AME1501 Study Guide

Introduction to Agricultural Economics
AME1501
Study guide
Agriculture and Animal Health

CONTENTS
MODULE OVERVIEW .................................................................................................................................................. 8
LEARNING UNIT 1 .................................................................................................................................................... 13
1W HAT IS AGRICULTURAL ECONOMICS ALL ABOUT? ................................................................................. 13
1.1 INTRODUCTION ............................................................................................................................................. 13
1.2 ECONOMIC DECISION-MAKING ............................................................................................................... 14
1.3 THE PRODUCTION POSSIBILITIES FRONTIER.................................................................................... 16
1.4 PRODUCTION POSSIBILITIES FRONTIER AND OPPORTUNITY COST ........................................ 17
1.5 WHAT IS AGRICULTURE? ........................................................................................................................... 19
1.6 ECONOMIC SECTORS OF AGRICULTURE ............................................................................................ 19
1.6.1 Farming...................................................................................................................................................... 19
1.6.2 Agribusiness ............................................................................................................................................. 19
1.6.3 Farm service supply industries ............................................................................................................. 20
1.6.4 Agricultural processing-marketing industries ..................................................................................... 20
1.6.5 The government supported sector ....................................................................................................... 20
1.7 HOW IS ECONOMICS APPLIED TO AGRICULTURE?.......................................................................... 20
1.8 WHAT DOES AN AGRICULTURAL ECONOMIST DO? ......................................................................... 21
1.9 THE ECONOMIC PROBLEM ....................................................................................................................... 22
1.9.1 The economic problem ........................................................................................................................... 22
1.9.2 A closer look at the economic problem ............................................................................................... 23
1.9.3 What should be produced? ................................................................................................................... 23
1.9.4 How should these goods and services be produced? ..................................................................... 23
1.10 SUMMARY ....................................................................................................................................................... 23
1.11 QUESTIONS FOR SELF-EVALUATION..................................................................................................... 23
LEARNING UNIT 2 .................................................................................................................................................... 25
Factors of production ................................................................................................................................................. 25
2.1 INTRODUCTION ............................................................................................................................................. 25
2.2 NATURAL RESOURCES (LAND) ............................................................................................................... 26
2.3 LABOUR ............................................................................................................................................................ 30
2.4 CAPITAL............................................................................................................................................................ 34
2.5 ENTREPRENEURSHIP .................................................................................................................................. 35
2.6 TECHNOLOGY ................................................................................................................................................ 36
2.7 THE INTERACTION AMONG FACTORS OF PRODUCTION ............................................................... 37
LEARNING UNIT 3 .................................................................................................................................................... 38
STRUCTURE AND PRODUCTION IN THE SOUTH AFRICAN AGRICULTURE......................................... 38
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3.1 INTRODUCTION ............................................................................................................................................. 39
3.2 NATURAL RESOURCE ENDOWMENT ..................................................................................................... 39
3.2.1 Climate ....................................................................................................................................................... 39
3.2.2 Soils and terrain ....................................................................................................................................... 39
3.2.3 Water resources....................................................................................................................................... 40
3.3 AGRICULTURAL POTENTIAL ..................................................................................................................... 41
3.4 LAND-USE PATTERNS................................................................................................................................. 43
3.5 DEMOGRAPHIC PROFILE OF SOUTH AFRICA .................................................................................... 45
3.5.1 Population size and growth ................................................................................................................... 45
3.5.2 Spatial characteristics ................................................................................................................................ 46
3.5.3 Demographic profile of rural areas........................................................................................................... 48
3.6 COMMERCIAL FARMING AREAS ............................................................................................................. 48
3.7 FORMER HOMELANDS ............................................................................................................................... 48
3.8 AGRARIAN STRUCTURE ............................................................................................................................ 49
3.8.1 Number of farms ...................................................................................................................................... 49
3.8.2 Total area of farms .................................................................................................................................. 49
3.8.3 Farm size .................................................................................................................................................. 49
3.8.4 Farming and the economy ..................................................................................................................... 50
3.9 CONTRIBUTION TOWARDS GDP.............................................................................................................. 50
3.12 CURRENT STATE OF FARMING INDUSTRY .......................................................................................... 57
3.13 NATURAL GRAZING AND LIVESTOCK NUMBERS.............................................................................. 65
3.14 SUMMARY ....................................................................................................................................................... 68
3.16 CONCLUSION ................................................................................................................................................. 71
LEARNING UNIT 4 .................................................................................................................................................... 72
THE DEMAND FOR AND SUPPLY OF AGRICULTURAL PRODUCTS......................................................... 72
4.1 INTRODUCTION ............................................................................................................................................. 72
4.2 THE DEMAND FOR AGRICULTURAL PRODUCTS ............................................................................... 73
4.3 DEMAND SHIFTERS – FACTORS THAT AFFECT THE DEMAND FOR PARTICULAR
PRODUCTS ................................................................................................................................................................. 76
4.3.1 Changes in prices of related commodities (substitutes and complements) in consumption .... 76
4.3.2 Changes in incomes of consumers: as income changes, demand for a commodity usually
changes 77
4.3.3 A change in consumer tastes and preferences ................................................................................ 77
4.3.4 Changes in consumer expectations ..................................................................................................... 77
4.3.5 Changes in the number of consumers: affects the total demand for a good ............................ 77
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4.4 THE SUPPLY OF AGRICULTURAL PRODUCTS ................................................................................ 78
4.5 THE MARKET EQUILIBRIUM ...................................................................................................................... 81
4.6 GOVERNMENT INTERVENTION................................................................................................................ 82
4.6.1 Why do governments intervene in agriculture? ................................................................................. 83
4.6.2 What causes short-term price fluctuations?....................................................................................... 83
4.6.3 Causes of declining farm incomes ....................................................................................................... 84
4.7 ELASTICITY OF DEMAND AND SUPPLY ................................................................................................ 90
4.7.1 Infinitely elastic demand ......................................................................................................................... 92
4.7.2 Infinitely inelastic demand ...................................................................................................................... 92
4.8 DETERMINANTS OF ELASTICITY OF DEMAND .................................................................................. 92
4.9 OWN PRICE ELASTICITY OF DEMAND .................................................................................................. 93
4.10 WHAT IS THE IMPACT OF PRODUCER REVENUE? ........................................................................... 98
4.11 WHAT IS THE IMPACT ON THE CONSUMER SURPLUS? ................................................................. 99
4.12 CROSS-PRICE ELASTICITIES ................................................................................................................. 100
4.13 APPLICABILITY OF DEMAND ELASTICITIES ...................................................................................... 101
4.14 CONCEPTS AND DETERMINANTS OF ELASTICITY OF SUPPLY ................................................. 101
4.15 DETERMINANTS OF ELASTICITY OF SUPPLY................................................................................... 102
4.16 OTHER DETERMINANTS OF ELASTICITY OF SUPPLY ................................................................... 103
4.17 QUESTIONS FOR SELF-EVALUATION................................................................................................... 104
LEARNING UNIT 5 .................................................................................................................................................. 105
INPUT/OUTPUT RELATIONSHIPS ....................................................................................................................... 105
5.1 INTRODUCTION ........................................................................................................................................... 105
5.2 THE PRODUCTION FUNCTION ............................................................................................................... 105
5.3 MARGINALISM.............................................................................................................................................. 106
5.4 ONE INPUT, ONE OUTPUT ....................................................................................................................... 106
5.5 THE TOTAL PHYSICAL PRODUCT CURVE .......................................................................................... 107
5.6 MARGINAL PHYSICAL PRODUCT .......................................................................................................... 108
5.8 STAGES OF PRODUCTION ............................................................................................................................ 109
5.9 SHIFTING A PRODUCTION FUNCTION ................................................................................................ 110
5.10 THE LAW OF DIMINISHING RETURNS .................................................................................................. 111
5.11 RATIONAL AND IRRATIONAL STAGES OF PRODUCTION.............................................................. 112
5.12 TYPES OF DECISIONS IN AGRICULTURAL PRODUCTION ............................................................ 112
5.13 PRODUCTION COSTS ................................................................................................................................ 113
5.14 PRODUCTION, COSTS AND PROFITS .................................................................................................. 113
5.15 COSTS AND PROFITS ................................................................................................................................ 114
5.16 TIME HORIZONS FOR DECISION-MAKING .......................................................................................... 114
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5.17 SHORT RUN COST CURVES ................................................................................................................... 115
5.19 ECONOMIES OF SCALE ............................................................................................................................ 117
5.20 MINIMUM EFFICIENT SCALE ............................................................................................................... 118
5.21 DISECONOMIES OF SCALE ..................................................................................................................... 118
5.22 CONSTANT RETURNS TO SCALE ...................................................................................................... 119
5.23 THE CONCEPT OF PROFIT MAXIMISATION ................................................................................... 119
5.24 PROFIT MAXIMISING DECISION............................................................................................................. 121
5.25 THE PROFIT FUNCTION ........................................................................................................................ 123
5.26 QUESTIONS FOR SELF-EVALUATION............................................................................................... 124
LEARNING UNIT 6 .................................................................................................................................................. 126
6MARKET STRUCTURES IN THE ECONOMY .................................................................................................. 126
6.1 INTRODUCTION ........................................................................................................................................... 126
6.2 THE CONCEPT OF A MARKET STRUCTURE ..................................................................................... 126
6.3 THE COMPETITIVE MODEL ..................................................................................................................... 127
6.3.1 The number and size distribution of buyers and sellers that make up the industry ................. 128
6.3.2 The degree of product differentiation ................................................................................................ 128
6.3.3 The extent of barriers to entry .............................................................................................................. 128
6.3.4 Amount of knowledge and information available (perfect information) ....................................... 129
6.3.5 Perfect factor mobility........................................................................................................................... 129
6.3.6 Zero transaction costs .......................................................................................................................... 129
6.3.7 The Profit Motive and the Results of Competition .......................................................................... 129
6.3.8 Constant returns to scale ..................................................................................................................... 129
6.3.9 Firms are price takers ........................................................................................................................... 129
6.4 MARKET PRICE AND QUANTITY............................................................................................................ 133
6.4.1 Market supply and demand relationship for a competitive market .............................................. 133
6.4.2 Specific Results of Competition .......................................................................................................... 133
6.4.3 Changes in supply or demand ............................................................................................................ 133
6.4.4 Supply shifters include: ........................................................................................................................ 134
6.4.5 An Increase in Demand ........................................................................................................................ 134
6.4.6 A Decrease in Demand ........................................................................................................................ 134
6.4.7 Demand Shifters include aspects such as ....................................................................................... 134
6.4.8 Agriculture’s Competitive Side ............................................................................................................ 134
6.4.9 Agriculture’s Departure from Competition ........................................................................................ 135
6.5 CASE STUDY ON CONCENTRATION IN SOUTH AFRICA’S FOOD CHAIN ................................. 135
6.6 MODELS OF IMPERFECT COMPETITION ............................................................................................ 137
6.6.1 The characteristics of monopolistic competition are as follows: .................................................. 137
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6.6.2 Monopolistically Competitive Firm’s Price, Quantity, and Profit – ............................................... 137
short run .................................................................................................................................................................. 137
6.6.3 Monopolistically Competitive Firm’s Price, Quantity, and Profit – ............................................... 138
long run ................................................................................................................................................................... 138
6.6.4 Pure Monopoly ....................................................................................................................................... 139
6.6.5 Characteristics of firms or farm business exercising monopoly ................................................... 139
power ....................................................................................................................................................................... 139
LEARNING UNIT 7 .................................................................................................................................................. 142
PRIVATISATION AND DEREGULATION ............................................................................................................. 142
7.1 INTRODUCTION ........................................................................................................................................... 142
7.2 THE ORIGINS AND IMPACT OF SOUTH AFRICA’S AGRICULTURAL MARKET SYSTEM ....... 143
7.3 THE NUMBER OF SIGNIFICANT THEMES CHARACTERISED THE SOUTH AFRICAN
AGRICULTURAL MARKETING SYSTEM FROM 1920S THROUGH TO THE 1980S ............................... 144
7.4 THE REASONS FOR REFORM ................................................................................................................. 149
7.5 THE MANAGEMENT OF REFORM PROCESS ..................................................................................... 153
7.6 THE IMPACT OF DEREGULATION TO DATE ....................................................................................... 154
7.7 INTERNATIONAL EXPERIENCE AND RELEVANCE OF MARKET REFORM .............................. 160
7.8 THE INTERNATIONAL RELEVANCE OF SOUTH AFRICAN REFORM EXPERIENCE ............... 160
7.9 CONCLUSION ............................................................................................................................................... 163
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WELCOME
Welcome to the module Introduction to Agricultural Economics (AME1501). We hope that studying this
module will be one of the most exciting, memorable learning experiences ever! We invite you to join us on a
journey through the world of Agri- cultural Economics. We further implore you to make the best of this
opportunity to study not merely to pass the examinations, but to use your newly found knowledge and skills
to equip and empower yourself and transform the communities that you will be serving upon completion of
your studies.
In this module we will guide you to gain the knowledge, understanding and skills to educate, advise and
transform the farming households and the communities. We will also request you to explore your attitudes
and inspiration through providing guidance and advice to the previously disadvantaged farmers that require
assistance in terms of access to finance, agricultural production and marketing information.
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WHERE DO I START?
Click on the Learning Units link on the left hand side and familiarise yourself with the introductory
section getting started.
Questions you may ask right now… Where is my study
guide?
Where do I start to study?
Where is my tutorial letter 101?
Where and when do I get my assignments?
All the answers to these questions are in the getting started of the learning units.
MODULE OVERVIEW – GETTING STARTED
This is the introductory section of this module and it will explain the following:
The purpose and outcomes of AME1501

Tutorial matter
Module-related resources
What is expected from students? How to study this
module online? Student support services
The assessment plan
Plagiarism
THE PURPOSE AND OUTCOMES OF AME1501
PURPOSE OF THE MODULE
The purpose of this module is to empower you with the necessary information, knowledge, skills,
expertise and attitudes to:
Understand basic economic concepts and describe what agricultural economics is all about.
Define the concept of “The economic problem” and relate it to the agricultural production situation
in South Africa.
Conceptualise and understand the economic concept of scarcity of resources and the choice
What to produce and economy’s use of factors of production
Understanding and applying the concepts of demand and supply on the market and how the
government intervenes in the market.
Describe input and output relationships in production economics
Understand the market structures that exist in the economy.
The module is intended for students that are aspiring to become Agricultural Economists, agricultural
scientists / practitioners or officers, project managers, researchers, lecturers, and facilitators in the field of
agriculture, and for that matter, any business. In addition, students who desire to pursue a career in the
field of agricultural economics or farming will benefit a great deal from this module.
The farming community at large will benefit a lot from having highly trained, know- ledgeable and highly
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skilled agricultural officers that will provide advice in production, marketing and as well as general
agricultural management practices. Such practices will not only ensure that farmers are efficient and
effective in their farming operations, but that their businesses are economically viable, profitable and
sustainable.
We encourage you to belong to a professional organisation in order to engage in academic

discourses in a way to enrich your knowledge in the field of Agricultural Economics. An example
of an professional organisation that you can belong to is the Agricultural Economics Association
of South Africa (AEASA). We believe that AEASA will be enhanced in terms of both increase
in membership as well as your research contribution and publications through the Agrekon
journal.
OUTCOMES
Upon completion of this module you will be able to:
Define the economic problem and apply it to the South African situation.
Describe the factors of production that exist in the economic system.
Explain and apply the problem of consumer choices in the market.
Draw and explain the demand and supply curves, the equilibrium point and describe how the
government intervenes in order to protect the consumers from unreasonable high prices.
Explain input and output relationships, costing and profit maximization in agricultural production.
Discuss the market structures that exist in the economy.
Understand the historical context and assess the impact of privatisation and deregulation in
agricultural marketing.
This module is a 12 credit module, meaning you will need at least 120 study hours to complete
this module.
MODULE-RELATED RESOURCES
The following material is prescribed, however, keep in mind that additional text- books and articles give
alternative views or provide more insight into issues under discussion and is an important additional
reading material.
Prescribed textbook
Your prescribed textbook for this module is:
Penson, J.B., Capps, O., Rosson C.P. & Woodward R.T. 2015. Introduction to Agricultural
Economics. 6th Edition.
Please refer to the list of official booksellers and their addresses in my Studies @ Unisa brochure. If you
have difficulty in locating your book at these booksellers, please contact the prescribed book section at
Tel: 012 429-4152 or e-mail vospres@ unisa.ac.za.
1. E-Reserves
You can access the e-Reserves via the library website. Then click on Find e-reserves and type this module
code (AME1501). Click on the specific item you want and then on the link “Connect to this electronic
resource” to view the item electronically.
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Mohr, P., Fourie, L. and Associates. 2009. Economics for South African students. JL van Schaik
Publishers Pretoria.
Mohr et al. (2009) provides an overview of economics and an introduction to the most important
economic issues to strengthen the concepts explained in the Penson et al. (2015). This book has been written
for South African students and has a distinct South African flavour it and will complement aspects covered
in Penson et al. 2015.
WHAT IS EXPECTED FROM STUDENTS?
Your responsibilities can be summarised as follows:

Study each unit in the learning units in the left-hand side of the page.
Show interaction by taking part in all the Self-evaluation questions in the learning units.
Send comments on the study material and assessments to the lecturer.
Complete assignments and submit at least two weeks before the closing date time. Manage your
time well.
Draw up a reasonable study schedule that can guide you through all the learning units considering
assignment due dates. Since this is a 12 credit module, you require at least 120 study hours. Thus,
to complete the module within the 24 weeks period, you need to study at least 5 hours per week.
HOW TO STUDY THIS MODULE ONLINE
Since all of the information you need to study is online, you will have a different experience than
when studying from a study guide. There are a number of tools on this website which we will use
in the learning experience.
OVERVIEW OF THE ONLINE TOOLS
For this module, we are going to be using the following tools on myUnisa to guide you in your
studies:
Home page / Welcome Announcements /

Email notification Schedule
Learning units
Discussion forums. This is an online discussion forum.
Official study material
Prescribed books Additional
resources Course contact
Inside the tool Discussion Forums, there are several forums where you will be asked to discuss
ideas and post your discussions online. As part of this space, we also give you place to just talk
socially with the other students registered for the course – we call this the “Chat space”.
Another one of the special forums under Discussion Forums is called “Talking with the
Lecturer”. Use this space to post questions to the lecturer about anything in the module and
she or your teaching assistant will get back to you. Remember, these discussion forums are public
places and everybody will be able to see your questions and answers. If you want to ask a private
question, use your myLife email or use Course Contact.
Other tools may be added at a later stage, depending on what the lecturer, the teach-
ing assistants and the facilitators want you to use for specific activities.
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Note the meaning of the icons used in this module. Please take note of them through-out the learning
units:
Time allocation
A number of hours are allocated to a learning unit and assignment indicating the
average time that should be spent on the task.
Study
Intense reading and repetitive reading to ensure insight to the content being
read. You should be able to recall information from the content without referring
back to it.
Read
Intense reading of the material referred to will give background and detail to the
topic being discussed.
Note
Important information regarding the content and/or how it should be applied.
Activity
The activities are tasks which help to give you insight to a topic. These do not
count towards your final mark, but will be taken into account when your portfolio
is being assessed and when your final mark is being calculated.
Assignment
It is imperative that you submit your assignments because they contribute to
your year mark (which gives access to examinations) and ultimately your final
mark. It is important to stick to the due dates which assignments are due on. It
is always advisable to submit at least a week before the due date so that if
technology fails you are safe.
Discussion
This icon draws your attention to an open discussion on the main concept of the
tutorial. This part of the tutorial is the focal or main activity of the tutorial, where
we exchange information and construct new knowledge together.
Feedback
This icon indicates that feedback will be provided for discussion forums and
learning activities.
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STUDENT SUPPORT SERVICES
The Directorate for Counselling, Career & Academic Development (DCCAD) supports prospective
and registered students before, during and after their Unisa studies. There are resources on the website,
and also printed booklets available to assist you with:
Career advice and how to develop your employability skills

Study skills
Academic literacy (reading, writing and quantitative skills)
Assignments submission
Examination preparation
Contact details
Website http://www.unisa.ac.za/counselling
E-mail for counselling counselling@unisa.ac.za
E-mail for Academic Literacy acalit@unisa.ac.za
Further important information appears in your my Studies @ Unisa brochure.
THE ASSESSMENT PLAN
Assignments are seen as an important part of the learning process for this module. As you do the
assignment, study the reading texts, consult other resources, discuss the work with fellow students or do
research, you are actively engaged in learning.
There are TWO assignments for AME1501 for each semester.
The assignments for this module are compulsory which will, if submitted in time, allow you entry for
summative assessment. If more than one assignment is set for a module, all the assignments for that
module will be taken into consideration when calculating your year mark. Thus, to ensure a good year
mark that can improve your final mark, submit your assignments on time.
How your final mark would be calculated:
Assignments will contribute to your semester mark.
Assignment Marks allocated
Assignment 1: Compulsory 20%
Assignment 2: Compulsory 20%
Examination mark 60%
Total Marks 100%
The due dates for the three compulsory assignments per semester are in the tutorial latter 101.
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LEARNING UNIT 1
1W HAT IS AGRICULTURAL ECONOMICS ALL ABOUT?
The overall purpose of this study unit is to provide a very brief overview and basic
understanding of what Economics is about as well as an understanding of what
Agricultural Economics is. There are definitions of the two terms and how they
relate to each other. In addition, the term scarcity is explained together with the
choice problem and the concept of opportunity cost. You are encouraged to make
use of the library and read more the prescribed textbook for the module as well as
the additional recommended reading material. Examples are provided for practical
real world challenges in the study material.
LEARNING UNIT OUTCOMES

After you have worked thoroughly through this learning unit, you should
be able to:
Describe basic concepts and uses of economics.
Define economics and agricultural economics.
Visualize the economic scope and organization of agriculture.
Apply the problem of consumer choices in the market.
Explain how economics is applied to agriculture and what does an agricultural
economist do.
TIME ALLOCATION
You should spend approximately 17 hours on this learning unit and activities.
1.1 INTRODUCTION
This learning unit will introduce you to an understanding of the concept agricultural
economics and what agricultural economics implies. You will gain a clear understand-
ing of how economic decisions are made in production. You will learn the importance
of choice making due to scarcity of resources to meet consumer demands. You will
also learn briefly about the economic sectors of agriculture and how they operate.
Have you ever thought that humans, whether they are producers or consumers, have
needs and unlimited wants that need to be met? Their wants are always more than
their needs. At the same time resources are limited and therefore not all needs/wants
can be met. As a result of the limited resources they always struggle to make choices
among alternative uses of the resources. The question now is who is responsible to
meet the unlimited wants and needs. That is why we have Economics as a concept
that deals with allocation of limited resources among alternative uses in order to meet
unlimited wants.
STUDY
Study unit 1, Also study chapter 1 of the prescribed book
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READ
Mohr et al. pp 14-15
DISCUSSION FORUM 1.1

Think about the resources that you have in your own household. Also think about
the needs required. Then think about wants that your household longs for or wishes
it could have (wish list). You may write them (needs and wants) down on the piece
of paper. Now compare the resources that are there in the household with the
needs and wants of the household. Can the needs and wants be met with the
resources? What do you think is the solution? You may propose any solution that
you feel will meet the needs and wants of the household. What is your conclusion
therefore? What are you learning from this exercise?
FEEDBACK
Feedback is available on myUnisa
1.2 ECONOMIC DECISION-MAKING

Economics, as it has been noted, is concerned with the allocation of scarce resources
to maximize benefits, choosing among competing wants. There are a few basic con-
cepts, such as allocation, scarcity and the problem of choice. The central elements
of economics are allocation, scarcity and choice.
Allocation
Allocation comprises the idea of putting resources and products to their best use.
Economists tend to call anything that satisfies economic wants a good. Free goods
are things that do not command a price. Economic goods are things that have value
in exchange or be obtained for a price. Within a free market system, prices serve as a
mechanism to allocate these goods.
The economising process that refers to the use of resources (inputs) in production and
the products (outputs) of production, involves three categories in decision-making:
Getting more output from a given amount of inputs.

Getting the same amount of total output by using fewer inputs.
Getting more output by increasing output relatively more than inputs.
Scarcity of resources in relation to unlimited wants
The term scarcity refers to a fundamental problem of economics – the finite quantity
of resources that are available to meet society’s needs. Because nature does not freely
provide enough of these resources, there is only a limited quantity available. There
simply are not enough resources or goods to satisfy all the desires that people may
have. The idea of scarcity fits practically in all economic decisions.
Resources can be broadly classified into three major categories:
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Natural and biological resources e.g., land, water, animals, plants, etc.
Human Resources e.g. labour, management, time, education, etc.
Manufactured resources e.g. tractors, buildings, storage capacity, etc.
On the other hand human wants are unlimited. Individuals have biological, spiritual,
material, cultural and social wants while people in a group have collective wants.
Now the key question becomes what do you do? How do you strike the balance
in what to produce, how to produce and for whom to produce? Hence the issue of
making a choice has to come in and there is inevitable an opportunity cost. If a so-
ciety spent 50 percent of its Gross Domestic Product (GDP) on military spending,
the opportunity cost is that it would not be able to spend much more on health and
education. (GDP could be defined as the total market value of all finalgoods and
services produced in a country in a given year, equal to total consumer, investment
and government spending, plus the value of exports, minus the value of imports).
Scarcity and the problem of choice (Penson et al.: Chapter 1: p.20)
Resource scarcity forces consumers and producers to make choices. Economic choices
arise from scarcity. These choices have a time dimension. Individuals must choose,
and a society must choose, between consumption and saving, and determine the
investment of savings for future use. The more we save now, the more we should
have for later. The choices consumers make today will have an effect on how they
will live in the future. The choices businesses make today will have an effect on the
future profitability of their firms. Scarcity necessitates trade-offs and the choices
one makes also have an associated opportunity cost.
Definition: Opportunity cost is the value of services or products (goods, services,

commodities, leisure, as so on) that must be given up or sacrificed to obtain an ad-
ditional amount of any service or product.
Opportunity cost is expressed in relative price, i.e. the price of one choice relative to
the price of another. For example, if milk costs R20 for two litres and bread costs
R10 per loaf, then the relative price of milk is two loaves of bread. If a consumer
goes to the supermarket with R20 and buys two litres of milk with it, then one can
say that the opportunity cost of 2 litres of milk was 2 loaves of bread assuming the
bread was the next best alternative.
STUDY
(Read prescribed book: Chapter 1)

From discussion forum 1 have you identified scarcity? Can you relate the scarcity in
your household with the overall scarcity in the economic system? Name the resources,
with examples, that are referred to as scarce. What is your own understanding of
opportunity cost?
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FEEDBACK
1.3 THE PRODUCTION POSSIBILITIES FRONTIER
Scarcity, choice and opportunity cost can be illustrated with the aid of a production
possibilities curve. An example of a model is the Production Possibility Frontier
(PPF). PPF is a graph/table that shows the maximum possible combinations of
outputs that can be produced from given inputs. Simplifying assumptions: Assume
the economy produces just 2 goods. Also assume that technology and the quantity
of factors (i.e. inputs such as labour, capital, & raw materials) are fixed.
Example: A farmer has 10 hectares of land available and can grow either wheat
or barley on it. The only input is land. He has the following possible production
combinations:
TABLE 1.1
Production possibility combinations for wheat and barley
Possibility Output Output
Wheat Barley
A 40 0
B 30 5
C 20 10
D 10 15
E 0 20
READ
(Mohr et al: p.14-15)
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1.4 PRODUCTION POSSIBILITIES FRONTIER AND OPPORTUNITY COST
PPF illustrates the opportunity cost of gaining more of one good. Opportunity cost
is equal to “loss” divided by “gain”. Opportunity cost of good on vertical axis = 1/
absolute slope of PPF. Opportunity cost of good on horizontal axis = absolute slope
of PPF. Therefore, when the PPF is a straight line, opportunity cost is constant.
What is the opportunity of Barley and Wheat in the example above? One good can
be traded off for the other at a constant rate, and inputs are equally good at produc-
ing either good.
When the Production Possibilities Frontier is a curve (bowed out from the origin),
the opportunity cost increases as we want more of a good. Inputs become special-
ized, and it becomes more efficient to produce one good than the other.
A production possibilities frontier (PPF) shows the combinations of two or more

goods that can be produced using all available resources efficiently.
A PPF is normally drawn as concave to the origin since the marginal productiv-
ity of allocating extra resources to one particular good may fall. For example in
Figure 1.2, some resources used in the production of barley may not be suited in
the production of wheat.
FIGURE 1.1
Production possibilities frontier for wheat and barley
Points lying inside the PPF occur when there are unemployed resources or when
the economy is not making efficient use of the scarce resources available. Point X in
Figure 1.2 is an example of this. We could increase output of both goods by moving
towards the production possibility frontier and reaching any of points C, A or B.
Point D is unattainable at the moment. An increase in total resources or an improve-

ment in technology to reach this combination of vehicles and personal computers
is required.
Reallocating our resources creates an opportunity cost. Choosing more output

of good X usually means giving up output of good Y.
17
If a change in demand from consumers means that more motor vehicles need to
be produced (a movement along the PPF from point A to C) - there may not be the
economic resources available to maintain the output of wheat.
The opportunity cost of a higher output of barley is the output of wheat that has
to be given up. Because the curve is non-linear, the opportunity cost will change as
production moves along the production possibility frontier.
LEARNING ACTIVITY 01
Which of the following statements are correct concerning the figure above?
(a) Point F represents an unattainable combination of soya beans and wheat.

(b) Point A represents an unattainable combination of soya beans and wheat.
(c) Point A represents an attainable but inefficient combination of soya beans
and wheat
(d) A movement from B to C involves opportunity cost
(e) A movement from D to C involves opportunity cost
a, b and e
b, c and d
b, d, and e
a, c, d and e
Only a, c and d
FEEDBACK
Remember that production is possible only inside the PPF. Also remember that
opportunity cost is the best alternative forgone.
Then what is Agricultural Economics?
STUDY
(Prescribed book: Chapter 1)
18
In very simple terms Agricultural Economics involves the application of the prin-
ciples of economics to agriculture, and therefore it can be defined as a field of study
in the following way:
Agricultural Economics can be defined as an applied social science that deals with how producers,
consumers, and societies use scarce resources in the production, processing, marketing, and consump-
tion of food and fibre products.
The development of the economics of agriculture has been moulded by two major
forces: a rapidly changing economic environment and an unfolding economic sci-
ence. Agricultural economics has broadened in scope while becoming more precise
as an analytical tool and more useful in solving practical problems or organization
and management.
1.5 WHAT IS AGRICULTURE?

