Since the news that South Africa could be hit by yet another drought, a frequent topic of discussion has been its possible implications on South Africa’s food price inflation.
This comes at a time when South Africa’s food price inflation has generally been subdued, having averaged 2.9% y/y in the first nine months of this year. This is because of relatively lower meat, milk, eggs and cheese prices, amongst other products, which managed to overshadow the price increases of grain-related products over this period. The lower consumer demand has also played part in this inflation development as consumer food price movements have not necessarily held a co-movement with producer price inflation as it has been the case in the past, as shown in Figure 1 below in the attached file.
While this year’s drought is a concern, current indications such as soil moisture, near-term weather forecasts and meat market dynamics, suggest that it might not be as intense as the 2015-16 drought where South Africa’s food price inflation was at double-digit for some time.
First, the past two weeks there has been a general improvement in South Africa’s soil moisture and that has allowed farmers to commence with summer crop plantings, specifically in Mpumalanga, Limpopo, KwaZulu-Natal, eastern Free State and the Eastern Cape (Figure 2 in the attached file). Estimates from various farming groups and our conversations with farmers suggest that about a third of the expected maize hectares have now been planted, mainly in Mpumalanga and eastern Free State. This, however, is way behind the optimal maize planting window for these provinces which is typically from 15 October to 15 November 2019. The risk of planting beyond this date is frost later in the season and an impact thereafter on yields. Be that as it may, the improved soil moisture and activity in the fields might contain potential maize price increases in the near term.
Second, the near-term weather forecasts from wxmaps.org, a George Mason University-based weather forecast, show prospects of 16 and 60 millimetres of rainfall this week over the summer rainfall areas of South Africa. This is with the exception of the Eastern Cape which is expected to remain dry and warm throughout the week. This would generally further improve soil moisture and subsequently crop-growing conditions in areas that have started planting. As with the previous point, this would keep maize prices hovering around its current levels. On 14 November 2019, yellow and white maize prices traded around R2 637 per tonne and R2 692 per tonne, which is up by 8% y/y and 12% y/y, respectively.
Third, meat, which accounts for more than a third of South Africa’s food price inflation basket, could remain subdued in the near term. The possible marginal upticks will mainly be because of base effects. Last week, we highlighted another case of foot-and-mouth disease in the Molemole district of Limpopo. The consequence of this is likely to be a temporary ban on South Africa’s meat exports. Mozambique, Zimbabwe and eSwatini are some of the countries that have already placed a ban on South African livestock and its products imports. This could result in a slight increase in domestic meat supply and thereby keeping meat prices at fairly lower levels in the near term. This bodes well for consumer price inflation, but the same cannot be said for farmers.
Overall, we had initially estimated South Africa’s food price inflation for 2020 at 4.9% y/y and we will revisit this estimate at the end of January 2020 when there is concrete evidence about the actual summer crop area planted and weather outlook for the rest of the 2019/20 production season. The main upside risk for food price inflation in 2020 is the weather. The outlook suggests that South Africa could receive below normal rainfall from end of January 2020. This includes all regions, and is, therefore, a concern even for the western and central regions of South Africa, which in the near term could receive above-normal rainfall between November 2019 and January 2020, according to the South African Weather Service.
With that said, the food price inflation outlook looks much better than during the 2015-16 drought years. Also, worth noting is that the global agricultural environment is likely to have minimal impact on South Africa’s food price inflation in the medium term. The main product that South Africa is exposed to the most is wheat, and there are large supplies of it in the world, keeping prices at comfortable levels. This is beneficial to the South African consumer.
Data releases this week
We start off today with the US Department of Agriculture’s US crop conditions data for the week of 11 November 2019. This data should give us a sense of the US crop-growing conditions, and thereafter the potential size of the harvest.
On Wednesday, the South African Grain Information Service (SAGIS) will release the grain producer deliveries data for the week of 15 November 2019. This covers both summer and winter crops. But we particularly monitor winter wheat data as farmers continue with the harvest process in the Western Cape. In the week of 08 November 2019, about 462 426 tonnes of the expected 1.8 million tonnes of wheat in the 2019/20 season had been delivered to commercial silos.
Also, on Wednesday, Statistics South Africa will release the Consumer Price Index (CPI) data for October 2019. In September 2019, South Africa’s food price inflation decelerated to 3.7% y/y from 3.8% y/y in the previous month. We’ve discussed part of the inflation dynamics in the introductory section of this note.
On Thursday, we will get the weekly grain trade data (wheat and maize), also for the week of 15 November 2019. In brief, maize exports for the 2019/20 marketing year have thus far amounted to 598 028 tonnes, which equates to 54% of the import forecast for this season. At the same time, we expect maize imports of about 450 000 tonnes, all yellow maize, mainly for the coastal provinces of the country. This is up from an estimated 171 500 tonnes in the 2018/19 marketing year. The country has thus far imported 347 081 tonnes of yellow maize.
In terms of wheat, South Africa’s 2019/20 wheat imports could increase by 14% y/y to 1.6 million tonnes because of expected lower domestic harvest on the back of unfavourable weather conditions in the Western Cape. The fifth import consignment of the 2019/20 marketing year was 52 396 tonnes. This placed total imports for the 2019/20 season at 341 178 tonnes, which equates to 21% of the seasonal import forecast. This week we will receive data for activity in the week of 15 November 2019.
