Business
Benefits of falling oil prices continue to elude African farmers
From the coffee plantations of Uganda to the maize (corn) fields of Zambia, the collapse in world oil prices has so far brought few benefits for African farmers, with stubbornly high pump prices and voracious middle-men maintaining a squeeze on margins. Only in South Africa, the continent’s most sophisticated economy and one of its top agricultural producers, have fuel prices – tightly regulated by the government – come down enough to make a difference.
Elsewhere, many smallholders are unaware of the near-halving of crude oil prices on world markets since July, and even the better informed doubt any savings will filter through the web of agents and brokers that dominates much of African farming.
“If it is true fuel prices are falling, it is possible these traders will increase what they are paying us,” said 73-year-old Ugandan Gladys Kavuma, who has been farming 2 acres of coffee in Buloba, a town 15 km (10 miles) west of Kampala, for 4 decades. “But I doubt prices will ever improve. They will simply come up with another reason to keep prices low,” she said, with a resigned shrug. A typical Ugandan smallholder who has brought up 5 children on the back of her meager coffee earnings, Kavuma’s plight is replicated across sub-Saharan Africa, which relies on small farmers for 80 percent of its food.
In essence, weak government regulation means fuel importers and distributors can raise pump prices as crude oil rises, but drag their feet when it drops.
“We have heard and read that the cost of oil has dropped globally but unfortunately we are yet to feel the effects,” said Jack Kneppers, a florist who employs 500 people at his Maridadi farm in Naivasha, 92 km (57 miles) northwest of Nairobi, Kenya. “The price of fuel has dropped by a few shillings and this has very little if any effect on our cost of production.”
Need to Diversify
In countries such as Zambia, Africa’s number two copper producer, oil’s dramatic decline has been offset by currency weakness as foreign investors have retreated from frontier market debt and stocks due to concerns about global growth.Furthermore, fuel imports are often paid for months in advance, meaning any benefit from the collapse in oil prices is delayed.
In its first price adjustment since April, Zambia dropped pump prices by 2.5 percent at the end of November based on fuel shipments bought in August, when crude was only just beginning its slump. Over that time, the local currency (kwacha) weakened 8 percent, eroding much of the impact of the oil price decline.
“The drop in global oil prices has not been felt in Zambia. The reduction in prices has been extremely negligible and means nothing to the farming community,” said 62-year-old Request Muntanga, who owns a 500 hectare (1235 acre) maize farm south of Lusaka.
Only in South Africa, where fuel price changes filter through faster and the government is stricter about ensuring reductions are passed on, have farmers seen major savings. According to commercial farmers group AgriSA, for every 0.1 rand drop in the domestic fuel price, farmers nationwide save an annualized 100 million rand (US$8.6 million). Economists forecast that a liter of gasoline will fall to 11.44 rand (US$0.98) a liter next month, its lowest since August 2012 and 20 percent below a record 14.39 rand (US$1.23) in April. If sustained, such a decline means US$250 million wiped off the annual fuel bill of South Africa’s commercial farmers.
The knock-on effect is even greater as the price of chemical fertilizer, another hydrocarbon by-product, should also come down over time. “If fertilizer prices do come down it will have a huge effect,” AgriSA President Johannes Moller said. “Production will go up and food prices will at least start rising slower, or may even come down. It is good news all round.”
In Nigeria, where agriculture accounts for 40 percent of gross domestic product (GDP), only a few large commercial farms have also been able to use their purchasing power to extract savings. “The drop in energy prices directly impacts the cost of urea which is the biggest farming input cost,” said Kola Masha, managing director of agriculture investment firm Doreo Partners.
Nigeria, too, has seen a sharp decline in its currency in the last three months, but Masha said this may ultimately reinforce the importance of diversifying the economy to reduce its 90 percent reliance on oil for foreign exchange. “A drop in oil should encourage governments to diversify, which should help agriculture businesses,” Masha said. “If governments see they need to diversify into areas like agriculture then these oil price shocks will not be so painful.”
A version of this article was first published on The Africa Report