Agriculture is an industry covering the organization of production resources – such
as land and minerals, capital and a wide variety of forms, management and labour -
for the production and marketing of food and fibre. The word agriculture has long
been associated with the growth of civilization. Originally it applied to the growing
of crops and the raising of livestock. As economic systems have developed, it has
taken on a broader meaning. It now also extends to firms and industries that manu-
facture farm machinery, produce fertilizer, market farm chemicals – all the services
and supplies used in modern farming. It also covers the industries that process and
market farm products: the huge grain firms, meat packers, cotton mills, fruit and
vegetable dealers and processors, wholesale food firms, and retail supermarkets.
1.6 ECONOMIC SECTORS OF AGRICULTURE

Modern agriculture is organized into three economic sectors which we identify
primarily by function. The sectors are farming, agribusiness and the publicly sup-
ported sector.
1.6.1 Farming
A farm is an economic unit – a business firm – organized to produce crops or raise
livestock. It involves land, capital resources in addition to land, management, and
labour.
1.6.2 Agribusiness
In all countries, the development of agriculture is characterized by relatively rapid
growth in businesses that provide farm services and supplies, as well as businesses
that process and market farm products. Agribusiness include farms and economic
enterprises organized to produce and sell services and supplies to farmers for use
in farm production and farm living; it includes firms and industries that buy and
process farm products and distribute them through wholesale and retail markets. The
first group are called service supply industries, and the second the agricultural processing-
marketing industries.
19
1.6.3 Farm service supply industries
The farm service supply industries transform mineral and other raw materials into
farm machinery, fertilizer and other chemicals, and a variety of other commodities
and services used in growing crops and raising livestock.
1.6.4 Agricultural processing-marketing industries
The modern industrial economy is also characterized by a substantial development

and growth of these industries, which in essence buy farm products and transform
them into commodities suitable for consumption. In fact, the kind and amount of
services added by these industries is also an indicator of a country’s development
and growth.
1.6.5 The government supported sector

The development and growth of agriculture in the modern industrial economy is
also marked by advances in a wide array of government supported services: scientific
research, education, including elementary and secondary education, vocational ag-
riculture, agricultural colleges and universities, and cooperative extension services;
government services such as food inspection, market news, and sanitary regulations;
market supervision; prevention of or regulation of monopoly; and government farm
price and income programmes.
1.7 HOW IS ECONOMICS APPLIED TO AGRICULTURE?
STUDY
Development of the economics of agriculture has been moulded by two major forces: a
rapidly changing economic environment and an unfolding economic science. The
economics of agriculture has broadened in scope while becoming more precise as
an analytical and more useful in solving practical problems of organization and
management.
Agricultural economics began as a way to study the allocation of scarce resources

in a farming context. Over time, however, the discipline grew in scope to encom-
pass issues of natural resource use, and rural and international development. Today,
agricultural economics is a branch of the larger field of economics, and is studied in
many universities.
Agricultural economics applies principles of economics to issues of agricultural pro-

duction, natural resources, and rural development. It mainly focuses on principles of
microeconomics, which examines the actions of individuals, households and firms.
Agricultural economics is sometimes referred to as agronomics, defined as the use
of economic methods to optimize actions by farmers and ranchers.
Agricultural economics began in the 19th century as a way to apply economic princi-
ples and research methods to crop production and livestock management. The roots
of the discipline, however, can be found in the writings of the classical economists of
the 1700s and early 1800s. The works of Adam Smith, Thomas Malthus and David
20
Ricardo discussed land as a factor of production and issues of human population
versus its ability to produce food.
In the 1960s, agricultural economics expanded beyond issues of farm and ranch
management and agricultural production to issues of international rural development
and natural resource use. This expansion of agricultural economics resulted from the
contraction of the agricultural sector in the world’s major industrial nations. This
development gave agricultural economics more of an international focus.
Agricultural economics includes a number of specialty areas, including agribusi-

ness, agricultural policy, farm and ranch management, rural development, interna-
tional development, natural resource and environmental economics, and agricultural
marketing.
1.8 WHAT DOES AN AGRICULTURAL ECONOMIST DO?
STUDY
Marginal analysis
– Economists are trained to perform marginal analysis

– Marginal analysis is a form of analysis that emphasizes examining what will
happen if an activity in agriculture changes at specified amounts. Examples are:
– What happens to the farmer’s profit if he applies one more bag of seeds to
each hectare of land cultivated?
– What happens to the production of maize if the farmer applies more fertilizer
per hectare?
– What happens to my yield if I decrease my pesticide usage on my vineyards?
Tools of the Economist
– Intuition
– Research
– Graphical analysis
– Mathematical modelling
LEARNING ACTIVITY 1.2

(1) Define economics.
(2) What questions does economics deal with?
(3) Why do we study economics?
(4) What are the basic ideas in economic decision-making? Are they impor-
tant? Why?
(5) Explain the term “scarcity of resources”
(6) What do you understand by the problem of choice?
(7) Use an example to explain what opportunity cost means.
(8) Describe briefly how economics is applied to agriculture.
FEEDBACK
Economics is a social science that studies how individuals, governments, firms
and nations make choices on allocating scarce resources to satisfy their unlimited
21
human wants. Economics can generally be broken down into: macroeconomics,
which concentrates on the behaviour of the aggregate economy; and microeco-
nomics, which focuses on individual consumers. Recall that sources of production
are hard to obtain and consumers have to make meaningful choices in order to
maximise their satisfaction. There are aspects that they have to forgo in order
to obtain their needs/wants. There are some aspects that they have to forgo in
order to meet their needs. Economics is applied to agriculture as a study of the
allocation, distribution, and utilisation of the resources used, along with the com-
modities produced, by farming.
1.9 THE ECONOMIC PROBLEM

From what you have read and studied so far, can you identify what the problem
of the economy is? What is the fundamental problem? Can you conclude to say the
economic problem springs from this problem of choice? Taking decisions about
economic questions relating to output, input and the distribution of goods and
services is part of the economic problem. You must understand that choices
concerning what goods and services to produce are about choices concerning
an economy’s use of its factors of production, the resources available to it for the
production of goods and services.
FEEDBACK
READ
(Mohr et al: p. 29–32)
1.9.1 The economic problem

The fundamental problem of economics is – a scarcity of resources. Since there is a
scarcity of resources, our desires (wants) are greater than the available resources.
Therefore economic issues spring from this problem of making decisions about
economic questions relating to output, input and the distribution of goods and
services. Choices concerning what goods and services to produce are about choices
concerning an economy’s use of its factors of production, the resources available to
it for the production of goods and services. In this study unit we will take a closer
look at the three central economic questions i.e. What? How? For whom? that have
to be solved in any economic system.
Important concepts
Consumer goods and capital goods

Different categories of consumer goods
Final goods and intermediate goods
Private goods and public goods
Economic goods and free goods
Homogeneous and heterogeneous goods
22
1.9.2 A closer look at the economic problem
This study unit will introduce you to three central economic questions that need to
be addressed in any economic system:
What goods and services will be produced and in what quantities? These are
output questions.
How will each of the goods and services be produced? How much of the scarce
resources will be used in the production of each good? These are input questions.
For whom will the various goods and services be produced? Who will receive
the goods and services? How much of them will they receive? And where will
the production occur? These are distribution questions.
An economic system must decide the allocation of inputs (resources) among pro-
ducers, the mix of output, and the distribution of output, no matter the scale of the
economy and level of development.
1.9.3 What should be produced?

The purpose of economic activity is to satisfy human wants. Humans have different
types of wants. Wants are satisfied by goods and services. Tangible goods are mer-
chandise that you can put your hands on including objects such as food, clothing,
houses, books and motor cars. Intangible goods are products that cannot be seen or
touched. Services are intangible and examples are medical services, legal services,
financial services, and services provided by public servants.
1.9.4 How should these goods and services be produced?

Once it has been decided what goods and services should be produced, the question
arises on how the goods and services should be produced. Because resources are
scarce they have to be used efficiently and effectively. The question is what are these
resources? The different types of resources are also known as factors of production.
1.10 SUMMARY
From this learning unit we have studied economic decision-making and production
possibilities frontier. Let us put it to work. The world’s growing population depends
on food and non-food on production possibilities frontiers that always shift out-
ward. But agricultural production is faced with diminishing returns as some of the
important factors of production especially land – economically speaking – are fixed.
Study unit 2 will deal with the four factors of production.
1.11 QUESTIONS FOR SELF-EVALUATION

(1) Give a definition of economics? With what questions does economics
deal with? Why do we study economics? (04)
(2) How can you define Agricultural Economics? (02)
(3) What are the basic ideas in economic decision making? Are they
important? (15)
(4) Explain the term “scarcity of resources” (03)
(5) What do you understand by the problem of choice? (03)
23
(6) Use an example to explain what opportunity cost means (03)
(7) Describe how economics is applied to agriculture? (06)
(8) Describe what does an agricultural economist do? Discuss the role of
agricultural economist at the micro- and macroeconomic level and in
terms of marginal analysis. (10)
24
LEARNING UNIT 2
Factors of production

After you have worked thoroughly through this study unit, you should be able
to:
Describe the factors of production

Describe how land is regarded as a factor of production
Explain land reform processes in South Africa
Explain why labour has become a scarce resource in South Africa
Describe how capital, entrepreneurship and technology are important in
the production.
TIME ALLOCATION
Important concepts
Consumer goods and capital goods

Different categories of consumer goods
Final goods and intermediate goods
Private goods and public goods
Economic goods and free goods
Homogeneous and heterogeneous goods
2.1 INTRODUCTION
This learning unit will introduce you to resources that are needed in order for
production to take place. You will learn that these resources are fundamental and
no production will take place without them. You are expected to know how they
function, their importance together with their limitations. It is important to know
how to combine production factors in order to come up with a product in the case
of Agriculture. You must note that in other case it is the combination of resources
in order to produce a service.
Factors of production (resources) are scarce. The scarcity concept arises from the
existence of resources for short. Resources can be defined as the inputs used in
the production of those things that we desire. When resources are productive, they
are typically called factors of production. The total quantity, or stock, of resources
that an economy determines what that economy can produce. Every economy has,
in varying degrees, vast amounts of different resources, or factors of production.
Factors of production can be classified in many ways. One common classification
scheme distinguishes natural, human and manufactured resources.
Economists have long recognized the five distinct factors that people use to create
25
what they want. They are land, labour, capital, entrepreneurship and technology also
referred to as factors of production. Each factor is plays a unique role in the production
of goods, and each factor is clearly distinguishable from the other four. Capital and
labour are active factors while land is passive. One can only shift capital and labour
rather than land which is given, to get a production-factor combination, which is
further reflected in the technology a firm employs to produce products and services.
READ
Mohr et al. p.36
2.2 NATURAL RESOURCES (LAND)

Land includes not only the land forms associated with the earth’s crust but also
resources such as minerals, forests, groundwater, and other resources given by na-
ture. Such resources are classified as either renewable (e.g. forests) or non-renewable
resources (e.g. minerals).
The most significant natural resource used in agriculture is the soil and in most
cases it will have been made more productive over time by cultivation. Land is a
very precious asset for the nation. Land is a fixed asset. Whilst the population of a
country increases over time, land is fixed and therefore is limited.
Features of land as a factor of production:
The total supply of land available for all uses is more or less fixed in supply;
In all economies there have developed a set of laws and customs regulating the
control and use of land in agriculture; and
Each unit of land is somewhat different from every other, in particular, every
unit of land is locationally unique.
Land is defined as everything in the universe that is not created by human beings or
effort on the part of humans. It includes more than the mere surface of the earth. Air,
sunlight, forests, earth, water and minerals are all classified as land, as are all manner
of natural forces or opportunities that are not created by people. Labour uses capital
on land to produce wealth. Every tangible good is made up of raw materials that
come from nature - and because all people (and other living things) have material
needs for survival, everyone must have access to some land in order to live. Some
land can grow phenomenal amounts of crops without any addition of fertilizer; other
land is incapable of growing anything in its natural state. Today, some economists
contend that natural resources are often the least important factors of production
in an economy. They believe that what is more important is the transformation of
exiting natural resources into what is truly usable by humans. That transformation
requires the other types of resources which are labour, capital and technology
Land as a basis of agricultural production
The basis of agricultural production and the most important production factor for
the farmers is land. By means of it, they can use their labour (and capital) in order to
earn their livelihood. In traditional agriculture, more land also means more income
26
and a better life, and increasing the size of the farm was a simpler way of improving
the living conditions than farming the existing land more intensively. This was the
source of the inclination to buy land that is still found in agrarian societies.
The possibilities of increasing the area of land are, however, limited. Land cannot
be enlarged or increased beyond that which it is, and when all of the land has been
put under cultivation, growing populations lead to continually smaller farms. This
is why land has the reputation of being a scarce production factor.
However, “scarce” and “abundant” are relative. Since mankind first began settling,
land has changed in its role as production factor. While at the beginning only the
natural fertility of the previously untilled soil was present, it was then put under
cultivation. The soil has improved over the centuries through the work of man so
that more products can be grown on the same amount of land, or ruthless exploi-
tation and negligence have mined it. In many regions, the productivity of the soil
has been greatly improved by artificial irrigation systems, or the crop intensity was
increased. These measures reduce the scarcity in the sense that on a given piece of
land as much can be grown as previously only on a larger area of land. That this
process has not remained without success even in densely populated areas can be
seen from the frequently deficient utilization of the soil that can, in some cases, be
called wastefulness. The prevailing land and land use laws may play a role in this
context, as well as the limited technical possibilities in traditional agriculture. This
does not change anything in the fact that land in the scope of traditional agriculture
is indeed limited, but that this can be overcome to quite an extent. In other words,
if the system of land management is improved, the scarcity of land is reduced by
more intensive cultivation. An improvement in the agrarian structure creates the
precondition for appropriate management and land use systems and a purposeful
integration of animal husbandry.
Land reform in South Africa
Probably the strongest imperative driving government is the need to redress the
inequitable land allocation of the past. The Department of Land Affairs completed
the process of land reform policy design with its White Paper in 1997, while imple-
mentation of the programme had already started in 1994. The goals of land reform
according the Department of Land Affairs are:
Redress past injustices;

To foster reconciliation and stability;
To support economic growth; and
To improve household welfare and alleviate poverty.
Land reform policy in South Africa is effected through three main programmes:
Land restitution: involving restoring land to people dispossessed in the past

by racially discriminatory legislation. The Land Claims Commission and Land
Claims Court deals with such cases;
Land tenure reform: ensuring security of tenure for different forms of land
occupation, which enables individuals or groups to earn the benefit of their
property en enjoy recognition and protection, without fear of arbitrary action by
the State or land-owners; and
Land redistribution: providing the poor with land to improve their livelihoods.
This focuses on the transformation of existing, racially biased land ownership
27
patters. Despite all efforts to speed up land reform, the net effect has been
limited. After almost 15 years of state sponsored land reform processes, slightly
more than 4 million hectares of the available agricultural land in South Africa
have been transferred through the formal programme. Furthermore government
recently admitted that the failure rate of new land reform projects could be as
high as 50 percent.
The effects of land reform (based on Vink et al., 2009)
Despite the well-formulated land reform policy and well-funded land reform pro-
gramme, progress has been slow, to the extent that less than 5 percent of white
commercial farm land has been transferred – as against a 30 percent target whose
completion date has been extended to 2014. Production conditions in the communal
farming areas have remained largely unchanged or may even have worsened and
tenure forms have hardly changed in these areas despite attempts to provide greater
tenure security. There is also no evidence that the supposed beneficiaries of land
reform are better off as a result of their participation in the programme. Empirical
evidence shows that private transfers, some funded by mortgages from the Land
Bank or the commercial banks, have occurred at a higher rate than state transfers.
Nevertheless, there are some examples of land reform that have had positive local
impacts, and that could possibly serve as examples for future land reform:
The best-known example of small farmer success in South Africa is the emergence
of 20 000 small cane growers in the sugar industry (discussed earlier). While the
support programme to small-scale cane growers in KwaZulu-Natal predates
the land reform programme by a few decades, it has recently been expanded
considerably in Mpumalanga province, where new sugar cane plantations have
been established.
In the early 1990s, a project was launched to encourage the development of a
land rental market on cropland in the communal areas by encouraging traditional
authorities to adopt measures that would lower the transaction costs of land rental.
As expected, this experiment has had interesting efficiency and equity results.
A number of farm worker share equity schemes have been set up, mostly in the
fruit export industries in the Western Cape, whereby farm workers use the land
reform grant to buy shares in an operating farm business, mostly on the farm
where they work. While the financial performance of these schemes still needs
to be independently assessed, these schemes have attracted significant private
sector investment.
Concerns about the vulnerability of small producers of wool led the National
Wool Growers Association (NWGA) and the government to set up a new wool
marketing channel by building and equipping shearing sheds in villages throughout
the Transkei and Ciskei region. In the first phase the focus was on the provision
of material support (shearing shed, equipment and for some villages, a dipping
tank). In the second phase, institutional support was provided to increase access
to information on breeding and training for proper shearing and grading, access
and knowledge on the use of inputs, and a market outlet. The NWGA also
organises interaction with brokers to market the wool. The NWGA prescribes
that candidate villages should have a minimum number of sheep, but more
importantly an active farmers association, whereby the wool farmers form a local
wool growers’ association.
There are a range of empowerment schemes in aquaculture and mariculture
(mussels, oysters, seaweed, abalone) situated along the west and south coasts of
the country that have the potential benefit of undermining widespread poaching
activity in these areas, in addition to providing new opportunities to small-scale
28
producers.
Similarly, there are a range of agricultural projects aimed at the production
of specialty products such as rooibos tea, honey bush tea, indigenous flowers,
medicinal plants, essential oils, hydroponics and organic products whose purpose
is to build new markets and to empower new producers.
Resource management policy
As indicated earlier, South Africa’s underlying agricultural resource base is poor. The
country has a total surface area of 122 million hectares, of which only 14 percent
(17 million hectares) is arable land. Of the arable land, only 1.3 million hectares are
under irrigation. Rainfall is generally low, erratic, unevenly distributed and unreli-
able. Approximately 91 percent of the country can be classified as arid, semi-arid
and dry sub-humid and South African soils are generally considered to have low
fertility. Although no formal statistics are available, the agreed perception shared by
all stakeholders in the agricultural sector is that South Africa’s natural resources are
under a severe threat of degradation. For the commercial sector, factors that have
contributed to this include monoculture cereal production, intensive tillage and
limited crop rotation (conditions that are changing, as noted earlier). For the
country’s communal areas, excessive firewood collection, inappropriate land use,
population density and overgrazing are the main factors causing soil degradation.
In aggregate, soil degradation is responsible for approximately 50 percent of land
degradation, while water-logging and salinity are further contributing factors.

Land reform is one very important and powerful tools of alleviating poverty and
food insecurity. Land reform should not be viewed in isolation since access to land
will not automatically lead to an improved food security situation within the rural
areas. The extent to which access to land can improve the welfare of beneficiar-
ies will depend on the economic viability of land, i.e. the agricultural potential of
land should be considered in relation to the potential land use which will depend
on the skills level and recourse capacity of the beneficiaries. Given this scenario,
discuss the impact of the land reform programme on food security.
FEEDBACK
Feedback is available on myUnisa.
29
2.3 LABOUR
STUDY
Mohr et al. p37
Labour can be defined as productive contributions of humans who work, which

involve both thinking and doing. In order to produce what we desire, a human re-
source must be used. That human resource consists of the productive contributions
of labour made by individuals who work – for example, steelworkers, ballet dancers,
farm workers and farm managers. The contribution of labour to the production
process can be increased. Whether potential workers obtain schooling and training
and whenever actual workers obtain new skills, labour contribution to productive
output will increase.
When nature is worked up by labour into tangible goods, which satisfy human desires
and have exchange value, we call those goods wealth. (When labour satisfies desires
directly, without providing a material good, we call that “Services”; thus, economists
say that labour provides the economy with “goods and services”.)
The farmer’s major instrument for achieving a good output is labour. Labour has a
direct effect if by means of investing a greater amount of it the output is increased.
Indirectly, labour can have an effect on the production via capital formation.
In densely populated agrarian societies, labour is an abundant production factor,

especially in relation to land and capital. This results, in extreme cases, in land being
substituted for by labour. In the case of a scarcity of land, e.g., fodder is not grown as
the entire land is needed for growing crops to feed the people. The necessary fodder
for the animals is collected by foraging weeds which demands the investment of a
great deal of labour. A further consequence of the often unproportionally large supply
of labour is rural underemployment. Manpower that is actually not necessary in the
agricultural production process is nevertheless retained in the family members. By
remaining together, the family supplies a basis for all of the members to exist upon,
even if at a lower level. It must be mentioned, though, that that which is produced
is consumed, and there is little left for investments.
Labour includes all labour services used in production with the exception of manage-
rial activities. It is operational activities that are referred to in this particular context.
In crop production, labour activities include seed bed preparation, planting, irrigation,
chemical applications, and harvesting. Labour activities in a canning plant include
receiving and grading fruit and vegetables arriving from the field, blanching, inspec-
tion, canning, and warehousing.
Labour represents the efforts both physical and mental, of human beings in the pro-
duction process. The labour force has embodied in it past human effort in the form
of general education and the specialist training for the acquisition of farming skills.
Labour refers to the workers that have to be employed in performing various tasks.
There is a skills component to it and there is a cost involved in developing the skill
and remunerating/ paying the people wages or salaries for work done. The labour
market is divided into five groups according to the level of schooling attained by
the workers:
30
Unskilled workers – have the minimum of schooling
Semi-skilled workers – do not have a high level of schooling but have a greater
degree of responsibility
Skilled workers – generally have a high level of manual skill and they usually
work with tools
Middle class workers – they have received further training and perform mainly
clerical work
High level workers – comprises professional people with professional qualifications.
The higher the skill the more the cost attached.
Agricultural labour situation and policy
Before 1993, South African farm workers were not covered by any labour protection
or collective bargaining legislation. In 1993, farm workers were included under the
provisions of the Unemployment Insurance Act (63 of 2001) and basic employment
rights were extended to them under the Agricultural Labour Act (1993). In 1993,
the provisions of the Basic Conditions of Employment Act (substantially revised in
1997) were also extended to agricultural workers. This Act stipulates minimum labour
standards and prescribes, among others, terms governing the maximum length of
the working week, vacation and sick leave allowances, and payment for overtime.
The Extension of Security of Tenure Act (1997) ensures that occupiers of rural land
earning less than R5000 per month have security of tenure. As a result of this Act,
landowners who wish to evict those living on farms can only terminate these rights
under relatively strict conditions. Finally, minimum wages in most sectors are set by
industry bargaining councils.
However, given that the agricultural sector was not significantly unionised and
could therefore not establish a bargaining council, the Department of Labour set
about establishing a minimum wage which it implemented in 2003. This sectoral
determination not only set a floor on wage levels for agricultural workers but also
specified what and how much could be deducted as in-kind payment. The progres-
sive regulation of the agricultural labour market described here has impacted on the
flexibility and unit cost of farm employment and has led to a number of structural
changes in the labour market and in employment patterns. The results of a number
of micro-level surveys provide insight into these changes:
Substitution of permanent labour with temporary/part-time/seasonal labour: Reasons cited

by farmers as factors inducing this shift include the constraints imposed by the
Extension of Security of Tenure Act, and rising labour costs due to compliance
with the Basic Conditions of Employment Act and minimum wages.
Increased use of labour contracting: In most cases a large proportion of farmers
makes use of an agricultural labour contractor/broker. In this arrangement, the
employment relationship is no longer directly between the farmer and worker.
Rather, a farmer concludes an arrangement with a broker who then supplies
the farmer with a team of workers. While this externalisation of labour offers
agricultural producers certain advantages such as the ability to control costs and
risks, for farm workers this holds serious implications in terms of livelihoods and
income. Rather than being ‘part of the farm’, the relationship between workers
and farmers is increasingly an indirect one that is limited to cash payment for
particular tasks completed.
Relative increase in the number of women farm workers employed: A significant increase
in the number of women farm workers employed is quite common on farms in
the Western Cape. The main reasons are employers’ attempts to maximise the
31
utilisation of the existing on-farm labour pool (and thereby control housing costs).
The shift towards mixed farming systems has helped flatten the sharp seasonal
labour demand peak and enabled farmers to employ women throughout the year.
Job shedding as a result of minimum wages: Six months after minimum wages had been
implemented in agriculture, it was discovered that the net employment effect was
less than 1%. She further notes that the most important consequence of the
implementation of minimum wages was not wholesale labour shedding, but
rather a slowdown in job creation for permanent workers at a time when output
was expanding.
While labour regulation appears to have negatively impacted on employment levels,

there is evidence to suggest it has had a positive impact on the development status
of those farm workers who continue to be employed. Using data from the 1996 and
2001 censuses, a composite human development indicator was used to compare the
extent to which the development status of Western Cape agricultural workers had
improved over time, and improved relative to other workers in that provincial
economy. These findings, show that, while the overall development status of farm
workers lags behind other workers in the Western Cape economy, between 1996 and
2001 farm workers managed to improve their relative position. It is expected that
this trend has continued in the balance of the first decade of the millennium.
The introduction of minimum wages in agriculture in 2002 accelerated the real

growth of farm wages. As a result, real agricultural wages rates increased by 65
percent between 2001 and 2005, with the biggest annual increase at the time of the
implementation of the minimum wage.
Impact of HIV/AIDS
The economic, social and medical implications of the AIDS pandemic are enormous
in South Africa. The sharpest economic effect of the South African epidemic will
probably be on the wealth distribution rather than on the size of the economy as a
whole. In the field of human and social development, however, the consequences
are expected to be much more profound.
The AIDS epidemic could be more severe in South Africa than in other African
countries because of a combination of factors such as rapid urbanisation, labour
mobility and a highly developed transport system. Many African countries are only
30 percent urbanised whereas South Africa is already about 50% urbanised. AIDS is
not only a disease of the poor and unemployed; data shows prevalence among people
working in all sectors of the economy. Data shows that prevalence (the proportion
of infections in the population) in rural areas of KwaZulu-Natal is often greater than
in urban areas. This mobility is ascribed together with the existing migration system.
In contrast, in Uganda there is a massive differential between rural and urban
prevalence.
The most significant cost for most companies and farming enterprises will be
indirect. These costs include absenteeism due to illness, lost skills, training and
recruitment costs and reduced work related performance and lower productivity.
It is estimated that by 2010 more than 15 percent of highly skilled employees will
have contracted HIV.
Labour intensive firms may appear to be at higher risk of lost production but the
actual impact will depend on the ease with which employees can be substituted.
Capital intensive industries can be more vulnerable to HIV/AIDS especially those
32
in which employees specialise in particular machinery. Accelerated skills develop-
ment in both young and working-age population will be critical in containing the
impact of AIDS on the economy. Skills development without effective HIV/AIDS
prevention might be a poor investment. HIV/AIDS will affect both commercial and
subsistence farming negatively. Farm labour in commercial agriculture comprises
unskilled farm labour that can be substituted in a market where the shedding of jobs
is common and mechanisation of farming activities is increasing. HIV/AIDS will
have a more profound effect on the subsistence farming community that is based
on the use of family labour.
HIV/AIDS will also affect the growth of many markets for goods and services and
especially agricultural produce. The vulnerability of markets will be influenced by
the nature of goods and services produced and the demographic and risk profile
of consumers. Affected households will divert expenditure to HIV/AIDS-related
needs. Non-essential goods with high elasticities of demand are likely to be more
susceptible to household expenditure shifts than staple products. Poor households
will be pushed further into poverty. Many middle income households will become
poor, and market growth for goods and services targeted at upwardly mobile house-
holds may be negatively affected.
The economic and social devastation of the AIDS epidemic causes poverty, and it
is expected that levels of poverty in especially rural areas will increase. To combat
HIV/AIDS the government needs to address the following conditions that exist in
most of the countries struggling with this condition:
Poverty
Population explosion and overcrowding
Malnutrition
Literacy, particularly of woman; and
Restriction of information to only a few.
The government will have to reprioritise its budget allocation to make provision for
women’s health, family planning and fertility control, education and nutritional
support. Access to information and education go hand in hand. More resources must
be spent on educating people about AIDS. A vaccine is the only real hope for a cure.
For the prevention of new adult infections, a behaviour change is the only hope, but
has not as yet proved successful.

(1) What are the most common problems with labour?
(2) How can labour productivity be increased?
(3) Provide 3 examples of personnel management.
FEEDBACK
(1) What are the most common problems with labour?
Workers are lazy, unreliable, irresponsible and have a tendency of

absenteeism
Less attractive working conditions
Migration to cities results is labour shortages
33
(2) How can labour productivity be increased?
Mechanisation
Treating labourers with respect
Team work
Recognition of job well done
(3) Provide 3 examples of personnel management
Supervision
Policies and procedures
Hiring correct personnel
Training of workers
Privileges Communication

Has labour legislation improved the plight of farm workers in South Africa? What
can be done to further improve the plight of farm workers? Would the further un-
ionisation farm labour improve the living conditions of farm workers?
FEEDBACK
2.4 CAPITAL
READ
Mohr et al. p. 37
The term capital takes on different meanings in different contexts. When some of
the wealth is used to produce more wealth, economists refer to it as Capital. When
using the term capital, a banker is referring to stockholders’ equity appearing on a
bank’s balance sheet. In a discussion of input use in the context of production, how-
ever, capital refers to manufactured goods such as fuel, chemicals, tractors, trucks,
and buildings that provide productive services to their users. A key aspect of capital
goods is that they do not provide consumer satisfaction directly but rather assist in
the production of other goods and services. Nondurable capital inputs are inputs
that are immediately consumed in one use or ones that have a lifespan of less than
3 years such as fuel and chemicals that are entirely used up during the current pro-
duction period. Durable capital inputs are inputs that do not quickly wear out, such
as machinery and buildings, on the other hand are utilized over a period of years.
A hammer, a screwdriver, and a saw are used by a carpenter to make a table. The table
has exchange value. The truck which delivers the table to a retail store, the hammer
and other tools -- and even the cash register -- are all forms of capital. When labour
34
is applied to land to grow maize, for example, something else is used. Usually it is a
plough or a tractor. That is to say, land and labour are combined with manufactured
resources in order to produce the things we desire. These manufactured resources are
called capital, which consists of machines, buildings, and tools. Additionally, capital
consists of improvements to natural resources, such as irrigation canals.
Capital increases labour’s ability to produce wealth (and services too). Therefore, there
is always a demand for capital goods, and some labour will be devoted to supplying
those goods, rather than supplying the consumer goods that directly satisfy desires.

(1) Provide and explain 3 forms of capital
FEEDBACK
Fixed capital
Examples: Land buildings, fixed improvements such as fencing, reservoirs,
boreholes, pumps and canals, orchards, plantations and vineyards
Movable capital
Examples: Livestock, machinery, implements, tractor, combine harvestor.
Working capital
Examples: Seed, feed, fertilizer, fuel, repairs, and capital used to pay wages,
contract work and transport.
2.5 ENTREPRENEURSHIP
READ
Mohr et al. p.40
Entrepreneurship is the fourth factor of production, involving human resources that

perform the functions of raising capital, organising, managing, assembling all other
factors of production, and making basic business decisions. The entrepreneur is a risk
taker.
Entrepreneurship is associated with the founding of new businesses or the introduc-

tion of new products and new techniques which lead to a monetary benefit. Without
entrepreneurship, virtually no large-scale business organisation could operate. Clearly,
entrepreneurship as a human resource is scarce: not everyone is willing to take risks
or has the ability for successful business decision-making. Entrepreneurship is not
necessarily the same as “management”. Entrepreneurship implies creation
of new value, finding and utilizing new opportunities etc. Management is on the
other hand traditionally concerned with “running things as they are” – operating
an existing organisation in an efficient manner.
Entrepreneurship’s functions are varied and are easier to conceptualise than to

measure. Like the leader of an orchestra, farmers and agribusinesses must make
decisions as to how, when and what to produce when organizing their inputs, when
and how to market the businesses’ s output, how large to grow, and how to finance
35
business expansion and taking decisions about the use of the other factors. It is
useful to distinguish between fixed factors of production and variable factors of
production. This distinction refers to the time period within which a decision to alter
the quantity used of an input can become effective. There are two reasons why an
input may be regarded as a fixed factor. First, it is sometimes physically impossible
to pursue all the stages required for an input to become involved in the production
process in less than a period of years. Second, where the productive life of an input
lasts for several years, there may well also be a period of years before a new decision
regarding its use is implemented.
2.6 TECHNOLOGY
READ
Mohr et al. p.41
Goods and services are produced using the factors of production available to the
economy. Two things play a crucial role in putting these factors of production to
work. The first is technology the knowledge that can be applied to the production of
goods and services, the knowledge that can be applied to the production of goods
and services. The second is the entrepreneur. An entrepreneur is a person who,
operating within the context of a market economy, seeks to earn profits by finding
new ways to organize factors of production. is a person who, operating within the
context of a market economy, seeks to earn profits by finding new ways to organize
factors of production.
The interplay of entrepreneurs and technology affects all our lives. Entrepreneurs
put new technologies to work every day, changing the way factors of production are
used. Farmers and factory workers, engineers and electricians, technicians and
teachers all work differently than they did just a few years ago, using new technolo-
gies introduced by entrepreneurs.
New technology is helping to produce more milk from cows. Cows are linked up to
electronic milkers. Computers measure each cow’s output and cows producing little
milk are identified for treatment. With the help of technology today’s dairy cows
produce 50 percent more milk than cows did 20 years ago.
Who benefits from technological progress? Consumers gain from lower prices and
better service. Workers gain: their ability to produce goods and services translates
into higher wages. Firm gain: lower production costs mean higher profits. Some
people lose as technology advances as jobs are eliminated and some businesses find
their services are no longer needed.

