South Africa is sitting on a food-price time bomb. The effect of the worst drought in more than two decades is being compounded by the rand’s 18% plunge against the dollar this year‚ increasing the cost of imports of maize.
Food inflation was set to accelerate to more than 10% by the middle of next year‚ more than double the current pace‚ forecasts from Stanlib Asset Management and Macquarie Group showed.
“South Africa is facing a convergence of factors on food – global food pressure‚ currency and the domestic drought – you’ll see that become much more evident when you start importing more‚” Stanlib chief economist Kevin Lings said.
“Ultimately‚ this will be forced through to the consumer.”
Maize prices have surged by more than 50% this year in South Africa‚ while dry weather caused by the El Nio weather pattern has disrupted planting.
A price shock may hurt consumers already facing job cuts and higher interest rates‚ further dragging down an economy that narrowly missed falling into recession this year.
Food’s 14% weighting in the consumer price index (CPI) is the largest after transport and rising costs have the potential to drive inflation higher.
The Reserve Bank has already raised the repo rate four times since the beginning of last year to 6.25% as it forecasts inflation will breach the 3%-6% target band next year.
The last time food inflation was above 10% was between October 2011 and January 2012‚ when the worst drought in a quarter of a century ravaged crops in the US‚ the largest producer of maize.
At that time‚ the central bank was cutting interest rates even though inflation was above 6% and the rand traded at an average of R8.08 to the dollar.
Now‚ inflation is sitting at 4.7%‚ while the rand reached a record low of R14.4410 to the dollar on November 16.
The price of yellow maize‚ used for animal feed‚ surged 47% this year to a record R3215 a ton in November on the South African Futures Exchange.
White maize has climbed 52%.
“To the extent that we’ve got a shortage of maize or some of the products‚ like meat‚ we will have to import that‚” Reserve Bank Governor Lesetja Kganyago said earlier in November after raising rates.
“An acceleration in food-price inflation is likely‚ adding to the upside risk of the inflation outlook.”
Poorer households are the hardest hit because one-third of their expenditure goes to food‚ more than three times the proportion that wealthier families spend‚ according to data from the statistics agency. That may intensify social tension in the country.
“The country at the moment is in such a space that it can hardly come up with quick fixes‚ but at the same time the government will fear the social disturbance that may come with food riots‚” University of South Africa political analyst Somadoda Fikeni said.
“It could become a burning issue.”
Consumers have so far been sheltered from the worst of the currency’s slump.
Companies such as food producer Tiger Brands have absorbed cost increases rather than pass them onto consumers in an environment of weak demand‚ putting pressure on earnings.
The profit margin for Tiger Brands’ grocery business had fallen to about 10% from as much as 15% in 2008‚ chief executive Peter Matlare said last week.
“If the cost push is R1‚ the consumer doesn’t absorb the full rand‚” he said.
“When you put those costs increases through‚ you’ve got to wait a bit.”
Prices may escalate as global pressures increase.
An index of 73 food prices rose 3.9% in October‚ the biggest jump since July 2012‚ the United Nations Food and Agriculture Organisation wrote in a report in November.
“Food inflation should’ve moved up already‚” Lings said. “You’re already seeing the pressure everywhere.”
SA faces food-price explosion
Food inflation was set to accelerate to more than 10% by the middle of next year‚ more than double the current pace‚ forecasts from Stanlib Asset Management and Macquarie Group showed.
“South Africa is facing a convergence of factors on food – global food pressure‚ currency and the domestic drought – you’ll see that become much more evident when you start importing more‚” Stanlib chief economist Kevin Lings said.
“Ultimately‚ this will be forced through to the consumer.”
Maize prices have surged by more than 50% this year in South Africa‚ while dry weather caused by the El Nio weather pattern has disrupted planting.
A price shock may hurt consumers already facing job cuts and higher interest rates‚ further dragging down an economy that narrowly missed falling into recession this year.
Food’s 14% weighting in the consumer price index (CPI) is the largest after transport and rising costs have the potential to drive inflation higher.
The Reserve Bank has already raised the repo rate four times since the beginning of last year to 6.25% as it forecasts inflation will breach the 3%-6% target band next year.
The last time food inflation was above 10% was between October 2011 and January 2012‚ when the worst drought in a quarter of a century ravaged crops in the US‚ the largest producer of maize.
At that time‚ the central bank was cutting interest rates even though inflation was above 6% and the rand traded at an average of R8.08 to the dollar.
Now‚ inflation is sitting at 4.7%‚ while the rand reached a record low of R14.4410 to the dollar on November 16.
The price of yellow maize‚ used for animal feed‚ surged 47% this year to a record R3215 a ton in November on the South African Futures Exchange.
White maize has climbed 52%.
“To the extent that we’ve got a shortage of maize or some of the products‚ like meat‚ we will have to import that‚” Reserve Bank Governor Lesetja Kganyago said earlier in November after raising rates.
“An acceleration in food-price inflation is likely‚ adding to the upside risk of the inflation outlook.”
Poorer households are the hardest hit because one-third of their expenditure goes to food‚ more than three times the proportion that wealthier families spend‚ according to data from the statistics agency. That may intensify social tension in the country.
“The country at the moment is in such a space that it can hardly come up with quick fixes‚ but at the same time the government will fear the social disturbance that may come with food riots‚” University of South Africa political analyst Somadoda Fikeni said.
“It could become a burning issue.”
Consumers have so far been sheltered from the worst of the currency’s slump.
Companies such as food producer Tiger Brands have absorbed cost increases rather than pass them onto consumers in an environment of weak demand‚ putting pressure on earnings.
The profit margin for Tiger Brands’ grocery business had fallen to about 10% from as much as 15% in 2008‚ chief executive Peter Matlare said last week.
“If the cost push is R1‚ the consumer doesn’t absorb the full rand‚” he said.
“When you put those costs increases through‚ you’ve got to wait a bit.”
Prices may escalate as global pressures increase.
An index of 73 food prices rose 3.9% in October‚ the biggest jump since July 2012‚ the United Nations Food and Agriculture Organisation wrote in a report in November.
“Food inflation should’ve moved up already‚” Lings said. “You’re already seeing the pressure everywhere.”
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