Letīs do Some Economics
What's up with the price of bread?
2015-04-01 17:37
Cape
Town - Nomsa Vumazonke buys two loaves of bread every day. She lives in
Philippi with her three children and four grandchildren, and after
making sandwiches for them says there is nothing left for her to eat.
"Bread is too expensive. It's very hard. I have to buy bread for my
children," she told GroundUp.
Over
the course of 2014 the price of bread, a staple food for more than half
of South Africa’s population, has risen nearly twice as fast as the
inflation rate.
According
to Stats SA, which monitors prices at more than 100 different locations
across the country to calculate the average bread price, the price of a
standard, 700g loaf of white bread rose 8.9% from R10.49 to R11.43 from
January to December last year.
The price of an equivalent brown loaf rose 8.1% from R9.47 to R10.24.
Over the same period, the consumer price index (the measure of the general rate of inflation) has risen 4.4%.
At
the beginning of 2015 the average price was R11.42 for a standard loaf
of white bread, and R10.29 for an equivalent brown loaf.
Bread
from spaza shops or informal retailers usually costs more than the same
product from large retail chains which negotiate with suppliers or bake
their own bread.
Not a new phenomenon
The
recent price rise is not a new phenomenon. The graph below shows the
price of white and brown bread since 2008, adjusted for inflation. It
shows that for the past four years the price has risen much faster than
the inflation rate.
Brown
bread is cheaper than white bread for two reasons. Firstly, it has a
higher extraction rate, meaning that more brown loaves can be made from
the same amount of wheat, relative to white loaves. Secondly, unlike
white bread, no Value Added Tax (VAT) is applied to brown bread.
This
means that a loaf of brown bread should cost at least 14% less than a
white loaf, since VAT is set at 14%. On average, however, it is only 9%
cheaper, suggesting that some of this margin is skimmed off before
reaching the consumer, who benefits very little from the tax exemption
on brown bread.
A
survey conducted by the African Food Security Urban Network in 2008
found that 80% of households in Cape Town were food insecure, and that
the poorest households spent more than half of their budget on food.
Higher costs
Anton
van Zyl, Marketing Executive at Pioneer Foods, says that the Sasko
bread price increases are due to higher input costs including wages,
electricity and the cost of wheat.
But
according to Christo Joubert, a manager at the National Agricultural
Marketing Council (NAMC), milling, baking and transport make up the
bulk of the cost of bread and the price of wheat accounts for less than
one-fifth of the total cost.
Four
large milling companies, including Pioneer, continue to dominate the
wheat to bread chain, controlling over 90% of the milling industry and
a large slice of the baking industry.
Van
Zyl says Sasko prices do take into account differences between white
and brown bread, but he says Sasko does not "have any influence on the
retail selling prices of bread". In his experience, he says, "white
bread is more often on promotion than brown bread".
Abubak’r
van der Fort, the manager at Something Nice bakery in Blue Downs,
recognises that high bread prices make life difficult, “especially for
the poor and needy community". He sells his own bread at slightly lower
prices than the branded loaves and says that “the current bread prices,
especially from suppliers such as Sasko, Albany and Duens are
exorbitantly high”.
Question 1
(a) Define Price elasticity of Demand [2 marks]
(b) Using a diagram explain how PED impacts the effects on familiy expenditure (revenue) when supply changes [4 marks]
(c)
Using information from the text and your knowledge of economics,
discuss the PED of brown bread compared with PED of white bread [8
Marks]
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