Do you think technology is beneficial to the employees? To the farm manager?
Substantiate your answers.
FEEDBACK
Feedback will be provided on myUnisa
36
2.7 THE INTERACTION AMONG FACTORS OF PRODUCTION
How do we figure out how much of society’s labour to devote to capital goods vs.
consumer goods? In a market economy, we don’t! The returns, or payments, to capital
and labour move naturally toward an equilibrium, or balance, in which neither fac-
tor has an advantage over the other. If a shortage of capital goods develops, people
will be willing to pay higher prices for those goods, and more workers will work on
making them. In time, this will create a shortage of consumer goods, and workers
will be drawn back towards making them.
Likewise, when there is more demand for land, the land factories gear up and crank
out more land – or, well, they can’t do that, can they? That is why land must be de-
fined as a distinct factor of production. Since land is needed for all production, any
time overall production is increasing, land will be in greater demand. When capital
goods are in greater demand, labour will eagerly produce more of them. But, the
supply of land cannot be increased, because land is not produced by human labour.
Definition of the five distinct, interdependent factors of production is another impor-

tant analytical tool that helps economists make sense of the processes of production
and distribution in a complex society. Each is clearly different from the other. The
mutually exclusive nature of these categories is what makes them so useful.
For whom should it be produced (see Mohr et al.,2009 Section 2.3: p 42–43) This
section is for self-study.
Please note the distribution question. The distribution of income will also affect
what goods and services will be produced. Other aspects include the distribution
between public and private sector and the geographic distribution of between dif-
ferent regions and between the primary, secondary and tertiary sectors (see Box 2.2
for definitions)

(1) Under which factors of production do the following belong?
(a) Factory that produces fertilizer (01)
(b) Tractor (01)
(c) Computer (01)
(d) Technician (01)
(e) Fuel and lubricators (01)
(2) Why are the factors interdependent? Explain (06)

(3) What is wealth? Give an example. (02)
(4) Why is land considered a passive factor of production? (01)
(5) How do capital and labour differ from land? (03)
(6) The progressive regulation of the agricultural labour market described
here has impacted on the flexibility and unit cost of farm employment
and has led to a number of structural changes in the labour market and
in employment patterns. Discuss. (15)
(7) Discuss the impact of HIV/AIDS on labour from a rural perspective. (10)
(8) Explain the role of technology and entrepreneurs in the utilization of
the economy’s factors of production. (10)
37
LEARNING UNIT 3
STRUCTURE AND PRODUCTION IN THE SOUTH AFRICAN AGRICULTURE

3

After you have worked thoroughly through this study unit, you should be able to:
Gain a broader vision on the structure and production in South African
agriculture as limited by natural resource endowment and the agricultural
potential.
Learn more about the demographic profile of South Africa in terms of the
rural and urban divide.
Explore the agrarian structure including number of farms and farm sizes.
Explain farming and the economy.
Conceptualize the current state of the farming industry.
Learn more about the challenges and opportunities in the agricultural sector.
TIME ALLOCATION
Important concepts
Natural resources
Agricultural potential
Population density
Demographic profile
Gross domestic Product
Gross value added
Sectoral composition
Agricultural employment
Agricultural exports
Composition of agricultural production
Production and consumption trends
READ
Department of Agriculture, Forestry and Fishing. 2010. Abstract of Agricultural
Statistics. Directorate Agricultural Statistics, Pretoria.
Fényes, T.I. and Meyer, N.G. 2003. Chapter 2: Structure and Production in South
African Agriculture in the Challenge of Change. Edited by Lieb Nieuwoudt
and Jan Groenewald.
Mohr, P., Fourie, L. and associates. 2009. Chapter 5: The South African economy
in Economics for South African students. JL van Schaik Publishers Pretoria
(self-study).
38
3.1 INTRODUCTION
This learning unit will introduce you to the South African agriculture. We will start
with a brief overview of the natural resources, agricultural potential and land use
patterns. The demographic profile and the agrarian structure, production and trade
will follow. Finally, the gross value of agricultural production and trends in the
farming sector are addressed. This learning unit is based on prescribed material as
adapted and is aligned to and should be studied in context of Study Units 1 and 2.
Click on Next to move on to the next section: 3.2 Introduction Natural Resource
Endowment
3.2 NATURAL RESOURCE ENDOWMENT

The development potential of South Africa is determined by its natural and human
resources. The nature and distribution of the natural agricultural resources (climate,
soils and terrain, vegetation and water) determines the agricultural potential of the
country. These features are briefly reviewed hereafter.
3.2.1 Climate
South Africa, with a mean annual rainfall of 497 mm (considerably less than the
world mean of 860 mm), may be described as mainly a semi-arid region with acute
water shortages. There are three main rainfall areas, viz. the winter rainfall area in
the Western Cape, an all-year-round rainfall area along the southern Cape coast and
a summer rainfall area that covers the remainder of the country.
There are also great variations in both rainfall and runoff. Rainfall varies from 100
mm in the west to more than 2 000 mm in KwaZulu-Natal and Mpumalanga prov-
inces in the east. Over 65 percent of the country receives less than 500 mm of rain
per annum. About one fifth of the country receives less than 200 mm. Only three
percent of South Africa receives rain throughout the year, while 86 percent of the
country only gets summer rain.
Temperatures in South Africa are strongly affected by altitude, latitude and ocean
currents. Temperature is also an important factor influencing agricultural potential
and crop adaptability. Except for small high-lying areas and the eastern escarpment,
most of South Africa has hot summers and a long growing season. High tempera-
tures also influence evaporation which varies from 1 100 mm to over 3 000 mm per
annum. Few areas are frost free in the winter months.
3.2.2 Soils and terrain

The surface area of South Africa falls naturally into two major physiographic re-
gions: the interior plateau, comprising extensive level surfaces with a mean altitude
of 1200 metres; and the marginal lands which lie between the plateau and the coast.
A third major element is the great escarpment, which forms the boundary between
the plateau and the marginal lands.
About 31 percent of South Africa’s surface area is level to gently undulating, while
19 percent is steep, rocky and mountainous. The Drakensberg, which forms part of
39
the Great Escarpment, which forms the boundary between the interior plateau and
marginal lands towards the coast, has a marked effect on the climate and vegetation
of the country.
3.2.3 Water resources
(a) Water availability in South Africa
The availability of water in South Africa correlates with the physical location of the
sub-continent and the prevailing high-pressure systems associated with dry condi-
tions and low rainfall. Rainfall distribution also correlates strongly with the occur-
rence of the warm Agulhas current in the Indian Ocean flowing southwards along
the eastern seaboard and the cold Benguella current in the Atlantic Ocean flowing
northwards along the west coast. Topographical features such as the Drakensberg
mountain range and escarpment extending from north to south parallel to the east
coast have a major impact on the distribution of rainfall.
Water in South Africa is a scarce resource. Annual rainfall varies from as much as
2000 mm/annum in the wet east along the escarpment to less than 100 mm/annum
in the dry west coast. What makes matters worse is that South Africa is periodically
afflicted by severe and prolonged droughts which often end in severe floods.
(b) Water demand
During the first half of this century, water development centred around the provision
of water for agricultural purposes. In the past 40 years, urban and industrial water
demand have both increased significantly at a higher rate and the total demand for
water will reach 26 bn m³ by the year 2010 (see Table 3.1).
Available supplies in some regions will start to fall short before the end of this cen-
tury. Irrigation demand comprised almost 51 percent in 1990 and consumed more
water than any other sector. Irrigation demand is, however, expected to decrease to
45 percent by the year 2010.
Agriculture is the largest user of water, consuming as much as 50 percent of total

demand. In 1981the latest year for which data were available at the district level824
000 hectares were irrigated, or 5.9 percent of the 14.3 million hectares with crop
potential1. In 1988, 230 000 irrigated hectares were in government water schemes,
300 000 hectares were controlled by irrigation boards, and 70 000 hectares were in
the former homelands. According to the Department of Agriculture, the total area
under irrigation in South Africa today is 1.2 million ha.
40
TABLE 3.1
Use of water in South Africa, 1990 and 2010
Water demand 1990 % 2010 %

3 3
million m per million m per
annum annum
Direct use:
Municipal/domestic 2 281 12.0 4 477 17.3
Industrial 1 448 7.6 2 961 11.4
Mining 511 2.7 649 2.5
Power generation 444 2.3 900 3.5
Irrigation 9 695 50.9 11 885 45.9
Stock watering 288 1.5 358 1.4
Nature conservation 182 1.0 191 0.7
Indirect use:
Forestry runoff reduction 1 427 7.5 1 700 6.6
Ecological use/estuaries 2 767 14.5 2 767 10.7
& lakes
Total 19 043 100 25 888 100
Source: Water Research Commission, 1997

How does water demand for agriculture affect the economy of South Africa?
FEEDBACK
Feedback is provided on myUnisa
3.3 AGRICULTURAL POTENTIAL
For a given crop and level of management, agricultural potential is largely determined
by the interaction of natural resources such as soil, climate and terrain. Primary pro-
41
duction is a quantitative expression of vegetative matter (i.e. harvested yield) which
the natural environment at a location per unit area or a given period of time can
produce. Primary production also gives an indication of the sustainable production
one can expect. According to estimates of primary production by province, the
areas of the highest natural environmental potential are in the east (see Figure 3.1).
Primary production changes most rapidly in the southern and south western coastal
areas and along the eastern seaboard, mainly in conjunction with rainfall gradients.
Table 3.2 shows that KwaZulu-Natal and Mpumalanga have the highest averages of
primary production, with 20 percent of Mpumalanga producing more than 9.5 tons
per hectare in a growing season and 80 percent producing more than 6.6 tons.
TABLE 3.2
Median annual primary production (tons/hectare/season)
Mean Maximum Minimum Probability to exceed mean

value
value Value Value
20% 50% 80%
Western Cape 2.0 8.0 0.3 2.9 1.7 0.9
Northern Cape 1.2 4.2 0.0 1.9 1.0 0.5
Free State 5.4 11.0 2.2 6.8 5.3 3.9
Eastern Cape 4.8 10.3 0.6 7.8 4.4 2.4
KwaZulu-Natal 9.0 14.6 4.8 10.0 9.0 7.8
Mpumalanga 8.0 12.4 4.0 9.5 8.0 6.6
Limpopo 5.2 11.8 2.1 6.3 5.2 4.0
Gauteng 7.5 8.4 5.8 8.0 7.7 6.9
North West 4.7 8.0 2.6 6.0 4.7 3.3
FIGURE 3.1
Median annual primary production (ton/hectare/season)
42
3.4 LAND-USE PATTERNS
The total land area of South Africa comprises 122.3 million ha of which farmland
occupies approximately 80.9 percent. Commercial and developing agriculture oc-
cupy surface areas of 105. 2 million ha and 17.1 million ha, respectively. The total
area under commercial agriculture is about five times that of developing subsistence
agriculture. Total arable land in South Africa comprises only 15.8 million ha or 13
percent compared to grazing land that comprises nearly 59.1 percent of the total area.
The remaining area is comprised of nature conservation land (9.6 percent), forestry
(1.1 percent) and non-agricultural land (2.5 percent).
(a) Land-use patterns in commercial agriculture
The Free State, KwaZulu-Natal and Mpumalanga provinces have almost 45 percent
of the arable land in South Africa, covering a total surface area of 4.2 million ha, 1.2
million ha and 1.7 million ha respectively. Approximately 22 percent of the arable
land in commercial farming areas is classed as high potential, 90.2 percent of which
is found in KwaZulu-Natal and Mpumalanga provinces. These regions are situated in
the moist eastern half of South Africa. Medium potential arable land in commercial
areas occupies almost 29 percent of total available arable land, 75 percent of which
is found in the Western Cape, Free State, Northern Province and North West. Al-
most 57 percent of medium and low potential arable land is found in the Free State.
FIGURE 3.2
Potential arable land in the commercial farming regions of South Africa
Source: Development Information Business Unit, DBSA, 1997
Only 1.1 percent of the total surface area of South Africa is irrigable. There are about
178 000 ha of dryland which could be irrigated, but the utilisation of this land is
unlikely due to the present water demand and supply situation. Demand for water
keeps on growing and some of the faster growing industrial and metropolitan areas
are situated in dryish parts far from the biggest dams and rivers in South Africa.
Almost three-quarters of the potential irrigation area is found in KwaZulu-Natal
and the Eastern Cape, and consists of deep valleys, which are very uneconomic to
develop. A shift to planted pastures is most evident in the marginal commercial
cropping region.
Natural grazing provides a basis for extensive stock farming, the most important
stock grazing regions being the Northern Cape, Mpumalanga, KwaZulu-Natal
43
and the Northern Province. The carrying capacity of the veld varies considerably
between these provinces and an overestimation of the carrying capacity of the veld
often results in overstocking.
(b) Land-use patterns in developing farming areas
Developing farming areas occupy 17.1 million ha or 13.9 percent of the total surface
area of South Africa. While the percentage of land allocated for agriculture is rela-
tively high in these areas, a large portion is utilised for settlement outside proclaimed
towns. The majority of inhabitants of the rural areas are women, children and aged
people who occupy the land for purposes of social security and not necessarily for
agricultural production. It is estimated that potential arable land comprises between
11.1 percent and 16.6 percent of the total area. Only between 40 to 80 percent of
this land is cultivated in any given year. The total irrigation potential of developing
areas is estimated at 200 000 ha (the sub-classification of this land is currently not
available). It appears that, although some of the developing areas are situated in the
moist eastern part of South Africa, steep terrain limits the amount of available arable
land and increases the erosion tendency.
Veld grazing in these areas has a relatively higher potential in terms of potential car-
rying capacity than in commercial areas. The present stocking rate, however, exceeds
the carrying capacity in virtually all the developing farming areas. Overgrazing has
affected the quality of arable land to such an extent that it is no longer suitable for
crop production.
Forestry land in the developing areas occupies nearly 256 268 ha of the total estimated
potential of 845 877 ha. A significant potential for expansion of forestry land exists
in KwaZulu-Natal and the Transkei portion of the Eastern Cape.
(c) Nature Conservation
Total area under conservation is estimated at around 16 million hectares, or 13%

of the total landarea of South Africa. About 11 million hectares of these areas are
privately owned and used for eco-tourism and game farming. South Africa’s 229
nationally protected areas (state forests, parks, and reserves) occupied around 5 mil-
lion hectares or 4 percent of the total land area in 1991. The relative size of the nature
conservation area under public ownership is not uncommon when compared to other
countries in the world. However, in terms of the absolute number of protected areas,
South Africa’s number is much higher than for other middle- income economies.

(1) The agricultural development potential of South Africa is determined by its
natural and human resources. Describe, by referring specifically to SA’s
natural resource endowment including climate, water resources and po-
tential land-use.
(2) Are the existing land-use patterns a true reflection of potential land-use. Is
there scope to improve efficiency and move to an optimum level of produc-
tion (land-use)? Discuss briefly.
FEEDBACK
(1) The agricultural development potential of South Africa is determined by its
natural and human resources. Describe, by referring specifically to SA’s
44
natural resource endowment including climate, water resources and po-
tential land-use.
South Africa, with a mean annual rainfall of 497 mm (considerably less than
the world mean of 860 mm), may be described as mainly a semi-arid region
with acute water shortages. Water in South Africa is a scarce resource.
The total land area of South Africa comprises 122.3 million ha of which
farmland occupies approximately 80.9 percent. Commercial and develop-
ing agriculture occupy surface areas of 105. 2 million ha and 17.1 million ha,
respectively. The total area under commercial agriculture is about five times
that of developing subsistence agriculture. Total arable land in South Africa
comprises only 15.8 million ha or 13 percent compared to grazing land that
comprises nearly 59.1 percent of the total area. The remaining area is
comprised of nature conservation land (9.6 percent), forestry (1.1 percent)
and non-agricultural land (2.5 percent).
(2) Are the existing land-use patterns a true reflection of potential land-use? Is
there scope to improve efficiency and move to an optimum level of produc-
tion (land-use)? Discuss briefly.
Only 1.1 percent of the total surface area of South Africa is irrigable. Demand
for water keeps on growing. Almost three-quarters of the potential irrigation
area is found in KwaZulu-Natal and the Eastern Cape, and consists of deep
valleys, which are very uneconomic to develop. Natural grazing provides a
basis for extensive stock farming.
Developing farming areas occupy 17.1 million ha or 13.9 percent of the

total surface area of South Africa. While the percentage of land allocated for
agriculture is relatively high in these areas, a large portion is utilised for
settlement outside proclaimed towns. The majority of inhabitants of the rural
areas are women, children and aged people who occupy the land for
purposes of social security and not necessarily for agricultural production.
It is estimated that potential arable land comprises between 11.1 percent and
16.6 percent of the total area. Only between 40 to 80 percent of this land is
cultivated in any given year. The total irrigation potential of developing
areas is estimated at 200 000 ha (the sub-classification of this land is
currently not available).
3.5 DEMOGRAPHIC PROFILE OF SOUTH AFRICA
3.5.1 Population size and growth

Table 3.3 shows that the total population of South Africa grew from 42 million at
an average annual growth rate of 1.56 percent to 44.7 million in the year 2000.The
composition of population groups in 2000 were as follows: Africans represented
78.9 percent, Whites 10 percent, Coloureds 8.7 percent and Asians 2.5 percent of
the SA population.
45
TABLE 3.3
Population profile of South Africa, 1996 and 2007
Population 1996 % 2007 % % Aver- age

groups annual
growth rate
1996-2007
Africans 32 144 622 76.9 37 821 955 78.9 1.49%
Asians 1 079 536 2.6 1 175 842 2.5 0.78%
Coloureds 3 645 590 8.7 4 174 477 8.7 1.24%
Whites 4 936 310 11.8 4 791 354 10.0 -0.27%
Total 41 806 058 100 47 963 628 100 1.26%
Male 20 664 734 49.43 23 617 290 49.24 1.22%
Female 21 141 324 50.57 24 346 338 50.76 1.29%
Urban 23 231 626 55.57 25 756 468 53.7 0.94%
Rural 18 574 432 44.43 22 207 160 46.3 1.64%
The average population growth rate in South Africa is expected to continue to

decline over the coming decades. The growth rate of the African population has
decreased from 2.45 percent in 1991 to an estimated 1.65 percent in 2001 while that
of the total population has dropped from 2.13 percent to 1.43 percent over the
corresponding period.
Population growth has important implications for the provision of infrastructure –

for example meeting basic needs such as housing, health, transport and education
as well as the provision of basic food types. Although lower than expected growth
population rates will put less pressure on the provision of infrastructure and basic
needs our declining economic performance and growth rate have increased unem-
ployment and poverty significantly.
3.5.2 Spatial characteristics

There are significant differences in population numbers and densities between the
provinces, i.e. the eastern seaboard is more densely populated than the western
interior. The highest concentration of the South African population is found in
KwaZulu-Natal (19.8 percent), followed Gauteng (17.4 percent), Eastern Cape (15.1
percent), Limpopo (11.4 percent) and Western Cape (9.4 percent) (see Table 3.4).
Figure 3.3 depicts the total de facto population by province.
46
TABLE 3.4
Population distribution by province, 2007
Province Urban Rural %

% % Distribution
Western Cape 88.85 11.15 10.33%
Eastern Cape 71.27 28.73 13.83%
Northern Cape 69.75 30.25 2.31%
Free State 36.45 63.55 5.95%
KwaZulu-Natal 42.27 57.73 21.03%
North-West 61.78 38.22 7.13%
Gauteng 10.42 89.58 20.67%
Mpumalanga 96.42 3.58 7.67%
Limpopo 37.09 62.91 11.09%
Processing and distribution plants for, among other things, basic food types, should
take this population distribution into account, seeing that the distribution of the
production volumes of products is not necessarily synchronized with this population
distribution. Population densities vary widely between provinces: from as high as
390 persons per km² in Gauteng to 2 persons per km² in the Northern Cape. Table
3.5 summarises the details per province.
TABLE 3.5
Population density by province, 2010
Province 1996 2007 Area km ² Population per
km ² 2007
Western Cape 4,053,055 4,954,677 129,388 38.29
Eastern Cape 6,187,099 6,632,992 363,389 18.25
Northern Cape 981,090 1,107,616 129,437 8.56
Free State 2,659,535 2,852,028 170,616 16.72
KwaZulu-Natal 8,847,061 10,085,846 91,481 110.25
North-West 3,019,084 3,417,537 82,333 41.51
Gauteng 8,227,355 9,913,005 116,824 84.85
Mpumalanga 3,143,918 3,680,733 116,824 31.51
Limpopo 4,662,272 5,319,464 118,710 44.81
Total 41,780,470 47,963,898 1,223,201 39.21
Source: DBSA, 2010
47
Increase in population density especially in former homeland areas has impacted on access
to land especially land suitable to be utilized for agricultural purposes and has increased
the rate of landlessness among the rural population. It is not clear whether the present
high rates of urban migration will release rural land pressure for South Africa as a whole.
3.5.3 Demographic profile of rural areas

Within the rural areas there is a marked difference in the nature and level of eco-
nomic activity and levels of welfare. These inequalities, coupled with the uneven
distribution of income in agriculture, has according to Brand (1990) contributed
to a disproportionate prevalence of poverty in rural compared to urban areas, and
the question for instance of the distribution of access to land between the different
groups will become an increasing burning issue in respect of rural areas. Continuous
and fluctuating movement of people according to Eckert (1994) provides one the
main dynamic forces intimately linking the rural and urban economies of Southern
Africa. Three accelerating factors that will enhance this movement are:
the disappearance of homeland boundaries;a possible reduction in civil service

employment and a collapse of the homeland economies; and a reduction in the
labour demand on commercial farms.

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3.6 COMMERCIAL FARMING AREAS

In general, the features of commercial farming areas are that of are high migration
of economically active population from poorer to economically stronger areas, farm
evictions, retrenchments, unbalanced economic structure and an uneven distribution
of economic and natural resources. The densification of commercial farming areas
is increasing as migration from the homeland areas to the rural towns increases.
Thus, significant shifts in the spatial distribution of people are possible. Migration
within rural areas is expected to be significant. This could further be complicated
by substantial influx from countries to the North who are presently competing ef-
fectively for service and informal openings in the larger cities.
3.7 FORMER HOMELANDS

The main features that characterise the demographic profile in the former homelands
are a high population growth coupled with an in-migration from former commercial
farming areas, very unequal age/gender distribution in the productive age groups
(20-50) and a high dependency ratio.
48
3.8 AGRARIAN STRUCTURE
One of the objectives of the agrarian reform programmes in South Africa is to change
the ownership and control patterns of land. An increasing flexibility of the farming
sector is manifested in changing land use patterns and farm size and the workings
of an active and robust land market. The flexibility will be enhanced by the repeal
of the Sub-division of Agricultural Land Act of 1970 which allowed sub-division of a
holding only by permission only of ministerial approval.
3.8.1 Number of farms

The number of farms in the mainly commercial farming sector increased from 81
432 in 1921 to 119 556 in 1952, before declining to 59 960 by 1983. From 1983 to
1988 the total number of farms increased slightly to 67 010 according to Hattingh
(1986, translation by Viljoen) the shrinkage in number of farming units accelerated
between 1950 and the early 1980s; beginning in 1950 when the number of farming
units declined at an average of 0.9%. In 1996, farming units in the commercial
farming sector numbered 60 938 (Table 6).
3.8.2 Total area of farms

The amount of land held (owned or leased) by the commercial sector has risen and
fallen in line with the trend in the number of farming units, but at a more moderate
rate – from 82.2 million hectares in 1930 to 91.4 million hectares in 1964, gradually
declining thereafter to 85.8 million hectares by 1988 and 82.2 million in 1996.
3.8.3 Farm size

Data on changes over time in farm size in South Africa are difficult to come by.
Official data show an unambiguous trend to larger farms and a smaller number of
farmers in the commercial sector up to the beginning of the 1980s. As the reduction
in the numbers of farming units outpaced the decline in the size of the commercial
sector, the size of the farming units has tended to increase over the past 30 years.
Nationwide, farm sizes increased from 738 ha/farm in 1953 to 1 280 ha/farm in
1988 and 1349 ha/farm in 1996.
49
TABLE 3.6
Farming units: number and size, 1996
Provinces Number Hectares Average farm

size (ha)
Western 9 759 9 766 969 1 001
Cape 6 730 29 734 978 4 418
Northern 11 272 11 342 502 1 006
Cape Free 2 342 756 946 323
State 6 338 10 327 660 1 629
Eastern 5 037 4 068 401 808
Cape 4 675 4 544 012 972
KwaZulu- 7 273 5 488 613 755
Natal 7 512 6 179 490 823
Mpumalan 60 938 82 209 571 1 349
ga Limpopo
Source: Statistics SA, 1996
Gauteng
3.8.4 Farming and the economy
North West Agriculture’s contribution to the economy can be highlighted by making use of a
range of measures. Probably the most important role of agriculture is providing suf-
Total
ficient food to the nation at affordable prices. Not only is this important in a macro
and regional context, but especially so at household level. The importance of the
sector is also highlighted by the relative contribution of agriculture to the GDP, its
share of the labour force and its contribution as earner of foreign exchange.
3.9 CONTRIBUTION TOWARDS GDP

Agriculture’s contribution to GDP in South Africa (at current factor cost) increased
from R 190 million in 1946 to R 25 375 million in 2000. The economy had grown at
an average annual growth rate of 3.8 percent between 1946 and 1995. It has slowed
down and stagnated since the mid -1970’s. The value added by the agricultural sec-
tor had grown by only 2.4 percent during this period, but being heavily dependent
upon climatic circumstances, its growth was more sporadic than that of the overall
economy (see Table 3.7 and Figure 3.4).
The growth in the GDP was accompanied by a high degree of diversification of the
economy. The lower growth rate of the agricultural sector relative to that of the
overall economy resulted in its share in the GDP steadily declining. This has been
part of a broader transformation of the economy over the past century from one
dependant on the primary sector (agriculture and mining) to a broadly diversified
manufacturing and services economy. Table 3.8 shows the marked changes in the
structure of South Africa’s economy in recent years.
50
TABLE 3.7
Average annual growth in GDP, 1946 – 2009
Period Agriculture Total

1946-1950 4.6 4.5
1950-1955 4.6 4.7
1955-1960 0.8 4.0
1960-1965 0.0 6.4
1965-1970 3.0 5.5
1970-1975 3.7 4.1
1975-1980 4.1 2.8
1980-1985 -2.7 1.1
1985-1990 4.4 1.9
1990-1995 -0.8 0.7
1995-2000 4.0 2.6
2000-2005 1.8 3.8
2005-2009 2.4 3.6
Source: SARB, 2010
There is little question of the view that modernising industrialisation is the engine of
sustained growth, however, there are dissent in theory as well as in practice about
how best to industrialise. Is it to be thought industrial-led or agriculture-led
industrialisation, through import-substitution or a trade-led strategy. The need for
increased agricultural production and food supply to sustain the industrialisation
process is recognised.
South Africa’s agriculture contributes substantially to economic development and

prosperity. The real contribution of the sector is, however, underestimated and ob-
scured when directly measured. For example, the low contribution of agriculture to GDP
of 2.5 percent generated in 2009 (see Figure 3.5), may create the impression that
agriculture is not important to the economy as a whole, but the true value lies in its
backward and forward linkages.
51
1990 2009
FIGURE 3.5
GDP at factor cost: percent contribution by sector, 1990 and 2009
Source: DBSA, 2010
FIGURE 3.6
Gross value added by economic sector
Source: DBSA, 2009
Table 3.9 summarises the economic growth rate of South Africa since the 1960s.
Average annual real GDP growth was 5.7 percent during the 1960s, 3.3 percent
during the 1970s, 2.2 percent during the 1980s and only 1.1 percent during 1990 – 97.
The impact of agriculture’s performance on the economic growth rate can be linked
to the negative influence in years when agricultural production is adversely affected
by natural factors such as droughts, while favourable periods impact positively on
the growth rate.
52
TABLE 3.9
Sectoral composition of South Africa’s GDP (at factor cost), 1997
Source: SARB, 1997
3.10 CONTRIBUTION TO EMPLOYMENT

Agriculture creates one of every seven job opportunities in South Africa and involves
4 million or 10 percent of the population. Although agriculture, as a rule, is not the
leading sector in employment-creating economic development, it must be borne in
mind that in absolute terms the agricultural sector was and will always be an im-
portant source of employment. It remains important because of the large number
of benefiting dependents per farm worker.
On the basis of the 1996 Census results, the number of employed people in the labour
force in the ten major sectors of the economy was 9.1 million, of whom 814 000 (10
percent) worked in the agriculture, hunting, forestry and fishing sector. More than
4 million people are sustained in this sector.
Within the broad sector of agriculture, hunting, forestry and fishing, the agriculture
hunting sub-sectors together accounted for 92 percent of all employment opportuni-
ties. In terms of the rural areas of the former homelands, the rural survey of 1997
suggests that a total of 2.2 million people are employed.
Real gross capital formation in agriculture increased at a relatively high rate from
1950 to 1997. Notwithstanding the high rate of capital formation and the decline
in agriculture’s share in the provision of employment, agriculture is still relatively
labour-intensive. On average, the agricultural sector uses more workers for every
R1 million value added than any other sector in the formal sector of the South Af-
rican economy. As a factor of production, labour should not be seen in isolation. A
closer examination of trends exposes important structural trends.
53
TABLE 3.10
Employment in urban and non-urban areas, 1996
Urban Non-urban Total
Number employed:
Agriculture and hunting 94 234 655 403 749 637
Forestry and logging 7 921 44 131 52 052
Fishing operation of fish farms 11 209 1 452 12 661
Total 113 364 700 986 814 350
Percent in each sub-sector:
Agriculture and hunting 83.1 93.5 92.1
Forestry and logging 7.0 6.3 6.4
Fishing operation of fish farms 9.9 0.2 1.6
Total 100 100 100
Source: Census, 1996
FIGURE 3.7
Formal and informal employment by sector, 2009
Source: WEFA, 2010
Apart from economic factors, recent labour unrest and the adoption of land reform
and labour legislation pertaining to agriculture have contributed to the eviction of
farm workers and unemployment. These trends identified above have definite policy
implications. The national government and the provincial authorities should modify
those policy aspects, which impair job creation opportunities in agriculture. Unless
job creation capabilities are enlarged, the problem of large-scale rural unemploy-
ment, poverty and social deterioration is unavoidable and will remain unresolved.
54
3.11 AGRICULTURE AS EARNER OF FOREIGN EXCHANGE
Agriculture is a net earner of foreign exchange. Export earnings by the sector have
increased at a faster rate than import expenditure. Table 3.11 shows that, export
earnings by the sector have increased substantially over the last number of years,
and the value of agricultural products exported as a percentage of the total value of
South African exports increased from 6.8 percent in 1993 to 8 percent in 2005 and
dropped back to 6.6 percent in 2007.
Despite relatively poor production conditions in agriculture (during the eighties and
early nineties) and persistent recessionary conditions in the economy as a whole in the
early nineties, agriculture has made an enormous contribution to foreign exchange
earnings which, in turn, has helped the country to meet its foreign debt obligations
under extremely difficult circumstances.
The value of agricultural export products has also shown the biggest increase in
comparison with other sectors in the economy since 1993. This is mainly as a result
of South Africa’s deciduous fruit, citrus, wool, mohair, groundnuts, subtropical
fruit, cut flowers and bulbs, wine, etc. being highly in demand in foreign countries.
Trends in the structure of exports show that during the 1960’s, wool, mohair and
skins constituted about 50 percent of the total value of agricultural exports. This
situation has since changed in that intensive industries – such as deciduous fruit,
citrus and wine – now contribute more to the value of exports than wool, mohair,
hides and skins and other extensive industries (Table 3.12).
This highlights the importance of the optimum utilization of high potential land,
especially land under irrigation in the Western Cape, Mpumalanga and KwaZulu-
Natal provinces, and the continued support of the sector through infrastructure
development and agricultural research.
55
TABLE 3.11
Total Agricultural Exports
Years R million Percentage
Agricultural exports Total SA exports
1985 2 382.30 36 410.40 6.5
1990 4 625.10 60 770.00 8.7
1991 4 769.40 64 356.30 8.9
1992 4 860.20 68 035.00 7.1
1993 5 287.10 80 671.30 6.6
1994 8 055.80 90 021.50 8.9
1995 8 145.60 102 545.10 8
1996 11 819.00 117 860.50 9.4
1997 12 508.90 132 347.40 8.7
1998 13 641.50 148 690.00 9.3
1999 14 549.90 166 673.50 8.9
2000 15 752.20 210 512.70 7.5
2001 20 067.10 253 579.50 7.9

2002 25 887.90 312 917.80 8.3
2003 23 252.70 273 126.80 8.5
2004 22 656.70 292 078.70 7.8
2005 26 141.20 327 125.40 8.0
2006 26 977.50 393 046.70 6.9
2007 30 666.80 463 237.90 6.6
2008 635 346.60
Source: National Department of Agriculture, 2010
56
Table 3.12
Export Value of Agricultural Products
Source: Customs & Excise, 2010
3.12 CURRENT STATE OF FARMING INDUSTRY

The composition of South Africa’s agricultural production is compared for years
1990, 1995 and 2000 (see Figures 3.7 & 3.8). Although the change between 1990
and 2000 is not as dramatic as the trends from 1980 to 1990, an analysis of farm
income by main branch shows important structural changes in agricultural produc-
tion patterns. The relative position of horticultural crops and animal products has
strengthened at the expense of field crops. Shifts of crop production to the higher
potential areas and livestock farming to the drier areas can be expected to continue
where livestock production will replace crop production in marginal production areas.
(a) Gross value of production
Table 2.13 shows the gross value of production for 1990, 1995, 2000. The gross value
of agricultural production expanded by 10.7 percent between 1990 and 1995 and 6
percent between 1995 and 2000, well below the inflation rate.
(b) Field crops
South Africa’s top field crops by gross value in 2009 are maize, wheat, sugar cane,
hay, sunflower seed and soya beans which together present almost 92% of the gross
value of field crop production (Figure 9).
57
FIGURE 3.10
Ranking and value of the leading field crops, 2009
58
Table 3.13
Gross value of production, 1996197, 2000101 and 2008109
Year 1996197 1 % I 2000101 I % I 2008109' I %

