It sometimes feels like there is little more to discuss regarding South Africa’s consumer food price inflation.
The local crop data continue to show that there are ample domestic supplies on the back of large harvests in field crops and horticulture, which would have ordinarily led to a decline in prices.
Still, the question that repeatedly comes out in discussions with various stakeholders in the food industry is the impact of higher global prices on the domestic food market and whether this is the reason local prices have remained elevated in the face of a large harvest. This is an important consideration because the price developments we have witnessed in South Africa’s soft commodities prices, specifically grains, in recent months reflect spillovers from the global market. This begs the question of where global grain prices are likely to go from here and how this could affect South Africa.
Before getting into the outlook for global grains, let us recall that South Africa is typically a net exporter of maize and is therefore well integrated into global markets. My rough calculations, using high-frequency data (daily data with more than 300 observations), shows 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 traded into the global market). This implies that when global maize markets increase, domestic maize prices rise in tandem. Importantly, for wheat, rice and soybeans (and other vegetable oils), where South Africa is typically a net importer, the correlation between domestic and global prices is stronger.
Against this backdrop, the recent report that the FAO Global Food Index averaged 127.1 points in May 2021, which is the biggest month-on-month gain since October 2010 and about 40% higher on a y/y basis would worry the local food industry stakeholders. This sharp increase was underpinned by a surge in prices for vegetable oils, sugar and cereals along with firmer meat and dairy prices, all of which South Africa is generally exposed to in the global market. The downgrade of production prospects in Brazil, dryness in parts of the US, the expected lower palm oil output in Southeast Asia, and the rising Chinese demand for grains, meat, dairy and oilseeds have been the primary drivers of prices these past few months.
But the data released at the end of May by the International Grains Council (IGC) suggests a change in the global grains supplies outlook in the 2021/22 production season. Firstly, the cold temperatures that had slowed plantings in parts of Europe have abated and plantings have now improved. Secondly, the US received beneficial rains, which improved the crop conditions and supported the plantings of the new crop. Lastly, the weather conditions in Ukraine and China have improved and supported the planting of the grain.
