Food inflation set to soar unless urgent interventions are made

In this fiscally constrained space the cost of producing food has soared and is reflected in the price consumers see on the shelves, despite the fact that farmers are price takers. Without action to make business easier and inputs more affordable where possible, food inflation will continue to put pressure on SA households, many of which are already at breaking point.  

Food prices have continued to rise over the course of 2023. Recent headlines focused on the positive news from Stats SA that CPI headline inflation slowed to 4.7% year on year for July, but this does not give the full picture of what consumers are facing when it comes to putting food on the table. According to the most recent data, inflation for food and nonalcoholic beverages increased 9.9% year on year in July. And the reality is that the increase in July is slight compared to previous months — the figure for March reached a whopping 14%. Several months of double-digit inflation have meant prices this year compared to last are severely jeopardising food certainty in many homes.   

The rising cost of food is in part a reflection of the issues the agricultural sector has long been warning must be addressed to ensure food security. Agriculture is an especially resilient sector of the economy and, importantly, employs hundreds of thousands of people in a range of jobs from high to low-skill occupations. The sector has adapted to numerous shocks over the past decade, from natural disasters such as drought, fires and locusts to a poor and declining business environment characterised by degrading transport infrastructure (roads, rail and ports), chronic load-shedding and escalating crime. While the sector’s resilience is laudable, it is vital that farmers absorbing the costs and taking responsibility for addressing failing infrastructure and services does not become normalised.

Farmers have already had to spend their own funds fixing roads and generating their own power, but this is not sustainable.   

To its credit, through all of this the sector has continued to produce, even though farmers are price takers. Farmers do not set prices for their produce beyond the farm gates but take the bulk commodity prices set by the market. Many other costs and margins are added to this commodity price before food reaches the consumer, and these too will be facing cost pressures. The unfortunate reality this creates is that farmers have to play somewhat of a zero-sum game — they must roll the dice and try to produce a specific commodity over a production season in the hope that the market price will be high enough to cover their costs of production.  

The war in Ukraine has meant that, together with a weaker rand, the prices of fertiliser and other agrochemicals have skyrocketed. These are essential inputs for farmers and cannot be avoided. At the same time, the cost of fuel has steeply increased, as has the cost of capital. At the beginning of September the fuel price rose by R1.71/l for petrol and R2.78/l for diesel. Fuel is a significant input cost for farming operations, and even more so for those who have been forced to rely on generators during load-shedding. At the same time, agriculture is a cyclical business. Farmers need to leverage debt at the bottom of the cycle to produce crops for the next harvest. However, as the interest rates have been increased in an effort to tamp down inflation, the cost of debt for farmers is increasingly becoming untenable. 

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Safety considerations are yet another issue that contribute to operational costs. These include the consequences of crime for farming enterprises, including stock losses, property damage and increased insecurity facing the trucking sector. As inputs become more expensive and capital less affordable, farmers will have no choice but to lower production. This leads to constricted supply, which drives prices up further.

Farmers will also increasingly think twice before planting specific commodities given the effects this may have on their operational sustainability. If the price producers believe they will receive from retailers for a given crop is unlikely to lead to at least a break-even scenario, it makes no business sense for an already over-leveraged operation to plant that crop. Given that farmers must largely absorb the cost increases discussed so far, and cannot set prices beyond their gates, if upward cost pressures persist food supply for specific commodities may constrict significantly as farmers choose not just to lower production, but to opt out of planting those crops entirely.  

There is no doubt that food inflation and production input costs are driven in part by externalities that are beyond the control of government. India has chosen not to export non-basmati white rice, for instance, and the suspension of the Black Sea Grain Initiative has had a major effect on food prices. The cost of fuel is also being driven up by factors such as the dollar price of crude oil, and to an extent the weakening of the rand.  

However, there are numerous urgent interventions that would make a great difference to the input costs facing the sector, and therefore the commodity price aspect of food price inflation. These include addressing infrastructure backlogs and operational failures (especially rail and ports), easing the  effects of load-shedding on the sector, and looking at possible further relief in terms of fuel.

Another option is implementing the agreements made at the 2022 rural safety summit. Members of Agri SA will be discussing these interventions and other potential initiatives to address rising input costs at the organisation’s annual conference in October, which is centred wholly on food certainty. Without important discussions like this and essential interventions consumers will face food cost inflation that is back in the double digits — a burden few will be able to afford.  

• Siweya is Agri SA chief economist.