R1 000
M aize 6 000 866 43.0 6928826 38.7 16 345 830 44.7
Wheat 2 454 045 17.6 2829568 15.8 4 981 13.6
Oats 10 253 0.1 24 002 0.1 712 0.2
Barley 140 409 1.0 92 961 0.5 55 290 1.2
Rw./I:AnniA) 2115 0.0 24 522 0.1 441659 0.3
Grain 225 353 1.6 156 691 0.9 95 480 1.3
Hay 1 262164 9.0 1 826 497 10.2 474 345 10.5
Lucerne 5038 0.0 2 629 0.0 3 834 210 0.1
Orv hF!J'Ins:.33 172 523 1.2 286 735 1.6 19 047 1.5
Dry peas 3 400 0.0 1 754 0.0 531 762 0.0
Lentils 113 0.0 23 0.0 1 3S9 0.0
Suoar cane 2 281 762 16.4 3 115839 17.4 29 12.1
Chicorv root 16 571 0.1 22215 0.1 4 419 822 0.0
Tobacco 384 394 2.8 621 580 3.5 16 745 0.7
Cotton 176 417 1.3 232 671 1.3 262127 0.2
Groundnuts 105 935 0.8 454 720 2.5 79505 2.0
Sun11ov.er 446935 3.2 893 156 5.0 715 280 6.5
Sova-beans 166 975 1.2 280934 1.6 2 377 319 4.5
Wattle bark 68911 0.5 57 433 0.3 1644 700 0.2
Sisal 2 476 0.0 1 732 0.0 83 244 0.0
Other field 27 264 0.2 68 268 0.4 0 0.5
0.0 0.0 174 839 0.0
TOTAL 13953919 100.0 17922 756 100.0 36 554 304 100.0
VltiOJiture 1 462 523 15.4 1 551 712 11.7 3 304 312 10.2
Citrus fruit 1 322 067 13.9 1674 909 12.7 5840296 18.0
Subtropical 470 354 5.0 1 008 261 7.6 2 085 697 6.4
Dedduous 2 239932 23.6 3 634 863 27.5 7 748 204 23.9
Dried fruil 183 022 1.9 193678 1.5 425 781 1.3
Nuts 24 970 0.3 42225 0.3 81631 0.3
Veoetables 1 918 562 20.2 2 482 467 18.8 7 856 398 24.2
Potatoes 1 253826 13.2 1 832 361 13.9 3 892820 12.0
Flowers and 399 764 4.2 536 449 4.1 855 555 2.6
Rooibos tea 58 500 0.6 38059 0.3 137 593 0.4
Tea 134 137 1.4 168 663 1.3 81 416 0.3
Other 15928 0.2 57 745 0.4 142290 0.4
0.0 0.0 0.0
TOTAL 9 483 585 100.0 13 221 392 100.0 32 451993 100.0
Wool 644 809 3.8 646 721 3.1 1 078 222 1.7
Mohair 113844 0.7 194 532 0.9 204 234 0.3
Karakul pehs 1872 0.0 2890 0.0 7 506 0.0
Ostrich 301671 1.8 320878 1.5 381 395 0.6
Fov,ts 5977 865 35.1 7 690014 36.3 22 451 045 36.4
Fnn-R'' 1678 899 9.9 2157 850 10.2 6 596281 10.7
Cattle and 3 237 155 19.0 3 445 060 16.3 13 183172 21.4
Sheep and 1 031 402 6.1 1 266839 6.0 3 097 310 5.0
Pios 780 973 4.6 803 050 3.8 3 047 338 4.9
Milk 2802 484 16.4 3 734 537 17.6 9 080 595 14.7
Other 469542 2.8 906 314 4.3 2 534 917 4.1
0.0 0.0 0.0
TOTAL I 17 040 516 100.0 21168 685 100.0 61 662 015 100.0
GRAND 40478 020 52312833 130 668 312
1} Prel1m1nary
2) From 2000/01, the value oll'fe has been replaced by that ofCanola
3) Until2002/03, including covl)eas
4) lnduding eggs for hatching
Source:Abstract of Agricultural Statistics, 2000

Production trend analysis of area cultivated and production for the period 1990 to
2000, reveals the following trends:
59
Product Period Area Growth Production Growth Yield
(1 000 ha) rate (%) (1 000 t) rate (%) (t/ha)
Maize 1990-2008 3 547 -2.38 9 289 2.32 2.62
Wheat 1990-2009 970 -3.41 2 019 0.48 2.08
Sorghum 1990-2008 115 - 4.80 325 -1.87 2.82
Sunflowers 1990-2008 530 -0.05 628 3.36 1.19
Groundnuts 1990-2008 99 -7.29 108 -0.43 1.10
Soya beans 1990-2008 121 7.47 192 10.18 1.59
Sugar cane 1990-2009 409 0.58 19 601 1.79 47.88
(c) Maize
(i) Maize consumption
The local commercial consumption requirements for white maize for 2008/09 are
approximately 8.8 million tons, of which 50, 5% is expected to be used for human
consumption. The local commercial consumption requirements for yellow maize
for 2000/01 were approximately 3.3 million tons. Yellow maize is sold mainly for
animal consumption and for use in the manufacturing of animal feeds.
The maize industry is an important earner of foreign exchange for South Africa
through the export of maize and maize products. The international maize market,
especially the US market, has a dominant influence on local imports and exports.
(ii) Maize production
Africa’s biggest economy is expecting its largest crop of the grain since the record
14.42 million tons harvested in the 1981/82 season. This would boost exports, but
is also seen as weighing on prices. The final estimates-report of the South African
commercial maize crop has been released in September. This showed the 2009/10
maize crop in total declined once more to 13.043 million tons. The area planted/
harvested is estimated at 2.742 million hectares, bringing the national average yield
to 4.76 tons per hectare. The crop now is 8.2 percent or 993 000 tons above that of
last year. Last year’s average yield was finalised at 4.96 t/ha. Trend analysis of time
series production data (1990-2008) shows that the area under maize production
decreased by 2, 4 percent while production increased by 2.3 percent.
The area estimate for white maize is 1.720 million hectares, and for yellow maize
it is 1.023 million hectares. The production forecast of white maize has been put
at 7.822 million tons, which is 15.5 more than last season, a rise of 1.047 million
tons. National average yield for white maize is 4.55 t/ha, and the same as last year’s
figure. Yellow maize production came in at 5.221 million tons, which calculates to
a decrease of 1.0%, or 54 400 tons from the previous season. The yield for yellow
60
maize averages at 5.10 t/ha, just 0.03 t/ha below the figure in the previous outlook,
but also well below last year’s average of 5.62 t/ha.
Estimates state that the biggest increase in white maize production for the 2009/10
season, will still take place in Gauteng, where a 37.4 percent larger crop is expected
at 493 000 tons. The Western Cape expects the greatest drop in white maize pro-
duction at 3 500 tons, or 76.7 percent less than last year. Gauteng’s yellow maize
production will also increase the most by 20.8 percent, while the greatest decline
comes from the Western Cape, with a 54.3 percent lower yellow maize crop of 16
000 tons. As for the three largest producers of white maize in South Africa: the Free
State expects 3.209 million tons, 20.8 percent more than last season. The Northwest
province estimates its white maize crop at 2.350 million tons, 16.3 percent more,
and Mpumalanga will harvest an expected 1.369 million tons, 6.1 percent up from
last year. For yellow maize the total crop declines by 1.0 percent. The Free State
will produce 5.5 percent more yellow maize at 2.004 million tons. This province is
also the only one with higher production from last year. Mpumalanga expects a crop
of 1.450 million tons, 8.2 percent down from last year, while the Northern Cape
estimates its crop at a 1.0 percent smaller 599 250 tons.
(d) Wheat
(i) Wheat consumption
The composition and the various needs of the population has a major impact on
the consumption of the product. A fairly large section of the total population of
South Africa is poor and is urbanising at a fast rate. Urbanisation causes consumers
to require more ready-to-eat food. Demand for convenience type foods is growing.
Bread is such a product which is a substitute for maize meal.
Total quantities of 2.9 million tons of wheat were available for local consumption
during the 2009/10 marketing season. In South Africa, wheat is mainly used for
human consumption. During the 2009/10 marketing year, approximately 2 850 000
tons of wheat were used for human consumption, 2 000 tons for animal feed and
24 000 tons for seed. An additional 56 000 tons were either used onfarm or the use
is not defined and 245 000 tons were exported in the 2009/10 marketing season.
(ii) Wheat production
Wheat is the second most important field crop of South Africa. Wheat is planted
mainly between midApril and midJune in the winter rainfall area and between midMay
and the end of July in the summer rainfall area. Most of the wheat produced in South
Africa is bread wheat, with a little durum wheat being produced in certain areas.
61
FIGURE 3.11
SA Wheat Production:
Trend analysis of time series production data (1990-2009) shows that the area under
wheat production decreased by 3.4 percent while production increased by 0.48 percent.
The estimated area planted to wheat for the 2010 season is 568 100 ha compared
to 642 500 ha planted the previous season. Approximately 15 percent of the total
area planted to wheat is cultivated under irrigation and 85 percent under dryland
conditions. South African wheat production is currently expected to decline some
13 percent, to 1.69 million tons from 1.96 million tons last season. Plantings of the
grain are estimated to have fallen 12 percent to 568 100 hectares from last season
to the lowest in more than 20 years. South Africa will likely import 1.3 million tons
of wheat, the most in three years, because of the lower plantings.

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(e) Horticultural crops
South Africa’s top horticultural crops by gross value are deciduous fruit, vegetables,
potatoes, Citrus fruit, Viticulture and subtropical fruit which present almost 90
percent of the gross value of horticultural production (Figure 3.11).
62
FIGURE 3.12
Ranking and value of the leading horticultural crops, 2009
Source: Abstract of Agricultural Statistics, 2010 (as adapted)
The most important fruit products in the horticultural sector by gross value of
production in 2009 were vegetables, followed by deciduous fruit, citrus, potatoes
and viticulture. On the basis of volume produced by main branch, apples are the
most prominent crop followed by pears and table grapes. The area planted by fruit
type is shown in Figure 3.12. Table 3.15 presents the growth rates and sales in the
deciduous fruit sector.
FIGURE 3.13
Percentage of area planted to deciduous fruit, 2000
63
(f ) Deciduous fruit industry
The deciduous fruit industry is the most important branch by gross value of the
horticultural industry contributing more than 24 percent of the total gross value of
this branch in 2008/09.
TABLE 3.15
Deciduous fruit: growth rates in production and sales
Product Period Average Volume Growth

Rate
Apples Production 1990-2008 632 781
2.29
Local sales 1990-2008 138 831
2.95
Export 1990-2008 249 470
2.51
Processing 1990-2008 205 240
1.03
Apricots Production 1990-2008 61 870

-0.11
Local sales 1990-2008 2 591
- 6.78
Export 1990-2008 3 485
5.25
Processing 1990-2008 47 105
0.28
Grapes Production 1990-2008 1 518 711

2.05
Local sales 1990-2008 24 452
1.44
Export 1990-2008 160 642
8.02
Pressed 1990-2008 1 165 430
1.61
Pears Production 1990-2008 286 299

3.01
Local sales 1990-2008 43 774
2.67
Export 1990-2008 121 826
3.24
Processing 1990-2008 107 661
2.90
Peaches Production 1990-2008 189 341

0.28
Local sales 1990-2008 28 726
-2.70
Export 1990-2008 5 629
7.19
Processing 1990-2008 129 280
1.28
Plums Production 1990-2008 40 309

6.57
Local sales 1990-2008 7 923
5.59
Export 1990-2008 30 120
7.09
Processing 1990-2008 1 064
5.03
Wine (litres) Good wine 1990-2008 560 927 322
3.85
Distilling wine 1990-2008 169 578 450
-3.82
Juice 1990-2008 88 790 962
-2.43
Rebate wine 1990-2008 75 627 946
-1.14
Total 1990-2008 894 924 680
1.18
Source: Abstract of Agricultural Statistics, 2010 (as adapted)
64
It has become a world player in the export market, generating over R 5.8 billion a
year in export earnings. The number of exporters has grown significantly.
Apples are the most important export fruit while the domestic market and fruit
juice industry plays an important role. There are nearly 10 million trees occupying 17
000 hectares mainly in the Elgin/Grabouw, Ceres and Langkloof production areas.
Apple production increased significantly from 515 074 tons in 1990/91 to 797 981
tons in 2008/09 at an average annual rate of 2.29 percent.
Pear exports totalled 180 6110 tons in 2008/09 while 114 361 tons were processed.
There are approximately 5 million trees on 10 000 hectares mainly in Elgin, Ceres,
Stellenbosch and the Langkloof production areas. Pear production increased sig-
nificantly from 208 900 tons in 1990/91 to 348 402 tons in 2008/09 at an average
annual rate of 3.01 percent.
About 6000 hectares have been planted with table grapes in the Western Cape, 3600
hectares of which is found in the Hex river Valley in the Worcester district. More
than 52 percent of table grape exports originate in this valley. Other important
production areas include the Paarl/Wellington districts in the Western Cape and the
sultana production area in the Lower Orange River of the Northern Cape. Table grape
production increased from 1.31 million tons in 1990/91 to 1.82 million tons in
2008/09 at an average annual rate of 2.05 percent.
Intake figures show that approximately 62 percent of the total plum exports originate
in the Franschoek and Stellenbosch districts of the Western Cape. Nearly 1.6 million
trees have been planted on 1 800 hectares. Plum production increased from 19 376
tons in 1990/91 to 39 077 tons in 2000/01 at an average annual rate of 8.9 percent.
Peaches are mainly grown in the Franschoek, Paarl and Wolseley production areas.
Peach production shows a decline from 1981 to 1991 but increased significantly from
157 100 tons in 1990/91 to 163 414 in 2008/09 at an average annual rate of 0.3 percent.
Approximately 65 percent of apricot trees are found in the Little Karoo production
area of Ladysmith and the Langkloof in the Western Cape. The crops are largely
dried and canned. Production trends show a significant increase in production from
48 469 tons in 1990/91 to 66 294 tons in 2000/01 and then declined to 50 078.
(g) Animal products
South Africa’s top animal products by gross value in 2009 were fowls slaughtered,
cattle and calves slaughtered, fresh milk, eggs and sheep and goats slaughtered which
together presents 88 percent of the gross value of livestock and animal products.
3.13 NATURAL GRAZING AND LIVESTOCK NUMBERS

The general condition of natural veldt in South Africa is poor and is deteriorating
at an alarming rate. The main reason for this condition is an overestimation of
the carrying capacity of the veldt by farmers which results in an overstocking of the
veldt. Certain veldt types are more vulnerable than others. In recent years, the
growth of the game farming industry has been threatening conservation farming
mainly for the following reasons.
65
FIGURE 3.14
Ranking and value of the leading animal products, 2009
According to statistics held by the NDA there were altogether 13.8 million cattle,
21.9 million sheep, 2 million goats and 1.6 million pigs in the country in 2009. The
distribution of the cattle in the nine provinces was as follows: KwaZulu-Natal (20.2
percent), Eastern Cape (22.5 percent), Free State (16.5 percent), North West (12.7
percent), Mpumalanga (9.8 percent), Limpopo (8.9 percent), Western and Northern
Cape (7 percent) and Gauteng (2 percent). The low percentage of the Limpopo
province can be ascribed to the increase of game farming replacing in this former
bastion of cattle ranching.
(a) Cattle and calves slaughtered
Beef production in South Africa is directed almost entirely towards the local market
as the country is a net importer of meat and meat products, mainly from the neigh-
bouring countries such as Namibia and Botswana and will remain so. While there
appears to be scope for substantial expansion in South African red meat production,
for example, by feedlotting should grain/meat price relations make it profitable, there is
also scope for considerable local market expansion, particularly if income levels rise.
The income elasticity of demand for red meat is fairly high, implying that increased
incomes will lead to substantial increases in South African demand for red meat.
Beef and veal (regarded as one commodity) form the main product of the red meat
industry. Although economic and technological factors have an influence on produc-
tion cycles and trends in the meat industry, variation in production (which is mainly
extensive), is, in the long run, mainly determined by climatic conditions, especially
the rainfall cycle. The build-up phase of stock numbers, i.e. when fewer female
animals are slaughtered, is directly linked to long-term weather patterns.
Cattle numbers reached a low of 11.9 million in 1984/85, after which a build-up
phase followed. As a result, slaughterings reached a high of 2.4 million carcasses in
1984 and a low of 1.9 million in 1988. Trend analysis of cattle slaughterings show a
decrease by 2.5 percent from 2.5 million in 1990/91 to 2.1 million in 2000/01.
66
Beef prices are directly affected by these cycles, i.e. prices rise during the build-up
phase, but reach a saturation point and fall sharply as more cattle are slaughtered. A
growth phase in the economy and a concomitant general rise in the demand for red
meat usually leads to meat price increases. Meat supply and production are therefore
price-sensitive. The part of the livestock cycle associated with increasing numbers
also often coincides with a period of decreasing spending power, which makes price
variations even more profound.
Low beef prices have major repercussions on the grain industry as the profitability of
feedlotting - now using about 1 million tons of maize, wheat and sorghum annually
– will be marginal. Beef prices also have an indirect effect on the dairy industry, i.e.
when beef prices are favourable, farmers refrain from marketing calves in anticipation
of higher prices. The opposite is also true: when prices are low, farmers market calves
at a young age, because it becomes unprofitable to rear them for a longer period.
(b) Fowls slaughtered
The broiler industry has shown continued growth for over 20 years. Assuming an
annual increase of 3.8 percent in the per capita consumption of chicken, which is
well below the historical performance, the industry will have to produce 13.6 million
broilers per annum by the year 2000, which is almost double the current production
of 7 million. According to Rainbow Chickens, the estimated per capita consumption
of chicken in SA came to 13.8 kg per capita head in 1990/91. This compares with
15.6 kg beef, 4.1 kg mutton and lamb, and 3.4 kg pork. Unlike red meat that shows
cycles in production and consumption, a constant growth in the consumption of
chicken has been experienced. The consumption of chicken has equalled that of red
meat by 1992.
An analysis of the historic trends in production shows that the broiler industry can
be regarded as one of the most important agricultural industries. On the basis of
gross value of production, the broiler industry currently lies in second position after
the maize industry. The gross value of poultry meat increased from R2 237 mil-
lion in 1990/91 to R6 204 million in 2000/01, while its share in the total value of
agricultural production rose from 6.7 percent in 1980/81 to 13.8 percent in 1994/95.
If current growth trends prevail, the broiler industry will become the single most
important agricultural industry by the end of the century. Currently an estimated 7.5
million broilers are slaughtered per week, while 1.5 million live broilers are sold to
the informal sector. Trend analysis based on time series data shows that white meat
production has increased from 587 000 tons to 796 000 tons at an average annual
rate of 4 percent.

(1) Describe the demographic profile of the rural areas and the impact of the
dynamic forces behind the fluctuating movement of people.
(2) The word-wide trend is towards larger farms and a smaller number of farm-
ers. Is there a future for the small-scale and subsistence farmer in S A.
Discuss briefly
(3) Discuss the role of agriculture in the SA economy.
FEEDBACK
(1) Describe the demographic profile of the rural areas and the impact of the
67
dynamic forces behind the fluctuating movement of people.
Remember Within the rural areas there is a marked difference in the nature
and level of economic activity and levels of welfare. These inequalities, cou-
pled with the uneven distribution of income in agriculture, has according to
Brand (1990) contributed to a disproportionate prevalence of poverty in rural
compared to urban areas, and the question for instance of the distribution of
access to land between the different groups will become an increasing
burning issue in respect of rural areas. Continuous and fluctuating move-
ment of people according to Eckert (1994) provides one the main dynamic
forces intimately linking the rural and urban economies of Southern Africa.
(2) The word-wide trend is towards larger farms and a smaller number of farm-
ers. Is there a future for the small-scale and subsistence farmer in SA.
Remember: Small-scale and subsistence farmers need to be creative by

establishing collaborations amongst themselves such as co-operatives.
(3) Discuss the role of agriculture in the SA economy.
Remember: Agriculture contributes to:
Gross Domestic Product

Employment
Earner of foreign exchange
Provides raw materials
3.14 SUMMARY
The structure of South African agriculture is characterised by the limits set by natu-
ral resources, climate, population profile, composition, socio-political policies and
traditional practices. The number of farms and the total area of farms has risen and
fallen in line with the trend in the number of farming units over several decades.
The size of the farming units has tended to increase over the past 30 years.
The importance of agriculture in the SA economy is highlighted by the delivery of

food to the nation at affordable prices, the relative contribution to the GDP, its share
of the labour force and its contribution as earner of foreign exchange.
The gross value of agriculture production expanded by 10.7 percent between 1990
and 6 percent between 1995 and 2000, well below the inflation rate. The top field
crops, maize, wheat, sunflower seed, groundnuts, soya beans and grain sorghum
account almost 62 percent of the gross value of field crop production in 2000.
Horticultural crops by gross value are deciduous fruit, viticulture and subtropical
fruit which present almost 90 percent of the gross value of horticultural production
in 2000.
South Africa’s top animal products by gross value in 2000 were fowls slaughtered,
cattle and calves slaughtered, fresh milk, eggs and sheep and goats slaughtered which,
together presents 80 percent of the gross value of animal products.
68
International and domestic realities
The agricultural sector is faced by many international and domestic realities
Realities – International
 Change in power relationships

 Change in trade environment
 Change in available energy and use Climate change
 Change in food prices and input costs (new equilibrium)
 Global financial crises
– Decline in economic growth
– 1st and 2nd round effects
Realities – Domestic
 SA comes from a strong base

 Issues such as unemployment, inequality, poverty, HIV and AIDS
surface again strongly
 Major concern is trade and current account deficit
 More difficult to finance current account
 Mining and manufacturing sectors struggling, and even restaurant and
fast food sector
 Unemployment increasing & poverty is high
 Negative impact on economic growth
Challenges facing the agricultural sector
The issues identified are mere pointers as to some of the many challenges facing
the sector.
Challenges
 Budgetary allocation to agriculture should be at least 10 percent: SA is 1 percent

 Support to agriculture as measured by producer support equivalent: PSE in SA
6 percent (within the rules of the WTO – there is space for support to increase).
Of the lowest in the world, however we need rural growth / new farmers
 R&D allocation insufficient to address international competitiveness – should
be increased to international accepted standards
 Infrastructure needs – roads vs rail (70 percent road vs 30 percent of freight)
 Agricultural potential: only 12.6 percent of land arable with little scope for lateral
expansion
 Poverty alleviation
–Poverty rates in the various provinces ranged from 24.9 percent in Gauteng and 28.8
percent in the Western Cape to 57.6 percent in the Eastern Cape and 64.6 percent in
Limpopo (Armstrong et al., 2008)
–The poverty rates of households and individuals in the rural areas were 54.2 percent
69
and 67.7 percent, respectively – more than double the corresponding rates for urban areas
(21.9 percent and 32.7 percent) (Armstrong et al., 2008) Adequate legal framework to
support sanitary and phytosanitary measures (SPS)and challenges
 Adequacy of own labs, accreditation, tests being used, capacity of staff and pesticide
registrations
 State Veterinary Services (under-manned)
 Stock theft (1 April 2008 – 31 March 2009)
 Losses = R365 872 700 (Source: SAPS & RPO, 2009)
 Farm murders – rural security should be a top priority Private public
partnerships not in place
 International competition increases
 Quality requirements increase costs to farmers
 Production costs are increasing – price cost squeeze
 Requests for higher import duties turned down (less protection)
 Commodity markets
– Lowest production cost
– Compete on price
– Volatile markets
– Compete with export countries
 Changing international food demand – higher value products/ stricter quality requirements –
high level Market intelligence/ research and development within government supportive
framework needed
 Services to agriculture should be expanded
 Strategic plans of provincial governments should be aligned to government policy and be
implemented in partnership with government
 Efficient co-ordination between different government departments with an impact
on agriculture is of vital importance
 Dualistic nature of agriculture and land redistribution
 Uncertain property rights
 Risk in crop production
 High debt levels
 Restrictive labour policies
 HIV / AIDS
 Rural land tax
 Under-investment in the rural economy
 Competitive pressures on agricultural producers and agribusiness
 Bankruptcy of commercial farms
 Low investor confidence in agriculture
Opportunities in South African Agriculture
 Market-led land reform

 Deregulation of agricultural marketing access to foreign markets
 Smallholder participation in value-added chains
 Agricultural research
 Institutional change
 Co-operation among role players
 Increasing living standards in emerging and developing countries
 More commodity-intensive economic growth
 More emphasis on food security
 More emphasis on sustainability, i.e. biofuels
70
 More emphasis on value-adding, i.e. agri-processing
 Rural Development
 Job creation for the less educated

(1) Discuss the reasons for the structural trends in the SA export and import market.
What would the impact of dumping be on the South African market from a
producer and consumer point of view. (05)
(2) The composition of SA’s gross value of production by main branch has
changed significantly over the years. What are the main contributing
factors to these trends?(10)
(3) South Africa has become a net importer of staple crops. Discuss the
long term trends pertaining to area, production and yields of staple crops. (10)
(4) Describe South Africa’s agricultural economic position in respect of
each of the factors of production. Mention the strengths and weaknesses. (10)
(5) Determine and propose a strategy of how the SA agricultural sector can be
global competitive. (10)
3.16 CONCLUSION
Agriculture is important to the SA economy as it is highlighted by the delivery
of food to the nation at affordable prices, the relative contribution to the GDP,
its share of the labour force and its contribution as earner of foreign exchange.
The gross value of agriculture production expanded by 10.7 percent between
1990 and 6 percent between 1995 and 2000, well below the inflation rate. The
top field crops, maize, wheat, sunflower seed, groundnuts, soya beans and
grain sorghum account almost 62 percent of the gross value of field crop
production in 2000.
71
LEARNING UNIT 4
THE DEMAND FOR AND SUPPLY OF AGRICULTUR AL PRODUCTS
This study unit deals with the economic theory of demand for and supply of
agricultural products. It illustrates the basic elements of clear thinking in economic
theory.

Identify factors that determine agricultural supply curves and those that
cause these curves to change;
Recognize the major determinants of demand for both the resources and the
Produce of agriculture and the factors that influence demand;
Understand how supply and demand interact to determine prices and
quantities in both the resource markets and product markets of agriculture
understand the rationale for Government intervention in the market
Learn the basic concepts and determinants of the elasticity of demand
Use elasticity in the analysis of economic data on production and consumption,
and prices and incomes.
Apply the concept of elasticity to agricultural supply
TIME ALLOCATION
4.1 INTRODUCTION
This learning unit will introduce you to the theory of demand and supply in a rational
economic decision-making for agricultural production. The aim is to equip you with
an understanding of the tools of demand and supply. You will also become familiar
with tools that can be applied to a range of important topics such as: evaluating how
global weather conditions will affect agricultural production and market prices of
agricultural commodities; assessing the impact of government rent control on dor-
mitory space; understanding how taxes, subsidies, and other government policies
affect both consumers and producers.
STUDY
Penson, J.B., Capps, O., Rosson C.P. & Woodward R. 2015. Chapters 4 & 5: Intro-
duction to Agricultural Economics. 5th Edition.
Suggested additional reading material

Mohr, P., Fourie, L. and associates. 2009. Chapters 7 & 8 in Economics for South
African students. JL van Schaik Publishers Pretoria.
72
4.2 THE DEMAND FOR AGRICULTURAL PRODUCTS
Definition: Agricultural demand may be defined as a schedule showing the various
amounts of a produce that consumers want to buy under given conditions, at each
specific price in a set of possible prices during a specified period of time.
Demand -refers to the various quantities of a good or service that consumers are
willing to purchase at alternative prices, ceteris paribus:
– Conveys both the elements of desire for the commodity and capacity to pay
(must be willing and able to pay).
– Emphasizes the relationship between quantity bought and its price, although
there may be other factors that determine how much a consumer wants to
purchase.
(Note: The Ceterus paribus condition – means that all other factors remain constant,
and is called the ceteris paribus condition or assumption (in Latin it is the term “for
all other things being equal”.)
The law of demand
The law of demand asserts that the quantity demanded of a good or service is
negatively or inversely related to its own price.
– When the price increases, less quantity of the good or service will be purchased
by consumers.
– When the price decreases, more quantity of the commodity will be purchased.
There are two reasons for this inverse relationship, viz:
In the case where the price of good decreases:
Substitution effect
– When price of a good decreases, the consumer substitutes the lower priced
good for the more expensive ones.
Income effect
– When price decreases, the consumer’s real income (or purchasing power)
increases, so he/she tends to buy more.
– Therefore, if P Qd
In the case where the price of good increases:
Substitution effect
– When the price of a good increases, the consumer tends to substitute it with
the lower priced goods.
Income effect
– When price increases, the consumer’s purchasing power (or real income)
decreases, so he/she tends to buy less.
– Therefore, if P Qd
The relationship between quantity purchased and alternative prices may be

presented in three ways:
– Demand schedule – in tabular form
73
TABLE 4.1
Demand schedule
Price (c/kg) Quantify demanded

(in kg)
280 2
210 5
160 9
120 12
90 15
80 20
– Demand curve – in graphical form
The demand curve
FIGURE 4.1
Demand curve for product
– Demand Curve. Note that the negative slope of the demand curve depicts the
inverse relationship between price and quantity demanded.
Demand function – in equation form

The demand function
Quantity demanded (Qd) is expressed as a mathematical function of price (P). The

demand function may thus be written as:
Qd = a – bP
Where a is the horizontal intercept of the equation or the quantity demanded when
price is zero
(-b) is the slope of the function. Example Qd = 8 - 0.02
74
Law of Diminishing Returns. The second proposition underlying the law of demand is found in
what economists call the law of diminishing returns.
Definition: The Law of Diminishing Returns is a general rule that states that when
units of a variable factor of production are added to a fixed factor, the extra output
that results from the extra units of the variable factor may at first rise, but sooner
or later the extra output will fall (diminish), and eventually total output will fall.
The Law of Diminishing Returns is a key concept in economics. It is used to explain

many of the ways the economy works and changes. It is a relatively simple idea;
spending and investing more and more in a product where one of the factors of
production remains the same means the enterprise will eventually run out of steam.
The returns will begin to diminish in the long run. If more fertilizer and better
machinery are used on a hectare of farmland, the yield will increase for a while but
then begin to slow. A farmer can only get so much out of the land, and the more
the farmer works, the harder it gets.
The economic reason for diminishing returns of capital is as follows:
When the capital stock is low, there are many workers for each machine, and the
benefits of increasing capital further are great; but when the capital stock is high,
workers already have plenty of capital to work with, and little benefit is to be gained
from expanding capital further.
Interpretation of market demand
Market demand is simply the sum of all individual demands.
Change in Quantity demanded vs. Change in demand
Change in quantity demanded – is a movement along the same demand curve,

due solely to a change in price, i.e., all other factors held constant.
Change in demand – is a shift in the entire demand curve (either to the left or to the
right) as a result of changes in other factors affecting demand.
This can be illustrated graphically as follows:
75
Draw two graphs on the same page to illustrate the effect of price on the demand
of wine to the local and export markets in South Africa using the information from
the table below:
Price of wine per Local supply of wine in crates Export supply of wine in
crate crates
R150 36 000 10 000
R190 38 000 20 000
R220 40 000 30 000
R240 41 000 40 000
R270 42 000 50 000
R300 43 000 60 000
R310 45 000 70 000
R330 47 000 80 000
R350 49 000 90 000
R370 50 000 100 000
FEED BACK.
4.3 DEMAND SHIFTERS – FACTORS THAT AFFECT THE DEMAND FOR

PARTICULAR PRODUCTS
What are the basic non-price determinants of demand?
4.3.1 Changes in prices of related commodities (substitutes and complements)

in consumption
Substitutes – are goods that are substitutable with each other (not necessarily
perfect).
Examples are coffee and tea, Coke and Pepsi, beer etc.
When the price of a substitute increases, the quantity bought of a good increases
– (direct relationship).
76
Complements – are goods that are used or consumed together.
Examples are coffee and sugar, bread and butter, tennis rackets and tennis balls.
When the price of a complement increases, quantity purchased of a good decreases
– (inverse relationship).
4.3.2 Changes in incomes of consumers: as income changes, demand for a

commodity usually changes
Normal goods – are goods whose demand responds positively to changes in
income. Economic progress in currently developing countries will greatly increase
demand for such products.
– Most goods including farm food products are normal goods. As income
increases, more shoes, TVs, clothes, are bought.
Inferior goods – are goods whose demand responds negatively to change in
income.
– Examples are firewood, “chicken feet”, bicycles, etc.
The relationship between income and quantify purchased is measured by a

coefficient called income elasticity of demand.
4.3.3 A change in consumer tastes and preferences

