Wheat consumers pay the price for taxman’s war with importers

A protracted war over the rate of tax applicable on imported wheat is to blame for the ongoing turbulence in the pricing of wheat products, industry data shows.

People familiar with the ongoings in the grains industry said the price increments are the result of cartel-like behaviour that has seen millers charge premium prices for products made from wheat they imported cheaply in May using the surge in global prices as reason for the adjustments.

The millers and the Kenya Revenue Authority had disagreed over the rate of import duty applicable on imports leaving 200,000 tonnes of wheat at the port of Mombasa for six weeks, forcing the millers to work with old stocks.

To cover for the losses incurred from inability to move stocks, the millers have been increasing their trading margins, a move that has seen prices of wheat products rise sharply since mid July.

The stand-off began with the importers’ insistence on paying duty at the revised rate of 10 per cent fixed by the East African Community and announced by Finance minister Uhuru Kenyatta in his June Budget.

But the taxman resisted the move saying that the new tariffs would only be applicable upon ratification by the Arusha-based East African Legislative Assembly.

Prices of wheat products have been rising since last month’s decision by Russia, a major world producer, to ban export of the produce to shield its domestic consumers from a looming shortage caused by severe drought.

Industry data indicates that the millers are holding large quantities of wheat they imported two months ago, which they are processing and selling to consumers at higher prices citing the surge in global prices.

Kenya has a combined daily milling capacity of less than 5,000 meaning such stocks can last for more than a month without causing any supply shortages.

Millers are estimated to be holding more than 480,000 metric tonnes of wheat in Mombasa-based silos and godowns, according to documents seen by the Business Daily.

More than 80 per cent of the stock is destined for the local market with the balance earmarked for re-export to the neighbouring countries.

“The millers are holding huge quantities of wheat they bought cheaply from international and the local markets,” said Booker Owuor, an agricultural economist.

“Many of them are hoarding the grains to create an artificial shortage they have been using to justify price increases,” he said.

The Kenya Revenue Authority (KRA) has recently ordered port authorities to clear all wheat lying at the harbour following the ratification of the new tariffs by the regional assembly on August 24.

Combined capacity

Some industry insiders, however, said a recent flurry of acquisitions of small millers by big rivals and the emergence cartel-like practices in the marketplace is partly to blame for the price turbulence in the grains market.

Mombasa Maize Millers is, for instance, said to have acquired Kabansora Mills, Milly Mills, Supa Flo mills, Bayusuf Grain Millers, Grain Milling Corporation and Swan Millers leaving it with a firms grip on the supply chain.

This has effectively more than doubled the company’s daily milling capacity to 1,620 tonnes from the initial 740 tonnes giving it control of 33 per cent of the market.

Pembe Group, another giant miller, owns two major players, Pembe/Bajaber (also known as Kitui Flour Mills) and Pembe Group while Premier controls Atta and Premier Flour Mills.

The two groups have a milling capacity of 900 and 800 metric tonnes respectively accounting for 18 and 16 per cent of the market.

That leaves the three millers with a combined milling capacity of 3,320 tonnes out of the national daily milling capacity of 4,940 tonnes.

These acquisitions have given the millers control of the entire supply chain that covers importation, transportation, milling, distribution and trading in the grains.

Diamond Lalji, the chairman of the Cereal Millers Association, could not be reached for a comment as he was said to be out of the office.

Mr Owuor said that the stranglehold that the three millers have on the market given them immense clout over the pricing of grains in the country that smaller players have been unable to break.

“These millers are holding old stocks they acquired before the price changes and should be lowering the prices at best and not increasing it,” said Mr Owuor.

The millers’ cartel-like behaviour is also being blamed for the failure of the recent drop in import duty from 35 per cent to 10 per cent to make an impact in pricing of wheat products locally and is expected to intensify the clamour for re-introduction of price controls in parliament.

A Bill seeking to introduce price controls for key consumer goods is currently before Parliament for reconsideration after President Kibaki refused to assent to it last week.

Should Parliament pass the Bill with a two thirds majority, it will automatically become law overriding the presidential veto.

Strong opposition

Local wheat farmers have put up strong opposition to the import duty reduction fearing a swamping of the market by cheap imports.

One tonne of wheat delivered at Mombasa now costs $250 (Sh20,000) meaning that at the rate of 10 per cent the importers are paying an average of Sh2,000 for every tonne of wheat shipped in down from Sh7,000 in May.

The UN’s Food and Agriculture Organisation (FAO has discounted fear of acute wheat shortage saying the market remains far more balanced than at the time of world food crisis in 2007/08.

Unfavourable weather reports have however forced FAO to cut its global wheat production forecast for 2010 to 651 million tonnes, from 676 million tonnes in June.

Severe drought in the Russia, the main global wheat producer, coupled with anticipated lower outputs in other major producers markets such as Kazakhstan and Ukraine have raised fears of a looming supply shortage during the 2010/11 marketing season.

More recently, wild fires in Russia have decimated huge tracks of land under wheat crops forcing the Russian government to ban the exports of grains.

Downgrading production

International wheat prices have jumped by over 50 per cent since June raising fears of a possible repeat of the 2007/08 food crisis that sparks riots in various parts of the globe.

FAO has allayed such fears saying that two consecutive years of record output have replenished world inventories and that the buffer stocks being held by traditional wheat exporters against unexpected supply shortage is enough to cover any anticipated production shortfall.

“External factors, including the macro-economic environment and developments in other food markets that were major drivers of the surge in international prices in 2007/08, are not posing a threat so far,” FAO said.

In downgrading the global wheat production forecast for 2010 FAO points to a tighter supply situation and increases the likelihood of higher wheat prices compared to the previous season.

On the other hand, should the drought in the Russian Federation continue, it could pose problems for winter plantings in that country with potentially serious implications for world wheat supplies in 2011/12.