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Import Substitution: A case for soya beans

by Victor Bhoroma
01 Sep 2021 at 14:26hrs | Views
For the past 10 years, Zimbabwe has produced an average of 56 000 metric tonnes (mt) of soya beans per year against national demand of 240 000 mt for food, animal feed and industrial consumption. In the current 2020/21 season where bumper harvests are expected, soya bean production is expected to register a 51% growth to 71 300 mt. The expected increase in production points to the need for irrigation to growth in production of the strategic crop which takes longer to mature (up to 8 months). Currently, A1 and A2 commercial farmers are producing 70% of the crop whilst the smallholder farmers account for 30% in delivered yield. In the past 5 years, the national average yield per hectare (y/ha) was estimated to be below 1.3 mt/ha for commercial farmers and 0.5mt/ha for small holder farmers. The United States, Brazil, Argentina, and China are the major soybean-producing countries (with y/ha exceeding 3.5 mt/ha). China and the European Union are the largest importers of soybeans.

SADC league
In the SADC region South Africa, Zambia and Malawi are the biggest producers. The three countries serve as critical exporters of the strategic crop to Zimbabwe. South Africa produces 1.5 million mt of soya beans annually while Zambia produces over 281 000 mt and Malawi 150 000mt. Zambia, Zimbabwe and Malawi possess the same size of arable land (Approximately 40, 000 sq. km) and boast of the same climatic conditions. Malawi earned US$25 million from exporting soya beans in 2019 while Zambia earned US$23 million in 2020 from regional exports of the commodity, with Zimbabwe importing a combined 70% in value of the two countries' soya bean exports. Ironically, in the 1999/2000 season Zambia only produced 28 000 mt of soya beans as compared to Zimbabwe's 141 000 mt.

Overdependence on imports
The soya bean value chain is one of the most strategic and profitable agricultural value chains locally and globally. The crop is essential in the production of cooking oil, margarine, soya chunks, soap, and powder milk among other basic foodstuffs. This speaks volumes about the employment created by the crop from primary production It is also a rich source of protein for animal feed. The country is heavily dependent on imports of Soya Beans, Crude oil, refined cooking oil and Soya meal with over US$115 million used to import these commodities in 2020. This explains the high cost of producing the listed consumer goods on the local market and the struggle local industry has to compete with imports from Zambia and South Africa which have a limited import component in the soya value chain. Import substituting soya beans locally will serve Zimbabwe millions in foreign currency and help create employment for various feed producers and oil expressers.

Key challenges for farmers
There are a number of factors leading to the decline in soya bean production by farmers in Zimbabwe. These include lack of funding, lack of bankable land tenure, viability challenges emanating from high cost of production and price controls (sub economic producer prices set by the government), unfair contract systems and low technical skills on the part of farmers. Soya bean farming is capital intensive with irrigation reducing overdependence on natural rainfall and combine harvesters essential in reducing cost of production. This means that there has to be a deliberate effort on the part of the government to guarantee financing facilities for A1 and A2 farmers and facilitate procurement of irrigation equipment.

The impact of policy changes
In April 2021, the government criminalized the side marketing of soya beans by farmers and middlemen under the Grain Marketing Act of 1966. This was done through Statutory Instrument 97 of 2021 (Control of sale of Soya Beans). The new regulations meant that unprocessed soya beans are now controlled commodities where the government becomes the sole buyer of the commodity at prices set in November of 2020. Exports of the same commodities were also banned, with offenders (both buyers and sellers) fined three times the value of the side marketed crop and facing jail terms of up to 2 years. The regulations also state that the Grain Marketing Board (GMB) cannot buy soya from middlemen who are not contracted to produce the crop. The regulations also limit farmers to storing and moving not more than 100kgs of soya-beans without permission from GMB. They can however move any amount on delivery to GMB. The producer price for wheat is currently pegged at ZW$48 000 per tonne, which translates to US$330 (Using the free market exchange rate) or US$560 (Using the pegged auction exchange rate). At the current levels of production, breakeven price/tonne exceeds US$650 which makes soya bean farming unviable. The high breakeven price also means that feed manufacturers and oil expressors find local soya beans expensive as a raw material and import from the SADC region at a landing price of US$450-US$500 per tonne.

This explains why parallel market dealers end up buying most of the crop at prices averaging US$450/tonne cash (as opposed to GMB which buys at US$330 and takes weeks to settle). To address the pricing and payment challenge, soya bean prices should not be set by the government. This is the role of the soon to be launched commodities exchange, the Zimbabwe Mercantile Exchange (ZMX).

Land Title
Soya bean farming is capital intensive with mechanization critical in reducing the cost of production per hectare and significant funding also required for lime, fertilizers and irrigation. As such, farmers cannot make it without accessing lines of credit from private financiers and local banks. Private capital is key in oiling the whole value chain from primary production, transportation, manufacturing and exporting. However, the current scenario where some commercial farmers have unbankable 99-year leases leaves the government as the sole financier or guarantor to loans for farmers. If legislation is added to the mix, viability is threatened. The involvement of the government can and will not lead to production efficiency.

The launch of the Zimbabwe Mercantile Exchange should herald the deregulation of soya bean production and marketing in Zimbabwe. The economic instability witnessed in the past 5 years and government policy missteps have had a fair share of poison to the high soya bean import bill. Farming viability is persistently threatened by sub-economic producer prices set by the government, which has no incentive to operate efficiently in the soya value chain.

Delays in paying for delivered produce by the GMB, coupled with inflation for the domestic currency means that producing soya is a loss making venture if compared to other crops that get billions in cheap public funds such as Maize, Wheat, Tobacco, and others. In the end, the government has to consistently provide unsustainable subsidies or cheap foreign currency to manufacturers who import crude oil or soya beans to cover for policy missteps on primary production. The government has also used command policies and legislation to cement its control on the marketing of soya beans, thereby crowding out private sector investment and hurting market oriented price discovery. Zimbabwe's rainfall patterns have adversely changed in the last 10 years due to climate change. There is a greater need to direct agriculture policies towards facilities for irrigation farming, farm mechanization and allow the private sector to interact with soya farmers through the commodities exchange.

Years of government funding to the staple maize crop have created a vicious circle of relying on government for free handouts and inputs that burden the tax payer. This has nurtured corruption in the marketing of soya where connected buyers buy from small holder farmers and sell at high prices on the parallel market. The dependency on SADC peers to satisfy local soya demand is also unsustainable for balance of trade considering the vast tracks of arable land and water bodies in Zimbabwe. Farming is a business and the role of government is to incentivize import substitution for Soya Beans with efficient local production through urgently addressing land tenure, cost of production, pricing and viability concerns that are hindering optimum production of the strategic crop.

Victor Bhoroma is an economic analyst and free market lobbyist. He holds an MBA from the University of Zimbabwe (UZ). Feedback: Email or Twitter @VictorBhoroma1.

Source - Victor Bhoroma