When consumer tastes shift towards a particular good, greater amounts of a good
are demanded at each price.
Example: consumer preferences for drinking mineral water increases so its demand
curve will shift rightward.
If consumer preferences change away from a good, its demand will decrease; at
every possible price, less of the good is demanded than before.
Example: the demand for VCDs and VHS tapes decreases due to preference
for DVDs.
Farm food products sold under monopolistic competition or oligopoly are often
highly advertised, generally by brand name, as a means of differentiating the
product of the processing-marketing firm. This tends to increase the demand for
the brand that is advertised. An unfavourable change in consumers’ tastes will
cause the demand to decrease, shifting the curve to the left.
4.3.4 Changes in consumer expectations

Expectations about future prices and income affect our current demand for many
goods and services.
If we expect prices of dried fish to increase with coming of the rainy season, we
might stock up on the good to avoid the expected price increase. Thus, current
demand for dried fish might increase
those who expect to lose their jobs due to bad economic conditions, will reduce
their demand for a variety of goods in the current period.
4.3.5 Changes in the number of consumers: affects the total demand for a
good
The growth of the population provides the basis for a general increase in the
demand for agricultural products around the world, provided per capita income
does not fall or other adverse consequences do not occur.
Total demand is also known as market demand. It is the summation of the
individual demand of all consumers
77
An increase in the number of consumers shifts the market demand curve to the
right
Example: demand for housing and transportation increases with an increase in
population.
On the other hand, less consumers will cause the market demand to decrease,
resulting in a shift to the left of the entire demand curve.
The question that comes to our mind is that given the world-wide growth in
population numbers would food production keep up with population growth
and food demand? In answering this question one should consider the following:
Rapid urbanization and changing demographics in developing countries has

an impact on consumption patterns. Moreover, a smaller number of farmers, in
percentage terms at least, have to supply a larger number of consumers. While this
may not imply diversification it does require adaptation to new farming techniques
to meet the higher level of demand.
One should also consider changing consumer demand patterns. As consumers

in developing countries become richer, food consumption patterns change notice-
ably. People move away from a diet based on staples to one with a greater content
of animal products (meat, eggs and dairy) and fruits and vegetables. In turn, more
dynamic farmers are able to diversify to meet these needs.
One should also consider the aspect of food security. Although there might be
enough food available to meet the demand the issue of food distribution and af-
fordability need to be assessed.
4.4 THE SUPPLY OF AGRICULTURAL PRODUCTS
Definition of supply
Supply may be defined as a schedule showing the various amounts of product

that producers are willing to able to produce and make available in a market,
under given conditions, at each specific price in a set of possible prices during a
specified time period.
Supply refers to the various quantities of a good or service that producers are
willing to sell at alternative prices, ceteris paribus.
– Obviously, firms are motivated to produce and sell more at higher prices.
– This emphasizes the relationship between quantity sold of a commodity and its
price. However, there are other factors that determine how much a producer
would like to produce and sell.
The Law of supply

The law of supply states that the quantity sold of a good or service is positively
or directly related to its own price.
– When the price increases, more of the good or service will be sold
– When the price decreases, less of the commodity will be purchased
There are three ways of presenting the supply relationship:
The relationship between quantity supplied and alternative prices may be presented in 3 ways:
– Supply schedule – in tabular form.
78
TABLE 4.2
The supply schedule for a product
Supply Schedule for a product
Price of Product Quantity Supplied per month (metric

(Rands) tons)
0 0
50 1
100 2
150 3
200 4
250 5
300 6
350 7
400 8
FIGURE 4.5
Supply curve – in graphical form
Supply function – in equation form
Supply function
Quantity supplied ( Qs) is expressed as a mathematical function of price (P). The

supply function may thus be written as:
Qs = c + dP
79
Where:
c is the horizontal intercept of the equation or the quantity demanded when price
is zero
d is the slope of the function.
Example: Qs = 0 + 0.02P
Change in Quantity Supplied vs. Change in Supply
Change in quantity supplied – is a movement along the same supply curve,

due solely to a change in price, i.e., all other factors held constant.
Change in supply – is a shift in the entire supply curve (either to the left or to
the right) as a result of changes in other factors affecting supply
FIGURE 4.6
Change in quantity supplied
FIGURE 4.7
Change in supply
80
FIGURE 4.8
Change in supply
4.5 THE MARKET EQUILIBRIUM

Market equilibrium is that state in which the quantity that firms want to supply
equals the quantity that consumers want to buy.
The price that clears the market is called the n price and the quantity
(sold and bought) is called the equilibrium quantity.
The market is said to be “at rest” since the equilibrium price and equilibrium
quantity will stay at those levels until either demand or supply changes.
TABLE 4.3
The market equilibrium
At prices above the equilibrium price, quantity supplied is greater than quantity
demanded, resulting in a temporary surplus.
81
– In a surplus supply situation, consumers may want to buy far fewer of a given
product than producers are prepared to supply at a specific price. Producers will
try to reduce price to entice consumers to buy more of the product. Actions
by both producers and the public will wipe out the temporary surplus.
– At prices below the equilibrium price, consumers desire to buy more of a
product than are available, creating a temporary shortage.
– Consumers will try to outbid each other, thus pushing up the price. As price
rises, firms increase their production while some consumers reduce their
purchases.
FIGURE 4.9
The market equilibrium
Market equilibrium
Algebraic solution: equate the demand and supply equations (Qd=Qs).
Qd = 8 - 0.02P
Qs = 0 + 0.02 P
Step by step solution:
– 8 - 0.02P = 0 + 0.02 P
– 0.04P = 8
– P* = 8/0.04 = 200
– Qd = 8 – 0.02(200) = 8 – 4 = 4
If P* =200 per unit, then Q* = 4 per month
4.6 GOVERNMENT INTERVENTION

Government intervenes in various forms. It provides many important functions such
as provision of law and order, a national defence, an infrastructure (construction
and maintenance of highways, sanitation programs, medical programs, educations
programs, communication facilities, etc.) and economic and social regulations. The
latter functions include providing the legal foundation and social environment con-
ducive to an efficient market system, maintaining competition in the marketplace,
redistributing income and wealth to accomplish specific social objectives, monitoring
82
the use of resources, and stabilizing the economy.
The rationale typically advanced for government intervention in the agricultural

sector of an economy is the need to:
Support/protect an infant industry

Curb market powers of imperfect competitors when necessary to promote social
good
Provide for food security
Provide for consumer health and safety, and
Provide for environmental quality
Tariffs, a form of tax on imported goods that raises their price to domestic consum-
ers, and import quotas are typically used to shield an infant industry from foreign
competition. Many nations intervene in their food and fibre industry to ensure an
adequate food supply from domestic sources. Although it is an important issue in all
countries, some nations drain off resources from other potential uses in all countries,
some nations drain off resources from other potential uses in an effort to meet their
food needs internally.
Aforementioned changes will only occur if the market forces of supply and demand
are free to establish equilibrium prices and quantities of goods and services. Quite
frequently, however, consumers, trade unions, farmers, business people and politi-
cians are not satisfied with prices and quantities determined by the free market.
Government intervention due to dissatisfaction can take different forms including:
Setting maximum prices (price ceilings, price control) – see 221–223

Setting minimum prices (price supports and price floors) – see 225–228
Subsidising certain products and activities
Taxing certain products or activities
4.6.1 Why do governments intervene in agriculture?

to reduce price fluctuations
to raise farm incomes
to protect rural communities
to encourage greater self-sufficiency in food
4.6.2 What causes short-term price fluctuations?

fluctuations in the harvest
low price elasticity of demand
83
TABLE 4.4
Elasticities of demand for various foodstuffs
FIGURE 4.10
Inelastic demand for food
4.6.3 Causes of declining farm incomes

low income elasticity of demand
increases in supply (we have seen a significant increase in average yields of
agricultural products)
a decline in food prices over time
84
FIGURE 4.11
Decline in food prices over time
Types of government intervention in agriculture
buffer stock to stabilise prices
FIGURE 4.12
Buffer stocks to stabilise prices
85
FIGURE 4.13
Buffer stocks to stabilise prices
buffer stocks to stabilise incomes
FIGURE 4.14
Buffer stocks to stabilize incomes (bought into buffer stock)
86
FIGURE 4.15
Buffer stocks to stabilize incomes (release from buffer stock)
Subsidies
FIGURE 4.16
Effect of subsidies in which the country is self-sufficient
87
FIGURE 4.17
Effect of subsidies on foodstuffs which are partly imported
High fixed (minimum) prices
FIGURE 4.18
Minimum price where some of the product is importee
88
FIGURE
4.19
Minimum price for a product where the EU is self-sufficient
FIGURE 4.20
The cost to the taxpayer of high fixed prices
89
FIGURE 4.21
The cost to the taxpayer of subsidies
reducing supply
quotas
taking land out of use (e.g. set aside)

(1) Use supply and demand analysis to illustrate the likely effects of a load shed-
ding on the equilibrium price and quantity in each of the following markets.
(a) the market for orange juice. (Hint: The oranges grown primarily used
to make orange juice.)
(b) the market for beef.
(c) the market for bread. (Hint: Bread is made from wheat).
FEEDBACK
4.7 ELASTICITY OF DEMAND AND SUPPLY
Having considered some of the fundamental concepts of supply and demand, let
us turn our attention to one concept that is crucial throughout economics and eco-
nomic analysis: elasticity. On a given demand (or supply) curve, elasticity refers to
the percentage change in quantity demand (or supplied) relative to the percentage
change in price as we move from one point to another. This rather simple concept
90
is crucial in understanding the economic organisation of functioning of agriculture.
READ
Penson, J.B., Capps, O., Rosson C.P. & Woodward R. 2015. Introduction to
Agricultural Economics. Chapter 5: Measurement and Interpretation of
Elasticities.5th Edition.Own-Price Elasticity of Demand (Ed) p. 70
Definition: Elasticity of demand is the percentage change in the quantity demanded

of a product or service in response to a given percentage change in the price of that
product or service, other things being equal. It depends primarily on percentage
changes and is independent of the units used to measure quantities and prices.
The own-price elasticity of demand is defined as:
Percentage of change in quantity demanded

Ed
Percentage change in price
Calculating Ed:
All 3 these equations below yield the same answer
Ed = %∆Qd / %∆P
= (∆Qd / ∆P) * Po / Qo
= (1/slope) * Po / Qo
Interpreting an elasticity estimate
If Ed = -0.75, what does it tell us?
For every 1% change in price, Qd will change by 0.75% in the opposite direction
Example:
P0 = 8 P1 =7
Q0 = 40 Q1 = 48
Step 1: ∆Q = 48 – 40 = 8
∆P = 7 – 8 = -1
Step 2: Use the formula for Ed
Step 3: Ed = (∆Qd / ∆P) + Po / Q∆o

= (8/-1) * (8/40) = -1.6
This means that for every 1% change in price there is a 1.6% change in the quantity
demanded in the opposite direction.
Since we know that an Ed = -1.6 this means that a 1% change in price results in a
1.6% change in quantity demanded in the opposite direction, what would a 20%
increase in price result in?
Step 1: Ed = %∆Q / %∆P

Step 2: %∆Q = Ed * %∆P
91
Step 3: %∆Q = -1.6 * 20% = -32%
What would a 20% increase in the quantity demanded result in?
Step 1: Ed = %∆Q / %∆P

Step 2: %∆P = 1/Ed * %∆Q
Step 3: %∆P = (1/-1.6) * +20% = -12.5%
We know how to mathematically determine Ed, what does it tell us about elasticity?
Economists usually drop the negative sign of the elasticity of demand for they know
that P leads to Q
[Ed] > 1 : elastic demand (very responsive to price changes).

[Ed] < 1 : inelastic demand (not very sensitive to prices)
[Ed] = 1 : unitary elastic (ratio of %∆s = 1)
Therefore
[Ed] > 1 : %∆Q > %∆P

[Ed] < 1 : %∆Q < %∆P
[Ed] = 1 : %∆Q = %∆P
4.7.1 Infinitely elastic demand

One of the basic conditions of pure competition is the fact that a purely competitive
individual firm cannot influence the market price. The total output of the firm or
any portion of it can be sold at the market price existing at the time of sale. If the
firm tries to get a higher price, nobody will buy, and there is no point in selling at
less than the competitive price. Thus, the purely competitive individual firm faces a
perfectly elastic demand curve. This, however, has nothing to do with the elasticity
of demand for the output of the industry, or for the output of a given of a given com-
modity or group of commodities. The perfectly elastic demand curve is a horizontal
straight line. The coefficient of elasticity of demand would be infinitely (Ed = ∞)
4.7.2 Infinitely inelastic demand

Sometimes a certain quantity may be demanded in a market regardless of price;
demand will be infinitely, or perfectly, inelastic. For example, in the case of market
contract where the buyer agrees to buy a specific amount of a product or service
without stipulating the price, the buyer’s demand in respect of that contract could
be said to be infinitely inelastic. The price might be set on the day of delivery, for
instance, according to the market price existing at the time. The demand would ap-
pear in a diagram as a vertical straight line. The coefficient of elasticity of demand
would be zero (Ed = 0).
4.8 DETERMINANTS OF ELASTICITY OF DEMAND

(a) Substitutability
Generally speaking, the larger the number of good substitute products available, the
greater the elasticity of demand. The demand for the product of the purely competi-
tive firm is infinitely elastic because there are an infinitely large number of perfect
substitutes for the firm’s product.
(b) Relative price levels in relative markets

92
Commonly, price elasticity of demand for farm food products is greater at the retail
level than at the farm level. This difference is largely due to the differences in the
relative level of prices between the two markets or to the value added to the product
between two markets.
(c) Substitutability in the domestic and export markets
The large differences in elasticity between markets are due to the fact that although
the demand for total farm output is highly inelastic in the domestic market, exports
compete directly with domestic farm production in the importing country and with
alternative sources of farm products from other exporting countries.
(d) Substitutes and complements
Since elasticity of demand is affected by the availability of substitutes, it is also affected

in both input and product markets by the existence of complements – commodities
or services that tend to be used together. In the farm resource or input markets for
example, tractors and tractor fuel, hybrid maize and fertilizers tend to function as
complements. In farm food markets, bread and butter are examples of complements.
(e) Importance in respect to income and costs
Other things being equal, the greater the importance of a product or service in a fam-
ily’s budget, the greater the tendency for demand to be elastic. A 50 percent increase
in the price of a particular spice or seasoning or a certain dried fruit will have very
little effect on the quantity demanded even though there might be close substitutes.
(f ) Necessities versus luxuries
Demand tends to be inelastic for necessities and elastic for luxuries. Bread tends
to be regarded as a necessity, and the demand for bread is generally inelastic. An
increase in the demand for bread will have much effect on the quantity demanded.
The demand for salt tends to be highly inelastic for a number of reasons. A certain
amount of salt is necessary to for health and to make food palatable.
(g) Time
Generally speaking, the longer the time allowed for the adjustment to a change in
price, the more elastic the demand, other things being equal. This is due in part to
the fact that people are creatures of habit, and it takes time for habits to change.
4.9 OWN PRICE ELASTICITY OF DEMAND

Demand curves show how sensitive consumers are to price changes
(a) Inelastic demand
When a decline in price P brings a smaller percentage increase in quantity demanded

Q so that total revenue (P X Q) declines, the demand is inelastic, i.e. Ed is between
0 and -1. (Note that Ed denotes elasticity of demand).
93
FIGURE 4.22
Relative inelastic demand for a product
Relatively inelastic
(1) Quantity demanded is not affected very much by price changes.

(2) Therefore not very sensitive to price changes.
(3) Not many substitutes, short period of time, and small proportion of budget.
(4) ∆ Q is not as great as the ∆ P.
[Ed] < 1: %∆Q < %∆P
(b) Elastic demand
When a decline in P increases Q so that the total revenue (P X Q) increases, the

demand is elastic, i.e. Ed is more negative than -1, such as -1.5, -2 and so on.
(c) Relative elastic demand for a product
FIGURE 4.23
Relative elastic demand
94
Relatively elastic
(1) Quantity demanded is affected very much by price changes.

(2) Therefore very sensitive to price changes.
(3) Many substitutes, long period of time, and large proportion of budget.
(4) ∆ Q is greater than the ∆P.
[Ed] > 1: %∆Q > %∆P
(d) Unitary elastic demand
When a decline in P results in an exactly compensating percentage increase in Q so

that total revenue (PX Q) is left exactly unchanged, there is unitary elastic demand.
This is where Ed = -1
FIGURE 4.24
Unitary elastic demand
Million Tons Price per ton Total Revenue Ed

per week
per week
3.5 130 455
Inelastic
3.6 120 432
Unitary elastic
4 108 432
Elastic
5 100 500
TABLE 4.5
Example of a numerical calculation of elasticity coefficient
95
Q ∆Q Price ∆ Price Q1+Q2 P1 + P2 Ed = ∆dQ ÷ ∆P
Million Million
per ton per ton 2 2 (Q1+Q2)/2 (P1 + P2)/2
tons tons
per per
week week
3.5 130
0.1 -10 3.55 125 0.1 ÷ -10 = - 0.3521
3.6 120 3.55 125
0.4 -12 3.8 114 0.4 ÷ -12 = -1
4 108 3.8 114
1 -8 4.5 104 1 ÷ -8 = -2.8889
5 100 4.5 104
96
Example of Arc elasticity:
The percentage change in the quantity of hamburgers demanded, for example, is
equal to the change in hamburgers divided by the average quantity of hamburgers
consumed during the period. The percentage change in the price of hamburgers is
equal to the change in price of hamburger divided by the average price of hamburg-
ers during this period.
Let say the consumption of hamburgers drops from three to two hamburgers when
the price increases from R 7 to R 7.50 per hamburger. The average quantity over this
range would be equal to 2.5 (i.e. (2+3) / 2, while the average price would be R7.87
i.e. (R 8.75 + R7)/2 . The own-price elasticity of demand would be
= (Qa – Qb) / ((Qa + Qb) /2)

(Pa – Pb) / ((Pa + Pb) / 2)
= (2-3)/2.5
(R8.75 – R7) / 7.87
= –1.79
Please note that Qa and Pa represent the quantity and the price after the change and
Qb and Pb represent quantity and price before the change.
Thus a 1% fall (rise) in the price of a hamburger will increase (reduce) quantity
demanded by 1.8%.
This formula measures average price elasticity between two points on the demand
curve and is technically called the arc elasticity.

(1) Consider the market for field crops.
(i) Is the demand for grains relatively elastic or relatively inelastic with respect
to the price? Explain why.
(ii) Is the demand for field crops relatively elastic or relatively inelastic with
respect to income? Explain why.
(iii) Is the supply of field crops relatively elastic or relatively inelastic with respect
to the price? Explain why.
FEEDBACK
97
4.10 WHAT IS THE IMPACT OF PRODUCER REVENUE?
A cut in price brings about a larger increase in the quantity demanded. What is the
impact on the producer revenue.
FIGURE 4.28
Impact of price change on producer revenue
98
4.11 WHAT IS THE IMPACT ON THE CONSUMER SURPLUS?
The consumer surplus before the price cut as area Pbca. The consumer surplus after
the price cut is area Pacb. (see Figure 4.29)
FIGURE 4.29
Impact on price change on consumer surplus
Example: What happens in the case on an inelastic demand curve?

Assume the government cuts taxes, thereby increasing disposable income by 5%.
The income elasticity for chicken is 0.3645.
(a) What impact would this tax cut have upon the demand for chicken?
(b) Is chicken a normal good or an inferior good? Why?
99
FEEDBACK
Assume the government cuts taxes, thereby increasing disposable income (I) by
5%. The income elasticity for chicken is 0.3645.
(a) What impact would this tax cut have upon the demand for chicken?
Solution:
.3645 = %∆QChicken ¸ %∆I
.3654 = %∆QChicken ¸ .05
%∆QChicken = .3645 ´.05 = .018 or + 1.8%
(b) Is chicken a normal good or an inferior good? Why?
Chicken is a normal good but not a luxury since the income elasticity is
> 0 but < 1.0
4.12 CROSS-PRICE ELASTICITIES

Cross elasticity of demand or cross-price elasticity of demand measures the
responsiveness of the demand for a good to a change in the price of another good. It is
measured as the percentage change in demand for the first good that occurs in response
to a percentage change in price of the second good. For example, if, in response to a 10%
increase in the price of diesel, the demand of new tractors that are diesel inefficient
decreased by 20%, the cross elasticity of demand would be:
-
2
0
%
1
0
%
=-
2%
A negative cross elasticity denotes two products that are complements, while a positive cross
elasticity denotes two substitute products. These two key relationships may go against
one’s intuition, but the reason behind them is fairly simple: assume products A and B are
complements, meaning that an increase in the demand for A is caused by an increase in the
quantity demanded for B. Therefore, if the price of product B decreases, then the
demand curve for product A shifts to the right, increasing A’s demand, resulting in a
negative value for the cross elasticity of demand. The exact opposite reasoning holds for
substitutes.
The formula used to calculate the coefficient cross elasticity of demand is
EA,B = % change in the quantity demanded of product

A
% change in price of product B
100
4.13 APPLICABILITY OF DEMAND ELASTICITIES
Policymakers
Farmers
Consumers
Input Manufacturers
Food Processors and Trade companies
4.14 CONCEPTS AND DETERMINANTS OF ELASTICITY OF SUPPLY

Elasticity of supply is a measure of the extent to which the quantity supplied of good
changes when the price of the good changes, and all other influences on seller’s plans
remain the same (ceteris paribus).
Definition: Elasticity of supply is the percentage change in the quantity supplied

of a product or service in response to a given percentage change in its price, other
things being equal
Price Elasticity of Supply (Es)
= % Change in Qs
% Change in Price
Es = Percentage change in quantity supplied

Percentage change in price
– If Price Elasticity of Supply > 1, Supply is elastic

– If Price Elasticity of Supply = 1, Supply is unit elastic
– If price elasticity of supply< 1, Supply is inelastic
Perfectly Elastic Supply – When the quantity supplied changes by a very large
percentage in response to an almost zero increase in price
Elastic Supply – When the % change in the quantity supplied > the % change
in the price
Unit Elastic Supply – When the % change in the quantity supplied = the %
change in price
Inelastic Supply – When the % change in the quantity supplied is < the % change
in price
Perfectly Inelastic Supply – When the quantity supplied remains the same as the
price changes
Perfectly Inealstic Supply Curve
Perfectly inelastic
supply curve
Price
0
Quantity
FIGURE 4.30
Perfectly inelastic supply curve
101
Inelastic supply means that quantity does not change much with a change in price.
Perfectly Elastic Supply Curve
Price
Perfectly elastic
supply curve
0
Quantity
FIGURE 4.31
Perfectly inelastic supply curve
Elastic supply means that quantity changes by a greater percentage than the percent-
age change in price.
Click on Next to move on to the next section 4.16: Determinants of elasticity of supply
4.15 DETERMINANTS OF ELASTICITY OF SUPPLY
Time
The main determinant of the elasticity of supply is time that a producer has to re-
spond to a given change in price. The supply may perfectly inelastic in a monetary
period if the total quantity delivered is fixed and must be sold on the same day as an
example. Remember, supply grows more elastic over time, especially when enough
time has passed for new firms to enter the industry and for existing firms to increase
their output
Economists have identified three distinct time periods, viz:
– The market period

– The short run
– The long run
The market period is the time immediately after a change in market price during
which the sellers can’t respond by changing the quantity supplied
– During this period the supply curve may be perfectly inelastic or with some
positive slope because firms have limited ability to increase output
In the short run a firm has an essentially fixed productive capacity but labour
flexibility
– A firm has some ability to increase output
* A firm could go from two 8-hour shifts to three 8-hour shifts

* Store hours could probably be extended
* And so, an increase in demand will result in more output
In the long run there is sufficient time for a firm to alter its productive capacity
102
– The firm can leave the industry
– New firms can enter the industry
– When a rise in demand is considered to be long lasting, some existing firms
will add to their plant and equipment
– If demand falls, some or all firms will cut back on their plant and equipment,
while others may leave the industry
4.16 OTHER DETERMINANTS OF ELASTICITY OF SUPPLY
(a)..Ease of substitution of products
It is a well-known facto in economic studies, however, that farmers place

considerable emphasis on relative product prices in determining what
area of each crop to plant, but that the elasticities are comparatively low
for aggregate crop areas, or total farm output in respect of price. This is
because it is easy to shift from one crop that uses similar resources, such
as from wheat to oats, barley or sorghum. But generally, the total area
cultivated cannot be expanded very much in response to high prices, and
prices must drop very low before it will advantageous to let much land
lie idle. The total supply of grain tends to be much more elastic than the
supply of individual commodities.
Livestock present a somewhat different picture. In comparison with

grains, of course, it is much more difficult and takes longer to shift from
one kind of livestock to another. Although single herds can be sold
quickly when and operation becomes unprofitable, usually the sale of
breeding stock involves some sacrifice. Generally, farmers are reluctant
to reduce their herds, and it takes much longer to increase numbers of
livestock. In addition, in the beginning of a period of expansion one of
the steps is to keep more breeding stock instead of selling it. This not
only reduces the elasticity of supply in the short run but also tends to
reduce the total supply in the immediate market period.
(b) Elasticity of supply of resources
The elasticity of supply for any product will depend on the elasticity of the
supply of resources used to produce it. Where important resources are
relatively fixed in the short run – such as the supply of good farmland –
the supply of products produced from the land will tend to be inelastic.
Under modern advances in technology, however, the declining
importance of agricultural land relative to other inputs used in farm
production tends to make the total-supply curve for agriculture more
elastic both in the short run and the long run. This assumes, or course,
that the supply of the other major inputs – such as farm labour and
management, machinery, fuel, fertilizer and farm chemicals – is more
elastic than the supply of farm land.
103
4.3.DISCUSSION FORUM
The demand for agricultural production is price inelastic and the income
elasticity for agricultural products is low. How do these facts help explain the
disappearing family farm?

(1) Define elasticity of demand. What is an elastic demand? Unitary elastic demand? Inelastic
demand? (3)
(2) What is the coefficient of elasticity of demand? What does it measure? How is it determined?
Give an example.(04)
(3) What are the determinants of the elasticity of demand?(12)
(4) What is an infinite elastic demand? Where one might be found? Give an example (04)
(5) What is an infinitely inelastic demand? Where one might be found? (04)
(6) What is a complement? How is the cross-elasticity of demand deter-mined? (04)
(7) Define elasticity of supply. What is an elastic supply? Unitary elastic supply? Inelastic supply? (04)
(8) What is measured by the coefficient of elastic supply? Provide an example (04)
(9) How does time influence the elasticity of supply? Give examples of the elasticity of supply in the
immediate market period, the short run and the long run? (10)
(10) Within a given time period, how does the ease or difficulty of substitution among resources or
Product influence the elasticity of supply? (08)
(11) Define supply. What is the law of supply? What is the basic proposition on which this law is based?
In what ways does this proposition differ from the proposition underlying the law of demand? In what
ways are the propositions similar? (07)
(12) What is change in supply? What are the major factors that account for changes in the supply of
agricultural inputs? Agricultural products or outputs? How does a change in price expectations
influence supply? Give an example (07)
(13) Discuss any four determinants of the quantity supplied of a good? (08)
(14) Use a diagram or diagrams to explain the difference between a movement along a supply curve and
a shift of a supply curve. Mention a possible case of each? (06)
(15) Define demand. What is the law of demand? On what general proposition does this law rest? (05)
(16) What is a change in demand? Is a change in demand the same as a change in quantity demanded?
Can there be a change in quantity demanded without a change in demand? Why, or why not.
Illustrate.(05)
(17) What major factors account for a change in demand for agricultural products? (05).
(18) Explain ceteris paribus.(02)
(19) Use a diagram to distinguish clearly between a change in demand and a change in the quantity
demanded. Mention a possible cause of each.(06)
(20) Define and illustrate market equilibrium. What is market equilibrium price? Market equilibrium
Quantity.(06)
104
LEARNING UNIT 5
INPUT/OUTPUT RELATIONSHIPS

Explain how physical production functions are plotted on graph paper
and on the computer to demonstrate that the amount of output received in
agricultural production depends on the amount of input applied/used.
Explain the Law of diminishing returns and explain how its applied to
agricultural production.
Explain how to resolve problems pertaining to the costing of agricultural
production.
Explain how profit maximization is determined for agricultural production
TIME ALLOCATION
5.1 INTRODUCTION
This study unit will introduce you input and output relationships of agricultural
production. The aim of this study unit is to use the concepts such as the production
possibility curves to develop a better understanding about the relationships between
production and costs in agriculture. It is essential to be able to compare the meanings
of costs in all its many aspects. Costs, as compared with market prices, determine
for agriculture what will be produced, how and for whom.
The study unit develops the basic physical relationships between the inputs used in
production and the resulting output, and the economic relationships between the
costs incurred in production and the resulting products. What are the physical and
economic principles that apply?
5.2 THE PRODUCTION FUNCTION

A production function could be described as a process that maps a set of inputs into a
set of outputs. There is a functional relationship between inputs and outputs, hence the
term production function. Production is the process of creating an economic good
or service from two or more other goods or services.
The basic idea is that it always takes two or more sets of resources, or factors of
production such as capital and labour, to create another product or commodity.
Definition: The production function is the technical relationship between inputs

and outputs, indicating the maximum amount of output that can be produced with
each and every set or combination of the specific inputs.The output from a
production function is known as the total physical product and usually denoted by
Y.
105
STUDY
Prescribed material
Agricultural Economics. Chapter 6: Introduction to Production and Resource
Use. 5th Edition
Suggested reading material
Mohr, P., Fourie, L. and associates. 2009. Chapter 11 in Economics for South African
students. JL van Schaik Publishers Pretoria.
5.3 MARGINALISM
This term refers to the incremental change that occurs due to a small change in
something else. To calculate a marginal change, it is necessary to calculate the
difference between an original value and the new value due to a small change in
controlling factor.
Change is represented with a symbol delta (∆).
5.4 ONE INPUT, ONE OUTPUT

We will focus on one input and one output as it relates to the production function
This can be done by assuming that we have only one input, i.e. y=f(x). The amount
of input that the producer gets depends on the amount of input used to produce.
This also be done by assuming that only one of the goods is variable while the
others are fixed, i.e. y = f(x1/x2, x3,....., xn)
Where:
Y denotes total physical product (TPP)
X1 – denotes the variable input or group of variable inputs
X 2 – denotes a fixed input such as total land in a given crop season
X 3 – denotes a second fixed input – such as family farm labour – having this
instance no alternative use
X4 – denotes other unidentified fixed inputs, or inputs assumed to be given, such

as given state of nature, rainfall and its distribution, the condition of the soil, and
so on.
The output from a production function is known as the total physical product and
usually denoted by Y.
STUDY
Prescribed material
Agricultural Economics. Chapter 6: Introduction to Production and Resource
Use. 5th Edition
106
Suggested reading material
Mohr, P., Fourie, L. and associates. 2009. Chapter 11 in Economics for South African
students. JL van Schaik Publishers Pretoria.
5.5 THE TOTAL PHYSICAL PRODUCT CURVE

The total physical product (TPP) curve is a graphical relationship between an
input and its corresponding output and shows how total product changes with the
quantity of a variable input employed. Total physical product (TPP) is the maximum
amount that can be produced with any given combination of fixed and variable inputs.
A fixed input is a factor of production that does not change as the level of output
is changed.A variable input is a factor of production that changes in such a way as
to change the level of output.
Example of a TPP curve
FIGURE 5.1
One input/one output
107
5.6 MARGINAL PHYSICAL PRODUCT
Marginal physical product (MPP) is defined as the change in output due to a change
in the input.
MPP= ∆y/∆x
Where ∆y= y and ∆x = x – x2

x2, y1 is one input output relationship on the production function, while x2, y2 is
another input output relationship on the production function
108
1
5.7 AVERAGE PHYSICAL PRODUCT

The average physical production (APP) can be defined as the level of output divided
by the level of input used.
APP = y/x
Where y is the level of output and x is the level of input
5.8 STAGES OF PRODUCTION

