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Curbing inflation through an improved food supply chain

May 31, 2022
in AgriBusiness, Economy, Top Stories
0
Curbing inflation through an improved food supply chain
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As virtually all stakeholders in Ghana’s economy, including the local populace and the inflation-targeting Bank of Ghana itself gear up for further rises in consumer price inflation over the coming months – it hit 23.7 percent in April, its highest level since 2004 – a new school of thought has suggested that the fight to curb it should shift from monetary policy measures to fiscal policy and supply chain management initiatives.

This new school of thought, ignited by suggestions made last week by renowned economic issues commentator Joe Jackson – the Chief Operating Officer of Dalex Finance, an Accra headquartered non bank finance house – argues that fiscal policy needs to be deployed rather than monetary policy to curb rising inflation and aimed specifically at food inflation.

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Speaking on Point of View, a programme aired by Citi Television and presented by Bernard Avle, Joe Jackson pointed out that since food inflation is currently the main propellant of consumer price inflation (food inflation for April was over 26 percent)  this is what needs to be addressed immediately to bring the overall inflation rate down. Jackson’s assertion and suggested policy measures have over the subsequent days been widely endorsed by economists and public policy analysts alike.

Indeed, it is because food and beverage prices account for half of the entire basket of goods and services used by the Ghana Statistical Service to compute consumer price inflation – this derived from the spending patterns of the average household in Ghana as determined by its periodic Ghana Living Standards Survey – that headline inflation has risen so rapidly.

To be sure the traditional sources of increased inflation in Ghana – cedi depreciation and rising transport costs – have played a major role in fuelling the current surge in price levels, but their effect on food prices have been just as impactful on food prices as they have been on non food product and services prices, and added to the supply chain problems highlighted by Jackson, this has left food inflation as the biggest challenge of all.

So far government has left the taming of inflation to the BoG through the conventional manner of using monetary tightening – primarily increased interest rates – to dampen demand across the economy with a view to curbing demand pull inflation. However Jackson and proponents of the new school of thought he has created point out that with food being essential purchasing and accounting for half of household expenditure on average, demand management cannot lower effective demand and consequently price levels. The primary effect would rather be a fall in demand for other items to accommodate inevitable demand for food and beverages.

Consequently, the impact of monetary policy tightening is severely limited on the food prices that are the primary cause of overall consumer inflation currently; due to the structure of rising inflation this time around, a different approach is required to curb it – at least over the short term – targeting food prices directly.

This emergent new school of thought points out that current, ongoing inflationary pressures derive from supply chain inefficiencies rather than surging demand which can be resolved with demand management policies such as monetary tightening.   Therefore proponents of this new thinking – which interestingly includes Journalists for Business Advocacy, the leading formalized grouping of senior economic and financial journalists in Ghana –  have pin-pointed the biggest food supply chain inefficiency of all as a crucial pillar in the short term effort to bring down food inflation – and consequently overall headline consumer price inflation – as quickly as possible.

This involves immediately introducing public policy support for entrepreneurs willing to compete along all facets of the roles currently being played by “Market Queens.”

These predominantly female food distribution sector players source food crops at the farm gate, package them, transport them to wholesale centres in urban centres and from there to retail markets where they use their economic power to determine which retail sellers get which food items and at what prices.

To be sure, market queens play absolutely crucial roles in the food stuff supply chain and these roles are much harder than they appear to be to the unenlightened. For instance sourcing food stuff from the rural farms requires knowing when and where they will become available (ie each producing village’s market days); transporting them along severely dilapidated rural roads from the farm to inter city transport centres; then transporting them to the actual urban consumer centres; and then repackaging them from wholesale sizes to retail sizes for sale to retailers in urban markets.

The current problem with all this however is that they are taking advantage of the supply chain disruptions created by COVID 19 (which still linger to varying degrees) and sharply increased commercial transport costs to expand their margins to a point that borders on profiteering. To do this they are operating more as oligopolies than as competitors.

Worse still is the fact that they break the supply chain into too many separate activities – in extreme cases, one set buys from the farm gate, another transports to the intercity transport centres, yet another transports the foodstuffs to the urban centres, then yet another breaks bulk for sale to urban wholesalers, then the final set actually sells to retailers at fixed oligopolistic prices.

If each set adds on a 20% profit margin onto the purchase price and cost of executing the particular role played by that particular set, then profits alone all along the supply chain approach 100%,  before actual operating costs (transport, storage, bulk breaking etc) are added on.

Little wonder then that the retail price of a particular type of foodstuff in, say Accra or Takoradi, can reach 120% over its price in say Yendi, and up to two and a half times the farm gate price where it is actually cultivated. This situation has been well documented by Goldstreet  Business’s GSB Data Services which tracks price arbitrage opportunities created by the price differentials between the same agricultural commodities across retail and wholesale markets in various markets around Ghana.   

This supply chain model is hopelessly inefficient and presents a potential investment opportunity, for agricultural commodity traders particularly if government is willing to provide logistical support wherever a bottleneck constrains investors seeking to compete. Investors willing to invest in the purchase of food crops at the farm gate, storage and transportation from there to consumption centres, stand to make competitive returns on investment by delivering food stuff at prices well below what they are currently. Gold Street Business computes that in pure economic terms this is possible even after adding a 30 percent profit margin on their entire supply chain costs.

However there are logistical problems that would need to be overcome and this is where government needs to play a (non-funded) facilitation role. For instance the District Assemblies in food producing areas can assist in identifying actual farms from which foodstuff can be purchased. This could be done for a one –off fee (once a commodity trader has learnt the potential sources of supply he or she would no longer need the service), which would help the districts effort to generate direly needed  internally generated funds.

 Government could also facilitate leasing of trucks for intercity transportation (eventually rail transport would bring down costs dramatically but that is a long term prospect) through tax breaks for the truck owners and/or the food stuff traders.

Crucially government could facilitate establishment of retail sales outlets in urban consumer centres in similar fashion as the yellow kiosks once used by the defunct National Food Distribution Company. This would prevent market queens from sabotaging emergent competition by restricting their access to retailers in urban markets. Significantly lower retail prices would quickly divert consumers their way with sales revenues paying for the cost of establishing such sales outlets, whether public sector or private sector owned and managed.

Importantly, unless the new food stuff traders themselves get involved in financing the farmers, the turnaround time for each cycle of their investment would be short enough (two months at the most, but possibly less than a month) to attract commercial financing without eating away significant proportions of their profits or forcing them to substantially increase their pricing.

Actually there would be little need for them to pre-finance farmers; as long as they could guarantee the purchase of specified amounts of a particular crop the farmers could secure financing from commercial lenders, or better still from family, friends or a nucleus farming enterprise.

Indeed, apart from immediately bringing down food prices by making the supply chain more efficient, this proposed model would lead to increased production, and not just by providing guaranteed markets for a specified volume and value of produce. Currently the market queens who run the supply chains make far more profit than the farmers themselves since their oligopolistic access to the farms and similarly oligopolistic pricing ensures that the farmers they buy from are price takers rather than price setters. Competition from a new, modern set of distributors, doing all the different activities themselves (and thus taking profits once rather than at every step along the supply chain) and enjoying veritable economies of scale would be able to pay farmers higher, fairer prices, thus giving them incentives to produce more.

There are several other measures that can be taken to lower food prices and thus curb consumer inflation as a whole. But the Joe Jackson led new school of thought has brought up a strategy well worth considering by both government as facilitator and both political and economic beneficiaries; and private sector investors who have been presented with a veritably lucrative investment opportunity accessible over the short run with all the advantages of that too.  

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Source: By Toma Imirhe
Tags: BoGInflation
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