fulﬁllment or
overfulﬁllment of the AgriBEE policy requirement. For these programs to be
effective it is essential for both private and public sector including retailers and

farmers organizations to participate.

96

2 (a)All food supply chain players need to assist previously disadvantaged

farmers in developing ways to increase the quantity and quality of produce they

supply

This implies that food supply chain players have an important role in

assisting the previously disadvantaged farmers in fulﬁlling the requirements of the
AgriBEE policy and ensuring that the beneﬁts from the policy are maximized
while the costs or negative effects are minimized. However, in the long run,
previously disadvantaged farmers may be able to supply the required quantities of
produce under the AgriBEE policy. This situation will occur when the transaction,
production and marketing costs of previously disadvantaged farmers are reduced.
In this situation the previously disadvantaged farmers will become more
competitive in production and this could lead to fulﬁllment of the AgriBEE policy

requirement.

(b) Previously disadvantaged farmers need to gain economies of scale.

In order to reduce some of the costs of production and marketing of fresh
produce previously disadvantaged farmers need to be organized in
cooperatives/associations so that they can beneﬁt from economies of scale. This
will enable the previously disadvantaged farmers to supply the quantities of

produce required under the AgriBEE policy.

97

(c) Retailers need to minimize transactions costs of dealing with previously
disadvantaged farmers.

From the results we note that preferential procurement requirement of the
AgriBEE policy affects the consumers the most. This occurs due to the fact that
the retailer will be procuring produce from both the high cost producers
(previously disadvantaged farmers) and the lower cost producers (large-scale
commercial farmers) which raise the retail price of the produce. In addition, the
high consumer loss values may indicate that the retailers could pass on the
increased costs of dealing with previously disadvantaged farmers to the
consumers. In order to minimize the impact of the AgriBEE policy on consumers,
the retailers need to deve10p ways of minimizing these transaction costs. If these
transactions are too high, the retailer may choose not to comply with AgriBEE

requirements but prefer to pay the penalty.

((1) The price or cost difference of produce from large-scale commercial farmers
needs to be minimized.

This is important because the size of the dead weight loss depends on the
price or cost difference between large-scale commercial farmers and previously
disadvantaged farmers. The source of this price difference is that there are costs
involved in improving the quantity and quality of produce procured from
previously disadvantaged farmers. Examples of these extra costs that the
previously disadvantaged farmers face in order to produce higher quality produce

include: use of higher quality inputs, use of improved technology and costs in

98

obtaining knowledge and better technical skills. In addition, retailers face higher
transactions costs when dealing with numerous previously disadvantaged farmers

than when they have contracts with a few large-scale commercial farmers.

(e) Mutual benefit can be gained by both large-scale commercial farmers and
previously disadvantaged farmers when they form joint ventures.

The ownership equity aspect of the AgriBEE policy requires that large-scale

commercial farmers form joint ventures with the previously disadvantaged farmers.

These relationships can be mutually beneﬁcial in that the large-scale commercial

farmer contributes knowledge and some capital to the joint venture farm while the

previously disadvantaged farmers have water rights and therefore supply water for

crop production, for example.

3. Previously disadvantaged farmers need to focus on high value agricultural
products.

From the results we note that the AgriBEE policy had the greatest beneﬁt
to previously disadvantaged farmers (i.e., the highest values for producer surplus)
with high value agricultural produce such as tomatoes. From the results we note
that there are drastic differences in the estimates of welfare between the three
vegetables analyzed. It is therefore important to note that the effects of the
AgriBEE policy are sensitive to the characteristics of each type of vegetable
which include: the volume of the vegetable sold, the current quantity of a speciﬁc

vegetable procured from previously disadvantaged farmers, whether a vegetable is

99

a high value product or not and the quantity of produce demanded for a speciﬁc
vegetable. All these characteristics affect the value of producer surplus for the
previously disadvantaged farmer. In order to maximize the gains from the
AgriBEE policy, previously disadvantaged farmers need to increase their

production of high value agricultural crops.

4. Setting the AgriBEE preferential requirement below the current market level
has a negative impact on previously disadvantaged farmers.
From the results for the cabbage analysis we need to note that when the
AgriBEE policy requirement policy is set at 25%, the quantity of cabbage
procured from previously disadvantaged farmers and their revenue will actually
decline. This implies that the level at which the AgriBEE content requirement is
set is important in determining the success of the AgriBEE policy in attaining its

objectives of promoting participation of previously disadvantaged farmers.