Figure 5.1 presents the relationship between TPP and its derivatives, MPP and APP.
FIGURE 5.2
Graphical presentation the three production stages
Stage I of production is where the MPP is above the APP, i.e. it starts where the input level
is 0 and goes all the way up to the input level where MPP=APP. This stage of the production
function is defined as that region where the average physical product is increasing. In this
region, the marginal physical product is greater than the average physical product. In this
region, each additional unit of input yields relatively more output on average.
Stage II of production is where MPP is less than APP but greater than zero, i.e. it
starts at the input level where MPP=APP and ends at the input level where MPP
= 0. This stage of the production process corresponds with the economically feasible region
of production. Marginal physical product is positive and each additional unit of input
produces less output on average.
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Stage III is where the MPP <0, i.e., it starts at the input level where MPP = 0.
This stage of production implies negative marginal return on inputs.
Most agricultural production functions relating to crop and livestock production have a narrow
range of increasing marginal productivity and a wide range of diminishing marginal
productivity. In livestock feeding for example and increasing marginal productivity of feeds
exists when the ration is below the level required for the maintenance of body weight. In this
case, an increase in the amount of feed by 10, 20 or 30 percent, which carries the ration out of
the maintenance range, will usually increase the gain by more than 10, 20 or 30 percent. Beyond
this range the relationship is mainly one of diminishing marginal feed productivity.
Unless you were paid to use the input, you would never produce in stage III. Under
perfect competition you would never produce in Stage I.
5.9 SHIFTING A PRODUCTION FUNCTION
As noted above, it is possible for the profit maximizing output level to occur in any of the three
stages. If profit maximization occurs in either stage 1 or stage 3, the firm will be operating at a
technically inefficient point on its production function. In the short run it can try to alter demand
by changing the price of the output or adjusting the level of promotional expenditure. In the
long run the firm has more options available to it, most notably, adjusting it’s production processes
so they better match the characteristics of demand.
This usually involves changing the scale of operations by adjusting the level of “fixed” inputs. If
fixed inputs are “lumpy”, adjustments to the scale of operations may be more significant than
what is required to merely balance production capacity with demand. For example, you may only
need to increase production by a million units per year to keep up with demand, but the
production equipment upgrades that are available may involve increasing production by 2 million
units per year.
FIGURE 5.3
Shifting a production function
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If a firm is operating (inefficiently) at a profit maximizing level in stage one, it might, in the
long run, choose to reduce its scale of operations (by selling capital equipment). By reducing the
amount of fixed capital inputs, the production function will shift down and to the left. The
beginning of stage 2 shifts from B1 to B2. The (unchanged) profit maximizing output level will
now be in stage 2 and the firm will be operating more efficiently.
If a firm is operating (inefficiently) at a profit maximizing level in stage three, it might, in the
long run, choose to increase its scale of operations (by investing in new capital equipment). By
increasing the amount of fixed capital inputs, the production function will shift up and to the
right.
5.10 THE LAW OF DIMINISHING RETURNS
The Law of Diminishing Marginal Returns states that as the producer adds more units of inputs
holding all other inputs constant, at some point the marginal physical product decreases, e.g.
labour, fertilizer, water etc. As a single resource is applied more intensively, the resource eventually
tends to accomplish less and less. Essentially it is a constraint imposed by nature.
This definition does not preclude diminishing returns beginning with the first
unit of the variable input.
Existence of diminishing returns relies on there being one or more fixed input
in production, e.g. land.
This law is mainly seen in the biological processes of agriculture.
TABLE 5.1
The production function
Input (x) Output (y) MPP=∆y/∆x APP = y/x Stage of

production
0 0
1 10 10 10.0 Stage I
2 25 15 12.5 Stage I
3 39 14 13.0 Stage I
4 52 13 13.0 Stage I/Stage II
5 62 10 12.4 Stage II
6 70 8 11.7 Stage II
7 75 5 10.7 Stage II
8 77 2 9.6 Stage II
9 71 -6 7.9 Stage III
10 62 -9 6.2 Stage III
In practise firms experience that by hiring more labourers they can make more productive use of
machines, which were underutilized. Output may initially increase. After a while, the firm may have
hired too many labourers given the number of machines. There may be overcrowding on the work
floor, mistakes may result, causing productivity to fall whilst costs will increase.
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5.11 RATIONAL AND IRRATIONAL STAGES OF PRODUCTION
Production functions of the classical type are divided into three segments as described above.
Irrational production: Stage I
For the producer to limit resource use to stage I is uneconomical. As production is increased from
zero the end of stage I, the average productivity of all previous inputs of the variable resource increases
continuously as more inputs are added. MPP is about APP throughout this stage. With each
additional unit of input, more is being added to the total output than was added on the average of the
previous input. This pays to produce up to the end of stage I where APP is at its maximum point.
Irrational production: Stage III
Stage 3 is also a level of resource use that is irrational; resources can be cut back of left idle, with the
effect of increasing the total output. The only difference is that now the variable resource rather
than the fixed resources is withdrawn from use. In either stage I or stage III it can be assumed that
irrational production exists if resources can be rearranged (increased or decreased).
Rational Production: Stage II
Now it is evident that stage II is the only rational stage of production. The rate at which variable
inputs are applied to fixed inputs cannot fall outside this range if the economic return is to be
maximised. But we cannot tell where production should fall within this stage until we know
something about prices of factors or products: the costs of production associated with each level of
output as well as the value of the output.
Effects of advances in technology
Advances in technology either:
Raise the production function? so that more is produced from a given resource use; or
Shift it? to the left so that the same amount can be produced with fewer resources.
The resources saved are likely to become available for other uses. The general experience with
technological advances in agriculture is that it has widespread implications not only for agriculture but
for other sectors as well.
5.12 TYPES OF DECISIONS IN AGRICULTURAL PRODUCTION
Factor-production decisions
The basis for factor-product decisions was addressed in the discussion on the production function.
Factor-factor decisions
If it has been decided which product shall be produced, decisions must be made about how much of
each input, or factor, to use. The rational answer depends on the prices of factors and how well one
substitutes for another, or how the marginal productivity of each factor compares with its cost or
price.
Product-product decisions
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Product-product decisions require judgements about how many enterprises to have on a farm, or how
many line of a product to produce in a plant, or how many resources to allocate to each enterprise.
5.13 PRODUCTION COSTS
Economic role of costs
How much should society produce – will be decided through political process and government
policies on taxes, budgets and incentives (prices and interest rates) would influence the society’s
decisions on how much to produce.
But how much will be produced by companies will be decided by consumers through their
demands (while consumer demand itself can be influenced by government policy)
Costs of production should not be seen only in terms of producing a commodity (x) as these costs
represent the desire of consumers for other items that could be produced instead, with the same
resources.
Economic Costs and Profits vs. Financial Costs and Profits
Economic costs include the highest valued alternative foregone by the resource owner when the
resource is used.
Total Economic costs = explicit costs + implicit costs
Explicit costs are payment made for such things as hired labour, rented land, and industrial
commodities or materials bought for the production of farm commodities.
Implicit costs: say owner gives his labour services to run a firm – then his opportunity cost of
providing services to the firm are other earning opportunities given up when he decides to work in
this firm.
It does not matter how capital is acquired whether through borrowing from lend- ers or through
equity issue to investors, there is an opportunity cost of the use of this financial capital- economists
use the “normal return on financial capital” when calculating the opportunity cost of using capital
(irrespective of it being borrowed through bonds/banks or through share issue).
5.14 PRODUCTION, COSTS AND PROFITS
There are four broad categories of inputs that firms need for production:
(1) Inputs that are the outputs of some other firm. These are called intermediate products.
(2) Inputs that are provided directly by nature such as land or air.
(3) Inputs that are provided directly by people such as labour services.
(4) Inputs that are provided by the services of physical capital (machines).
The production function relates inputs to outputs. It describes the chronological relationship
between the inputs that a firm uses and the output that it produces. It is important to remember that
production is a flow: it is so many units per period of time.
In simple functional notation we have: q = f (L, K)
Where:
q is the flow of output per period, K is the flow of capital services, and L is the flow of labour services.
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Changes in the firm’s technology, which alter the relationship between inputs and outputs, are
reflected by changes in the function f
5.15 COSTS AND PROFITS

Compared with accountants, economists have somewhat different concepts of costs and profits.
Economists include the opportunity cost of the owner’s capital in the firm’s costs.
This is not just the depreciation of the capital, but an estimate of what the capital, and any other
special advantages owned by the firm, could have earned in the best alternative uses. When this larger
set of costs is deducted from revenues, the remainder is called economic profit.
If economic profit is positive, then the owner’s capital is earning more than it could in its next best
alternative use. If economic profit is negative, the return is less than in its next best use.
5.16 TIME HORIZONS FOR DECISION-MAKING
The short run is a length of time over which some of the firm’s factors of production are fixed. Typically,
physical capital (the size of the plant) is the fixed factor – labour and material inputs are typically
variable.
The long run is the length of time over which all of the firm’s factors of production can be varied, but
its technology is fixed.
The very long run is the length of time over which all the firm’s factors of production and its
technology can be varied.
Costs in the Short Run
Total cost (TC) is the full cost of producing any given level of output. Total cost is
divided into two parts, fixed cost and variable cost.
Total fixed cost (TFC) does not vary with the level of output. Total variable cost
(TVC) varies directly with output.
TC = TFC + TVC
Average total cost (ATC) is TC divided by the level of output. Average total cost can be
separated into average fixed cost (AFC) and average variable cost (AVC).
ATC = AFC + AVC
Marginal cost (MC) is the increase in total cost resulting from increasing the level of output by
one unit. ∆ TC
MC =
∆Q
Because fixed costs do not vary with output, the only part of TC that changes is the
variable costs.
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5.17 SHORT RUN COST CURVES
When AP is at a maximum, AVC is at a minimum. Each additional worker adds the same amount
of cost but a different amount of output.The AFC curve declines steadily as output rises. The
decline reflects spreading the overhead over more units of output.
FIGURE 5.4
Total variable and fixed cost
Since ATC = AVC + AFC, it follows that the ATC curve is obtained by vertically
adding the AVC and AFC curves
The shape of the ATC curve reflects the assumptions that average productivity increases
when output is low but at some level of output, average productivity be- gins to fall fast enough
so that AVC increases faster than AFC is falling. When this happens, ATC increases.
Each new worker adds the same to total costs, but differs in their marginal product. This implies
that each worker adds differently to marginal cost. If the MP curve is rising, then MC is falling.
Conversely, when the MP curve is falling, the MC curve
is rising.
Notes on Table 5.2
Fixed costs of R120 000 per annum in Table 5.2 do change regardless of the stage
of production. We assume that this total include the explicit cost of property taxes,
interest on farm mortgages, return on the owner’s equity etc. Figure 5.6 a shows
fixed
st sco stra i a t lia gh. ne
Figure 5.6a shows the variable cost starts at zero, rising upward and then curving
back. The variable cost is set at R 20 000 per unit and include explicit outlays for
soil fertility, chemical for control of pests and disease, cultivating, harvesting, drying
etc. Also they include implicit costs such as wear and tear on farm machinery and
equipment or unpaid family labour.
FIGURE 5.6
Total cost, total fixed cost and total variable cost.
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(1) Here are some hypothetical cost data. Fill in the rest of the table:
Output TFC TVC TC AFC AVC AC MC
(Rand) (Rand) (Rand) (Rand) (Rand) (Rand) (Rand)
1 100 200
2 100 350
3 100 425
4 100 500
5 100 525
6 100 560
7 100 600
8 100 780
9 100 1025
10 100 1400
FEEDBACK
Output TFC TVC TC AFC AVC ATC MC
(Rand) (Rand) (Rand) (Rand) (Rand) (Rand) (Rand)
1 100 200 300 100.0 200 300
2 100 350 450 50.0 175 225 150.0
3 100 425 525 33.3 141.7 175 75.0
4 100 500 600 25.0 125.0 150 75.0
5 100 525 625 20.0 105.0 145 25
6 100 560 660 16.7 93.3 110 35
7 100 600 700 14.3 85.7 70 40
8 100 780 880 12.5 97.5 110 180
9 100 1025 1125 11.1 113.9 125 245
10 100 1400 1500 10.0 140 150 375
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5.18 PRODUCTION COSTS IN THE LONG RUN
In order to make their long-run decisions:
Firms look at costs of various inputs and the technologies available for combining these inputs.
Decisions are taken on the basis of expected costs and expected usefulness of inputs ;and
Then decide which combination offers the lowest cost.
Technical and economic efficiency
Technical efficiency – as few inputs as possible are used to produce a given output.
Technical efficiency is efficiency that does not consider cost of inputs.
Economic efficiency – the method that produces a given level of output at the
lowest possible cost. It is the least-cost technically efficient process.
Economies of Scale and Long-Run Cost Curves
In the long run, a firm has many sizes to choose from.

The short run requires that scale be fixed – only one or a few resources can be
changed.
Determinants of the Shape of the Long-Run Cost Curve
The law of diminishing marginal productivity does not hold in the long run. All inputs
are variable in the long run.
The shape of the long-run cost curve is due to the existence of economies and
diseconomies of scale.

The cost function is the inverse of the production function that underlies it multi- plied by the
price of the input. Discuss
FEEDBACK
5.19 ECONOMIES OF SCALE

Scale means size
Economies of scale: the decrease in per unit costs as the quantity of production increases
and all resources are variable
Diseconomies of scale: the increase in per unit costs as the quantity of production increases
and all resources are variable
Constant returns to scale: unit costs remain constant as the quantity of production is increased
and all resources are variable.
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FIGURE 5.7
Typical long-run average total cost.
Economies of scale – means that long run average total costs decrease as output increases.
In real-world production processes, economies of scale are extremely important at low levels of
production.
An indivisible setup cost is the cost of an indivisible input for which a certain minimum amount of
production must be undertaken before the input becomes economically feasible to use.
Indivisible setup costs create many real-world economies of scale.
The cost of a blast furnace or an oil refinery is an example of an indivisible setup cost.
In the longer run all inputs are variable, so only economies of scale can influence the shape of the long-
run cost curve.
Because of the importance of economies of scale, business people often talk of a minimum efficient
level of production.
The minimum efficient level of production is the level of production that spreads setup costs out
sufficiently for firms to undertake production profitably. The minimum efficient level of production is
reached once the size of the market expands to a size large enough so that firms can take advantage of
all economies of scale.
5.20 MINIMUM EFFICIENT SCALE

Most industries experience both economies and diseconomies of scale.
The minimum efficient scale (MES) is the minimum point of the long-run average-cost curve;
the output level at which the cost per unit of output is the lowest.
The MES varies considerably across industries.
5.21 DISECONOMIES OF SCALE

Diminishing marginal productivity refers to the decline in productivity caused by increasing units
of a variable input being added to a fixed input.
Please note that the diminishing marginal productivity only applies in the Short-run
Diseconomies of scale refer to decreases in productivity which occur when there are equal increases
of all inputs (no input is fixed).
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Diseconomies of scale occur on the right side of the long-run average cost curve where it is upward
sloping, meaning that average cost is increasing.
As the size of the firm increases, monitoring costs generally increase. Monitoring costs are those
incurred by the organizer of production in seeing to it that the employees do what they are
supposed to do.
As the size of the firm increases, team spirit or morale generally decreases.
5.22 CONSTANT RETURNS TO SCALE

Constant returns to scale is where long-run average total costs do not change as output
increases.
It is shown by the flat portion of the LRATC curve
FIGURE 5.8
Typical long run average total cost curve
5.23 THE CONCEPT OF PROFIT MAXIMISATION

Profit is defined as total revenue minus total cost:
i.e. π = TR – TC
(where π to stand for profit because we use P for something else: price.)
Total revenue simply means the total amount of money that the firm receives from
sales of its product or other sources.
Total cost means the cost of all factors of production. But – and this is crucial – we have to think
in terms of opportunity cost, not just explicit monetary payments. If the owner of the business
also works there, we must include the value of his time. If the firm owns machines or land, we
must include the payments those factors could have earned if the firm had chosen to rent them
out instead of using them.
If only explicit monetary costs are considered, we get accounting profit. But to find economic
profit, we need to take into account the opportunity cost, implicit or explicit of all resources
119
employed.
The main constraints faced by the firm are:
technology, as summarized in the cost curves of the last lecture;

the prices of factors of production, also taken into account by the cost curves;
and the demand for its product.
Profit will be maximized when total revenue (TR) exceeds total cost (TC) by the
greatest amount.
This is also the point when the additional revenue of producing one more unit is equal to the
additional cost of producing one more unit and the additional cost is increasing. In other words,
profit is maximized when marginal revenue (MR) is equal to marginal cost (MC) and MC is
increasing.
Figure 5.10 compares the total vs marginal approaches to looking at profit maximization. When
MR = MC, no additional net revenue (i.e., profit) will be added to total profit. That means total
profit cannot go any higher and is at its maximum.
Comparing MR with MC (instead of comparing TR with TC) to determine the profit-

maximizing output focuses our attention to the incremental step ahead. It is like looking ahead
only for the next 100 meters when driving on a superhighway. When MR exceeds MC, producing
more will add to total profit. Similarly, when MC exceeds MR, producing more will subtract from
total profit.
But comparing MR and MC alone would not tell us whether the profit is positive or not. Marginal
cost looks at only costs that change with output (namely variable costs). For profit to be positive,
total revenue must be high enough to cover also fixed costs.
FIGURE 5.9
Profit maximization
120
Shareholders in a company might attempt to “constrain” the price and output decisions of
managers by introducing a minimum profit constraint.Consider the following diagram (Figure
5.10):
The normal profit maximising output is at Q2 (where the vertical distance between the total revenue
and total cost curve is at its greatest) Revenue is maximised at output Q1 where the total revenue
curve reaches a maximum (i.e. marginal revenue is zero)
If shareholders insist on the business achieving a minimum profit as shown, then the managers of
a business have the discretion to vary price and output anywhere between Q2 and Q4. At any
output beyond Q3 (where total revenue and total cost intersect) losses are made
FIGURE 5.10
Profit and revenue maximisation
5.24 PROFIT MAXIMISING DECISION

The firm uses MR and MC to decide how much to produce.
Suppose increasing output by one unit will bring in more additional revenues than it costs to
produce. That is, MR > MC. Then it makes sense to produce the unit, because doing so will
create more added benefit than added cost.
On the other hand, suppose your last unit cost more to produce than it brought in additional
revenue. Then MR < MC. And it makes sense to cut back your production (not produce that
unit after all), because the last unit created more added cost than added benefit.
So the only point at which you’re satisfied is where MR = MC. This is the general rule for profit
maximization, which we’ll use with any firm, whether a perfect competitor, monopolist, or
anything in between.
Graphically, we find the quantity q* where the MR and MC curves cross. What price
corresponds to this quantity? We find it by extending q* up to the demand curve to get gp*.
No other price will work: a higher price will reduce sales below q*, and a lower price will
increase sales above q*.
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FIGURE 5.11
Profit maximisation decision
How much profit does the firm actually make? To find this out, we need more information
about the firm’s costs. We can get all the information we need from ATC. Recall that ATC = TC/Q.
Therefore, TC = ATC×Q. Graphically, we can see this as the rectangle created by q* and ATC*
on the ATC curve.
FIGURE 5.12
Profit and the average total cost
Profit is defined as the difference between TR and TC. TR, as we saw before, is the rectangle
p*q*. TC is the rectangle ATC*q*. So the difference in the areas of these rectangles is profit, as
shown below.
FIGURE 5.13
Profit (total revenue – total cost)
As drawn, the firm is making profits, but it need not be such a happy outcome. If the ATC curve
had been higher, we could have gotten at ATC* greater than the price. When this happens, the
firm is making negative profits, also known as losses. This can happen even though the firm is
doing the best it can, because any choice other than q* would make it lose even more.
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5.25 THE PROFIT FUNCTION
The MC-MR approach yields the same optimal quantity that you would get if you looked directly
at a profit function. A profit function simply shows how much profit you make at each level of
output.
FIGURE 5.14
The profit function
A perfectly competitive firm has total revenue and total cost curves given by:

TR = 100Q
TC = 5,000 + 2Q + 0.2 Q 2
(a) Find the profit-maximizing output for this firm.

(b) What profit does the firm make?
FEEDBACK
The profit function is given by
We differentiate to get:
The maximum profit is
π* = -5000+98x245-0.2x245² = R 7005
The very highest point on this curve occurs at q*, which is also exactly the quantity at which the
MC and MR cross.
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Remember:
In production producers use inputs to convert them into outputs/products. The important
aspect in this area is the maximisation of production, stages of production when maximum
production is achieved and the avoidance of wastage of resources (inputs). When producing
costs are incurred and they are divided into fixed costs and variable costs. At the end the
producer aims at attaining maximum profits and it is important to know how to maintain the
profits in order to avoid any losses.

(1) Explain how the economist measures costs. What is the difference between an explicit
and implicit cost?
(2) What is the essential difference the short run and the long run in economics?
Provide a practical example.
FEEDBACK

(1) What is production? What is a production function? A fixed input? A variable input? (04)
(2) Write the general formula for a production function and explain what it means. Is it
necessary to know anything about prices in order to develop a production function? Why,
(05)
(3) Define marginal physical product (MPP) and explain how it is derived from total physical
product (TPP). How is average physical product (APP) derived? (03)
(4) What is the relationship between total product, marginal product, and
average product shown by the law of diminishing returns? (03)
(5) What is the Law of Diminishing Returns? Give a descriptive example. (4)
(6) The graph shows the yield (production) as the amount of fertilizers
(input) added to the soil are increased. Answer the questions that follows:
124
(a) Describe and explain the differences in the values between B and C? (03)
(b) What can the farmer deduct from this graph? (02)
(7) What is the relationship between marginal cost and marginal product? (02)
(8) By using a graph of TPP, locate the range of increasing returns and the range of
diminishing returns. Identify Stage I, Stage II and Stage III. Why is stage II is the only
rational range of production? (07)
Variable output with increasing inputs
Units of Total Output Average Marginal

Input
(tons) Output per Output of
(Labour)
Unit of Labour Labour
1 100 (tons) (tons)

(TPP)
2 350 (APP) (MPP)
3 702
4 1 152
5 1 700
6 2 190
7 2 604
8 2 904
9 2 908
10 3 114
11 3 240
12 3 300
13 3 250
14 3 080
Calculate APP and MPP
Use graph paper and plot TPP on a graph and APP and MPP on a.separate graph.(10)
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LEARNING UNIT 6
6MARKET STRUCTURES IN THE ECONOMY

At the end of the learning unit the learner is expected to:
Understand characteristics of a perfect competitive market and compared to the
characteristics of the actual market in South Africa.
Understand the characteristics and limitations of monopolistic competition with
special reference to agriculture.
Analyse shortcomings of monopoly, which are assessed in the context of
agriculture.
TIME ALLOCATION
Prescribed material
Penson et al. (2015): Chapter 8: Market Equilibrium and Product Price: Perfect
Competition
Penson et al. (2015): Chapter 9: Market Equilibrium and Product Price: Imperfect
Competition
6.1 INTRODUCTION
This learning unit will introduce you to the market for agricultural products. The aim is to explain
what perfect competition means, to analyze the decisions taken by an individual firm operating
under conditions of perfect competition and to analyze the equilibrium of a perfect competitive
industry. Moreover, the purpose is to introduce monopoly and monopolistic competition and
compare it with perfect competition.
6.2 THE CONCEPT OF A MARKET STRUCTURE

The market structure identifies how a market is made up in terms of:
The number of firms in the industry

The nature of the product produced
The degree of monopoly power each has
The degree to which the farm can influence price
Profit levels
Farm’s behaviour – pricing strategy, non-price competition, output levels
The extent of barriers to entry
The impact of efficiency
Major market structures include:
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(a) Perfect competition – is a theoretical market structure that features unlimited contestability
(or no barriers to entry), an unlimited number of producers and consumers, and a
perfect elastic demand curve.
(b) Monopolistic competition – also called competitive market where there are a large
number of firms, each having a small proportion of the market share and slightly
differentiated products.
(c) Oligopoly – where a market is dominated by a small number of firms that
together control the majority of the market share.
(d) Monopoly – where there is one provider of a product or service.
(e) Natural monopoly – a monopoly in which economies of scale cause efficiency to
increase continuously with the size of the firm. A firm is a natural monopoly if it is able
serve the entire market demand at a lower cost than any combination of two or more
smaller, more specialized firms or farming operations.
The spectrum of competition ranges from highly competitive markets where there are many
sellers, each of whom has little or no control over the market price to a situation of pure
monopoly where a market or an industry is dominated by one single supplier who enjoys
considerable discretion in setting prices, unless subject to some form of direct regulation by the
government.
These forms of market competition can be presented as follows:
The further to the left in Figure 6.1 we move the more competitive (fewer imper- fections) and
the further to right we move the less competitive (greater degree of imperfection) and the greater
the degree of monopoly power exercised by the firm.
FIGURE 6.1
Forms of market competition
6.3 THE COMPETITIVE MODEL

Generally a perfect competitive market exists when every participant is a “price taker”, and no
participant influences the price of the product it buys or sells.
Specific characteristics may include:
127
6.3.1 The number and size distribution of buyers and sellers that make up the
industry
Infinite consumers with the willingness to buy the product at a certain price, and infinite
producers with the willingness and ability to supply the product at a certain price. For example:
Large number of farms/firms;

Most farm’s output is so small, any one’s output, compared to total output, is
imperceptible;
What one farmer does has no influence on what any other farmer does;
The same can be said for consumers;
Market place has many consumers and the vast majority consumes small amounts.
Examples: There has been a significant increase in the concentration of farm hold- ings within
the commercial agricultural sector in South Africa. In 1996, there were
60 000 farming units, but by 2007 this had declined to fewer than 40 000 units. This suggests a
consolidation of landholding into larger units of ownership and production. Of the estimated 8
million households living in the non-metro areas of South Africa, 17 percent or 1.3 million
households have access to land for farming purposes. Most of these households (97 percent)
engage in some farming activity, mostly on relatively small plots of land. There are many
consumers (see populations numbers in Study Unit 3).
6.3.2 The degree of product differentiation

The characteristics of any given market good or service do not vary across suppliers.
A competitive market is characterized by undifferentiated or homogeneous products.

Homogeneous or undifferentiated products cannot be distinguished from one another. e.g.
No. 2 yellow maize.
If you feed livestock and have two different maize sellers you can buy from, how do you
determine which corn seller to buy from?
What determines decision?
– Price
– Identical product
6.3.3 The extent of barriers to entry
It is relatively easy for business to enter or exit in a perfectly competitive market. In the long run
it means that the market is open to competition from new suppliers
– this affects the long run profits made by each firm in the industry. The long run equilibrium
for a perfectly competitive market occurs when the marginal firm makes normal profit only in the
long term. Barriers to entry are determined by:
Things that prevent other firms from entering the market;

Economics of scale;
Absolute unit cost advantages; Capital
access cost; Government policy, i.e.
– Patents
– Commodity programs
– Import controls
Examples in SA: Agribusiness can assist small-scale farmers and farmers entering commercial
agriculture to overcome the barriers of entry to high value raw commodities by providing
inputs and a guaranteed market. A wide range of issues and constraints act as barriers of entry
for smallholder black farmers. These include general and specific barriers of entry to the various
128
raw commodities, a move away from the open market to closed markets and country specific
historical legacies that continue to retard the transformation of agriculture.
6.3.4 Amount of knowledge and information available (perfect information)

Prices and quality of products are assumed to be known to all consumers and producers.
In a perfectly competitive market, firms would have same access to new knowledge
and information about market prices, quantities, and quality.
For perfect competition to exist, firms must have a singular goal of profit
maximization.
Example in SA: SAFEX price formation for field crops is generally considered efficient (see
caveat below) and a true reflection of prices in the domestic market. Thus, by using SAFEX
instruments effectively, farmers can minimise their price risk, which in turn lowers their cost of
doing business.
6.3.5 Perfect factor mobility

In the long run factors of production are perfectly mobile allowing free long term adjustments
to changing market conditions.
Example: Economic development in the world was strongly related to the endeav- ours of the
so-called ‘nation-state’. The role has become much diminished in modern times due to the
increased mobility of various factors of production mainly human, financial and technological
capital.
6.3.6 Zero transaction costs

Buyers and sellers incur no costs in making an exchange (perfect mobility).
Transaction costs, i.e. observable and non-observable costs associated with exchange, are the
embodiment of access barriers to market participation by resource poor smallholders. These
include costs of searching for a trading partner with whom to exchange, the costs of screening
partners, of bargaining, monitoring, enforcement and, eventually, transferring the product to its
destination.
6.3.7 The Profit Motive and the Results of Competition

Firms aim to sell where marginal costs meet marginal revenue, i.e. where they gen-
erate the most profit.
6.3.8 Constant returns to scale

Constant returns to scale ensure that there are sufficient firms in the industry. In production,
returns to scale refers to changes in output subsequent to a proportional change in all inputs (where
all inputs increase by a constant factor).
6.3.9 Firms are price takers

They have no control over the market price they charge for their product. The farmers buying
or selling transactions are assumed to have no effect on the market.
The competitive firm’s demand curve can be presented as follows:
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FIGURE 6.2
Perfect firm’s demand curve
The optimal level of output for a competitive firm is determined where Marginal Revenue (MR)
is equal to Marginal Cost (MC). This can be presented diagrammati- cally as follows:
FIGURE 6.3
Optimal output level.
At this output the firm is making a normal profit. This is a long run equilibrium
position.
Average Total Cost (ATC) can be added to the graph to demonstrate the firm’s profit
potential
Average Total Cost:
The per unit cost of producing a specific good.

The difference between ATC and product’s price equals the profit per unit of
product.
130
FIGURE 6.4
Average total cost
Average Total Cost:
Price minus ATC = Profit per unit of output

Note: Price > ATC indicates a profit
FIGURE 6.5
The individual firm
In the short run the equilibrium market price is determined by the interaction between market
demand and market supply. In figure 6.5 price P* is the market clearing price and this price is then
taken by each of the firms. As the market price is constant for each unit sold, the D curve
becomes the Marginal Revenue curve (MR). A firm maximises profits when marginal revenue =
marginal cost. In the diagram above, the profit – maximising output is Q*. The farm sells Q* at
price P*. The area shaded is the economic profit made in the short run because the ruling market
price P* is greater than the total cost.
Notes on Profit:
Price minus ATC = Profit per unit of output

Note: Price < ATC indicates a loss
It is important to note that profit in a perfectly competitive market will lead to firms
131
wanting to enter that market
If enough firms enter, then the market supply curve will shift to the right.
FIGURE 6.6
Effect of changes in market supply on profit
With the increase in Supply, price will be driven down.

With the lower price, profits will be driven out. Profit
With the decrease in Supply, price will be driven up. With the
higher price, the losses will be driven out.
Not all firms make supernormal profits in the short run. Their profits depend on the position of
their short run cost curves. Some firms may be experiencing sub-normal profits because their
average total costs exceed the current market price. Other firms may be making normal profits
where total revenue equals total cost (i.e. they are at the break-even output). In figure 6.7, the
firm shown has high short run costs such that the ruling market price is below the average total
cost curve. At the profit maximising level of output, the firm is making an economic loss (or
sub-normal profits)
FIGURE 6.7
Economic loss in the short run
132
Use a diagram to explain the equilibrium position of a perfectly competitive farm which makes
an economic profit (in the short run). Clearly indicate the economic profit per unit of output and
the farms total economic profit
Do the same as in the question above but for a farm which makes an economic loss in the short
run.
FEEDBACK
6.4 MARKET PRICE AND QUANTITY

What are the factors that generate the market price that farmers use to make their production
decisions?
The interaction of the Market Supply and Market Demand curves will determine the price
that consumers will pay and producers will receive.
6.4.1 Market supply and demand relationship for a competitive market
FIGURE 6.8
Market supply and demand in equilibrium
6.4.2 Specific Results of Competition

Price takers
Optimal output
No product differentiation Market
equilibrium Technological advancements
Efficiency
6.4.3 Changes in supply or demand

An Increase in Supply
Note that the supply curve shifts to the right.

