Food inflation drivers and expectations Although the overall inflation rate in South Africa has decreased over the past 6 months, albeit rather modestly, food inflation remains sticky.
This is a result of several supply shocks in various agricultural commodity and livestock markets around the globe. These shocks have, in turn, also filtered through to the local market. The word of the year in 2022 was “Perma crisis” which refers to the state of permanent shocks in which the world economy has found itself over the past two years. In agricultural commodity markets, these crises ranged from hot and dry conditions in key production areas to geopolitical unrest and supply chain disruptions. The latest issue that is supporting global maize and oilseed prices, for example, is a severe drought in Argentina, although rain during the third week of January did cause prices to ease somewhat. High grain and oilseed prices have, in turn, also affected production costs in livestock markets. This, combined with disease issues, limited the supply of products such as poultry which provided upward movement in global and local poultry meat and egg prices. Locally, higher prices in global markets and a weak exchange rate during the last quarter of 2022 contributed to the inflationary effects apparent in food products.
Although exchange rate movements have largely been driven by global monetary policy dynamics, the increase in load-shedding frequency and intensity has also contributed to a weaker rand. During January we did however experience some relief from a stronger Rand and slightly lower fuel costs. Beef prices during January also traded lower on the back of increased supply and reduced demand after the festive season. This could push food inflation for January 2023 to below 12% year-on-year. Extending further into 2023, global market dynamics as well as local supply and demand dynamics will be an important factor influencing South African food prices. The second Brazilian maize crop will be a key global determinant of staple food price trajectories over the first half of 2023. Locally, the Crop Estimates Committee (CEC) will publish its first official area estimates. Maize and soya futures markets are trading at export parity levels, reflecting the market sentiments that South Africa is still on track to produce surpluses of maize and soya beans under current cropping conditions.
This is, however, not the case with sunflower prices, which have increased sharply in the past few days. The market is factoring in fewer hectares planted to sunflower, which implies that local availability could become a cause for concern in the following months. This will influence sunflower oil retail prices. The relative strength of the Rand and the extent of continued load shedding will also play a role. The impact of loadshedding on the economy and the food system is severe. Load-shedding increases costs directly, and indirectly through higher rates of wastage and spoilage within food chains. Financial results from several food companies indicate that fuel expenses to run generators during load shedding are skyrocketing. These costs cannot be absorbed in the chain and are to a large extent passed on to consumers. In fact, we expect that load-shedding will be a key factor that prevents South Africa from following the global trends of decreasing food price inflation during 2023.
