History

> Origin, financing and ownership of grain silos in SA

Introduction

Due to the high costs involved in the handling of grain in bags (especially maize and wheat), and the shortage of grain bags during the late 1940's and early 1950's producers, grain traders, millers and the various grain boards requested Government to encourage the erection of grain silos and/or to convert existing storage facilities for bulk handling of such products.

This resulted in a long-term loan scheme for the erection of grain silos and bulk stores that was announced by the Minister of Agriculture in Parliament on 12 February 1952. The scheme entailed that long-term loans would be made available through the Land and Agricultural Bank to co-operatives, traders and millers for the above-mentioned purpose. A co-ordinating committee, the Grain Silo Committee, was appointed to supervise the execution of the scheme.

Role of the grain silo committee

The Grain Silo Committee consisted of four representatives from the Department of Agricultural Economics and Marketing, and one each from the Maize Board, Wheat Board, Oilseeds Board and Sorghum Board. An engineer from the Department of Agricultural Engineering assisted the Committee on technical matters. Applications for the erection of grain silos had to be approved by the Grain Silo Committee. Permits for the erection of silos were issued according to the need for bulk storage facilities in fourteen specified regions in the country. Silos had to comply with technical specifications of the Grain Silo Committee.

Permits were not restricted to co-operatives. Anybody could apply for a permit. Permits were, for example, issued to several private millers and entrepreneurs (e.g. Messrs Bruwer at Wesselsbron, Messrs Senekal at Wesselsbron and Viljoenskroon, and Messrs Allem Brothers at Viljoenskroon).

Non co-operative enterprises could also apply for Land Bank loans for the financing of grain silos on the same conditions that applied to co-operatives. However, they did not use this facility extensively.

Role of the co-operatives

Co-operatives played (and still play) a major role in the economics of the rural areas of our country. The co-operatives took the risk to invest vast amounts of money in the rural areas with very low return on their invested capital to create the necessary infrastructure and job opportunities for thousands of workers investment-returns prevented the profitable "private sector" from becoming involved in the grain silo business.

The co-operatives were prepared to take the risk of a very low return on their investments since they did this as a service to, and in the long term interest of, their members.

The co-operatives were instrumental in placing our country amongst international agricultural leaders as far as the provision of sufficient, well distributed, highly effective and operational bulk storage facilities are concerned. Compare our country with any of our neighbouring countries and an export country such as the Argentina where they are compelled to export crops during the harvesting season, since they either don't have adequate or operational silos.

Few people know that the first silo in the world with a larger diameter and lower height was built by a co-operative in South Africa, namely North West Co-operative.

This design soon became the standard for grain silos internationally, because it:

Remuneration for storage and handling

Agents of control boards were remunerated for their services at average cost plus a small risk margin equal to 5% of their cost. This applied to all agents, including commercial maize millers who also received remuneration from the Maize Board for storage and handling. When the Maize Board stopped the latter payments in 1976, it also stopped payment to co-operatives on maize that was due for delivery to mills in which they had a financial interest, however small such interest was.

Agents of control boards did not receive "grants" from the boards - they only received a fair remuneration (without a profit margin) for services rendered to the boards (i.e. for the storage and handling, insurance and financing of stocks that belonged to the boards).

Until the mid-eighties payments (at fixed average rates) by the control boards to their agents, were based on throughput i.e. on the tonnage of products despatched on behalf of the boards. Since 1986 agents were paid on the capacity of silos. Co-operatives did not receive capacity payments on the full capacity of all their silos, but only on that portion that was accepted by the boards as their responsibility - less the capacity needed for the storage of products for the co-operatives' own maize mills, feed mills, farmers' stock, etc.

The reasons for the change in the method of payment (from throughput to capacity payments) were the high fixed costs of the agents (85 % of the total cost) and because the program reached a stage where sufficient silo-capacity had been erected.

The change in the method of payment did not result in higher costs to the boards. It only had the effect that the same gross amount was distributed differently between agents in 1996, when the single-channel maize marketing scheme came to an end.

Had it not, however, been for this arrangement with the control boards, the co-operatives would have had to charge higher rates for the storage and handling of the products of the boards to compensate for the higher risks they would have been exposed to. This would have increased the cost of the boards, and hence also the selling prices (consumer prices) of the boards.

Although non-members did not contribute to the financing of the silos, the co-operatives were compelled to receive and store products delivered to them by any producer. They only received "standard" remuneration from the boards and were not allowed to charge a premium for services rendered to non-members.

The co-operatives did not have a guarantee that they would be remunerated for their costs indefinitely. They had to apply annually for appointment as agents of the various boards. Government did also not guarantee payments of any silo tariffs to co-operatives.

Government Involvement

Government did not supply loans, grants or guarantees to the co-operatives for the erection of grain silos.

Government only issued a guarantee to the Land Bank to protect the Land Bank should a co-operative (or other debtor who owed a silo-loan to the Land Bank) be liquidated and be unable to redeem its debt to the Land Bank. The Land Bank never needed to exercise this guarantee and therefore no taxpayers' money contributed to the cost of the silos.

Confirmation of this is evident from a letter from the Department of Agriculture (12/11/1993) which reads as follows: "… the Minister indicated that he cannot commit the Government to assistance … regarding the utilisation of Government funds to defray the fixed costs attached to the underutilisation of grain silo capacity. … It should further be noted in this regard that the co-operatives have to take into account the economic viability of the silos concerned, as a normal business transaction at the erection thereof … The guarantee can only become effective when a co-operative becomes insolvent."

Although Government subsidised a portion of the administrative costs of the Maize Board from time to time, this was based on the Maize Board's costs attributable to the domestic consumption of maize and had the effect to reduce the domestic selling price of maize. This resulted in an advantage to the consumer of maize and not to the co-operatives.

Ownership of silos

An asset belongs to the owner who takes the initiative and/or the risk to obtain or erect it - even if he has to borrow money to do this.

There should thus be no doubt that the silos belong to the co-operatives because:

  • The silos have been erected on property which belong to the co-operatives (nobody can argue to be the owner of an immovable asset on another's property).
  • Co-operatives took the initiative and the risk to erect the silos. Both the silos (assets) and the loans (liabilities) to finance the silos are registered in their names, and have been shown accordingly in their balance sheets for decades. No claims other than those shown in their balance sheets have ever been made against their assets.
  • Co-operatives did not receive "grants" from the control boards or Government. They only received a fair (and legitimate) compensation for services rendered to the boards. All this didn't happen in secrecy. The control boards' financial statements were subject to annual public audit and scrutiny in Parliament.
  • The mere fact that co-operatives rendered services to statutory boards, does not mean that their assets belong to the boards or to the Government employees' and ex employees' assets (whose salaries and housing loans were paid with taxpayers' money) as well as those of many other institutions that rendered services to Government and got paid with taxpayers' money (which had not been the case with the co-operatives).
  • The co-operatives did not have any advantage from Government subsidies. Where such subsidies were granted to the Maize Board, the industry and/or consumers had the advantage of them.
  • Neither did the co-operatives benefit from "cheap" Land Bank loans. The co-operatives were simply remunerated for their actual costs - including the actual financing costs of their Land Bank silo loans.

Source: Dr C L Wentzel, North West Co-operative, Lichtenburg – 1997