This lowers price and increases quantity supplied.
133
A decrease in supply
A decrease in supply would be represented by a shift of the supply curve to the left.
6.4.4 Supply shifters include:

Input Costs
Prices of Related Goods
Technology
Weather
Number of Sellers
Taxes Expectations
6.4.5 An Increase in Demand
FIGURE 6.9
Effect of increase in demand
Note that the Demand Curve shifts right
This increases price; and

Increases quantity demanded
6.4.6 A Decrease in Demand

Demand Curve would shift left
Decreases price
Decreases quantity demanded
6.4.7 Demand Shifters include aspects such as

Income
Population
Tastes and Preferences Prices of
Related Goods Expectations
6.4.8 Agriculture’s Competitive Side

40 000 commercial farmers; 35 000 emerging farmers (>20 ha) and 1.225 million subsistence
134
farmers in communal areas (<20 ha)
Homogeneous products Freedom of
entry and exit Information is available
6.4.9 Agriculture’s Departure from Competition

Controlled marketing
Concentration in food chain
Agricultural input industries, packaging and transportation
Marketing cooperatives
Click on Next to move on to the next section 6.5: Case study on concentration in
South Africa’s food chain
6.5 CASE STUDY ON CONCENTRATION IN SOUTH AFRICA’S FOOD

CHAIN
This case study serves as an introduction to the next section that deals with models of imperfect
competition
Economies of scale and barriers to entry in the milling industry
Barriers of entry into oligopolistic industries created by government such as the milling industry
stopped short of creating a pure franchised monopoly limiting the number of competitors and
the brand names created under these circumstances almost entrenched their market share. A
prospective entrepreneur entering the market must be willing to bear risks, must find investors
to put up capital, must recruit a labour force, must attract customers. All these things are hard
work.
A firm experiences economies of scale of its long-run average costs decline as its scale of output
increases. There are many potential sources of economies of scale. Operating multiple milling
plants may permit cost savings in scheduling, transportation, research and development,
finance, marketing and administration. A plant with a large market share accumulates experience
more easily than does a plant with a small market share.
Economics of scale results from internal savings in a business. These specialisations can be the
more specialised labour in the production as it expands. The specialisations can be for the
maintenance of machinery and equipment, for research, marketing, purchasing and so on. If the
production levels become too high, diseconomies of scale can result. Maintenance staff is not
able to maintain all machinery and equipment in time or the level of stock could become too high
so that it costs extra money to store stock.
This is exactly what happens in the case of larger mills. The nature and extent of their capital
intensive operations requires more capital investment. The high cost of capital, capital
replacement and labour specialisation are eroding their profits and they have in the process also
lost their economies of scale advantage.
For an oligopolist market to function properly there should be: A small
number of sellers (i.e. concentration);

A similar product, i.e. maize meal or wheat flour;
A growing market to ensure optimum utilization of mill capacity and economies of scale;
Price leadership; and
135
Non-price competition (the argument here is that advertising and product differentiation
may give an established company and advantage over potential entrants that is very possible
a crucial deterrent to entry).
With barriers to entry, the first firms to enter the milling industry were able to maintain their
market shares as the industry grows even without the economies of scale. In a deregulated
market, i.e. having neither large economies of scale nor high barriers to entry, growth may come
about primarily through the entry of small millers, leading to a fall in concentration over time.
Although there is a still strong concentration in the market, the market share of many of the
larger companies has declined significantly since the deregulation of the industry.
The market for large scale millers has shrunk significantly as the entry of small-scale millers eroded
both the input supply, i.e. raw material supply and the market share by “stealing” some of the
customers. Some of the large-scale millers run at 67 % of their capacity. Under these
circumstances larger mills are finding it difficult to utilize their capacity fully.
In a deregulated free market price leadership is difficult to implement. Indications are that small
millers are more efficient and are supplying their products at a lower price.
The major barriers of entry that still exist can be summarised as follows:
The large capital investment required to set-up and establish a mill

The level of expertise require to successfully operate a mill
Access to financing and bargaining power (large-scale millers have an advantage)
The level of concentration in the market that benefits large-scale millers in buying or contract
large quantities wheat and maize stock at the detriment of small-scale millers
Storage problems – the small-scale miller does not have access to sufficient storage facilities
The large-scale millers have established brands they are in a position to switch brands frequently.
There are also brand-image advertising. A new entry will have to spend a great deal on advertising.
Small-scale millers have the following comparative advantages:
They are more efficient and cost-effective. The establishment of a mill requires
a lower capital investment and lower overhead costs
They can therefore market their product at a lower price
The production structure has changes significantly since deregulation. Small-scale millers can
locate in close proximity of the production area and save transport costs. Many farmers are
adding value to their produce by on-farm milling
The small miller can also locate closer to the market and focus on niche markets.

What are the major barriers of entry that still exist in the milling industry?
What is the competitive advantage of small-scale millers have over large-scale millers?
Perform your own research on the de facto situation today. Do monopolistic ten- dencies still
exist in the milling industry?
Perform your own research and determine in what other industries do concentration (i.e.
monopolistic competition and oligopoly) occur?
FEEDBACK
136
6.6 MODELS OF IMPERFECT COMPETITION
Imperfect or monopolistic competition exists whenever a farm has some control over the price
it charges for its product. It generally occurs where the conditions of perfect competition does
not hold. Varying degrees of imperfection give rise to varying market structures. Monopolistic
competition is one of these and should not be confused with monopoly.
FIGURE 6.10
Forms of competition
6.6.1 The characteristics of monopolistic competition are as follows:

Many sellers in market, each having a small proportion of the market share and slightly
differentiated products (Penson, p145)
Differentiated products – they have some element of control over price due to the fact that
they are able to differentiate their product in some way from their rivals – products are
therefore close, but not perfect substitutes (Penson, p146) Ease of entry or exit –few barriers
to entry and exit (Penson, p146)
Information is readily available – consumer and producer knowledge is imperfect
Non-price competition usually occurs
Economic environment (Penson, p147).
6.6.2 Monopolistically Competitive Firm’s Price, Quantity, and Profit –
short run
(Penson, p. 148)
137
FIGURE 6.11
Monopolistic Competitive Firm in the short run
Marginal cost and average cost will be the same shape. However, because the products are
differentiated in some way, the firm will only be able sell extra outputs by lowering price.
The demand curve (D) facing the firm will be downward sloping represents the AR
earned from sales.
Since the additional revenue received from each unit sold falls, the MR curve lies under the AR
curve.
We assume that the firm produces where MR = MC (profit maximising output). At this output
level, AR>AC and the firm makes abnormal profit (the grey shaded area).
If the firm produce 5 units and sells each unit for R1 (on average) with the cost (on average) for
each unit being 19p, the firm will make 13p x 5 in abnormal profit.
This is a short run equilibrium position for a firm in a monopolistic market structure.
6.6.3 Monopolistically Competitive Firm’s Price, Quantity, and Profit –
long run
FIGURE 6.12
Monopolistically Competitive in the long run
138
Long run position
As there is relative freedom of entry and exit into the market, new firms will enter encouraged
by the existence of abnormal profits. New entrants will increase supply causing price to fall. As
price falls, the AR and MR curves shift inwards as revenue from each sale is now less.
Notice that the existence of more substitutes makes the new AR (D) curve more price elastic.
The firm reduces output to a point where MC = MR (Q2). At this output AR = AC and the firm
will make normal profit.
This is the long run equilibrium position of a firm in monopolistic competition

Discuss the equilibrium of a monopolistic farm which earns an economic profit. Clearly state
the equilibrium condition, the equilibrium price, the equilibrium quantity, profit per unit of output
and the farm’s total economic profit.
FEEDBACK
6.6.4 Pure Monopoly

Only one producer seller exits in market
Product totally differentiated
No free entry or exit – one firm dominates the market
Imperfect information
Where a perfectly competitive firm is a price taker, the monopolist is a price -searcher.
What are the origins of a monopoly?
Through growth of the firm

Through amalgamation, merger or takeover Through
acquiring patent or license Through legal means.
6.6.5 Characteristics of firms or farm business exercising monopoly
power
Price – could be deemed too high, may be set to destroy competition, price
discrimination possible
Efficiency – could be inefficient due to lack of competition or highly efficient due to high
profits
Innovation – could be high because of the promise of high profits (possibly
encourages high investment in research and development)
Collusion – possible to maintain monopoly power of key firms in industry
High levels of branding, advertising and non-price competition.
139
FIGURE 6.13
Monopolist’s demand curve

Why is it important for marketers to know the market in which they operate?
FEEDBACK
Marketers need to know the market in which they operate. It is important to understand the
forces of supply and demand operating in the market, the time when the market is cleared, the
market clearing price, supply shifters and demand shifters. They also need to know how to
deal with their competitors.
N.B: Make sure that you understand how to read the graphs that depict supply, demand
and their shifters, models of perfect and those of imperfect competition.
FIGURE 6.14
Monopoly prince, quantity and revenue schedule
AR (D) curve for a monopolist likely to be relatively price inelastic. Output assumes to be at profit
maximizing output (note that not all monopolists may aim for profit maximization).
140
(1) List six formal requirements for the existence of perfect competition (06)
(2) Explain, with the aid of a diagram the relationship between average and
marginal revenue under condition of perfect competition (05)
(3) Explain with the aid of a diagram, why a firm’s profit is maximised (or
loss minimised) where marginal cost is equal to marginal revenue (05)
(4) Use a diagram to explain the equilibrium position of a perfectly
competitive firm which makes an economic profit (in the short run). Clearly
indicate the economic profit per unit of output and the firms
total economic profit (08)
(5) Do the same as in question 4 but for a firm which makes an economic
loss in the short run (08)
141
LEARNING UNIT 7
PRIVATISATION AND DEREGULATION

After studying this study unit learners should be able to:
Discuss the context of agricultural marketing regulation and deregulation.
Assess the origins and impact of South Africa’s controlled agricultural
marketing system.
Discuss the reasons for market reform.
Critically assess the impact of deregulation and the sustainability of reforms to date.
Compare the international reform experience and relevance of the South
African reform experience.
Prescribed material
The study unit is an extract based on the following publications:
Bayley, B. (2000). A Revolution in the Market: The Deregulation of South African

Agriculture. Oxford Policy Management, Oxford, England
Vink, N. & Van Rooyen, J. (2009). The economic performance of agriculture in South Africa
since 1994: Implications for food security. Development Bank of Southern Africa:
Development Planning Division, Working Paper series No17. Midrand.
Vink, N, (2008). The evolution of agricultural policy in South Africa – what worked and what did
not work. Department of Agricultural Economics. University of Stellenbosch.
TIME ALLOCATION
7.1 INTRODUCTION
This learning unit will introduce you to privatisation and deregulation of agriculture. It is aimed at
creating an understanding of reasons for market reform and the impact of deregulation and the
sustainability of reforms to date. At the end of this learning unit you will have a clear
understanding of the evolution of marketing systems from its inception as far back as the early
twenties until its reform in 1996.
Until early 1998, the marketing of most agricultural products in South Africa was extensively
regulated by statute, based on the original Marketing Act (1968) (some
70 percent of agricultural output by value), under the Cooperative Societies Act (38 of 1925) (in
the case of ostriches (1958) and tobacco (1932)) or by industry-specific statutes (such as the Sugar
Act (1978) and the Wine and Spirit Control Act (1970). Most products were regulated under the
22 marketing schemes introduced from 1931 and especially from the time of the 1937 Marketing
Act (consolidated in the Marketing Act of 1968). Sweeping change was brought about by the
Marketing of Agricultural Products Act (1996). This Act set up the National Agricultural Marketing
142
Council (NAMC), whose immediate task was to dismantle the existing marketing control
boards, and subsequently to manage and monitor state intervention in the sector. It is evident
that the effects of deregulation differed among the field crops, the horticultural and the livestock
subsectors of agriculture, partly because of their different modes of production, and partly
because the nature of control under the old 1968 Act and its predecessor differed between
different commodities.
The way that agricultural prices are determined in South Africa has, with the sole exception of
sugar, been transformed. The control boards have been closed down, export subsidies have been
terminated, and the degree of protection from agricultural imports has fallen. The main influences
on prices are now import and export parity prices, tariffs, and the net domestic and regional
demand and supply conditions for the commodity in question.
7.2 THE ORIGINS AND IMPACT OF SOUTH AFRICA’S AGRICULTURAL MARKET

SYSTEM
For much of the 1920s, farmer representatives complained that producer prices of agricultural
products were low and unstable. A number of commodity-specific statutory initiatives were
taken by government with a view to helping farmers deal with depressed market conditions, but
pressure for the introduction of “compulsory co-operation” in commodities (in particular maize)
was resisted.
Pressure from the agricultural lobby increased when world and domestic agricultural prices fell
during the Great Depression of the 1930s. The result was the Export Subsidies Act of 1931, as
well as commodity-specific legislation which was intended to support producer prices for wheat,
dairy products, maize, and red meat. These measures viewed as temporary initiatives to deal with
an extreme but short-run dis- ruption. Nevertheless, senior officials of the Department of
Agriculture, influenced by developments in Europe and America, became convinced of the need
for statutory controls over agricultural marketing in South Africa to be retained for the long term.
The 1937 Marketing Act established a system whereby farmer-dominated control boards had all
the powers necessary (always subject to the approval of the Minister of Agriculture) for
determining which persons should produce, handle, process, and trade agricultural commodities,
and at what price, or for what margin they should do so. With the exception of the control
measures introduced during World War II, the principles and mechanisms of the 1937 Act (re-
promulgated in 1968) provided the legal framework for statutory interventions in agricultural
marketing until 1996.
The degree of control increased gradually. For example, a single channel fixed price marketing
arrangement for maize was introduced for the first time only in the 1944/45 marketing year.
However, contrary to the expectations of the agricultural lobby many of the controls over
agricultural marketing in terms of the 1937 Marketing Act were initially used (in the context of
World War II and its aftermath) to contain producer prices rather than to increase them. It was
only with the election of the National party in 1948 that the 1937 Marketing Act became a
consistent source of transfers to the white farming sector.
143
7.3 THE NUMBER OF SIGNIFICANT THEMES CHARACTERISED THE SOUTH
AFRICAN AGRICULTURAL MARKETING SYSTEM FROM 1920S THROUGH TO THE
1980S
(a) The reinforcement of the marginalisation of the black farming sector
It is sometimes argued that the Marketing Act was not a discriminatory piece of legislation per
se. However, a number of points can be made in this regard.
The Marketing Acts of 1937 and 1968 (along with the Land Bank Act of 1912 and the Co-
operatives Act of 1922), and in conjunction with significant levels of state subsidy were
important components of a legislative system that was designed to advance the interests of
white farmers. They were established in the context of the systematic disempowerment of
black farmers brought about by other pieces of legislation.
The broader legal, social and economic context affected the way that the provisions of the Act,
and the schemes established in terms of the Act, were interpreted and implemented.
The 1968 Act did provide for treating different geographical areas differently. Given the emphasis
on confining African farming activities to specified geographical areas it is easy to see how
geographical distinctions (for instance the controlled and uncontrolled areas specified within the
Meat Scheme) could become euphemisms for discrimination.
Most agricultural households in the reserves/homeland areas were reliant on off-farm
incomes and food purchases to supplement their own production. Such households were
adversely affected to the extent that marketing policies led to inflated food prices.
Market interventions designed to benefit white farmers were sometimes implemented in
a way that negatively affected net sellers in homeland areas. Tinley (1940) reports that for
much of the 1930s statutory interventions in South Africa’s maize market did not take account
of the different market conditions in reserve areas.
Between the 1880s and the 1980s African farming was transformed so that by the last quarter
of the 20th century it accounted for only around 4 percent of the value of production. It was
confined to over-populated, resource- and infrastructure-poor homeland areas which were unable
to produce even a modest proportion of the subsistence requirements of the vast majority of
households, and made an insignificant contribution to the homeland economies.
(b) The high level of state support to the co-operative sector
At the beginning of the 20th century the co-operative movement was not a significant force in
South African agriculture. But by the mid-1990s it was a dominant force, not just in the
agricultural marketing system, but more widely in the rural economy. Each year co- operatives
handled the vast majority of many of South Africa’s most important crops. They handled all
exports of deciduous and citrus fruit, 98 percent of the wheat crop, 93 percent of the maize crop
and the whole wool clip. On the input side they supplied or financed 90 percent of the fertiliser,
85 percent of the fuel, and 65 percent of the chemicals used by white farmers. In 1996 about 250
agricultural co-operatives owned total assets worth R 12.7 billion, enjoyed an annual turnover
of R 22.5 billion, operated approximately 1200 branches throughout the country, and employed
70000 people.
The expansion of the influence of the co-operatives caused increasing concern in

agricultural circles. Indeed, Le Clus (1979) was moved to argue that:
“In the co-operative societies, one has all the ingredients of a potentially dangerous situation -an
approaching monopsony in the distribution of farm inputs, low cost Land Bank funds coupled
to a first lien on the farmers’ crops (which is a very important marketing tool) and a rapid
expansion in the manufacturing of farm inputs”.
144
This massive growth in the importance of co-operatives in the South African agricultural sector
was no accident. Government promoted the co-operative movement in the following ways:
The Land Bank Act of 1912. Up until the mid-1980s, the Land Bank lent money to farmers
and co-operatives at rates of interest that were more reasonable than those available from
commercial banks. The Land Bank was prohibited from making such concessionary finance
available to business organisations that were not organised along co- operative lines.
The Co-operatives Act of 1922. The 1922 Act provided for the establishment of
limited liability co-operatives. An amendment to the act provided for the ‘lien’, whereby
farmers owing money to the co-operatives were obliged to deliver their crop to the co-
operative. Thus the co-operatives’ structural advantages in the provision of agricultural
inputs through the Land Bank Act were translated into advantages in the handling of
agricultural produce.
The vesting of statutory marketing powers in agricultural co-operatives. There are a number of examples.
Over and above the Wine and Spirits Act of 1924, they also handled
90 percent of the sunflower crop, 90 percent of dried fruit, all of the tobacco crop, and
processed 86 percent of domestically produced wine-tobacco through seven co-operatives,
the Klein Karoo Co-operative enjoyed statutory powers over the marketing of ostriches and
ostrich products between 1958 and 1993. Representation on the control boards. The 1937 Act
stipulated that producer representatives on any control board should enjoy an outright majority.
In practice many producer representatives on control boards were directors of the larger co-
operatives. Co- operatives were also represented on the boards in their own right as board
agents. Control board appointment and remuneration policies for their agents. According to Kassier
(1986), the 1937 Act saved the co-operative movement. The boards pursued policies towards the
appointment and remuneration of agents which favoured co-operative interests and made it
increasingly difficult for non-co-operative agents to survive. The silo building loan programme. In
the context of the sheltered environment provided by the control board system, the silo
building loan programme allowed co- operative agents of the boards to build up a huge
marketing infrastructure in their own name.
Direct financial support from government. For example, for a number of years the government
subsidised the Northern Transvaal Co-operative (NTK) to a very significant degree.
Competition policy. The co-operatives were not subject to the provisions of the
Competition Act.
The tax status of co-operatives. Prior to 1977, agricultural co-operatives were required to pay income
tax only on those profits arising from dealings with non-members. The channelling of drought relief
to farmers through the co-operatives. Over many years, but particularly since 1983, statutory
emergency relief schemes enabled indebted farmers, who might otherwise have gone out of
production, to continue purchasing agricultural inputs from their co-operative. Summer grain
co-operatives are, as a result, substantial indirect beneficiaries of drought relief schemes.
(c) The dominance of a small number of large-scale agro-processing companies
The 1937 Marketing Act provided for the restrictive licensing of agricultural processors, and
many control boards made use of this provision. The rationale for such restrictions appears
to have been a belief that there existed excess capacity in agricultural processing, that all costs
incurred by agricultural processors could be recovered from the marketing chain, and that such
over-capacity was necessarily at the expense of the farmer.
In fact, in a deregulated agricultural market a combination of many processors, together with

over-capacity in processing, could normally be expected to result in significant competition, to
the benefit of both primary producers and end consumers alike. It is only when processing
margins are set administratively on the basis of cost surveys that processors are in a position to
negotiate a pricing dispensation to cover all of their costs (fixed and variable).
The result of restrictive registration was an ever more concentrated and capital- intensive agro-
145
processing industry that was dominated by a small number of large food companies. The
inherent dangers were soon recognised. The 1947 Marketing Act Commission was critical of
restrictive registration in the processing industries and argued that the grant of the right to a board
to restrict entry should be the exception, not the rule; and even then suitable safeguards against
abuse are an essential adjunct. The Commission noted the danger that restrictive licensing might
lead to preferential treatment being accorded by virtue of the composition of a board or through
its management.
Indeed, the NMC (1965) noted the following in respect of wheat milling and baking:
the number of registered bakers had fallen from 663 in 1941 to 464 in 1962; millers were
taking over bakers at ‘excessive’ prices with a view to securing a market for their flour, so
that there was an increasing danger of a monopoly situation developing;
in the Witwatersrand, three milling groups accounted for the 77 percent of bread production;
and
in certain urban areas bakers were co-operating to such an extent that they were subjecting
themselves to production quotas.
(d) The capitalisation of statutory support into land prices
A series of commentators have concluded that South African land prices have been responsive to
changes in the profitability of agricultural production, whether such changes arose from market
forces or statutory initiatives, such as interventions in South Africa’s agricultural commodity
and credit markets. Agricultural subsidies, and the expectation of such subsidies, have been
capitalised into the value of South
African land.
(e) The ratchet effect of government intervention
The experience with efforts to institute statutory controls in agricultural marketing from the
1920s onwards is that control gives rise to one or more compensating effects. As a result choices
arise as to whether to remove the controls or strengthen them. To the extent that a first round of
controls inflated cost structures or negatively affected the structure and capacity of a section of
the marketing chain and thereby reduced alternatives to the public sector, it was sometimes
difficult to do anything but increase the level of control when problems were encountered. As a
result there was a tendency during much of the period between 1920 and 1987 for controls to
beget more controls.
Indeed a 1973 Agrekon editorial noted that ‘strong representations are constantly being made
nowadays for schemes to be modified to acquire further powers to extend control’. The
Commission of Inquiry into the Marketing Act (1976) noted that control had spread further than
envisaged by the 1947 Commission. It went on to observe that control boards were often reluctant
to accept limits to their scope of activity, but were reluctant to make essential adjustments to
their marketing arrangements when necessary.
As the level of protection increased, so there was an expansion in the supply of the commodity
in question, often resulting in a surplus. Policy makers then had a choice. They could deal with
the root cause of the surplus by reducing prices with a view to stimulating domestic demand and
reducing production incentives. Or, they could try to reduce the extent to which producers could
respond to higher prices.
(f ) The economic cost of the interventions
146
South Africa’s agricultural marketing and trade controls resulted in a complex system of economic
welfare transfers and inefficiencies. This section focuses on the ways in which the system of
controls:
inflated agricultural production and marketing costs;

distorted relative prices; and
the resultant financial and other economic welfare transfers.
Firstly, inflated costs at the level of the primary producer as well as in the marketing chain between
the producer and the final consumer were incurred even when, and sometimes especially when,
controls were instituted in the name of containing costs and margins. There are many examples
of ways in which the controlled marketing system did, or could, lead to cost inflation.
The inclusion of the cost of land in the calculation of producer prices;
The inclusion and inflation of entrepreneurial and management margins in cost calculations; The
capitalisation of production and delivery controls into quota rents;
Supervision and administrative costs related to the control boards were significant; and
The system of basing processing and marketing margins on costs was inflationary even when it was done in the
name of containing margins.
Secondly, distorted price signals resulted in sub-optimal production patterns in terms of

commodity, location and timing. This had a negative environmental impact and reduced the real
value (i.e. net of subsidy) of agricultural output. Price distortions also resulted in sub-optimal
consumption patterns.
The artificial inflation of producer prices through the controlled system caused dramatic expansions in
agricultural output, resulting in surpluses (which then had to be disposed of at significant cost).
The prices of grains relative to meat were distorted, causing environmental damage. Inflated producer prices
for crops such as wheat, sugar and maize resulted in a more intensive utilisation of existing
arable land as well as the movement of more marginal land from grazing into the production
of arable crops.
Distortion of timing and location differentials. Farmers harvesting a commodity like maize early,
before the bulk of the harvest is available, or next to a big mill, should rationally receive a
price premium because of the carrying, financing and transport cost savings that result.
A reduction in consumption. As early as the 1930s there were concerns that inflated maize prices
were causing malnutrition. In later years, instead of paying domestic producers a premium for
white maize (or importing white maize) when there was a domestic production shortfall, the
Maize Board obliged maize millers to purchase white and yellow maize in specified proportions
even though maize meal produced from a mixture of white and yellow maize is not favoured by
consumers.
Third, there were large economic welfare transfers from consumers to producers. However, in
order to protect consumers from the worst effects of inflated producer prices for maize and
wheat, government was obliged to subsidise storage and handling costs for maize and to subsidise
bread prices, resulting in direct financial transfers from taxpayers. Control boards also generated
deficits from time to time, representing another demand on government resources.
Net welfare losses to consumers. Richards (1938) noted that consumers had to pay for a bag of wheat
when better quality wheat could be imported for half the price.
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Consumer subsidies. From World War II until 1991 (when bread subsidies were finally
terminated) government sought to offset some of the burden of the control board system
on consumers with consumer subsidies on a small number of staple commodities.
The burden of agricultural risk. A policy of administered agricultural prices meant that producers
and processors did not have to manage many of the risks arising out of climatic instability.
Control board losses. If responsibility for the pricing and marketing of an agricultural product is
limited to one control board, errors by that board (whether one-off or systematic) will affect
the whole industry, and will often result in pressure for government to cover the financial
cost of that mistake.
(g) The use of marketing controls as vehicles for rent- seeking.
Any analysis of agricultural policy that is based on an assumption that the interests of farmers
are homogeneous is over-simplistic. Different laws and controls affect different farmers
differently, as has been noted In respect of the suppression of black farming.
To a lesser degree the same was true within the white commercial farming sector. The 1937
Marketing Act and the schemes for which it provided were vehicles through
which the Minister of Agriculture could affect the price of different agricultural
commodities to both farmers and buyers. The mere fact of statutory control of the agricultural
marketing system was, by itself, no guarantee of an advantage to a particular set of producer
interests, even though producer representatives had pushed hard for such measures for so long.
Indeed, the 1937 Marketing Act had barely been passed before it was increasingly being used (and
bypassed) during World War II, to keep certain agricultural producer prices lower than they might
otherwise have been.
It was not until the late 1940s that organised agriculture was in a position to ensure that the system
was used as a source of transfers in its favour. According to the 1976
Commission of Inquiry into the Marketing Act:
The 1947 Commission pointed out the danger of sectional action (if boards were constituted on a representative
basis) because then each group might try to promote its own interests. The dangers as foreseen by the 1947
Commission did materialise in practice. The problem is ag gravated in that some producers, who regard the powers,
conferred on control boards under the Marketing Act as their established right, put increasing pressure on their
representatives.
There was a tendency for developments in the agricultural sector, in particular the Marketing
Act, to result in the concentration of influence and power over agricultural matters in the hands “of
a sort of agrarian-industrial upper class or nomenclature”, that was increasingly isolated from the
farming public (Kassier, 1986).

What is the current government policy on co-operatives? Critically assess the pros and cons
of co-operatives and the co-operative movement
It is stated that the result of restrictive registration was an ever more concentrated and capital-
intensive agro-processing industry that was dominated by a small number of large food
companies. What is the current nature and extent of concentration in the agro-processing
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industry?
Distorted price signals lead to dramatic expansions of agricultural output resulting in
surpluses. Perform a time series trend analysis on maize production and consumption patterns
during the pre- and post-deregulation period. Discuss the results. Suggestion: use the Abstract
of Agricultural Statistics to perform a time series analysis.
FEEDBACK
Feedback is available
7.4 THE REASONS FOR REFORM

Agricultural policy began to change in the early 1980s, prompted by policy reforms outside the
agricultural sector. The most important of these was the liberalisation of the South African
financial system from the 1970s onwards, which led, in turn, to the real depreciation of the Rand
during the 1980s, the scaling down of interest rate subsidies on loans from the Land Bank, and
increased pressure on the government’s budget.
As a result, government subsidies to the control board system were withdrawn. For instance,
bread subsidies and subsidies to cover maize marketing costs were phased out during the 1980s
and early 1990s. Meanwhile, government was not prepared to continue covering the Maize Board’s
export losses. It stipulated that from the 1987/88 marketing year onwards the Maize Board could
not rollover export losses from one year to the next. As a result marketing costs, and the losses
on exports, had to be covered by the margin between the Maize Board’s buying and selling prices,
which increased the incentives for bypassing official marketing channels, increasing the pressure
on the established processors.
There were a significant number of developments within the agricultural sector,

including the following:
There were reforms of the tax treatment of agriculture;

There were a decrease in the level of budgetary transfers to commercial agriculture; In 1991 the
Land Act and related pieces of legislation were repealed; and
There was a move to more market-related pricing practices by some control boards and
deregulation of parts of the agricultural marketing system, in terms of the
1968 Marketing Act and other legislation.
The notable early commodity specific reforms are summarised in Table 7.1
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TABLE 7.1
Important marketing reforms up to 1993
Maize Prohibition on the building of grain silos repealed. A change in pricing

policy (1987) and the scrapping of price control on maize meal.
Winter cereals Phasing out of bread price subsidy (by 1991). Abolition of remaining
controls over the pricing of bread and flour, and registration of millers
and bakers lifted (1991 )
Wool, sorghum Abolition of single channel marketing arrangement

and leaf tobacco
Oilseeds Abolition of import control measures on oil cake and fishmeal
Deciduous fruit Free issue of domestic marketing permits. Citrus fruit Domestic market
control abolished (1990).
Red meat Restrictions on the movement of livestock from uncontrolled to controlled

areas were abolished (1992). Abolition of restrictive registration of pro-
ducers, abattoir agents, butchers, dealers, processors and importers.
Milk and butterfat Abolition of consumer price control on fresh milk (1983) and butter and
cheese (1985). Price stabilisation activities halted (1992)
Potatoes, dry The five control boards responsible for these products were closed
beans, eggs, down in 1993.
bananas and
chicory
Wine The production quota system was abolished in 1992
Sugar
The cane quota system was reformed in 1990.
Ostriches The Klein Karoo Agricultural Co-operative’s single channel in terms of

the Co-operatives Act
Source: LAPC (1993).
Other developments that reinforced the move away from regulated agricultural marketing
included the following:
pressure from farming and industrial interests which were critical of aspects of the control
system;
legal challenges to control board schemes;
the generally poor performance of the agricultural sector; and
the moves towards a reduced degree of statutory intervention throughout economy.
Real increases in the price of food prompted a series of official investigations into agricultural
marketing system during the early 1990s, all of which recognised, although to differing degrees, the
need for agricultural prices to be more market related.
It was the Board on Tariffs and Trade’s (BTT) preliminary report into the food chain that set off
the bureaucratic process towards the legislation which was to replace the
1968 Marketing Act. The BTT report was prompted by widespread concern at the degree to
which food price increases were outpacing inflation. The report noted that concentration in the
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food marketing chain tended to coincide with the existence of statutory controls. It concluded
that:
deregulation should occur at both the national government and local authority lever;
quantitative controls and tariffs applied to imported foodstuffs should be reviewed with a view
to fostering competition from abroad;
health and hygiene regulations should be reviewed; and
the statutory powers of control boards should be terminated, and any control boards
retaining such powers should be reconstituted so that board members are appointed to look
after the national interest rather than commodity-specific vested interests.
The BTT’s preliminary findings were widely criticised by various parts of organised agriculture.
A prominent complaint was that the report ignored the level of concentration in agro-processing.
The Kassier report was submitted to the Minister of Agriculture in early January
1993. Some of its most notable recommendations were that:
a more representative and transparent Marketing Council be established;
only persons benefiting from a control board’s actions should be obliged to fund
the board;
there should be a moratorium on the appointment of sole agents by control boards; the grain
boards should become more consumer-friendly in their pricing policies; private organisations
should be prevented from exercising de facto statutory powers; pan-territorial and pan-
seasonal pricing should be abolished immediately and prices paid by boards to producers
should reflect locational advantages and quality differentials;
responsibility for dealing with production and price instability in the agricultural sector should
rest with the private sector;
the funding of the SAAU and its affiliates through statutory levies should be
terminated; and
statutory single-channel and price-support schemes should be discontinued, with a longer
transition period for single-channel export arrangements.
The Kassier report heavily criticised the attitudes of the various vested interests which it
encountered during its investigations. Organised agriculture was particularly incensed by the
report’s references to the ‘tyranny and arrogance of the status quo’.
Up to 1996 the reforms to the agricultural marketing system were implemented in terms of the
1968 Marketing Act. These reforms were, in principle, easily revers- ible, and were managed in a
relatively ad hoc manner. Thereafter, reform was swifter and more comprehensive, and took place
in terms of the Marketing of Agricultural Products Act, 1996.
The 1968 Act, the first Bill, and the 1996 Act were all enabling in nature. As such they all implied
the delegation of statutory power from Parliament to the Minister to take certain decisions with
the force of law, without further input from Parliament. They all specified a process, including
advice from a statutory council, through which all ministerial decisions should go, and specified
the type and extent of market interventions that would be allowed. However within those broad
similarities lay significant differences.
The most important aspects of the 1996 Act can be listed as follows:
Interventions. Interventions in terms of the 1996 Act can only be introduced where they are shown
to be in accordance with Section 2. It contains aims which reflect government’s policy goals, and
is drafted in a way that recognises that not all aims will be consistent in any given situation, and
that there are limits to the degree to which certain policy goals can be pro-actively pursued
through agricultural marketing policy. The initial presumption is in favour of non-intervention.
National Agricultural Marketing Council ( NAMC) constitution. The NAMC is constituted in such a way
151
as to ensure, as far as is possible, that statutory advice is based on expertise, rather than the
interests of particular interest groups.
Consultation. Over and above the constitution of the NAMC, the Act is designed to ensure
consultative processes which are as open and inclusive as possible.
Requests for intervention. Any directly affected group may request the establishment, amendment,
or removal of an intervention in terms of 1996 Act.
Intervention mechanisms. The list of interventions that can be introduced in terms of the Act is
limited to levies, export restrictions, and the collection of information.
Implementation. The means by which any intervention is implemented is left flexible.
The new government moved to close down the control boards because their well- documented
impact was at odds with the new government’s stated objective to reduce poverty and
inequality in the context of economic growth and job creation. The controlled marketing system
had been widely criticised for the many inefficiencies it had fostered in the production and
marketing of agricultural commodities, as well the large net welfare transfers it had facilitated
from consumers and taxpayers to producers.
Deregulating South Africa’s agricultural markets was expected, ceteris paribus, to have the
following impacts compared to a regulated system:
a more efficient use of South Africa’s agricultural resources;

a more efficient and competitive agricultural marketing system;
in particular increased investment and employment in agricultural marketing activities;
a real fall in food prices and land prices to the extent that the control system had
artificially inflated prices and fostered inefficiency in the supply chain;
a shift in responsibility for managing agricultural risk from government sector;
a reduction in the cost to the fiscus;
a reduction in the scope for legal challenges to the system (either domestically terms of the
Constitution or internationally through the WTO);
a saving in the amount of political and bureaucratic time and energy spent on price
setting; and
a reduction in the scope for rent-seeking by vested interest groups.
Over and above the arguments in favour of deregulation, the reorientation of the control board
system to serve the needs of small-scale farmers or consumers was not considered to be
attractive, or practical, because it would have perpetuated and augmented many the inefficiencies
of the control board system; and ultimately, the burden would have fallen on the fiscus.
In spite of the arguments in favour of further deregulation, there was a belief amongst some
representatives of black farmers that the control board system should have been maintained and re-
oriented with a view to providing support to the development of the black farming sector. Such an
approach would have been similar to that adopted post- independence in much of eastern and
southern Africa.
At one level such an argument is based on a desire for redistribution, and recognition that the state
must find effective means of promoting black agriculture. However, interventions through the
control boards would not have been the most cost-effective way to achieve redistribution
objectives.
Finally, there was cause for concern that any plan to re orientate the control board system
(whether in favour of small-scale farmers or consumers) would be very difficult to implement
in practice.
152
Discuss the main reasons for reform and a move away from regulation of agricultural
marketing.
Discuss the expected impact of deregulation compared to a regulated system
FEEDBACK
7.5 THE MANAGEMENT OF REFORM PROCESS

The strong political commitment to reform resulted in a short and unambiguous timetable for
the closure of the control boards in the 1996 Act, whilst Section 2 of the 1996 Act, provided an
explicit policy framework for evaluating any intervention proposed in terms of the new
legislation. The result has been greater policy cred- ibility which has encouraged farmers and the
private sector to invest the time and money required in order to adapt to the new marketing
environment. The one-year timetable also gave the respective industries time to make new
institutional arrangements to meet the demands of the deregulated market. The timing of the
reforms was also important. They coincided with the deregulation of external agricultural trade,
as well as the relaxation of exchange controls.
Together with consistent signals from the Minister of Agriculture, the Marketing of Agricultural
Products Act, 1996, resulted in a predictable framework within which the private sector could
invest, operate and respond to the new circumstances. It increased the degree of policy certainty
for market participants in a number of ways.
It provided a legislative directive from Parliament stipulating that all boards be closed down
within a specified time period, and as such it protected the Minister from a constant stream of
submissions and arguments from vested interests that the marketing arrangements for one or
other commodity represented a special case; The one-year timetable for control board closure
was clear, decisive and sent a signal of government’s intent; and
The processes specified by the 1996 Act, and in particular the wording of Section
2, made statutory interventions in agricultural markets more difficult to initiate,
and government decision-making more rule-driven.

