Although July 2021 consumer food price inflation of 7% y/y is unchanged from the previous month, there are clear signs in the underlying details that pressures are beginning to moderate.
We are seeing a similar trend in the global market. The Food and Agriculture Organization of the United Nations (FAO)’s Global Food Price Index has slowed for the second consecutive month in July. After all, the acceleration in South Africa’s consumer food price inflation from late 2020 and in the first half of 2021 was not necessarily driven by domestic factors, but mostly unfavourable spillover effects from the global market.
As I have pointed out previously, South Africa had a large grains harvest in the 2020/21 production season, with maize production at 16,4 million tonnes, the second-largest yet. The soya bean harvest was the largest on record, and the same is true for citrus. With harvest figures like this, it is understandable that South Africans would have expected food price inflation not to reach 7% y/y in June 2021, which is the highest rate since June 2017.
But we experienced spillover effects of the global surge in agricultural commodity prices. The price increases were caused by a range of factors, including growing demand in China, lower production of palm oil in Asia, lower global grain stocks, dryness in South America and unfavourable weather in parts of Europe and North America at the start of 2021/2022 production season. But we have now seen a substantial change in these factors, and global prices are starting to reflect it – an example is a decline in the FAO Global Food Price Index. Production conditions have improved, notably in Europe and North America. Against this, the International Grains Council forecasts 2021/2022 global grain production at a record 2.3-billion tonnes.
These production forecasts suggest global agricultural commodity prices in the second half of the year could continue softening slightly from the levels of recent months. If this transpires, South African grain prices should follow a similar path, which bodes well for consumer food price inflation.
The only significant upside risk on grain prices is tightening global grain stocks and progressively growing consumption from the bioenergy industry. That said, the data so far point to improved affordability for consumers in the second half of the year. Another upside risk that is worth keeping an eye on is the rising fuel prices as South Africa transports a large share of the food by road. An example is grains and oilseeds where over 70% is transported by road.
The oils and fats in South Africa’s food basket, whose price direction is largely influenced by global vegetable oil price trends and were amongst products keeping food inflation at fairly higher levels in July 2021, could also soften in the coming months. Global prices are already on a downward path.
Meat, which also increased slightly in July, is likely to soften in the coming months. Bearish factors include biosecurity challenges, specifically foot-and-mouth disease in parts of KwaZulu-Natal and Limpopo, and the subsequent banning of South African beef from various export markets. While this disease is damaging and costly for farmers, it tends to put downward pressure on domestic meat prices due to the restricted exports and higher domestic availability.
In sum, all else being equal, South Africa’s consumer food price inflation probably now peaked and the coming months will present some moderation.