5. The level of AgriBEE preferential requirement has an upper bound.

From the theoretical model we conclude that the AgriBEE preferential
requirement or content ratio that is set has an upper bound. If the content ratio is
set too high, the retailers may choose not to comply with the requirements but will
prefer to pay the penalty. In addition when the AgriBEE preferential procurement
requirement is set too high such that the previously disadvantaged farmers ﬁnd it
difﬁcult to supply the required quantities of produce then it will be difﬁcult for

the objectives of the AgriBEE policy to be attained.

100

6. Policy makers could consider providing specific quantifiable incentives to
retailers to encourage their compliance with the AgriBEE policy requirements.
The proposed AgriBEE policy currently states that complying with the

requirements grants the participating ﬁrm an AgriBEE compliant status. In
addition, other incentives that are currently in place are access to government
loans and contracts. However provision of speciﬁc quantitative incentives may
also encourage compliance with the AgriBEE policy and minimize conflicts
between supply chain participants. For example, the policy makers could place a
provision for tax deductions for ﬁrms that comply with the AgriBEE

requirements.

5.3 Conclusion

This study has shown the potential economic welfare effects of the AgriBEE
policy on the fresh vegetable industry using the tomato, butternut squash and cabbage
industries as examples. The baseline scenario results showed that the previously
disadvantaged farmers can beneﬁt from the AgriBEE policy. However large-scale
commercial farmers and consumers are substantially penalized under the AgriBEE
policy. Simulation results of a lower AgriBEE preferential procurement requirement of
25% may be undesirable especially for the cabbage sector since previously disadvantaged

farmers are already selling more than 25% of their produce at the terminal markets.

In the short run it will be very difﬁcult for previously disadvantaged farmers to

beneﬁt from the AgriBEE policy. In order for the AgriBEE policy to be successful in

101

attaining its objectives, the government needs to invest substantially into reducing the
costs faced by the previously disadvantaged farmers. It is therefore essential that the
policy makers ensure that enough time is set aside for building of skills of the previously
disadvantaged farmers to enable them to supply the desired quantities and quality of

produce to retailers in order to prevent food shortages.

A major conclusion that is drawn from this analysis is that introducing the
AgriBEE policy increases procurement of produce from the previously disadvantaged
farmers and decreases the total quantity of fresh produce procured from both large-scale
producers and previously disadvantaged farmers. When comparing the case when the
AgriBEE content requirement is 50% and when it is 75%, the degree of change in the
total quantity of fresh produce increases the most when the AgriBEE content requirement

ratio is set at 75%.

Second when the AgriBEE content requirement ratio is set below the current
market level as in the case of cabbages (when k is set at 25% in the simulations), the
quantity of produce procured from previously disadvantaged farmers could decline.
These results are similar to those found in other industries when DCPS are implemented
and illustrate the fact that the AgriBEE policy has both beneﬁts and undesirable side
effects. The important issue then becomes how the beneﬁts can be maximized whilst the

negative outcomes are minimized.

102

The results suggest that the AgriBEE policy may have a positive effect on the
welfare of some supply chain players but it may also severely hurt others. If the
policymakers force an extremely high level of AgriBEE preferential procurement
requirement with a high penalty, then the retailers may prefer to pay the penalty and pass
the extra costs on to consumers. However if retailers and large-scale commercial farmers
are offered incentives to comply with the requirements they may have a positive attitude
to the policy and both the large and small-scale commercial farmers would beneﬁt ﬁ'om

the policy.

The overall conclusion is that the AgriBEE policy has the potential to improve the
welfare of previously disadvantaged farmers under speciﬁc conditions. These conditions
include improved access to capital, land, markets, extension services and high quality

inputs.