What were the reasons for reform in agriculture?
FEEDBACK
Liberalisation of the South African financial system from the 1970s onwards, which led, in
turn, to the real depreciation of the Rand during the 1980s, the scaling down of interest rate
subsidies on loans from the Land Bank, and increased pressure on the government’s
budget.
To withdraw government subsidies and control board system. For instance, bread subsidies
and subsidies to cover maize marketing costs were phased out during the 1980s and early
1990s. Meanwhile, government was not prepared to continue covering the Maize Board’s
export losses. It stipulated that from the 1987/88 marketing year onwards the Maize Board
could not rollover export losses from one year to the next. As a result marketing costs, and
153
the losses on exports, had to be covered by the margin between the Maize Board’s buying
and selling prices, which increased the incentives for bypassing official marketing channels,
increasing the pressure on the established processors.
7.6 THE IMPACT OF DEREGULATION TO DATE

It is too early to evaluate fully the impact of deregulation. Furthermore, it is difficult to isolate the
effect of domestic market deregulation from other developments, such as the relaxation of
exchange controls, international trade liberalisation, movements in world prices, and fluctuating
production conditions. Nevertheless, the response to date of farmers and the private sector to the
reforms have been impressive. Some of the most important developments can be summarised as
follows:
a large number of organisations have emerged to compete with Outspan and

Unifruco in the exportation of citrus and deciduous fruit;
there has been an acceleration in the establishment of new enterprises in the food and the
agricultural sector;
the real value of South Africa’s agricultural trade, in particular exports, has grown
significantly;
real retail food prices have not increased since 1992, in spite of the rand’s depreciation
in real terms between 1994 and 1998;
there has been a shift in production patterns in response to changes in the relative risks and
prices with which farmers are confronted;
real land prices have continued to fall in the 1990s;
following the drought of the early 1990s, real farm incomes have recovered to
approximately two thirds of their level in the mid-1970s; and
Government finances have been relieved of the burden of agricultural marketing
subsidies.
Perhaps the most significant development has been the establishment of an agricultural futures
market in 1995, where the growth in volumes of white maize futures and options traded has
been rapid.
The impact of marketing deregulation by main branch (Extract from Vink

et al. (2009))
(a) Field crops
The process of deregulation of the agricultural marketing system involved more than just a change
in the trade regime. The most important changes included the abolition of pan-territorial and
pan-seasonal pricing mechanisms, concomitant changes to physical access to the market and the
food processing sector, as well as a range of institutional impacts that are elaborated as follows:
Most of the major field crops were sold under a ‘single channel fixed price’ marketing
regime, characterised by pan-territorial and pan-seasonal pricing. The main consequence
of pan-territorial prices was that farmers closer to the market were effectively cross-
subsidising those further away and who faced higher transport costs. With deregulation,
prices started to become regionally differentiated to reflect transport costs and regional
variations in demand and supply. Another consequence was that processors moved closer to
the market, as they also paid the same price irrespective of the point of delivery. The main
result of pan-seasonal pricing was that no grain was stored on-farm, and that the entire crop
was sold immediately after harvest. This tended to cause havoc on the money markets,
especially when the maize crop was harvested, as farmers were paid in full on delivery to the
154
cooperatives. The result was an over-supply of storage capacity, which was also arguably sub-
optimally located.
Another feature of the regulated market was that the price differentials between different
grades and cultivars of grains did not reflect differential demand. This was particularly
evident in the wheat industry, where wheat produced in the Western Cape, for example,
was unsuited to the production of bread, while there were few incentives to produce for specific
baking qualities, or for the production of pasta, for example.
With deregulation, the major grain industries (maize, wheat) became more differentiated as
the location of production shifted in response to differential prices across space and over
time. One of the first manifestations of this has been that an increasing proportion of the
maize crop is now milled by small-scale millers, both on- and off-farm (industry estimates
suggest this can be as high as 30 percent of the crop). This has impacted the rural areas in three
ways. Firstly, there are increased opportunities for small and medium scale businesses in
processing and distributing maize and maize products. This increased activity in the rural
areas has provided a stimulus to rural economies. Secondly, there has been a marked increase
in agro-tourism throughout the country. While agro-tourism has long been a feature of the
wine industry, there has been a marked increase in farm stores and farm stays in most parts
of the country. Thirdly, small-scale farmers have, in theory, at least better access to the market
than before, as the cooperatives that acted as agents under the single channel schemes would
only take delivery in bulk. However, the slow pace of land reform (see below) means that few
new entrants to agriculture have been able to take advantage of these benefits.
The abolition of pan-territorial and pan-seasonal pricing has also had interesting consequences
for the rural finance sector. Under the control schemes, the control boards appointed agents,
mostly farmer cooperatives, to carry out the physical functions of receipt of the crop, payment,
storage, and onward consignment to the processors. These input supply cooperatives therefore
became effective regional monopolies, which enabled them to become preferred suppliers
of seasonal credit to farmers. They generally used the Land Bank as their preferred source
of funds. With deregulation, however, the commercial banks have been able to expand their
share of this market.
An additional consequence of the abolition of pan-territorial and pan-seasonal pricing has
been the advent of a wide range of strategies (increased part-time farming, contract farming,
strategic selling throughout the season, price hedging, etc.) and institutions (the agricultural
futures market, or SAFEX, grain trading firms, brokerage firms, etc.) that have enabled farmers
to participate in the market with greater certainty and lower transaction costs. These
institutional changes have generally served to lower the transaction costs of market
participation. Price hedging instruments such as SAFEX are mainly used to hedge or insure
against price risk and thus manage farmers’ liquidity in a deregulated market. SAFEX price
formation for field crops is generally considered efficient (see caveat below) and a true reflection
of prices in the domestic market. Thus, by using SAFEX instruments effectively, farmers
can minimise their price risk, which in turn lowers their cost of doing business. The uptake
of SAFEX derivatives among South African farmers has not been scale neutral for two
reasons. The first relates to contract size: a 100-ton contract is the only contract size traded
on SAFEX and this translates into a farmer threshold entry level of above 50 hectares in the
case of maize. The second reason relates to the substantial legal and financial knowledge,
computer literacy and infrastructure requirements such as electricity and internet access that
are needed to be able to make full use of these market instruments.
A recent investigation into the performance of SAFEX identified a number of potential

weaknesses in the operation of the market that might have contributed to high food prices and
price volatility observed in the period of deregulation. The main recommendation yielded by
this investigation was the need to revisit a number of the rules and regulations governing
155
SAFEX with respect to restrictions on the size of the trading position taken, as well as limiting
the opportunistic behaviour of traders.
(b) Livestock
Control over the livestock industry was exercised through a wide range of marketing control
schemes. Red meat and eggs were controlled under ‘surplus removal (price support)’ schemes,
whereby a floor price was set with the relevant board responsible for manipulating supply in order
to maintain prices above this floor. In the case of red meat, the main consuming areas were
designated as ‘controlled’ areas, and meat could only be sold there under a permit. Meat could
also only be slaughtered in approved abattoirs, most of which were in the controlled areas. This
created an artificial shortage in the consumer market and an artificial surplus in the producing
areas, with the result that the holders of permits gained windfall rents. Wool and milk were
controlled under ‘single channel pool’ schemes.
The major sources of animal feeds were also controlled, with maize under a single channel fixed
price scheme, and oilseeds and lucerne under single channel pool schemes. The poultry industry
was never subjected to statutory control. The effects of deregulation on the livestock subsector
have not been subject to rigorous analysis, partly because of the heterogeneity of the sector, and
partly because of the lack of reliable data, especially on consumption of red meat. However, some
effects of deregulation include:
An increase in the proportion of red meat sold in the informal sector directly into poor urban
and peri-urban communities. Live sheep and cattle are bought on the farm, or even delivered to
these townships, and slaughtered at the roadside, where the meat is sold raw or cooked in various
forms. While it is known that this trade makes up a substantial proportion of total red meat
sales, its exact magnitude has not been established. Similarly, there is an active market in pig
and poultry by-products such as offal, chicken heads and feet.
Deregulation resulted in a rapid increase in the number of smaller abattoirs in the rural areas,
mostly on-farm facilities that are combined with retail outlets or that supply directly to
retailers in the formal market. One consequence is that the large metropolitan abattoirs are
all running at less than a third of capacity, leading to severe financial problems for the holding
company, Abakor.
A relatively large proportion (up to 80 percent of formal sector sales) of South Africa’s red
meat comes from feedlots, mostly as a final finishing phase, ostensibly because of the lack of
winter grazing in the summer rainfall areas. It is not clear whether this practice has increased
in the post-deregulation era, although there is little evidence that it has decreased. For this reason,
red meat prices are particularly sensitive to changes in the cost of animal feeds. The decline in
the real price of yellow maize, oilseeds and other components of animal feeds since
deregulation has therefore resulted in relatively low red meat prices, at least until the recent
increase in grain prices.
(c) Horticulture
Most of South Africa’s fresh vegetable and subtropical fruit industry escaped controls under
the old agricultural marketing regime, while the domestic market for fresh deciduous and citrus
fruit was deregulated in the 1970s. Hence, the focus here is on exports of deciduous and citrus
fruit. These products were marketed under
‘single channel pool’ schemes, whereby producers had to channel their produce into a pool
operated by a statutory monopoly empowered by the deciduous fruit and citrus control boards
respectively. The main implications of the deregulation of these industries include the effect
on the quality and quantities exported, as well as the destination of exports:
The main advantage of the single channel export schemes was obviously the ability to
manage the price of exports, and more specifically to use the monopoly power to keep prices
156
high. The main disadvantages were that: products were pooled (individual producers had
no incentive to deliver a quality higher than the average); prices were maintained at high
levels by restricting output; there was little incentive to develop new markets; and there was
little incentive to save on marketing costs. The results of this were that: South African
production lagged behind that of its competitors; the country became vulnerable to changes
in individual clients, given its concentration on the most lucrative short-term markets; the
country lagged in the innovation of cultivars; and the marketing costs were high.
Deregulation changed the calculus in each of these dimensions. The first effect of
deregulation in the fruit export industries was the entry of literally hundreds of marketers,
and hence a sharp decline in price and in quality delivered into a global market characterised
by a rising demand for new products and a stagnant demand for conventional cultivars. In this
regard, the apple industry was hardest hit, and experienced a decline in exports in the period
immediately after deregulation in the mid to late-1990s. As apples are grown in only a few
specialised areas, these areas experienced a negative impact on farmer incomes and
employment, while the impact on the wider economy was limited. Nevertheless, total fruit
exports increased in volume and value in the post-deregulation era. Under the new,
deregulated trading regime, producers were more exposed to the shifting demand for new
fruit types and varieties. While this has had a negative impact on sales in the short term, it
has also resulted in a new investment boom as farmers have strategically shifted the
locations for crop replanting and new plantings to reflect changes in demand from
consumers. In the citrus industry, for example, the Western Cape producing area has been
favoured over Mpumalanga, Limpopo and Eastern Cape provinces, as the demand shifted
to easy-peelers, which are more suited to the climate, with the result that the Western Cape
has become the largest source of citrus exports.
A further result of deregulation is that farmers are now better able to withstand shocks in
individual markets. While the bulk of deciduous fruit and citrus exports are still destined for the
UK market, the concentration of exports has diminished considerably, with new markets being
exploited in Eastern Europe, South and East Asia, the Middle East and Africa. There is
also anecdotal evidence that competition between marketers has resulted in a lowering of
supply chain costs, although the market for shipping space and harbour facilities is not
competitive, and South African exporters face higher costs than those of their competitors.
Producers’ ability to shift a wider variety of products to a wider range of markets has also
provided a measure of protection against competition from heavily subsidised producers
in northern hemisphere countries. New technologies have resulted in an extension of the
production and marketing season for these producers, thereby closing the ‘marketing windows’
for counter- seasonal southern hemisphere countries. This disadvantage has been partially
offset by new storage and shipping technologies for South African producers. However, the
reduction in state support for research and development presents a real threat to the deciduous
fruit and citrus industries which will fall behind competitors in the innovation of new
cultivars.
The regions that have benefited most from these changes in market conditions and the new
opportunities that have arisen as a result of deregulation include the new table grape
production areas along the Orange River in the interior of the country, and the wine
producing areas of the Western Cape. Table grape exports from South Africa have grown
fastest from among the deciduous and citrus exports, largely because of rapid expansion of
production capacity in the Northern Cape Province. This expansion has been driven largely
by the early harvest opportunity which generates favourable market conditions, by production
technologies such as precision irrigation, and by infrastructural investments aimed at improving
air and shipping transport.
The wine industry has also undergone radical structural changes. For example, exports have
increased more than threefold over the past decade, and from less than 10 percent of the total
harvest to more than a third. These changes have been driven by investment to replace current
production capacity and to create new capacity. In the wine industry, this implies a smaller
total crop, as high-yielding grape varieties are replaced by low-yielding ‘noble’ cultivars. This
157
also implies that the area under vines has grown only slowly, as most of the investment is
targeted at replanting. Nevertheless, new areas in the Western Cape, including the Malmesbury
district on the West Coast, and the southern Cape have been the focus of a rapid expansion in
wine grape production. At the same time, the processing capacity of the industry has also been
expanded, with new wineries being set up, mostly in the traditional high-quality producing
areas of Stellenbosch and Paarl.
(d) Food prices
Price controls for bread, maize meal and dairy products were abolished in 1991 and from then
on retail prices were set by market forces. The initial impact of deregulation and trade
liberalisation in the 1990s was a decline in producer prices for cereals, and as a result food price
inflation kept pace with overall inflation levels in the economy until 2001. However, the
depreciation of the Rand in 2002 and the concomitant sharp rise in major commodity and food
prices led Cabinet to announce the establishment of a food price monitoring committee in
response to this crisis. Following the recommendations of the committee, the National
Agricultural Mar- keting Council now regularly publishes a food cost review. Furthermore, over
the past three years, the Competition Commission has been investigating and remedying anti-
competitive behaviour in a number of food industries, such as the dairy, grain storage and bread
industries.
Food prices play a dual role in the South African economy. They act as incentives to agricultural
producers and as major determinant of the real income of consumers. High prices may be
desirable to induce increased production in especially developing areas, yet this imposes a heavy
cost on low-income consumers. Food prices also play a central role in the hunger and food
equation in the rural areas.
As household food security is a prime concern of government, the food security policy therefore
states that the affordability of food is an important issue. The consumer benefits from lower
consumer prices. When relatively cheaper products are available on the world market due to a
comparative advantage, it is better to import such products. This implies that the protection of
local industries should be reduced. In practise, the food security and more specifically the policy of
cheap imports, have indeed encouraged the importation of large quantities of agricultural
commodities (often subsidised), i.e. wheat, beef, veal, pork, poultry and dairy products and animal
feeds. This inevitably leads to a downward pressure on local prices and production capacity which
then takes time to recover to previous levels. Unfortunately the price advantage of cheaper food
imports is not passed to the consumer in all cases. South Africa’s foreign reserves are declining
and it will be increasingly difficult to pay for these imports. The depreciation/appreciation of the
Rand also renders the imports of commodities more expensive or in-expensive.
Concentration in the food chain seems to be a major or contributing problem. For instance, in
the meat industry it was found that three major role-players had 84 percent of the market share.
Some of the deregulations of the previous control board system promoted not only concentration,
but also monopolistic conduct. Areas where concentration may cause widening food margins
include, for example, agricultural input industries, packaging, transportation agencies, etc.
Some of the monopolies brought about by the system of controlled marketing are still in place,
for example the in the manufacturing industry. Concentration in the food manufacturing
industry has lead to price rises of some commodities, i.e. the bread price rise enforced by the
oligopolistic structure of the baking industry. These inflationary effects as well as public
resistance to market distortions have caused politicians to embark on a policy of deregulation
and privatisation. It is in the national interest that the deregulation of control boards should,
therefore, be followed by a simultaneous de-concentration exercise in the manufacturing,
distribution and retail industries.
158
What have been the negative impacts of deregulation of agriculture?
FEEDBACK
Deregulation of agricultural marketing has resulted in a decline in total employment in the
sector. When capital replaced labour it can be argued that agriculture played a negative role in
the economic development of South Africa by reducing employment rates and opportunities.

What has been the impact of marketing deregulation in your place where you stay?
Hint: Look at how famers/co-operatives operate the marketing of their agricultural products
It is evident that the effects of deregulation differed between the field crop, the horticultural and
the livestock subsectors of agriculture, partly because of their different modes of production,
and partly because the nature of control under the old 1968 Act and its predecessor differed
between different commodities. Discuss the impact of deregulation by main branch.
FEEDBACK
The sustainability of the reforms
The reforms are still vulnerable in a number of respects. Firstly, whilst planting patterns are still
adjusting and millers are not yet fully managing their price risk there exists a heightened risk of
maize meal price instability, particularly in years following drought affected harvests. However,
there has already been a significant supply response to the changes in the relative risks and prices
that confront farmers. Increasing price risk management by processors and traders is reinforcing
the trend towards the more secure domestic production of white maize and buffers the maize meal
market from producer price instability.
Secondly, government needs to embark on location- and commodity-specific programmes

(largely revolving around infrastructure and training) designed to increase the capacity of black
farmers (existing and prospective) to compete meaningfully in a deregulated market. Otherwise
pressure will grow for statutory initiatives to inflate net producer prices, even though any such
interventions are likely to encounter the same difficulties that resulted from controlled marketing
for much of the 20th century.
Thirdly, government policy decisions, and the implementation of these decisions, will determine
the extent to which the potential benefits of deregulation will continue to materialise.
Any proposals for market intervention should continue to be evaluated in an open a transparent
manner. Policy consistency and predictability will continue to be needed to give the private sector
the confidence to invest in agricultural marketing in general and in the management of price risks
in particular.
Agricultural tariff policy needs to be consistent with marketing policy. For some commodities
159
such as wheat, it is possible for import tariffs to largely negate the impact of the agricultural
marketing reforms and to inflate production and marketing costs unnecessarily.
It is important for South Africa to continue to push for reductions in the degree to which
foreign countries apply import tariffs, production and export subsidies in commodities
(particularly in their processed state) in which South Africa enjoys a comparative advantage. In
all commodities, South Africa needs to push for the export subsidy regime operated by other
countries to be implemented in a transparent, predictable and stable way.
Whilst export controls and floor prices may have an intuitive appeal to policy makers, any short-
run benefits from such measures will most likely be outweighed by associated medium to long
run costs.
Furthermore it is important that government facilitates the efficient operation of South

Africa’s deregulated agricultural markets by using all reasonable means to promote:
competition along the marketing chains;

the provision of agricultural information;
a legally secure framework within which agricultural trade can take place; and the
maintenance of the physical marketing infrastructure.
7.7 INTERNATIONAL EXPERIENCE AND RELEVANCE OF MARKET REFORM
International experience
South Africa’s agricultural sector differs from those of its neighbours in many ways. However, there
are important similarities (not least of which are the central importance of maize, the level of climatic
instability, and the dualistic structure of agriculture). As a result the experience with agricultural
market reform in eastern and southern Africa provides an important point of reference for South
Africa. This experience can be summarised as follows.
Reform gives rise to opportunities for the expansion of small- and medium- scale agricultural
processing and trading activities.
Reform may increase the level of price instability for both producers and consumers.
As a result the reforms may be vulnerable to significant political pressures-
For domestic agricultural market reforms to have their full impact, they need to be
complemented by the liberalisation of agricultural trade and foreign exchange markets.
Reforms tend to be motivated primarily by fiscal pressures. As a result they often take place in
an atmosphere of severe macro-economic difficulty when they have least chance of success.
In many countries, the successful implementation of reforms has been hampered by the
inconsistency and unpredictability of government decision making.
In New Zealand (a net exporter of agricultural products like South Africa) reform resulted in
adjustments to relative input and commodity prices which led in turn to an expansion of milk
and beef production relative to mutton, lamb and wool, and a substantial reduction in
agricultural land prices.
7.8 THE INTERNATIONAL RELEVANCE OF SOUTH AFRICAN REFORM

EXPERIENCE
The following lessons can be drawn from the South African experience since the mid-1990s.
160
In order to achieve the best results from the liberalisation of domestic and international
agricultural markets there needs to be a stable macro-economic environment and a basic level of
infrastructure (transport, storage, communications and financial) in place.
In particular, where there is potential for the price of a commodity to swing between export and
import parity related prices it is crucial that farmers, processors and traders should have access to
as wide a range of price risk management mechanisms as possible.
Indeed, opportunities now exist for other countries in southern Africa, where deregulation has
resulted in spot price instability for maize, to benefit from the price risk management
infrastructure created in South Africa. However, to derive any such benefits, the governments
of those countries will have to refrain from ad hoc export restrictions.
The success of the reform process so far, and the fact that the deregulated agricultural
marketing system has operated relatively smoothly to date, is due, in no small part, to the fact
that there has been strong political backing for the reform process, combined with a significant
degree of consultation with stakeholders (around the new Act, and during the various
commodity-specific reforms). Furthermore, by the
1990s most of the South African control boards worked extensively through their agents. Most
did not own the marketing infrastructure, or handle, store, process, or finance agricultural
production or marketing activities themselves. As a result, the closure of the control board
system did not create a significant vacuum in the marketing chain. It merely implied that board
agents operated in a different decision- making environment.
A crucial aspect of the existing business and investment environment in the agricultural sector
relates to the consistency and predictability of government decision making around agricultural
marketing. The government has been clear (and is showing signs of being consistent) in its views
on the division of responsibilities between government and the private sector in agricultural
marketing.
A comparison of New Zealand and South Africa’s agriculture (This section

is based on research conducted by Prof Nick Vink, 2008))
South Africa’s agricultural sector differs from New Zealand’s (NZ); however, there are also
similarities. Some of these differences and similarities could be summarized as follows:
Both countries share southern hemisphere climate. NZ has a more reliable rainfall and
better soils
NZ, with its smaller domestic population, is more export-oriented
Both are Cairns Group members: world leaders in unsubsidised agriculture Both underwent
dramatic reforms; NZ in the mid 1980s and SA a decade later The evidence shows that NZ
has adjusted to ‘free’ markets better than SA to date Marketing reform was triggered by
external macroeconomic factors in both cases NZ: experienced economic stagnation,
change in government in 1984 and a subsequent drive to liberalise
Agriculture is a central part of these reforms
SA: also macroeconomic precedents, as attempts to stabilise the economy in the late 1970s
resulted in a rapid increase in interest rates
Thus, both countries embarked on the reforms at about the same time
However, the process from that time onwards was markedly different
To understand these differences, and their consequences, it is necessary to compare the reforms
in terms of their timing, sequencing, breadth, and depth
Timing
161
NZ: most reforms implemented within 3 years of the 1984 elections
Producer Subsidy Equivalent (PSE) declined to below 5 percent after 1988, and has since
declined to below 1 percent
SA: reforms for 15 years followed by the ‘big bang’ that lasted for 12 months
NZ market reforms preceded SA by a decade
SA’s PSE remained at above 10 percent until 1995 after which it declined to below 5
percent
Sequencing
Deregulation in NZ had two distinguishing features:
NZ: marketing reforms preceded international trade liberalisation under the AoA
SA: sequencing more complex as explained above. Trade liberalisation preceded the ‘big bang’
However, no evidence that policy makers in NZ or SA followed any deliberate sequence of
reforms
Breadth
SA and NZ: Virtually all of agriculture was subject to intervention before deregulation
In both there is evidence that previously uncontrolled industries have been the most
successful
NZ: deer and wine
SA: Poultry and vegetables
NZ also implemented labour market reforms, which resulted in more flexible
labour markets
Depth
The biggest difference between SA and NZ was in the depth of the reforms.
SA: all statutory powers were removed, with two exceptions: Sugar
industry
The powers of the NAMC that allow statutory levies
NZ: the end result was more nuanced:
Quota allocations into EU and USA remain in dairy and meat, while kiwi fruit operates a
single desk with monopoly export powers
This did not result in a higher PSE, because import controls are not necessary to maintain an
export monopoly, hence the price gap between domestic and world prices, the key to the
measurement of PSE, is unaffected
This has both costs and benefits to different stakeholders
Have the marketing reforms in SA resulted in technology innovation?
Agricultural exports’ share in production increased from 1/5 to 1/3

According to Vink (2008), agricultural exports increased by 9.2 percent p.a. between 1997
and 2007: wine, citrus and table grapes grew by 17.8 percent, 16 percent and 12.9 percent
respectively
Some evidence of innovation, but the jury is still out on the results of the reforms Different
patterns of technological growth can be observed by and within regions over time
Innovation continues apace, but how much of it can be ascribed to the reforms?
162
Field crops
Prices declined to world market levels

Farmers shifted to low-till, etc. production
Reduced inputs such as fertilisers, insecticides, herbicides, tractors, other machinery,
and fuel
Thus process rather than product innovation
Industry average yields more than doubled
Fruit sector
Increase in output and exports, driven by:

– (1) the addition of new export-oriented production regions (Orange river:
pre-reform)
– (2) introduction of new production technology
– (3) introduction of better control over the cold chain
Export growth OK, but limited
Wine
Marketing reforms resulted in:

– (1) Many new entries in the industry (2 cellars/month for >10 years!)
– (2) Inward Foreign Development Investment, accompanied by overseas marketing
and the burgeoning tourism sector
– (3) Large scale replanting of vineyards
7.9 CONCLUSION
OECD calculations show that South African agriculture is relatively unprotected
– similar to Australia, Chile and New Zealand (Argentina still taxes agriculture) But output
and export growth has been slowest in South Africa
– Why: poor resources or investor confidence?
– Or do we just have to wait longer to reap the benefits (or pay the price!)
Economic effects:
Infrastructure development: location, mode of transport (road vs. rail), capacity

(silos, railways, ports)
Market power of producers (e.g. dairy)
Negotiating power in export markets (fragmentation vs. over-concentration) Information
(role of NAMC)
Access for small farmers
163
(1) What are the context of agricultural marketing regulation and deregulation? (05)
(2) What were the origins and impact of South Africa’s controlled agricultural marketing
system? (05)
(3) A number of significant themes characterise the South African agricultural marketing
system from the 1920s through to the 1980s. Discuss the impact of SA agricultural
marketing policy up to the 1980s. (20)
164

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Introduction to Agricultural Economics

Agriculture and Animal Health

Questions you may ask right now… Where is my study

MODULE OVERVIEW – GETTING STARTED

The purpose and outcomes of AME1501

THE PURPOSE AND OUTCOMES OF AME1501

PURPOSE OF THE MODULE

We encourage you to belong to a professional organisation in order to engage in academic

Your prescribed textbook for this module is:

WHAT IS EXPECTED FROM STUDENTS?

Your responsibilities can be summarised as follows:

HOW TO STUDY THIS MODULE ONLINE

OVERVIEW OF THE ONLINE TOOLS

Home page / Welcome Announcements /

Career advice and how to develop your employability skills

E-mail for counselling counselling@unisa.ac.za

E-mail for Academic Literacy acalit@unisa.ac.za

Further important information appears in your my Studies @ Unisa brochure.

THE ASSESSMENT PLAN

There are TWO assignments for AME1501 for each semester.

How your final mark would be calculated:

Assignments will contribute to your semester mark.

Assignment Marks allocated

Assignment 1: Compulsory 20%

Assignment 2: Compulsory 20%

Examination mark 60%

Total Marks 100%

1W HAT IS AGRICULTURAL ECONOMICS ALL ABOUT?

LEARNING UNIT OUTCOMES

DISCUSSION FORUM 1.1

1.2 ECONOMIC DECISION-MAKING

Getting more output from a given amount of inputs.

Scarcity of resources in relation to unlimited wants

Resources can be broadly classified into three major categories:

Scarcity and the problem of choice (Penson et al.: Chapter 1: p.20)

Definition: Opportunity cost is the value of services or products (goods, services,

DISCUSSION FORUM 1.2

1.3 THE PRODUCTION POSSIBILITIES FRONTIER

Possibility Output Output

A production possibilities frontier (PPF) shows the combinations of two or more

Point D is unattainable at the moment. An increase in total resources or an improve-

Reallocating our resources creates an opportunity cost. Choosing more output

(a) Point F represents an unattainable combination of soya beans and wheat.

Then what is Agricultural Economics?

1.5 WHAT IS AGRICULTURE?

1.6 ECONOMIC SECTORS OF AGRICULTURE

1.6.4 Agricultural processing-marketing industries

The modern industrial economy is also characterized by a substantial development

1.6.5 The government supported sector

1.7 HOW IS ECONOMICS APPLIED TO AGRICULTURE?

Agricultural economics began as a way to study the allocation of scarce resources

Agricultural economics applies principles of economics to issues of agricultural pro-

Agricultural economics includes a number of specialty areas, including agribusi-

1.8 WHAT DOES AN AGRICULTURAL ECONOMIST DO?

– Economists are trained to perform marginal analysis

Tools of the Economist

LEARNING ACTIVITY 1.2

1.9 THE ECONOMIC PROBLEM

DISCUSSION FORUM 1.3

1.9.1 The economic problem

Consumer goods and capital goods

1.9.3 What should be produced?

1.9.4 How should these goods and services be produced?

1.11 QUESTIONS FOR SELF-EVALUATION