Source: Wandile Sihlobo, Agricultural Economics Today, 19 May 2021, photo credit: Food Safety News
On Wednesday morning, Statistics South Africa reported much higher figures for consumer food price inflation than some had expected. In April 2021, the country’s consumer food prices were at 6,7% year-on-year, the highest level since July 2017.
The different thing about 2017 is that it was a year that followed a drought period – so there were still pass-throughs of higher grain prices from the previous poor season. Notably, livestock farmers were restocking their herds after the devastation caused by the drought. This meant that there was less slaughtering activity and meat prices rose, driving the uptick on overall consumer food price inflation, which for July 2017 was reported at 6,9% year-on-year.
But we are far from that reality this time around. We have had two consecutive favourable agricultural seasons, characterised by higher rainfall, which supported crop yields and the livestock industry.
Nevertheless, we are operating in a global environment and developments in various regions of the world impact the South African agricultural market. A case in point are global grain prices, which remain elevated because of droughts in South America and dryness in parts of the U.S. and Canada.
Driven by these higher global prices, on 13 May 2021, South Africa’s spot prices for yellow and white maize were up by 38% y/y and 31% y/y, trading at R3 586 per tonnes and R3 422 per tonne, respectively. Similar price trends are also evident in oilseeds (an additional price driver here is also robust Chinese demand for soybeans)
Therefore, in our view, the driving factors of local food prices is not so much what is happening in South African, where we are expecting the second largest maize harvest in history, about 16,7 million tonnes. Instead, the higher global grains and oilseeds prices are the driving factors of prices for reasons I have mentioned above.
We know from our most recent research (an article on this issue will appear soon in Business Day) that the correlation between domestic and international maize prices remains positive, about 60% for white maize (which is mainly traded into the African region) and 85% for yellow maize (which is sold into the global market). This implies that when global maize markets show an increase, domestic maize prices tend to rise in tandem. We see pretty much similar observations for soybeans, of which South Africa is a net importer.
These higher maize and overall oilseeds prices have been our reality since last year, putting increased pressure on the livestock industry. At the start of the week, Astral Foods, one of South Africa’s notable poultry companies, signalled that they are now being forced to pass on the rising input costs to consumers. Therefore, it is not surprising to see that one of the products that underpinned the recent increase in South Africa’s consumer food price inflation is meat. The meat producers have had a hell of a time with higher feed costs for such a long period. Eggs, milk and cheese also increased, and the driving factor is similar.
Oil and fats are another food product category that was behind the notable increase in consumer food price inflation. South Africa imports large volumes of vegetable oil a year, roughly half a million tonnes of palm oil and just over a hundred tonnes of sunflower oil. Currently, the global prices of vegetable oils are relatively higher because of supply constraints in the palm oil producing Asian countries, combined with generally higher global demand. What we are witnessing here in the domestic market is a spillover of this phenomenon.
The article was written for and first published on Fin24.
The South African Pork Producers’ Organisation (SAPPO) coordinates industry interventions and collaboratively manages risks in the value chain to enable the sustainability and profitability of pork producers in South Africa.
