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Zimbabwe: Prices - Case for Bread Industry
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Financial Gazette (Harare)
OPINION
27 March 2008
Posted to the web 27 March 2008
David Govere
INDEED it is possible to bring some sanity in the pricing of most basic commodities. The current efforts have been on legislation and law enforcement but sustainable controls arise from analysing the value chain, determining the inputs and stabilising the input costs in order to arrive at an appropriate bread price and then leverage on strategic institutions such as the Grain Marketing Board (GMB) and industrial associations to ensure compliance.
The regulatory scenario must make it difficult for deviants to succeed - reversing the current trend where the parallel market and the multiple pricing system has rewarded handsomely the daring, deviant and illegal.
In making a loaf of bread the key inputs are flour, packaging, yeast, energy (fuel and electricity), baking ingredients, spares (plants and vehicles), labour, water and the loaf price will also depend on the retailer margins.
The entire process forming the value chain will need to be controlled and we can take a quick look at each input.
Controlling the price of flour
The government has done its part by ensuring that wheat is sold at $61.00 million per tonne, which is highly subsidised. However, taking into account the heavy transportation costs, the milling costs and labour, the National Incomes and Pricing Commission (NIPC) has fixed the flour price at $1.2 billion per tonne.
The traditional flour millers (Blue Ribbon, National Foods and Victoria Foods) citing the continually rises in costs require $2.5 billion per tonne as a minimum and NIPC, the Joint Operations Command (JOC) and government have tended to go very hard on the traditional millers but it must be stated that these are not the price setters.
The price setters are the new millers led by the Chinese millers who argue that they have to recoup their new investments and use the parallel market exchange rate to determine the day's flour price.
While traditional millers are at $2.5 billion per tonne, the Chinese millers range from $9.0 billion to $15.0 billion per tonne depending on volume and method of payments (notes preferred).
These Chinese millers suggest that their investment was in United States dollars and therefore need notes to convert back to the US dollar quickly.
They have also submitted that through their companies, which are partnered by very influential ZANU-PF Cabinet Ministers nothing can happen to them. To even make it worse the associated politicians have exerted so much pressure on GMB that a disproportionately high amount of wheat is allocated to the Chinese millers.
It is almost impossible to control the bread price without managing the Chinese millers and the GMB wheat must be allocated to millers on the basis of compliance i.e. no compliance, no wheat.
Controlling packaging costs
Both the cost of plastics materials and inks are a function of the foreign exchange rate. The Reserve Bank of Zimbabwe (RBZ) needs to stabilise the exchange rate and provide the foreign exchange in order to control the bread price.
If industry resorts to the parallel market for foreign exchange costs will determine the movements within that market.
Controlling yeast
Yeast comes from molasses and imported enzyme cultures and chemicals and Anchor Yeast is the sole supplier. Again Anchor Yeast needs access to officially priced foreign exchange and then the company must be made to comply with NIPC price guidelines.
Controlling baking ingredients and fats
These include fermentation enzymes, preservatives, sugar, salt and special fats, which have been constantly rising due to the parallel market exchange rate and increasing local production costs. One cannot stabilise bread prices without controlling these key inputs. All the salt used in Zimbabwe is imported.
Controlling energy costs
Bakeries use paraffin, diesel and petrol for the baking and distribution of bread, unfortunately the National Oil Company of Zimbabwe's limited resources have resulted in the bread price increasing because of fuels supplied from the parallel market. The costs of electricity are so low, that ZESA has been unable to supply power to industry because the low tariffs cripple ZESA's effectiveness.
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When a baker runs a fuel powered generator for one hour the cost of fuel exceeds the electricity costs for the whole month. ZESA tariffs must be increased to capacitate the institution and guarantee reliable and more affordable energy. Even if the ZESA tariff was increased 20 times, it will still be far below the cost of diesel or petrol used in generators.
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