103

 

APPENDICES

APPENDIX 1: Previously Disadvantaged Farmers Contribution to Total Sales and
Production

 

Vegetables ruits

 

 

 

 

lPercentage contribution to production “70 1.09
Current percentaLecontribution to sales L.13 I0.33

 

 

 

[50.00

Target percentgge contribution to sales I50.00

 

Source: Statistics South Africa (2002)

APPENDIX 2: Number of Producers Growing Selected Vegetables in South Africa

 

 

 

 

 

 

Number of producers (10008)
CROP Large-Scale Previously South Africa
Commercial disadvantaged
Producers producers (includes both
large-scale
producers and
previously
disadvantaged
producers)
Cabbage 6 100 106
Pumpkins and 5 133 138
Squashes
Tomatoes 4 35 38

 

 

 

 

Source: Statistics South Africa (2002) Survey of Large and Small—Scale Agriculture

104

 

APPENDIX 3: Comparison of Asset and Labor Costs for Large-Scale Commercial
Farmers and Previously Disadvantaged Farmers

 

 

 

 

 

 

 

Total Large-Scale Previously
Commercial Disadvantaged
Farmers Farmers
Total Assets (ZAR billions) 424.9 384.9 40.]
Labor Costs (ZAR billions) 10.2 0.1 10.1

 

Source: Statistics South Africa, 2002

APPENDIX 4:Comparison of Costs for Cabbage

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Production
Large-Scale Previously
Commercial Disadvantaged
Producers Producers
Item R/ha R/ha
Seedlings 3,400 4,400
Packaging 3,680 3,060
Labor 549 5,000
Transport 7,200 14,400
Fertilizer 1,785 3,060
Chemicals 300 158
Insurance 2,820 0
Operations - ploughing,
discing 450 750
Gross Income/ha 99,600 22,200
Yield/ha 80,000 30,000

 

 

 

Source: Bediako (2007) and Griqualand West Koporasie (Coop) (2007)

105

 

APPENDIX 5:Comparison of Costs for Butternut
Squash Production

 

 

 

 

 

 

 

 

 

 

 

Large-scale Previously
Commercial Disadvantaged
Producers Producers
Item R/ha R/ha
Seeds 2,925 722
Packaging 1,698 3,060
Labor 146 5,750
Transport 7,650 15,300
Fertilizer 1,920 1,850
Chemicals 3 00 162
Insurance 1,205 0
Operations 450 850

 

 

 

 

Source: Bediako (2007) and Griqualand West Koporasie (Coop) (2007)

106

APPENDIX 6: Availability of Services and Facilities Among Farming Operations
That Require Them by Type of Farmer

 

 

Other
Packaging services _,.,... a... r
Driers ,. A» 2...... l
Cold storage facilities W. ._. a... w
Warehouses .. .-m... '

 

l
_ l
Mllb WV'WTFJ. -erm “an? ..

Trading centres mm,“ m, i ; I Former homelands

 

 

Grain silos __............... 5 Former RSA
Water for irrigation ”WWW—m...
lnput dealers .m -.......--...--...._.........--
Telephone services mm"...- a... . A... ....

Electricity for farming purposes Wang—m... 2......
Farm to market road mm;~n. “mm..- . M
Transport

 

 

i‘aﬂmilhl“ .
l r I I 1 l 1 l

010 20 30 40 50 60 70 80
Level of availabilty of service/facility

 

 

 

 

Source: Statistics South Africa (2002)

NB: Former RSA represents the large—scale commercial farmers and former homelands

represents the previously disadvantaged farmers

107

 

APPENDIX 7: Mathematical Derivation for the Three Cases: Fulfillment,
Underfulfillment and Overfulfillment of the AgriBEE policy

Max fl

Max PFU, de + Q13) - de de— P15(1 +1) Q13 -W1

Subject to the constraint:

(1)613“ = 0, ian <(1-k)(de+ Q15)

(2) t,,,* = (m, otherwise

Fulfillment of Content Requirements

For the case when the content requirements are met:

L = PF (1, de + Q15) — de de - P13 (1 + 0) Q15 - wl — M Q: 41-10(de + Q10}

L = PF (1, de + Q15) ' de de ' Pls (1) Q15 ' W]- xi Q15 ' (de + Q13 ' k de “k Q15»

L = PF (1, de + Q13) - de de " P15 Q15 " W1" 1% Q13 ‘ de ' Q15 + k de+ k Q15»

L = PF (1, Qpa' + Q15) ' de de " I>15 Q15 " W] ' )V (’de ’ k de " k Q13)

