The recently released data by Statistics South Africa shows that consumer food inflation accelerated to 14,4% in March 2023 from 14,0% in the previous month. The food product prices that increased notably were milk, eggs, and cheese; fruit; vegetables; and sugar, sweets, and desserts.
However, we are probably closer to the peak, and there should be moderation soon. I expect consumer food price increases to remain sticky at relatively higher levels for the coming month, which will likely be the peak. There could be some moderation from around May into the year’s second half.
For April, we will likely see the continuation of the tail-end effects of the high grain prices of last year. If sustained, the current relatively cheaper grain prices will filter through mainly in the year’s second half. There is a lag between three and five months between farm (agricultural commodity prices) and retail prices of some products.
Other product prices that could remain elevated in the near term are fruits and vegetables. The unfavourable weather conditions over the past few months disrupted vegetable production.
Moreover, the area plated for some vegetables was lower this season than in the previous one, which also weighed on the harvest. We also saw reports of crop diseases in some vegetables, such as tomatoes, which added to wobbly vegetable prices. Thus, there was a pick-up in some vegetable product prices in recent months.
But this will be a temporary blip and should soften in the year’s second half. There is already an improvement in supplies of certain vegetables, which should help curb the rising prices.
Moreover, the impact of load-shedding may also influence prices for the next few months. The mitigating measures businesses are currently making to improve power supplies, along with the diesel rebate announced by the Finance Minister, should bear fruits later in the year.
The Agro-Energy Fund to help farmers establish alternative energy sources is another welcome development that should bear fruits in the coming months.
Positively, global agricultural commodity prices are softening. In April 2023, the Food and Agriculture Organization of the United Nation’s Global Food Price Index, a measure of the monthly change in international prices of a basket of agricultural commodities, was at 127,2 points, down 20% from April 2022. This shows that there is an improvement in the affordability of various agricultural commodity prices since their peak in the month after Russia invaded Ukraine last year. This decline has been observed in most commodity prices, including cereals, dairy and vegetable oils.
Importantly, these are farm-level prices, although named “Food Price Index”, not retail prices. Therefore, the decline at the farm level will take time to show at the retail level. In South African experience, this could be a lag of between three to five months, as I noted above.
The exception in the global commodity moderation is sugar and meat prices, which are relatively up. The price surge in sugar reflects the concerns about the tight global supplies in the 2022/23 season. This uptick is caused by the downward revisions to the sugar production forecasts for India and China, along with lower-than-earlier-expected outputs in Thailand and the European Union.
Moreover, the meat price index increase was underpinned by the firm demand in Asian countries for pork. The pork supply limitations in several leading exporters increased prices due to high production costs and animal health issues. Additionally, the solid Asian demand extended to poultry meat; hence the price rebounded following nine months of continuous declines. The supply limitations arising from widespread avian influenza outbreaks in various regions also increased the price.
Still, the FAO Food Price Index is 20% lower than in April 2022, primarily driven by the softening prices of the cereals, dairy and vegetable oil price indices. These price trends will likely overshadow the impact of the rising sugar and meat prices in the near to medium term and thus keep the headline global food price index at relatively lower levels compared to a year ago.
South Africa is part of the global agricultural market. Therefore, this anticipated price trend will likely be a reality also in the domestic market. South Africa’s maize, soybeans and sunflower seed prices are already down by 20% from levels we saw a year ago.
In essence, this means that agricultural commodity prices will likely continue to soften from last year’s levels, although not to the extent that we are back at pre-covid-19 levels. Still, this will be sufficient to moderate consumer food price inflation.
Notably, South Africa had a favourable agricultural season following adequate rainfall. The 2022/23 maize production is estimated at 15,9 million tonnes, 3% higher than the 2021/22 season’s harvest. The current harvest is the third-largest harvest on record. The harvest improvement is primarily on the back of expected large yields, as the area planted is slightly down from the 2021/22 season. About 8,4 million tonnes is white maize, with 7,5 million tonnes being yellow maize. A crop of 15,9 million tonnes implies that South Africa will have sufficient supplies to meet domestic needs of roughly 11,4 million tonnes and remain with about 3,0 million tonnes for export markets in the 2023/24 marketing year that started in May 2023.
Also worth noting is that South Africa’s soybeans harvest is estimated at a record 2,8 million tonnes. The crop improvement is due to an expansion in the area planted and the expected higher yields. The expected large harvest means South Africa could meet its domestic demand and remain with just over 300 000 tonnes of soybeans for export markets.
Red meat prices, which have softened over the past few months, should continue to moderate somewhat in the coming months, as we already see that continuous trend at the farm level. The expected softening in red meat prices is a function of both improved supplies and the usually weaker domestic demand that reflects the bleak economic conditions.
In essence, South Africa’s consumer food inflation outlook for the year’s second half is reasonably better. The key drivers of the expected moderation will be meat, grain-related products, vegetable oils and fruits, which comprise roughly two-thirds of the consumer food inflation basket. The base effects also support a view of a softening pace to levels around 8% y/y in 2023 (from 9,5% in 2022).
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