Understanding The Wheat Tariff

08 May 2013

When does the wheat tariff kick in?
The wheat tariff kicks in as soon as the international Hard Red Winter (HRW) nr 2 free-on-board wheat price is trading below $ 10 /ton of the new referencing level of $ 294 /ton for a period of three consecutive weeks.
How much must the current international HRW winter wheat price declines before the tariff kicks in?
The HRW wheat price is currently trading at approximately $ 340 /ton free-on-board. This means that the international wheat price must decline by $ 56 /ton from the current $ 340 /ton to $ 284 /ton before the tariff kicks in. The international HRW wheat price must therefore decline by more than 16.5% before the tariff kicks in.
When last was the HRW wheat price below the price level of $ 284 /ton?
As recently as 19 June 2012, the HRW wheat price was trading below the level of $ 284 /ton. During the past 12 months the average HRW wheat price was $ 341 /ton. The price declined to $ 259 /ton during this time, but also increased up to $ 388 /ton.
What does the new reference price of $ 294 /ton in the tariff formula mean for producers (in the north)?
An explanation based on the past twelve month’s prices can clarify this. If the $ 294 /ton was implemented a year ago, producers could have had tariff protection against imports. At $ 259 /ton it would mean that a tariff equal to $ 35 /ton would be applicable. At an exchange rate of R8.16 on that specific day, a tariff of R 285 /ton could have been in operation. On the same day the Safex grain price traded at R 2 719 /ton. The consumer of wheat could then have purchased grain at R 2 719 /ton at Randfontein or would have been forced to import it from Argentina at R 2 800 /ton, but due to the impact of the tariff, the imported wheat would cost the importer R 3 085 /ton.
Does this mean that in-land producers can expect a price support of R 3085 /ton and that prices will not decline lower than this price level?
No, unfortunately not. Although South Africa is a net import country, we do not import 100% of our need for wheat. There will always be somebody that is able to offer cheaper domestic wheat. The tariff of R 285/ton would however support a higher domestic wheat price of between R 2 719/ton and R 3 085/ton, but the local supply and demand situation will always determine the wheat price.
To explain: During the past 12 months the Safex price traded at an average of 6% lower than the import parity price of wheat from Argentina. If this assumption is used, it means that the price of wheat would rise potentially from R 2 719 /ton to R 2 900 /ton (R 3 085/ton minus 6%). The tariff would then support prices at least at R 2 900/ton. The lowest Safex grain price over the same time was R 2 670/ton.
What does the new price reference mean for producers in the Western Cape?
Based on the same principle as the above and on the wheat imports from Argentina, the tariff would have had a price support of at least R 2 590 /ton for the past 12 months (R 2 480 plus R 285 /ton – 6% = R 2 765 – 6% = R 2 756 – R 166 = R 2 590 /ton).
Can the tariff support a higher price level?
If the local supply and demand situation leads to a higher demand, the tariff can help to support even higher prices if those who have local stock do not sell it. The users of grain will then be forced to offer better prices for wheat or they will have to import wheat (the tariff included) at a higher price.
Can the wheat tariff have any value for producers closer to the end of the year?
If the Ukraine had a good wheat harvest from mid-June and Australia has enough rain and the United States has a big grain harvest in September, it can be expected that the wheat price will trade at a lower price in the last quarter of 2013 due to these circumstances.
Based on the current price expectancy, the USA will be trading HRW wheat during December at a price level that will be approximately 5% higher than the current price. Locally wheat prices are trading approximately 5% lower than the old season stock for delivery in December. Based on current conditions, it will not be necessary for tariff protection. The international HRW wheat price will have to decline by $ 56 /ton or 16.5% from now until December for the tariff to kick in.
Summary
Grain SA submitted a request to lift the level of the price support of wheat while prices are high and there is not much pressure on the government. If the large maize harvest of the USA realizes, it will not only place the price of maize under pressure, but also the price of wheat. Therefore Grain SA wants to ensure that there is a higher level of support than in the past.