F.O.C

Where F: = 5F(x1, xz)/ 5xi

i) 5L/ 8L PFI =w

ll) 5L/ 5M PF2= de- A( l —l()

ill) 5L/ 5 Q13 PFZ = P13 + 1» k

108

iv) sum szs=(1-k)de
but

.de-x(1—k)=P,s+xk
de-P,S-X+kk-Ak=0

V) de- P13 = A

Substituting (v) into (ii)

PFz = de - (de - P/le 40

PF; = PM — (de - k de - P15 + k P15)
PFZ = de— PM + k de+ PIS - k P13
PFz = k de+ P13 - k P13

PFz = k de+ P15 (1' k)

Under the LCP (AgriBEE policy) the price of a composite good will be:
k PM + PIS (1- k) and the ratio of produce from small and large-scale farmers should

be k/(l-k)

Overfulﬁlling content requirements
Allowing the ﬁrms to overfulﬁll the content requirements necessitates the use of Kuhn-

Tucker conditions to maximize:

Max PF“, de + Q15) " de de _ P15 (1 + t) Q15 'Wl

Subject to

“71*: 0, if Q15 < (1 'k) (de + Q15):

109

this constraint holds as a strict inequality only if de < P13 under one of the

Kuhn-tucker conditions

Underfulfillment of content requirements
Due to the fact that the proﬁt function is non increasing in factor prices, a sufﬁcient

condition for the ﬁrms to opt to underfulﬁll the content requirement is:

P/s(1 +tm)<kad+Pls(1‘k)
kad>P15(l+tm)'P15(1'k)
kad>st+tPIs-Pls+P/sk
k PM > P15 - P13 +tm P15 + P13 k
kad> tm Pls+Plsk
kad> P15 (tm+l()

de> P15 (tm+l()/l(

PM > P15 (tm /k+ 1)

110

APPENDIX 8: Summary of Values Used in Welfare Estimations For the Baseline

Scenario

 

Symbol

Description

Unit

Tomatoes

Butternut
Squash

Cabbage_

 

Content ratio under
AgriBEE

%

0.5

0.5

0.5

 

Price for previously
disadvantaged farmers

ZAR

3.36

1.67

0.89

 

Price for large-scale
commercial farmers

ZAR

2.35

1.17

0.62

 

Weighted average price'9

ZAR

2.86

1.42

0.76

 

de

Quantity of fresh produce
procured from previously
disadvantaged farmers
before AgriBEE

1,830,840

1,409,046

3 7,920,060

 

de'

Quantity of fresh produce
procured from small-scale
previously disadvantaged

farmers after AgriBEE

100,186,842

28,697,777

68,420,000

 

Qt

Total quantity of fresh
produce procured from
both previously
disadvantaged farmers and
large-scale commercial
farmers before AgriBEE

kg

240,900,000

64,340,000

143,800,000

 

 

Q1

 

Total quantity of fresh
produce procured from
both previously
disadvantaged farmers and
large-scale commercial
farmers after AgriBEE

 

 

200,373,684

 

57,395,555

 

136,840,000

 

Where ZAR= South African Rands

 

'9 The weighted average price is estimated by using the following formula: P1 = kad + (1-1()P|S

111

 

APPENDIX 9: Summary of Values Used in Welfare Estimations For the Scenarios 1
and 2 Tomatoes

 

Description

Unit

Scenario 1

Baseline

Scenario 2

 

Content ratio under AgriBEE

%

0.25

0.50

0.75

 

Price for previously disadvantaged
farmers

ZAR

3.36

3.36

3.36

 

Price for large-scale commercial
farmers

ZAR

2.35

2.35

2.35

 

Weighted average price

ZAR

2.60

2.86

3.11

 

Quantity of fresh produce procured
from previously disadvantaged
farmers Before AgriBEE

kg

1,830,840

1,830,840

1,830,840

 

Quantity of fresh produce procured
from small-scale previously
disadvantaged farmers Aﬁer
AgriBEE

55,289,103

100,186,842

132,550,000

 

Total quantity of fresh produce
procured from both previously
disadvantaged farmers and large-
scale commercial farmers Before
AgriBEE

kg

240,900,000

240,900,000

240,900,000

 

 

Total quantity of fresh produce
procured from both previously
disadvantaged farmers and large-
scale commercial farmers After
AgriBEE

 

 

221,156,410

 

200,373,684

 

176,733,333

 

