Food prices likely to increase
Wandile Sihlobo, an economist at Grain SA, told Justmoney that items such as grain and maize meal, which are directly affected by the drought that South Africa is experiencing, are likely to see price increases within four to six months.
Other items such as dairy products, meat and poultry, where grain is used to feed the animals, will experience a delay in price increases according to Sihlobo, with increases most likely to hit the consumer within nine months.
However, it is difficult to estimate what the exact increases will be, as there are a number of factors that influence the price of food. Despite not being able to predict the price increases, Sihlobo notes that there is already an upward trend in prices.
The effect of a drought
A drought can affect a country’s economy, as it reduces agricultural output, which in turn reduces the country’s Gross Domestic Product (GDP). Alex Smith, an economist at First National Bank (FNB), pointed out that this was illustrated in the second quarter GDP numbers for 2015 for South Africa, where agricultural output significantly declined.
Karabo Takadi, an agri-specialist at Absa, said: “Drought leads to poor harvest, and less supply of crops which means that we have to import more than we would have liked to, which pushes up prices. During drought years, prices trade towards import parity prices, and the higher prices leads to food inflation. Industries that use grains for feed also get affected like dairy, and livestock, because [there are] less crops.”
Sihlobo noted that the specific foods that have been affect by the recent drought are summer harvests such as maize, sunflowers, soy beans, ground nuts and dried beans, among others.
“The drought basically affects food prices because it leads to a lower output. If there is lower supply that means even the normal demand [cannot be met]. That pushes the prices up, so drought actually adds upward pressures to the prices,” explained Sihlobo.
However, both Sihlobo and Takadi highlight that there is no risk of a food shortage. Takadi revealed: “We produce enough maize to cover local demand, and demand to BLNS countries (Botswana, Lesotho, Namibia, Swaziland), so [there is] no risk of a shortage expected. Prevailing drought in other neighbouring countries such as Zimbabwe that may require unforeseen food imports later in the marketing year, [which] can create short term domestic shortages during the first quarter of the calendar year before harvesting of new season maize.”
Sihlobo added that South Africa is not in a food crisis, but that there are going to be import needs and demand outstripping local output due to the drought. This need to import goods is one of the factors that will influence the food price.
In addition to the need to import food, the weakening Rand is also influencing the cost of food.
The impact of the Rand on food prices
Figures released by Statistics South Africa for the 2015 second quarter GDP showed a 17.4% drop in agriculture growth. GDP contracted by 1.3% in the second quarter.
Smith noted: “If we have a surplus of food in South Africa then the Rand’s performance doesn’t affect food prices very much. However, if we are importing a lot of food like we are now due to a drought, then a weak Rand will tend to push up food prices.”
David North, head of strategy and corporate affairs and Pick n Pay, said: “A weakening Rand increases the price of imported products and puts pressure on the price of commodities which trade internationally.”
Takadi agreed, adding: “If the rand continues to weaken it means we pay more for our imports. However, the weaker exchange rate supports the produce that is exported, as it supports export prices.”
Sihlobo highlighted that the inflationary factors of the weakening Rand will add to the increases that consumers may experience, as South Africa is having to import about half of its domestic consumption of wheat, as well as about 750 000 tons of maize.
When will consumers feel the pinch?
Some believe food prices will hike up but that this will not affect the consumer immediately. According to Smith it depends on the type of goods as to how long or how quickly a change in the performance of the Rand (i.e. weakening or strengthening) will affect consumers.
“For example, petrol prices are adjusted monthly, so fluctuations in the Rand affect these prices very quickly. However, consumer goods prices react with a longer lag of six to 12 months as retailers often hedge their short term currency exposure,” revealed Smith.
Takadi added: “The weak Rand supports prices of those commodities which [South Africa] import, such as wheat. As we do not produce enough wheat for domestic use and to be self-sufficient we rely on imports. It usually can take up to three months before higher wheat prices is given through to producers.
“It should, however, be noted that global wheat prices declined. We do not expect domestic wheat prices to increase but to trade sideways. Thus, the price of bread should not increase. In terms of maize, it is expected that prices will trade sideways from earlier this year. No further increases in food prices are expected. We expect commodity prices to decline as soon as the new harvest in March 2016 starts to get harvested. The oil price declined and with lower fuel costs food prices should actually benefit to some extent going forward,” noted Takadi.
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