The cost of living is rising and everyone is feeling the impact. Some are asking why SA exports food when millions live in poverty and prices are surging. Why not cater for South Africans first and block exports? Do we have sufficient food for ourselves before worrying about the global consumer?
These are all fair questions. In short, SA has sufficient food supplies and mechanisms to ensure that we do not export too much food and risk creating shortages in the domestic market. SA consumers are a priority. The exports are essential for the sustainability of the farming business.
However, one has to appreciate that the food price increases are not unique to SA. In May 2022, Zambia, Kenya, Brazil, the US and the EU had consumer food price inflation averaging more than 10% year on year. By comparison, SA’s consumer food price inflation averaged 7.8%.
There are various events behind these price increases. The focus has been on the Russia-Ukraine war and its disruptions to Ukraine’s supply chains and grains stocks. But in reality, the war came when global food prices were already on an upward trend.
The challenges began with China importing ample supplies of grains over the past few years as the country rebuilt its inventories and expanded its pig industry after it was devastated by the African swine fever. China’s large and continuous grains and oilseeds purchases added upward pressure on global prices.
The second event was the drought in South America from the 2019/20 season to 2020/21, which undermined production in key producers, Brazil and Argentina. To fully appreciate their importance consider that Brazil and Argentina collectively account for an average of 14% and 50% of global maize and soybean production, respectively. Indonesia, which has accounted for 54% of global palm oil exports in value over the past five years, also had weather-related challenges that weighed on the harvest these past few years.
The third and less pronounced issue was the move towards biofuels support by the Biden administration in the US, which also stimulated demand for grains and oilseeds, thus an upward pressure on prices. The disruptions in the supply chains and the increase in the shipping costs due to covid-19 were an additional challenge not the primary reason for rising prices.
It is mainly these events that by December 2021, the FAO Global Food Price Index, a global measure of selected agricultural commodity prices, was up by 21% year-on-year. The comforting point at the time was that we could still rely on the Black Sea region, which constitutes a large share of grains and oilseeds exports.
Many people have come to recognise that Russia and Ukraine are substantial players in the global agricultural commodities market. Russia produces about 10% of global wheat, while Ukraine accounts for 4%. This is nearly the size of the European Union’s total wheat production. Wheat is for domestic consumption as well as export markets. Together the two countries account for a quarter of global wheat exports, with Russia having accounted for 18% while Ukraine for 8% in 2020.
Both countries are also notable players in maize, responsible for a combined maize production of 4%. However, Ukraine and Russia’s contribution is even more significant in exports, accounting for 14% of global maize exports in 2020. Both countries are also among the leading producers and exporters of sunflower oil, with Ukraine’s sunflower oil exports accounting for 40% of global exports, with Russia accounting for 18%.
The disruption caused by the war on production and trade reduced the volume of grains that could be accessed from these countries and also increased anxiety in the global agricultural market. Had it not been for the war, agricultural prices would still have been at higher levels, but not as high as we see today.
As these developments in the world occurred, South Africa had good weather conditions, leading to a bumper harvest of key crops and fruits. We have had three consecutive seasons of favourable rains and large agricultural produce, starting from 2019/20 to the current season of 2021/22. This production improvement has enabled South Africa to remain a net exporter of agricultural products over the years.
As the production improved, agricultural commodity prices, specifically grains and oilseeds, didn’t decline as a response to improved supply, which people would ordinarily expect. The reason is that South Africa is interlinked with the global agricultural market. For intense, the second-largest maize harvest on record in the 2019/20 production season didn’t lead to a notable decline in prices as some might have expected, mainly because of a 20% rise in export parity prices for the 2019/20 season and a further 70% rise in the 2020/21 season.
Simply put, export parity prices are derived from the global maize price multiplied by the exchange rate minus transaction costs and can be regarded as a “floor price” for domestic maize prices. As domestic prices trade closer to export parity levels, South African maize becomes more competitive in international export markets, which triggers an increase in volumes of exports. The increase in exports also doesn’t mean we would run out of grains supply; South Africa has weekly export reporting mechanisms that signal market players about the domestic stocks and export activity, which triggers price adjustments when we are nearing the appropriate export volume.
The exports are important for sustaining a competitive agricultural sector from a production perspective. Farmers export or sell to the domestic market to cover their production costs so they can produce food again for the next season. The past few years haven’t been as easy for them as well. Farmers have also experienced increased input costs during this period, through rising fuel, fertilizer and agrochemical prices. So, they did not per se “make a killing” on the back of poor consumers. The fertilizer price increase was triggered by the Russia-Ukraine war, and China’s decision to drastically reduce fertilizer exports in 2021 contributed to increasing farming input costs.
South Africans are feeling the impact of these events as we emerge from a relatively lower food price inflation period in the country. For example, in 2018, domestic consumer food price inflation averaged 3,3%, and in 2019 at 3,1%. It was in 2020 that consumer food price inflation averaged 4,8% and in 2021 at 6,5%. In recent memory, the period of heightened consumer food price inflation was in 2016, averaging 10,8%. This was a time of drought. There was not much talk about rising costs of living as today, as we were observing a general price increase as we see at the moment.
The past few months of the year have seen a general increase in the consumer food price inflation, with May figures reaching 7,8%. While most food products in the inflation basket increased, the next few months could present a mixed picture. I expect the grains-related food products and vegetable oils to remain elevated. Meanwhile, fruits, vegetables, and to an extent, meat price inflation could soften. There is increased supply and blockages of our fruit exports to the Black Sea market, which is typically notable, and temporary suspension of our red meat exports because of the foot-and-mouth disease, are some factors that could play positively for the South African consumer in these products.
Additionally, South Africa has sufficient food supplies, and even on the three main food staples we rely on imports – rice, wheat and palm oil – there have been decent volumes on our shores already. The running theme we all worry about is the impact of rising fuel prices on the costs of consumables. We have a heavy reliance on the road. For example, roughly 80% of our staple grains and oilseeds are transported by road. These are high costs that food companies might have minimal room to absorb and remain a major upside risk on food price inflation.
Still, I think South Africa’s general consumer food price inflation will likely be an exception from what we see in the world in the second half of the year, with some moderation on the fruits, vegetables, and to a limited extent, meat. The grains-related and vegetable oil products will likely remain elevated. These are, unfortunately, the products in most South African food baskets and will be increasing faster than other food products.
The appropriate policy response to these difficulties should be through targeted support to poor households and support of subsistence and small-scale farming to improve household food production. Any thoughts of price interventions would have long-term unintended consequences for the farmers and ultimately consumers, as we see in many African countries that have attempted such policy responses, especially as this is a global challenge and not unique to South Africa.
This is an elaborate essay of the version that appeared in the Sunday Times on 10 July 2022.
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