112

 

APPENDIX 10: Summary of Values Used in Welfare Estimations For the Scenarios
3 and 4 - Butternut Squash

 

 

 

 

 

Description Unit Scenario 3 Baseline Scenario 4
Content ratio under AgriBEE % 0.25 0.5 0.75
Price for previously

disadvantaged farmers ZAR 1.67 1.67 1.67
Price for large-scale

commercial farmers ZAR 1.17 1.17 1.17
Weighted average price ZAR 1.30 1.42 1.55

 

Quantity of fresh produce
procured from previously
disadvantaged farmers before
AgriBEE kg 1,409,046 1,409,046 1,409,046

 

Quantity of fresh produce
procured from small-scale

previously disadvantaged
farmers after AgriBEE kg 15,185,719 28,697,778 40,276,277

 

Total quantity of fresh produce
procured from both previously
disadvantaged farmers and
large-scale commercial farmers
before AgriBEE kg 64,340,000 64,340,000 64,340,000

 

Total quantity of fresh produce
procured from both previously
disadvantaged farmers and
large-scale commercial farmers
aﬁer AgriBEE kg 60,742,877 57,395,555 53,701,702

 

 

 

 

 

 

 

113

APPENDIX 11:Values Used in Welfare Estimations For the Scenarios 5 and 6 —
Cabbage

 

Description

Unit

Scenario 5

Baseline

Scenario 6

 

Content ratio under AgriBEE

%

0.25

0.5

0.75

 

Price for previously disadvantaged
farmers

ZAR

0.89

0.89

0.89

 

Price for large-scale commercial
farmers

ZAR

0.62

0.62

0.62

 

Weighted average price

ZAR

0.69

0.76

0.82

 

Quantity of fresh produce procured
from previously disadvantaged
farmers before AgriBEE

kg

37,920,060

37,920,060

37,920,060

 

Quantity of fresh produce procured
from small-scale previously
disadvantaged farmers after
AgriBEE

35,089,344

68,400,000

100,350,000

 

Total quantity of fresh produce
procured from both previously
disadvantaged farmers and large-
scale commercial farmers before
AgriBEE

143,800,000

143,800,000

143,800,000

 

 

Total quantity of fresh produce
procured from both previously
disadvantaged farmers and large-
scale commercial farmers after
AgriBEE

 

kg

 

140,357,377

 

136,800,000

 

133,800,000

 

114

 

APPENDIX 12: Summary of Values Used in Welfare Estimates for Scenario 7

 

 

 

 

 

 

Butternut
Description Unit Tomato Squash Cabbage
Content ratio under AgriBEE % 0.25 0.25 0.25
Price for previously
disadvantaged farmers ZAR 3.06 1.52 0.81
Price for large-scale commercial
farmers ZAR 2.35 1.17 0.62
Weighted average price ZAR 2.53 1.26 0.67
Quantity of fresh produce
procured from previously
disadvantaged farmers before
AgriBEE kg 1,830,840 1,409,046 37,920,060

 

Quantity of fresh produce
procured from small-scale
previously disadvantaged farmers

after AgriBEE kg 56,660,185 15,466,] 88 35,349,535

 

Total quantity of fresh produce
procured from both previously
disadvantaged farmers and large-
scale commercial farmers before
AgriBEE kg 240,900,000 64,340,000 143,800,000

 

Total quantity of fresh produce
procured from both previously
disadvantaged farmers and large-
scale commercial farmers after
AgriBEE kg 226,640,741 61,864,752 141,398,140

 

 

 

 

 

 

 

115

APPENDIX 13: Summary of Values Used in Welfare Estimations for Scenario 8

 

Description

Unit

Tomato

Butternut
Squash

Cabbage

 

Content ratio under AgiBEE

%

0.75

0.75

0.75

 

Price for previously disadvantaged
farmers

ZAR

3.76

1.87

0.99

 

Price for large-scale commercial
farmers

ZAR

2.35

1.17

0.62

 

Weighted average price

ZAR

3.4075

1.70

0.90

 

Quantity of fresh produce procured
from previously disadvantaged
farmers before AgriBEE

1,830,840

1,409,046

37,920,060

 

Quantity of fresh produce procured
from small-scale previously
disadvantaged farmers after AgriBEE

84,425,000

37,225,588

97,3 80,000

 

