Expensive debt and increased input costs are linked factors that have driven the cost of producing wheat, which in the long run may drive up the retail price of bread, a key household commodity in Zimbabwe.
Sources within the Government have suggested the need for a subsidy on critical areas of the value chain to ensure that the cost of wheat for millers and other value chain players does not filter down to vulnerable consumers.
Spiralling prices of labour (51 percent); fertilisers, both Compound D and ammonium nitrate (27 percent); and tractor and equipment (144 percent), saw Cabinet resolve to adjust the wheat producer price.
Information, Publicity and Broadcasting Services Minister Monica Mutsvangwa, during a post Cabinet media briefing on Tuesday, said the biggest driver of costs is the cost of borrowing which stands at 40 percent.
Ironically, wheat is funded under the supposedly cheaper medium term bank accommodation facility offered by the central bank. The rate currently stands at 30 percent with banks putting their margins on top. Besides, agriculture is the major beneficiary of Covid- 19 $18 billion stimulus package, with the sector accounting for over $6 billion.
The upward review of the floor price saw the wheat flour producer prices increasing to $55 517,69 per tonne for ordinary grade wheat at a 15 percent return on investment, and $66 621,22 per tonne for premium grade wheat during the 2021 marketing season.
Using the official exchange rate, the wheat producer price becomes US$638,72 per tonne for ordinary grade wheat and US$766,46 per tonne for premium grade wheat. Using the parallel market rate, the wheat price ranges between US$346 and US$416 against an import parity of between US$430 and US$460.
According to the Government, the newly gazetted wheat producer price would enable farmers to go back into production.
However, fears are percolating in the market that these steep input prices could inflate the cost of bread.
Analyst Walter Mandeya, said while the wheat price was competitive against import parity, when using the parallel market exchange rate, the price increase would be hard to absorb across the value chain.
"The new producer price, which is roughly an increase of 26 percent, might be passed on across the value chain to flour millers, to the bread maker and ultimately to the consumer.
"As you can see, the latest producer price review has been caused by cost increases as highlighted by the minister, but it creates a vicious inflationary cycle," Mr Mandeya said.
He said the concerns were justified as millers could likely pass on the increased wheat producer price to the vulnerable consumer.
The Grain Marketing Board (GMB) is the sole buyer of wheat in the country and millers will have to pay an equal or more than the set producer price which was $43 778,84 per tonne in September last year.
The additional cost will be passed on to the bread consumer. Bread currently costs $122,95.
While Minister Mutsvangwa said "the current subsidy framework to millers will be maintained," Business Weekly understands there is currently no subsidy for wheat with effect from January 2020.
Presenting the 2020 National Budget Statement in November 2019, Finance and Economic Development Minister Mthuli Ncube said the: "subsidy policy whereby Government funds the procurement of grain at market price and sell this to registered grain millers at subsidised price, has been open to abuse and placed a huge burden on the fiscus. At times the intended beneficiaries do not enjoy the benefits of the subsidy from the Government.
"To address these distortions, the Government will, with effect from January 2020 remove the existing grain marketing subsidies for maize and wheat that were being provided to Grain Millers through the Grain Marketing Board.
"The intervention will see GMB selling wheat and maize at market prices, with Grain Millers having an option to either import or purchase grain from GMB."
At the time, Minister Mthuli admitted the removal of the subsidy would drive up the cost of basic foodstuffs.
"This means the prices of basic commodities such as bread and mealie meal may adjust," he said then.
A senior source within the government confirmed the development saying there is currently no subsidy for wheat adding that it would not be prudent to subsidise wheat to millers as the subsidy will be abused.