Understanding Food Prices Between Farm and the Kitchen

Food prices have been in the headlines for some time in South Africa – from drought related concerns to the abundance of supplies on the back of a big harvest.

However, there’s has been little discussion or explanation of the price transmission mechanism in the food industry. This has led to a situation where some consumers expect a decline in maize prices to lead to a similar movement in maize meal prices.

An example of this is a recent tweet I sent out with a chart showing a long-term trend of South Africa’s maize prices and the message behind it was that the price of a tonne of maize declined by roughly 54% year-on-year in January 2018. The question posed by other folks on Twitter was whether the decline in maize prices had been passed to the end consumer.

The answer to this is partial yes because product prices such as one kilogramme of maize meal had only declined by 20% year-on-year during the same period. However, there are reasons behind the stickiness of maize meal prices. The first thing to note is that at most times, farmers do not necessarily produce food products, but agricultural commodities. This means that there is a processing time lag between the farm gate and the retail levels, which includes costs such as labour, transport and processing, amongst others.

This processing chain typically explains the delays in price transmission between agricultural commodity prices and the food products. In the case of maize meal, this lag could vary between three to six months. A recent research paper by agricultural economists Marlen Louw, Ferdi Meyer and Johan Kirsten show that there is roughly 63% price transmission between the prices of white maize and retail maize meal, with a delay of three months. Simply put, this means if the white maize spot price declines by 10%, then consumers can expect a 6.3% decline in maize meal prices, with a delay of three months.

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Follow me on Twitter (@WandileSihlobo)

Author: Wandile Sihlobo

Wandile Sihlobo is an agricultural economist and head of agribusiness research at the Agricultural Business Chamber (Agbiz) in South Africa. He is a columnist for Business Day and Farmers Weekly magazine. Sihlobo is a member of the South African Agricultural Economics Association. He has previously served as an economist at Grain South Africa. He holds a Master of Science degree in Agricultural Economics from Stellenbosch University.

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