Total quantity of fresh produce
procured from both previously
disadvantaged farmers and large-scale
commercial farmers before AgriBEE

240,900,000

64,340,000

143,800,000

 

 

Total quantity of fresh produce
procured from both previously
disadvantaged farmers and large-scale
commercial farmers aﬁer AgriBEE

 

kg

 

1 12,566,667

 

49,634,] 18

 

129,840,000

 

116

 

APPENDIX 14: Summary of Tomato Data Used in Welfare Estimations for

Scenario 9

 

 

 

 

 

 

 

 

 

 

 

 

disadvantaged farmers and
large-scale commercial farmers
after AgriBEE

 

 

 

 

 

Symbol Description Unit Price Elasticity of Supply
0.5 l 1.5 2
k Content ratio under AgriBEE % 0.50 0.50 0.50 0.50
de Price for previously ZAR 3.36 3.36 3.36 3.36
disadvantaged farmers
Pl, Price for large-scale commercial ZAR 2.35 2.35 2.35 2.35
farmers
P. Weighted average price ZAR 2.86 2.86 2.86 2.86
de Quantity of fresh produce
procured from previously Million 1.8 1.8 1.8 1.8
disadvantaged farmers before kg
AgriBEE
de' Actual estimated quantity of
fresh produce procured from Million 2.2 2.6 3.0 3.4
small-scale previously kg
disadvantaged farmers after
AgriBEE
Qt Total quantity of fresh produce
procured from both previously Million 240.9 240.9 240.9 240.9
disadvantaged farmers and kg
large-scale commercial farmers
before AgriBEE
Q,’ Total quantity of fresh produce Million 200.4 200.4 200.4 200.4
procured from both previously kg

 

117

 

APPENDIX 15: Summary of Butternut Squash Data Used in Welfare Estimations
for Scenario 10

 

Symbol

Description

Unit

Price Elastici

of Supply

 

0.5

l

1.5

2

 

Content ratio under AgriBEE

%

0.5

0.5

0.5

0.5

 

Price for previously
disadvantaged farmers

ZAR

1.67

1.67

1.67

1.67

 

Price for large-scale
commercial farmers

ZAR

1.17

1.17

1.17

1.17

 

P1

Weighted average price

ZAR

1.42

l .42

1.42

1.42

 

de

Quantity of fresh produce
procured from previously
disadvantaged farmers before
AgriBEE

Million kg

1.4

1.4

1.4

 

de'

Actual estimated quantity of
fresh produce procured from
small-scale previously
disadvantaged farmers after
AgriBEE

Million kg

1.7

2.0

2.3

2.6

 

Qt

Total quantity of fresh produce
procured from both previously
disadvantaged farmers and

large-scale commercial farmers
before AgriBEE

Million kg

64.3

64.3

64.3

64.3

 

Q"

 

 

Total quantity of fresh produce
procured from both previously
disadvantaged farmers and
large-scale commercial farmers
after AgriBEE

Million kg

 

 

57.4

 

57.4

 

57.4

 

57.4

 

118

 

APPENDIX 16: Summary of Cabbage Data Used in Welfare Estimations for

Scenario ll

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Symbol Description Unit Price Elasticity of Supply
0.5 l 1.5 2
k Content ratio under AgriBEE % 0.5 0.5 0.5 0.5
de Price for previously ZAR 0.89 0.89 0.89 0.89
disadvantaged farmers
PIS Price for large-scale commercial ZAR 0.62 0.62 0.62 0.62
farmers
P1 Weighted average price ZAR 0.76 0.76 0.76 0.76
de Quantity of fresh produce Million 37.92 37.92 37.92 37.92
procured from previously kg
disadvantaged farmers before
AgriBEE
de' Actual estimated quantity of fresh Million 46.25 54.59 62.92 71.25
produce procured from small- kg
scale previously disadvantaged
farmers after AgriBEE
Qt Total quantity of fresh produce Million 143.80 143.80 143.80 143.80
procured from both previously kg
disadvantaged farmers and large-
scale commercial farmers before
AgriBEE
Qt' Total quantity of fresh produce Million 136.84 136.84 136.84 136.84
procured from both previously kg
disadvantaged farmers and large-
scale commercial farmers after
AgriBEE

 

119

 

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120

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