The rising grain prices, which over the weekend I highlighted their impact on the livestock sector, present upside risks also to South Africa’s food price inflation. This is a case although the pass-through of the recent price increases remains fairly muted, with “bread and cereals” category of the food price inflation basket rising by only 2.8% y/y in August 2020, marginally up from the previous month (I have previously discussed the food price transmission mechanism story here).
Earlier in the year, we estimated that South Africa’s food price inflation in 2020 could average at 4% y/y (compared with 3.1% y/y in 2019). At that time, we anticipated a notable decline in domestic grains prices on the back of a large harvest, which as we all have come to see didn’t materialize. Maize prices are currently up by over 20% y/y, on the back of rising global demand, primarily from China; the weaker domestic currency; and generally higher global maize prices, amongst other factors. Meanwhile, other food products categories in the food price inflation basket are roughly in line with our expectations.
As a result of this, South Africa’s headline food price inflation has averaged about 4.4% in the first eight months of 2020. With maize prices likely to remain at these elevated levels for the rest of the year, we now think the headline food price inflation could average at levels around 4.5% y/y in 2020, which is slightly higher than our initial expectations. To be clear though, this is by no means an extraordinary level. We’ve seen volatile and elevated headline food price inflation over the past couple of years as illustrated in Exhibit 1.
Going forward, South Africa’s food price inflation will likely remain contained into 2021 as we expect a good agricultural season on the back of a La Niña weather event. This should help contain grain prices from early 2021, and at the same time support all forms of agriculture output. What will make 2021 different is that a La Niña weather event could present good rains across the Southern Africa region, which would reduce the grain shortage in various countries, and in turn, demand for white maize from South Africa. Under this scenario, the base effects of grain prices, combined with potentially sideways prices of other agricultural commodities should help contain South Africa’s food price inflation in 2021.
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