Consumers Will Benefit From Fewer Farming Pressures

This year promises to be a fairly good one for South African consumers, particularly from a food cost perspective.

The deceleration in food inflation that was observed in 2017 could again prevail this year as large grain stocks and the expected good harvest in the current production season continue to underpin the market. In 2017, food inflation decelerated to 7.0%, from 10.5% in 2016, thanks to a robust agricultural output.

Indeed, the slowdown has continued into 2018 with food price inflation reaching a multi-year low of 3.5% year-on-year (y/y) in March.

The deceleration this year could, however, be broader compared to 2017 where most food products price inflations slowed with the exception of meat. Meat price inflation was quite sticky, averaging 12.8%, from 5.8% in 2016.

The year 2016 was characterised by higher slaughtering activity as farmers struggled to feed their livestock amid higher feed costs, coupled with drier pastures. In that year, the South African farmers slaughtered 3.6 million head of cattle which is a 5.0% y/y increase, according to data from the Department of Agriculture, Forestry and Fisheries. This dampened meat price inflation even as other parts of the food basket were rising.

I highlight meat not only because of its price dynamics, but also its share within the food inflation basket. Meat accounts for 35.3% of the food inflation basket. Therefore, meat price changes could have notable implication on the overall food price inflation path.

In 2017, lower maize and soybean prices on the back of record harvest, as well as a good recovery in pastures provided a conducive environment for farmers to start rebuilding their herds. This process subsequently led to a decline in slaughtering activity of cattle to roughly 3.4 million head. Herd rebuilding by farmers was not limited to cattle. Other sub-sectors such as piggery and sheep faced similar dynamics to an extent.

More recent data has shown a reversal in livestock slaughtering. This is evident from data from the Red Meat Levy which shows that cattle slaughtering activity softened by 4.6% month-on-month (m/m) and 11.3% y/y in February 2018, with 185 262 head of cattle slaughtered.

This has raised some concerns that meat price inflation could rise again as supply comes under pressure. However, some analysts suggest that this trend is only temporary and could soon bottom out, particularly in cattle slaughtering.

Case in point is the recent report from the United States Department of Agriculture (USDA) which suggests that the number of cattle to be slaughtered in 2018 could increase by 4.0% from the previous year to 3.5 million head. This is largely driven by the expected increase in demand and a general recovery in the industry performance.

Other food products which have a relatively large share of the food inflation basket are ‘bread and cereals’, as well as ‘milk, eggs and cheese’. The prices of these food products could remain relatively low for some time owing to favourable weather conditions, which supported crops. In the case of eggs, however, prices could remain elevated for some time, as the sector continues to recover from the 2017 avian influenza which led to the culling of roughly 4.8 million birds, of which more than two-thirds were egg-layers.

Above all, meat price inflation was the key upside risk on food inflation in 2017. Fortunately, the outlook is fairly positive on that front as the USDA hints of a possible increase in slaughtering.

That said, the effects of the tax increases announced in the February Budget, including a percentage point increase in VAT, will affect a significant part of the food basket outside of the zero-rated items. However, in the absence of underlying upside price pressures, the outlook for food price inflation remains favourable. Therefore, consumers should be in a fairly better place this year compared to 2017 on the food price inflation perspective.

*Written for and first published on Business Day on 26 April 2018.


Follow me on Twitter (@WandileSihlobo). E-mail: wandile@agbiz.co.za

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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